Medicare and Medicaid are rife with fraud. We’re talking 10 percent or more of total spending, which is two orders of magnitude more than what credit card companies tolerate.

In a recent article, I explained a couple of ways such fraud occurs:

For providers, Medicare is like an ATM: So long as they punch in the right numbers, out comes the cash. To get an idea of the potential for fraud, imagine 1.2 million providers punching 1,000 codes each into their own personal ATMs. Now imagine trying to monitor all those ATMs.

For example, if a medical-equipment supplier punches in a code for a power wheelchair, how can the government be sure the company didn’t actually provide a manual wheelchair and pocket the difference? About $400 million of the…fines paid by Columbia/HCA hospitals were for a similar practice, known as “upcoding.”…

Yet federal and state anti-fraud efforts remain uniformly lame. Medicare does almost nothing to detect or fight fraud until the fraudulent payments are already out the door, a strategy experts deride as “pay and chase.” Even then, Medicare reviews fewer than 5 percent of all claims filed.

I also explained why fraud is so rampant:

Efforts to prevent fraud typically fail because they impose costs on legitimate beneficiaries and providers, who, as voters and campaign donors respectively, have immense sway over politicians. At a recent congressional hearing, the Department of Health and Human Services’ deputy inspector general, Gerald T. Roy, recommended that Congress beef up efforts to prevent illegitimate providers and suppliers from enrolling in Medicare. But even if Congress took Roy’s advice, it would rescind the new requirements in a heartbeat when legitimate doctors — who are already threatening to leave Medicare over its low payment rates — threatened to bolt because of the additional administrative costs (paperwork, site visits, etc.)…

How could it be any other way? Anti-fraud efforts will always be inadequate when politicians spend other people’s money…[People] care less about health-care fraud, and have a lower tolerance for anti-fraud measures, than they would if they paid the fraud-laden premiums themselves.

In a word, government is stupid.

As if to prove the point, the Obama administration—despite its rhetoric about getting tough on fraud—is behaving pretty much as I predicted. In mid-November, the administration announced two anti-fraud efforts, one to prevent fraudulent claims for power wheelchairs and scooters, and another to eliminate “pay and chase” for some Medicare claims in some states. Not two months later, under “heavy provider opposition,” Medicare has delayed these demonstrations “until further notice.”

If you’re interested to see how this all turns out, follow @CMS.gov on Twitter and keep an eye out for #pmd_demonstration (the wheelchairs and scooters demonstration project; there’s no hashtag for the project to curb “pay and chase”).  HT: Peter Suderman.

As Predicted, Obama Administration Backs Off Medicare Anti-Fraud Efforts is a post from Cato @ Liberty - Cato Institute Blog

The Obama administration somehow continues to garner positive coverage for arresting (alleged) Medicare fraudsters who bilk the program for, say $295 million.  See this CBS News report:

Combating fraud is a good thing, but $295 million is chicken feed compared to the $100 billion or so that Medicare and Medicaid lose to fraudulent and other improper payments each year.

Instead of merely parroting the government’s press releases on its anti-fraud efforts, it would be nice to see some media outlet examine why Medicare and Medicaid fraud is so prevalent, so persistent, and why politicians have no incentive to do anything serious to combat it.  They could start with this article and this video:

‘Biggest Crackdown Ever’ Shows Medicare’s Anti-Fraud Efforts Are a Fraud is a post from Cato @ Liberty - Cato Institute Blog

Over the past decade, American taxpayers have lost as much as $60 billion dollars to massive fraud and waste in the nation building campaigns of Iraq and Afghanistan, according to a report released today by the Commission on Wartime Contracting. The independent panel confirms much of what we already know about rent-seeking in wartime; nevertheless, the panel details specific reconstruction projects and programs that display a stunning array of mismanagement:

