Why Government Fails So Often: And How It Can Do Better (31 page)

Endemic fraud, waste, abuse, and corruption are perhaps the clearest signs of mismanagement. These excrescences have an ancient pedigree, of course: the first inspector general to investigate a procurement scandal was appointed by the Continental Congress, and virtually all presidents have campaigned against them.
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Government bears a special responsibility for them both as an enabler of private misconduct—and also as a chronic source of its own. The government often violates the same rules it imposes on others. Congress, for example, repeatedly violates clean fuel requirements,
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and even the supposedly squeaky-clean Secret Service security force was caught in a sex scandal.
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In August 2013, the leading federal appeals court up-braided an agency for flagrantly violating its own governing statute,
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and the special intelligence surveillance court, usually so deferential to the National Security Agency, castigated it for massive constitutional violations.
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The remainder of this chapter, then, is devoted to this particular form of government failure.

The Office of the Inspector General for the Department of Defense defines fraud, waste, and abuse as follows:

Fraud: “A type of illegal act involving the obtaining of something of value through willful misrepresentation.”

Waste: “[I]nvolves the taxpayers not receiving reasonable value for money in connection with any government funded activities due to an inappropriate act or omission by players with control over or access to government resources…. waste relates primarily to mismanagement, inappropriate actions and inadequate oversight.”

Abuse: “[I]nvolves behavior that is deficient or improper when compared with behavior that a prudent person would consider reasonable and necessary business practice given the facts and circumstances.”
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These somewhat overlapping and strikingly ambiguous definitions, of course, encompass a broad spectrum of action (and inaction). Accordingly, the three terms are usually joined into a single phrase rather than analyzed separately; the shorthand referent is FWA. It is ordinarily used to refer to a host of improper and/or illegal practices by or against the government, and to measure its inefficiency, its susceptibility to being gamed and exploited. Although the GAO often refers to “improper payments” (those that were made incorrectly or for an improper amount, including both overpayments and underpayments),
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it explicitly cautions readers that improper payments are not necessarily fraudulent. A February 2012 GAO report noted that only 42 of 79 federal programs complied with OMB guidelines for reporting the causes of their improper payments; the remaining 37 programs, together accounting for 60 percent of the estimated $115 billion in improper payments in 2011, did not analyze causes.
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By any plausible definition, FWA is a huge problem. (It is not unique to the United States, of course, but international comparisons are meaningless because of different methodologies.) In 2002, Congress passed the Improper Payments Information Act (IPIA), which requires federal agencies to review their programs annually and identify those most susceptible to improper payments. By 2012, improper payments were estimated at $115.3 billion, or between 4 and 5 percent of the $2.5 trillion spent by agencies subject to IPIA reporting requirement.
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(It’s important to note, however, that much of this rise tracks with the implementation of better monitoring procedures rather than with raw increases in improper payment levels.) The leading offenders were Medicare Fee-for-Service ($28.8 billion), Medicaid ($21.9 billion), the Earned Income Tax Credit ($15.2 billion), unemployment insurance ($13.7 billion), and Medicare Advantage ($12.4 billion). Of the thirty programs that the GAO annually designates “high risk,” seventeen (including Medicare and Medicaid) have been so classified for more than a decade.
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The ten most wasteful programs together accounted for $107 billion in improper payments in 2011, but improper payment estimates fell for the first time that year
and again in 2012, partly because of lower unemployment insurance outlays and efficiency gains in the Earned Income Tax Credit and Medicare Advantage programs. In 2012, the Justice Department opened 1,131 investigations against 2,148 potential defendants in the health care industry, disrupted 329 criminal fraud organizations, and won more than $3 billion in fraud judgments and settlements.
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Yet the GAO finds Medicare and Medicaid actions to prevent overpayments to be chronically ineffective.
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The Department of Defense has long been pressed to improve its contracting practices, having paid out hundreds of billions of dollars to contractors engaged in fraud.
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The Citizenship and Immigration Service found that 21.7 percent of H-1B visa petitions (for temporary highly skilled foreign workers) contained fraud or technical violations.
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The GAO has found that USDA programs are rife with fraud, partly because the department’s inspectors often fail to follow up on suspicious claims. The GAO reported that the USDA paid $22 million to more than 3,400 crop insurance policyholders who had been dead for at least two years,
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that the $9 billion program’s fraud rate is 5 percent, and that the $75 billion food stamp program’s fraud rate has declined to “only” 1 percent. A crop insurance fraudster in just one scheme involving nearly $100 million told the Associated Press that “it’s everywhere, all across the country” because the insurance adjusters rely entirely on what the farmers tell them.
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The GAO finds that the VA pension program is riddled with FWA.
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Tax fraud—through identity theft, refund fraud, or tax-preparer fraud—has grown dramatically to the point where it ranks just behind Medicare, Medicaid, and unemployment insurance. Tax-identify theft has exploded in the last few years, with the Treasury’s inspector general for tax administration reporting more than $5.2 billion in potentially fraudulent tax returns in 2011 alone.
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The government has failed to collect either the $780 billion that Americans already owe in delinquent loans, fines, and penalties, or the additional $300 billion that they already owe in back taxes—including $1 billion owed
by federal employees
and $757 million owed by
federal contractors
!
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Documentary fraud is particularly rife in programs like immigration control, in which the costs of obtaining false documents and the probability of detection (upon repeated attempts, if necessary) are far lower than the benefits of gaining entry to the American labor market. Numerous GAO reports, select commissions on immigration reform, and congressional hearings have called for more effective enforcement against document fraud, which the law already penalizes heavily. The legalization programs enacted in 1986 experienced widespread fraud, particularly among “special agricultural workers,” and the new legalization programs considered by Congress in 2013 will, if enacted, surely be vulnerable as well. Congress’s steadfast refusal to require a secure national identity document practically guarantees this result.

