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Wanted: More Fraud, Abuse in Government Spending

A new government report says the stimulus was virtually free of waste, fraud, and abuse. This is supposed to be good news. I’m not so sure.

The report, which Vice President Joe Biden officially delivered to the president on Friday, is the official 2010 audit of the American Recovery and Reinvestment Act. It’s a full accounting of how the government has spent Recovery Act money, but it’s the section on waste that’s gotten the most attention.

And rightly so. Of the nearly 200,000 prime and sub contracts that the Recovery Act awarded, just 293 led to “consequential investigations” of fraud. That’s 0.2 percent—i.e., two-tenths of a percent. Given the amount of money we’re talking here, that’s astonishingly clean, even by private sector standards. 

Lest you think this is just the Obama Administration whitewashing its own record—and me whitewashing their whitewashing—the General Accounting Office has reached the same conclusion, calling the amount of waste and fraud minimal. Earl Devaney, the Interior Department Inspector General who is on leave to run the the Recovery Accountability and Transparency Board, told the New York Times recently that “I do think history will show that there was a lot less fraud in this effort than had been anticipated or that normally would occur with such a large amount of money.” Steve Ellis, vice president of the watchdog group Taxpayers for Common Sense, says "the fraud and waste element has been smaller than I think anything anybody anticipated."

Mike Grunwald, who’s been covering the issue for Time, explains how the feds are doing it:

The board is using newfangled computer algorithms that can track suspicious spending patterns before there's a complaint; the inspectors general of every major agency are bird-dogging the stimulus as well. Devaney likes to say that if you really want to steal, you'd be crazy to steal from the Recovery Act; it's far too transparent, with every dollar traceable at, and there are far too many eyes on it.

Make no mistake: This is a genuine accomplishment and reflects a commitment to good government by prominent Democrats that dates back at least to the early 1990s, when policy expert David Osborne published Reinventing Government and Vice President Al Gore made bureaucratic reform a personal obsession. If the goal of the Recovery Act were simply to prove that government could spend a ton of money in a very, very careful way, then it's been an absolute success.

But efficiency isn't the Recovery Act's primary purpose. Reviving the economy is. And that's required spending a vast amount of money very quickly—a goal that, inevitably, is at odds with spending the money carefully. Or, to put it another way, a stimulus that threw a little more money away might have created more jobs.

In that same Times article, Devaney noted some anecdotal evidence of this dynamic at work:

My observation—and it's probably supported by at least one audit I think that was done over at Energy—is that they've been slow to get that money out because they've been exercising caution. Now, that's in contrast to the sometimes notion that you got to get this money out so that it can do something for the economy, and there's a lot of pressure to do that. So there's this angst going on there.

The new report says that the administration hit its target of spending at least 70 percent of Recovery Act funds by September 30 of this year. So maybe the caution hasn't slowed the flow of funds that much. On the other hand, I recall several conversations from early 2009, when experts and operatives were arguing against a bigger, faster stimulus because government couldn't push money into the system more quickly and do it smartly—that is, without creating opportunities for abuse or spending in ways that didn't seem particularly productive in the long term.

Matt Yglesias, who has been making this argument for a while, illustrated the dilemma nicely last week:

If we’re looking for things with a high multiplier—i.e., a large impact on GDP relative to the expenditure—then letting corrupt mayors embezzle money and hand it out as “walking around money” actually looks pretty good. The recipients of such funds presumably have a very high marginal propensity to spend. But of course that’s the essence of waste.

I can add one other data point to this discussion—from New Orleans. The Katrina recovery funds, like the stimulus, were remarkably free of graft and waste. And that was because government authorities doled out the money carefully. But the distribution was necessarily slow and that had a devastating effect on the poorer neighborhoods, where residents couldn't afford to wait a year or two to get their rebuilding money.

In the end, the Katrina rebuilding effort worked out a lot like the Recovery Act did: It minimized wasteful spending, to a remarkable degree. But, partly as a result, the spending's impact was smaller than it might have been if the money had flowed more quickly and more freely.

Update: I added a few phrases to make clear my main point—that we might have been better off with a bigger, faster stimulus that created more jobs, even if it generated more waste along the way.