• A modest $60 million agricultural development program in northern Afghanistan expanded to the south and east to the tune of $360 million. The cash-for-work program was intended to distribute vouchers for wheat-seed and fertilizer in drought-stricken areas. Today, the program spends $1 million a day. The panel reports, “The pressure to quickly spend the millions of dollars created an environment in which waste was rampant. Paying villagers for what they used to do voluntarily destroyed local initiatives and diverted project goods into Pakistan for resale.”
• During operations in Iraq and Afghanistan, waste and fraud averaged about “$12 million every day for the past 10 years.” [Emphasis in original];
• The Department of Defense (DoD) awarded an $82 million contract for the design and construction of an Afghan Defense University. Now, DoD officials say it will cost $40 million a year to operate—beyond the indigenous government’s ability to fund and sustain;
• The U.S. Agency for International Development, the U.S. Government’s main distributor of development contracts, funded the Khost-Gardez road project. Originally valued at $86 million it has since mushroomed to $176 million;
• The insurgents’ second-largest funding source is the U.S. taxpayer. Money for construction and transportation projects are diverted to the insurgency so Afghan subcontractors can pay them for protection. Of course, the insurgents use this money to buy bombs, IEDs, and other explosives to kill foreign troops and civilians.

The report goes on and on with examples that should disgust U.S. taxpayers. In addition, the report was released amid news that August 2011 was the deadliest month for U.S. service members, and 2011 shaping up to be the deadliest year for Afghan civilians. Despite the spin from warhawks, people in the region know the coalition has lost. Last year, the “Godfather of the Taliban,” Hamid Gul, the former head of Pakistan’s Inter-Services Intelligence agency, laid out in extensive detail why America has been defeated (for skeptics of withdrawal, it’s worth reading).

The United States has largely disrupted, dismantled, and defeated al Qaeda. America should not go beyond that objective by combating a regional insurgency or drifting into an open-ended occupation. We have endured enough with tens of thousands of people killed, injured, and traumatized, and billions of dollars wasted.

Wartime Contracting Report Provides More Evidence to Exit Afghanistan is a post from Cato @ Liberty - Cato Institute Blog

USA Today reports that the Obama administration’s efforts may yield an 85 percent rise in federal fraud prosecutions.  Yawn.

Fraud expert Malcolm Sparrow:

By taking the fraud and abuse problem seriously this administration might be able to save 10 percent or even 20 percent from Medicare and Medicaid budgets. But to do that, one would have to spend 1 percent or maybe 2 percent (as opposed to the prevailing 0.1 percent) in order to check that the other 98 percent or 99 percent of the funds were well spent.  But please realize what a massive departure that would be from the status quo. This would mean increasing the budgets for control operations by a factor of 10 or 20. Not by 10 percent or 20 percent, but by a factor of 10 or 20. [emphasis added]

That’s not going to happen, as I explain here and in this video:

An 85 Percent Increase in Health Care Fraud Prosecutions? Be Still My Beating Heart… is a post from Cato @ Liberty - Cato Institute Blog

The federal government, four states, and a whistleblower have extracted a $154 million settlement from Par Pharmaceuticals for fraudulently inflating the prices it charges Medicaid, according to the Associated Press.

With Medicare and Medicaid losing roughly $100 billion each year to fraud and other improper payments, however, the fact that a paltry $154 million settlement is news can only mean that federal and state governments are not even trying to combat fraud in any serious way.   As I explain in this video, that’s because politicians have almost zero incentive to do so — which makes massive amounts of fraud an inherent part of these programs:

Under ObamaCare, Medicare and Medicaid fraud will only get worse.

$154 Million Medicaid Fraud Settlement a Sign of Govt Failure, Not Success is a post from Cato @ Liberty - Cato Institute Blog

The Washington Post’s editorial board issued a challenge to the president and his Republican opponents: “show us your plans” for deficit reduction. In fact, the Post says it would be “delighted” to receive plans from its readers. However, the Post isn’t interested in “meaningless promises” to cut “waste, fraud, and abuse”—it wants specifics:

Here’s what we’re not looking for: pablum about eliminating unnecessary spending without identifying where. Gauzy rhetoric about making hard choices without making them. Meaningless promises about eliminating waste, fraud and abuse. Broad assertions about where to find the money — “Medicare savings,” “tax reform” — without specifics. Arbitrary spending caps without accompanying details about how those limits are to be met. If you believe, for example, that federal spending should be kept to a specific share of the economy — 18 percent? 20 percent? — show the plausible path to getting there.

