Government Fraud and Abuse: A Dissenting View

An arresting if perplexing blog post from Jonathan Cohn. He calls for more fraud and abuse in government spending. If that is the price one must pay for ramping up public spending more quickly, he argues, it could be worth it.

[E]fficiency 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.

Where to begin? Most obviously, the main obstacle to further stimulus is popular resistance. "We promise to waste more of your money" might do little to ease that particular constraint. Remembering the emphasis that Democrats have rightly placed up to now on getting good value, I worry it could also complicate the message.

But presentation and winning the public's confidence aren't everything. Set these aside. Is the economics correct?

There are two issues. First, do strict anti-fraud controls slow the process down very much? Apparently not, according to Cohn.

The new report [the just-released White House assessment of the Recovery Act] 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.

Cohn does add that he recalls several conversations from early 2009 suggesting the opposite. So on the one hand, you have the official tally of disbursements; on the other, several conversations from early 2009. Let's call that inconclusive.

The second issue is whether fraud and abuse in themselves give you better bang for the stimulus buck. Cohn's authority on this is Matt Yglesias.

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 don't dispute that this is the kind of creative thinking that Democrats need if they are to restore the country's good opinion of their efforts. But is the marginal propensity to spend from the proceeds of fraud and abuse really all that high? I've read that criminals sometimes salt away their ill-gotten gains--Swiss bank accounts, keeping bundles of cash in the freezer, and that sort of thing. I don't see why fraud and abuse should transmit more demand than, say, cutting taxes (which Democrats object to on grounds of small bang for the buck), or leaving boxes of money on street corners, or dropping it from helicopters.

Any of those things--perhaps especially tax cuts--might be easier to sell to the public than encouraging corrupt mayors to embezzle more money. But I could be missing something.