The economist Arthur Okun famously described a social welfare system as a “leaky bucket.” Okun was a liberal, but he admitted that when policymakers tried to tax the rich to give money to the poor, some of the funds wouldn’t reach their target, and instead would “leak out,” or be lost to fraud, administrative costs, and the bad incentives from both taxes and welfare itself.
Yet the post-Covid-19 spending splurge has been marked by unprecedented levels of fraud and losses. Seeking to shovel money to the public, the government seemed to stop caring whether the funds got to their target. The leaky bucket now appears bottomless.
Congress approved almost $5 trillion in federal Covid relief money over a one-year period—about three times the direct appropriations for the Iraq and Afghanistan wars, which were spread out over two decades. We now know that hundreds of billions of dollars of relief money vanished into the ether.
Much of the relief funds were lost to outright fraud. The expanded unemployment-insurance program was one of the biggest honeypots. The Government Accountability Office recently estimated that more than $100 billion of unemployment-insurance payments were fraudulent—up to 15 percent of all unemployment funds paid during the pandemic.
Another government inspector found that more than $200 billion of the Small Business Administration’s two major Covid relief funds, the Paycheck Protection Program and the Economic Injury Disaster Loan program, appears fraudulent. This represents 17 percent of all payments from these programs.
Hundreds of billions of dollars of fraud are hard to fathom, but we can put some faces on the figures. One California man was charged with getting more than $5 million in Covid money and using it to buy a Ferrari, a Lamborghini, and a Bentley. One rapper, later arrested, wrote a song about how he had gotten rich off false unemployment claims. The government has charged at least 1,500 people with fraud in pandemic programs.
One of the main reasons the swindles were possible is that these three major pandemic programs operated on the honor system, relying on people’s promises that they qualified under the law. Considering that the government often requires detailed documentation to retrieve even small amounts of cash, providing trillions on such an uncritical basis might have been a bad idea.
But instead of cracking down on fraudsters, the Biden administration wants to invite more of them to participate. The Small Business Administration recently proposed to open its loan programs to “justice-impacted individuals,” which includes those on probation or parole and those under indictment for financial misconduct or making false statements.
Beyond the fraud exists an entire universe of government payments made incorrectly, either without documentation or doled out to people who aren’t supposed to be getting the money in the first place. The problem has grown rapidly. In fiscal year 2022, the GAO estimates that federal agencies made almost $250 billion in improper payments. That total is more than half again as large as in 2017.
Medicaid, the health-insurance program for the poor, poses by far the largest problem, with $80 billion in bad payments. Perhaps this has something to do with the fact that, among its “strategic pillars,” the Centers for Medicare and Medicaid Services lists first “advance equity” and only fifth “protect programs.” Perhaps it also has something to do with how, during the pandemic, the federal government told states to stop checking whether people on the Medicaid rolls were eligible. The amount of estimated “overpayments” in Medicaid went up more than 2,000 percent after 2017. Overpayments in another program, the Children’s Health Insurance Program, also rocketed more than 2,000 percent after 2017, peaking at almost a third of all program spending.
Government health insurance is the source of some of the greatest losses, but large chunks of many welfare programs appear illegitimate. In the food stamp program, about 10 percent of all payments are overpayments, including wrong or “false” payments. One of the long-reigning champions of sending checks to the wrong people is the refundable Earned Income Tax Credit. In many years, about a fourth of all these checks are overpayments, but last fiscal year, that portion reached almost a third, at over $18 billion. That’s the equivalent of every man, woman, and child in the United States contributing $50 to support false payments to just one federal program.
The cost of administering these programs is substantial, too. One government report found that administration ate up about 15 cents for every dollar paid out of food stamps, housing, and traditional welfare—and that doesn’t include the expense of administering the tax system to pay for all those. In the end, between fraud, overpayments, administration, and bad incentives, for many programs it’s likely costing $1 or more to get $1 to a person in need. Most of the bucket is leaking out.
America had to help its neediest during Covid. But we now know that the scale of relief was wildly unnecessary. The cash flood appears even odder when one recalls that the government was telling most Americans not to go out, not to shop in malls, and not to eat in restaurants. The result of reduced consumer spending, combined with excessive government relief, was over $2 trillion in extra money going into savings during the pandemic. The government spent trillions putting money into people’s bank accounts, only to see the inevitable inflation eat away much of it.
We live in an era when trillions trip lightly off the tongues of American lawmakers and when Congress indulges its most Brobdingnagian spending fantasies. Yet pictures of Ferraris and Bentleys driven by fraudsters who bilked their fellow citizens should give them pause. It might even make Congress question how much of our welfare spending is getting to its intended beneficiaries.