Amen. Chris Edwards and I have been beating the drum for Republican policymakers in particular to get specific about what they would cut. Chris recently noted that with the exception of Sen. Tom Coburn (R-OK), Sen. Rand Paul (R-KY), and perhaps a few others, Republicans aren’t putting much effort into identifying programs to terminate. And I have noted that “It’s more common to hear Republicans blubber on about ‘reducing waste, fraud, and abuse’ in government programs and ‘saving’ the pillars of the welfare state (Social Security and Medicare) for ‘future generations.’”

As for deficit reduction ideas from Washington Post readers, we have a balanced budget plan on our Downsizing the Federal Government website. In fact, not only do we have a plan, we have over three dozen essays on numerous government agencies that provide details on what programs to cut and why.

Washington Post Asks for Budget Plans is a post from Cato @ Liberty - Cato Institute Blog

From today’s Los Angeles Times:

On Tuesday, a jury found [south Los Angeles pastor Christopher] Iruke, his wife and an employee who worked for the couple guilty of healthcare fraud and conspiracy to commit fraud…

Authorities said Iruke and associates often supplied power wheelchairs to Medicare patients perfectly capable of walking on their own —including one who did jumping jacks to show agents he never needed one. Also among the patients Iruke and his associates filed reimbursement claims for were two people who were deceased, according to court papers…

After purchasing the wheelchairs at about $900 wholesale and paying for the prescriptions, he pocketed the remainder of about $6,000 in taxpayer money he received as Medicare reimbursements, according to court documents. The pastor operated four medical equipment supply companies between May 2002 and September 2009 as part of the scheme, according to authorities.

In all, Iruke’s companies filed for $14.2 million in claims and received about $6.6 million in reimbursements.

The money funded a lavish lifestyle, including several luxury cars, international travel, and about half a million dollars of remodeling on his Baldwin Hills home, prosecutors contended in trial…

The case was brought as part of a federal strike force on Medicare fraud, which has resulted in charges against more than 1,000 people across the country who billed the program $2.3 billion, according to a Department of Justice press release.

Apologies for the long excerpt, but this stuff is fascinating for several reasons.  The ease with which these folks defrauded Medicare.  The vast gulf between the market price for a wheelchair ($900) and what Medicare pays ($6,000) — which practically begs people to defraud the program. The fact that DOJ pats itself on the back for nabbing the perpetrators of $2.3 billion of fraudulent billings even though that represents a much smaller number of fraudulent payments, which in turn account for a teeny-tiny share of the official estimate that Medicare loses $48 billion to fraud and other improper payments per year, which itself understates the extent of fraud in the program.

As I explain in this article and the below video, the extent of Medicare and Medicaid fraud is truly mind-blowing.

ObamaCare will bring even more fraud.  And efforts to combat Medicare, Medicaid, and ObamaCare fraud will always be inadequate until Congress reforms or scraps these entitlement programs.

Medicare Fraud: Et Tu, Reverend? is a post from Cato @ Liberty - Cato Institute Blog

Available here. Something about Medicaid employees coaching faux Russians on how to hide income and assets so as to enroll their father in Medicaid.

I’m not sure how much of what Project Veritas has found counts as fraud. But I’m pretty sure it’s chump change compared to this stuff:

It is interesting, and consistent with the thesis of this video and my National Review article, that Project Veritas’s Medicaid-fraud videos haven’t garnered nearly as much attention as their other “stings.”

‘Project Veritas’ Releases New Medicaid Fraud Video is a post from Cato @ Liberty - Cato Institute Blog

Today, the Government Accountability Office will release a new report on fraud in Medicare and Medicaid.  By my count, it is the 159th report the GAO has issued on fraud in these programs since 1986.  According to the Associated Press:

The federal government’s systems for analyzing Medicare and Medicaid data for possible fraud are inadequate and underused, making it more difficult to detect the billions of dollars in fraudulent claims paid out each year, according to a report released Tuesday.