FWA in federal programs takes many forms and surely has numerous causes, of which I shall note only a few that seem endemic to contemporary government. One important cause is
program complexity
. Medicare, Medicaid, and a host of other programs have tens of millions of beneficiaries, and their eligibility depends on whether they satisfy a variety of conditions specified in the statute, regulations, and other administrative issuances. Because their own life situations—income, employment, health, family structure, and a host of others—change regularly, so does their eligibility. Yet the government is in a poor position to keep up with these changes, a problem that is greatly exacerbated by its chronically retrograde, inferior information systems, as discussed earlier in the chapter. Most of these programs, moreover, are administered by state and local governments whose systems may be even more anachronistic and inefficient than those in Washington. In addition to inducing high error rates, this complexity and decentralized administration practically invite fraudsters to exploit complex programs through false claims—a temptation magnified by the often weak enforcement discussed in
chapter 7
.
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Another
source of FWA is
poorly designed reimbursement rules
. Such waste occurs when inadequate reimbursement, as with Medicaid’s fee structure, causes providers to refuse to participate in the program, exacting its toll by
non
care for low-income people who are legally entitled to health services—another group of “invisible victims” discussed in
chapter 2
. A more visible kind of waste results from excessive reimbursement, exemplified by more than $500 million in overpayments to dialysis clinics that Congress recognized as such.
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FWA also occurs because
officials’ incentives
to combat it are relatively weak. Any improper payments they recover likely go to the general treasury, not even to their agency, much less to their program budget. FWA prevention is costly, legal rules make it hard for the government to win criminal convictions, and the legal process is protracted and often inconclusive. And if the misconduct is not rectified, it is the taxpayers that stand to lose, not the officials. They are busy people with other programmatic responsibilities. They are working with other people’s money. As noted in
chapters 6
and
12
, Congress has not funded sufficient enforcement personnel. Some incentives—their sense of professionalism, respect for the law, and fear of congressional criticism—do cut the other way, but evidently are insufficient. For example, only a
New York Times
front page report on its own investigation of major fraud in disability benefits paid by the Railroad Retirement Board, followed by repeated demands for action by the board’s own inspector general, got it to cut off the benefits. It then quickly restored the benefits until outside pressure again forced it in July 2013 to renew the cutoff.
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Beyond the inadequate incentives to control and reduce FWA, there is the vital question of federal procurement officials’ managerial competence. Steven Kelman, a scholar and former administrator of procurement policy, notes that contracting is now a core organizational activity. Indeed, many agencies spend more than half their budgets on contracted products and services (among them the Department of Energy, at 94 percent, and the Department of Defense, at 46 percent). Michele Flournoy, undersecretary of defense in the first Obama administration, describes the mismanagement problem in
DOD procurement thus: “Since 1960, the U.S. government has commissioned at least 27 major studies on defense-acquisition reform, and more than 300 studies have been undertaken by nongovernmental experts. Still, the Defense Department rarely achieves the expected return on its investments. Most major weapons programs run over cost and over schedule, costing American taxpayers billions more while delivering less capability than planned.”
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No wonder a front-page
New York Times
headline in December 2013 proclaims, “In Tech Buying, U.S. Still Stuck in Last Century.”

Government contracting is especially vulnerable to FWA, Kelman argues, because procurement officers lack the necessary
management
skills—business savvy, in other words. Procurement work is usually seen as unglamorous; it is rarely assigned to higher-ranking or higher-performing employees. Kelman and Flournoy urge federal managers to redesign contract administration in a number of ways.
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Although I have focused on FWA in this section, other kinds of federal management failure are endemic. Indeed, the list of much-heralded administration task forces that have studied and reported on federal mismanagement—both across the board and in particular areas—is long. From president Franklin Delano Roosevelt’s Brownlow Commission in 1937 to the National Performance Review headed by vice president Al Gore during the Clinton administration, high-profile reviews of management problems have produced thoughtful proposals for reforms, but without much evidence of significant improvement. In 2013, the Brookings Institution established the Governance Studies Management and Leadership Initiative to promote these reforms and develop others—even more evidence that federal mismanagement is a chronic problem at the very time when the ambition of national policies has swelled.

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As just one example, consider how Facebook, one of the most successful business ventures in history, failed—by a large margin—to accurately predict the market for its public shares despite the best expert Wall Street advice that its billions could buy.

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Based on an informal talk by Hayek that I attended in 1979 when he was 80, I venture to speculate that Hayek, who was a great admirer of the United States, agreed.

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I distinguish this desirable purposive or functional adaptability from the kinds of spasmodic, unpredictable shifts in government direction and commitment that impair its performance by undermining its credibility—a special problem discussed in the next section.