The Government Accountability Office report said the systems don’t even include Medicaid data. Furthermore, 639 analysts were supposed to have been trained to use the system – yet only 41 have been so far, it said.

The Centers for Medicare and Medicaid Services – which administer the taxpayer-funded health care programs for the elderly, poor and disabled – lacks plans to finish the systems projected to save $21 billion. The technology is crucial to making a dent in the $60 billion to $90 billion in fraudulent claims paid out each year.

In this article for National Review, I explain that there are reasons why those tools are, and will remain, “inadequate and underused.”

GAO’s 159th Report on Medicare/Medicaid Fraud Finds Anti-Fraud Measures ‘Inadequate’ is a post from Cato @ Liberty - Cato Institute Blog

Over at Downsizing the Federal Government, we focused on the following issues this week:

• Block-granting Medicaid would be a good short-term reform to get the program’s ballooning spending under control.
• Policymakers who are concerned with bureaucratic duplication and waste should focus their efforts on limiting the government’s capacity to spend.
• Federal spending would still increase in fiscal 2011 if Republicans get the $61 billion in funding cuts they’re seeking.
• The solution to a lot of the problems caused by farm subsidies lies not in changing the direction of the programs, but in abolishing them.
• “Other mandatory” programs are often forgotten in the debate over how to rein in our extraordinary deficits and mounting debt. That needs to change.

Follow Downsizing the Federal Government on Twitter (@DownsizeTheFeds) and connect with us on Facebook.

This Week in Government Failure is a post from Cato @ Liberty - Cato Institute Blog

When the Washington Post published a story in 2007 about how dead farmers had received farm subsidies to the tune of over $1bn, most people were horrified (even “farm subsidy moderate” Rand Paul thought they should go!). Although the article made clear that “most estates are allowed to collect farm payments for up to two years after an owner’s death,” and that the payments weren’t necessarily fraudulent, outrage ensued.

But a follow-up investigation by the USDA has found that all but about $1 million of the payments were completely above board. From the Associated Press:

A 2007 report that the federal government had paid $1.1 billion in subsidies to dead farmers sparked an outcry and has been frequently cited by critics who considered the payments a blatant example of wasteful spending. But a follow-up that found no fraud and determined nearly all the subsidies paid on behalf of dead farmers in recent years were proper has received little attention.

According to the U.S. Department of Agriculture’s Farm Service Agency, just a little over $1 million out of the billions of dollars paid in subsidies in 2009 went to estates or business entities that weren’t entitled to them.

“Very little money is going to individuals who have not earned that money. Very little is being paid in error because a farmer has passed away,” FSA Administrator Jonathan Coppess told The Associated Press. [emphasis mine]

Don’t you just love how Mr Coppess uses the word “earned” there?

That’s the real scandal of farm subsidies, readers. Not that they are fraudulent (although that is of course an outrage), but that they are, for the most part, perfectly legal.

The Real Scandal of Farm Subsidies is a post from Cato @ Liberty - Cato Institute Blog

New York’s budget problem is actually a Medicaid problem.  In Sunday’s New York Post, I offer advice to New York Governor Andrew Cuomo (D) on how to fix a budget gap that will grow to $17 billion during his term:

Gov. Cuomo can’t fix Medicaid by himself. He needs the help of Congress.

There is a solution…

Block grants are how President Bill Clinton and a Republican Congress reformed welfare back in 1996, to spectacular success. Welfare reform forced New York to be smarter about welfare spending, just as a block grant would force New York to rededicate Medicaid to its original mission — providing necessary medical care to the truly needy.

There’s one place Gov. Cuomo can start on his own: Close the loopholes that allow well-to-do New Yorkers to feign poverty on paper so that Medicaid underwrites their long-term care. Medicaid exists for the poor, not to help well-off baby boomers protect their inheritance.

Steve Moses of the non-partisan Center for Long-Term Care Reform recommends that Cuomo take steps to ensure that New Yorkers with means pay for their own long-term care. These include reducing New York’s home-equity exemption from $750,000 to $500,000 (and seeking a federal waiver to reduce it to $0), expanding the use of liens and estate recovery and ending the abusive practice of “spousal refusal.”

Reducing Medicaid abuse won’t be easy. But Cuomo doesn’t have much choice.

In fact, what he has is an opportunity to become the leading national spokesperson for block grants, the quickest and easiest course to relief for states toiling under the unsustainable yoke of Medicaid spending.

For more on Medicaid reform, click here.  For more on abuse of Medicaid’s long-term care subsidies, click here.

How Gov. Cuomo Can Fix New York’s Budget Mess is a post from Cato @ Liberty - Cato Institute Blog

Who said: “A government bureau is the nearest thing to eternal life we’ll ever see on this earth.”?

As political junkies know, that was Ronald Reagan at the 1964 Republican convention. The Internet attributes other similar quips to Reagan.

Reagan apparently borrowed the idea from Senator James F. Byrnes, who stated on the floor of the Senate in 1933: “The nearest earthly approach to immortality is a bureau of the federal government.”

My source is “Reorganization of Federal Administrative Agencies,” Congressional Quarterly, September 17, 1933. The article is a reminder that concerns about government waste, duplication, overlap, and inefficiency certainly did not start with Reagan. Government failure has been around a long time.

The CQ article notes that the 1932 Democratic platform called for “an immediate and drastic reduction of governmental expenditures by abolishing useless commissions and offices, consolidating departments and bureaus, and eliminating extravagance, to accomplish a saving of not less than 25 percent in the cost of the federal government.”

Alas, that leaner-government policy was not exactly the approach followed by FDR.

Government Program Immortality is a post from Cato @ Liberty - Cato Institute Blog

The Office of Senator Tom Coburn (R-OK) has released an appropriately timed report on federal subsidies that have gone to the deceased. From the introduction:

In the past decade, Washington sent over $1 billion of your tax dollars to dead people. Washington paid for dead people’s prescriptions and wheelchairs, subsidized their farms, helped pay their rent, and even chipped in for their heating and air conditioning bills.

In some cases, these payments quietly gather in a dormant bank account. In many others, however, they land in the pockets of still-living people, who are defrauding the system by collecting benefits meant for a now-deceased relative.

Since 2000, the known cost of these payments to over 250,000 deceased individuals has topped $1 billion, according to a review of government audits and reports by the Government Accountability Office, inspectors general, and Congress itself. This is likely only a small picture of a much larger problem.

As a Cato essay on fraud and abuse in federal programs discusses, these problems are endemic because the federal government is a “vast money transfer machine.” While federal subsidy programs should be cut because they harm the economy and are unfair to taxpayers, Coburn’s findings of pure waste represent one more reason to pursue terminations of federal programs.

Halloween: Uncle Sam Style is a post from Cato @ Liberty - Cato Institute Blog

Cato adjunct scholar Tim Sandefur, who authored an amicus brief in the case of Skilling v. U.S., writes on his home blog:

Today, the Supreme Court decided the case of Jeffrey Skilling, the CEO of Enron, who had been convicted of the crime of “honest services fraud.” The statute, however, is so vague, that nobody knows what the term “honest services fraud” actually means. Pacific Legal Foundation (joined by our friends at the Cato Institute) filed a brief in the case arguing that statutes that are so vague violate the constitutional guarantee of due process of law—and that the constitutional protection against vague laws should apply in the business realm the same as anywhere else. Vague laws are dangerous because you cannot know what they prohibit and cannot therefore avoid breaking the law. It is unfair and unconstitutional to hold vague statutes over their head in such a way.

Unfortunately, the Court has in the past been reluctant to apply it outside the regular criminal context, on the theory that businesses are wealthier and can afford expert legal advice. But in a case like this, even the experts have no idea what the statute actually means. The federal circuit courts are in disarray as to what it means. And nobody should be convicted under a statute that is so broadly and vaguely worded, that even the prosecuting lawyer can’t tell you what that law actually means.

As they say, read the whole thing.

The Unbearable Vagueness of “Honest Services Fraud” is a post from Cato @ Liberty - Cato Institute Blog

I’m usually in enthusiastic accord with our friends over at the Competitive Enterprise Institute, but it seems to me they’ve made a mistake by petitioning the Federal Trade Commission (FTC) to crack down on GM’s ridiculous “we repaid our federal loan” ad. Some zealous enforcers would love for the FTC to do more to regulate speech by American business on matters of public concern, and it seems to me the last thing we should do is encourage such a trend.

For those who came in late, General Motors and its CEO Ed Whitmire were widely and rightly assailed here and elsewhere for asserting (in a column whose message was repeated in much-played TV ads) that the company had repaid its bailout loan “in full, with interest, years ahead of schedule.” Actually, as the inspector general of the government’s TARP program readily acknowledged, the firm had merely used one pot of federal money to repay another. Iowa Sen. Charles Grassley helped expose the dodge, and publications ranging from FoxNews.com to the New York Times joined in with scathing coverage.

Yesterday CEI announced that it had filed a formal complaint [PDF] with the FTC urging the commission to investigate the automaker’s ad campaign as misleading. It alleges that the ad campaign “could unfairly dupe consumers into a false, renewed confidence in the company” and that “consumer purchasing decisions can easily be affected by such considerations.” Nick Gillespie at Reason, CEI general counsel Hans Bader, and Todd Zywicki at Volokh have more.

There’s a long history of businesses’ responding to public criticism of their operations or products — and getting in further legal or regulatory trouble because of that very response. In one early case, the FTC went after egg producers for asserting, in the midst of a cholesterol scare that in hindsight appears overblown, that their ovoid wares were not in fact a menace to cardiac health. Sen. Charles Schumer (D-N.Y.) and the Center to Prevent Handgun Violence have asked the FTC to prohibit ads that imply that keeping a loaded weapon on hand will make a family safer. In Nike v. Kasky, a famous case that reached the Supreme Court [Thomas Goldstein, Cato Supreme Court Review 2003, PDF], shoemaker Nike was sued under a California law over the public defense it had put forward of its labor practices in overseas factories. Environmentalists have sought to suppress ads claiming that nuclear power is nonpolluting, and so forth.

Free-market advocates have generally argued that whatever the merits of laws or regulations banning misleading advertising in garden-variety commercial contexts, there are special dangers to the First Amendment and to robust debate generally in letting agencies and courts second-guess the content of “issue ads” and speech on topics of public controversy. To begin with, it encourages advocates to turn to the law to silence disagreeable speech rather than muster their best arguments to rebut it. In one grotesque example, MoveOn.org and Common Cause actually petitioned the FTC to institute a complaint against Fox News over its use of the slogan “Fair and Balanced”, since (they said) the network was neither.

Despite its current dependence on government, GM is in every relevant legal sense a private company, so any precedents forged against it will wind up applying to every other private enterprise that might wish to advertise on matters of public controversy. Which makes it a concern that CEI’s complaint cites with seeming enthusiasm broad FTC interpretations of authority — for example, its authority to suppress speech that might not be in itself false but could leave a potentially misleading impression.

If there is a continuum extending from more or less purely commercial speech (“Our tires last 40,000 miles”) to more or less purely political speech (“Our business is badly overtaxed”), GM’s ad campaign surely falls way over toward the “political” side. CEI’s response to this is to argue that the campaign might influence consumers’ purely economic calculations (as opposed to the political reasons they have to feel angry at GM) by making them more likely to see the company as solvent and thus as capable of making good its warranty promises. The words “strained” and “makeweight” come to mind to describe this argument. Does CEI really want to establish the future principle that a company’s over-sunny talk about its financial prospects will henceforth get it in trouble with two federal agencies, the FTC and SEC, rather than the SEC alone?

It all seems a rather high price to pay in principle for keeping the GM-TARP story in the papers for another day or two.

The FTC and Those GM Ads is a post from Cato @ Liberty - Cato Institute Blog

As the nation contemplates the new health care entitlements that Congress and President Obama just created, it is worth noting an article in today’s Washington Post, which reports on the performance of past efforts to eliminate fraud in another health care entitlement:

More than a decade ago, Congress set out to squeeze the fraud out of Medicare billing at nursing homes, requiring more precise justifications for costs. It created new “ultra-high” billing categories intended to be used for only 5 percent of the patients needing highly specialized care and rehabilitation.

But within a few years, nursing homes flooded the ultra-high categories with patients, contributing to $542 million a year in potential overpayments, federal analysts found.

Since then, the numbers in the ultra-high categories have quadrupled, and the amount of waste and abuse could reach billions of dollars a year…

The article ends with the ominous implication that eliminating fraud in entitlement programs like Medicare will ultimately require government agencies to decide whether certain services are medically necessary.

Death panels, anyone?

Medicare Fraud: 1, Anti-Fraud Measures: 0 is a post from Cato @ Liberty - Cato Institute Blog

The President has announced a government crackdown on Medicare and Medicaid fraud. The effort appears to be an attempt to make it easier for Americans to swallow the health care “reform” he’s trying to shove down their throats. As House Republican leader John Boehner correctly asked, “Why can’t we crack down on fraud without a big-government takeover of health care?”

As I’ve noted before, improper payments made by Medicare and Medicaid is may well be $50 billion more than the already appalling $100 billion annual figure the president cited. Administrative efforts to rein in fraud and abuse are welcome, but they won’t solve the huge and fundamental inefficiencies of these programs. Because the law requires government health care programs to quickly get payments out the door, Uncle Sam will always be engaged in a costly game of “pay and chase.”

The broader problem is that government programs aren’t subject to market discipline. Policymakers and administrators have little incentive to be frugal because they face few or no negative consequences when playing with other people’s money.

Most of us have noticed how good private companies can be at reducing fraud. I recently received a call about questionable charges on my Discover credit card. After quizzing me on a list of purchases made with my card in the past 24 hours, it became clear that someone had gotten control of my account. Discover immediately closed the account, opened an investigation, and removed me from any liability for the fraudulent charges.

What amazed me is that I only had about $300 worth of charges on my card. It’s not a big account and thus not a big money maker for Discover. Yet, within 24 hours of a string of suspicious charges, the company was right on top of it before I even realized anything nefarious was going on. Private markets don’t always work this well, but government programs almost never do.

A Tale of Two Frauds is a post from Cato @ Liberty - Cato Institute Blog

1. Additional federal spending transfers resources from the more productive private sector to the less productive public sector of the economy. The bulk of federal spending goes toward subsidies and benefit payments, which generally do not enhance economic productivity. With lower productivity, average American incomes will fall.

2. As federal spending rises, it creates pressure to raise taxes now and in the future. Higher taxes reduce incentives for productive activities such as working, saving, investing, and starting businesses. Higher taxes also increase incentives to engage in unproductive activities such as tax avoidance.

3. Much federal spending is wasteful and many federal programs are mismanaged. Cost overruns, fraud and abuse, and other bureaucratic failures are endemic in many agencies. It’s true that failures also occur in the private sector, but they are weeded out by competition, bankruptcy, and other market forces. We need to similarly weed out government failures.

4. Federal programs often benefit special interest groups while harming the broader interests of the general public. How is that possible in a democracy? The answer is that logrolling or horse-trading in Congress allows programs to be enacted even though they are only favored by minorities of legislators and voters. One solution is to impose a legal or constitutional cap on the overall federal budget to force politicians to make spending trade-offs.

5. Many federal programs cause active damage to society, in addition to the damage caused by the higher taxes needed to fund them. Programs usually distort markets and they sometimes cause social and environmental damage. Some examples are housing subsidies that helped to cause the financial crises, welfare programs that have created dependency, and farm subsidies that have harmed the environment.

6. The expansion of the federal government in recent decades runs counter to the American tradition of federalism. Federal functions should be “few and defined” in James Madison’s words, with most government activities left to the states. The explosion in federal aid to the states since the 1960s has strangled diversity and innovation in state governments because aid has been accompanied by a mass of one-size-fits-all regulations.

For more, see DownsizingGovernment.org.

Six Reasons to Downsize the Federal Government is a post from Cato @ Liberty - Cato Institute Blog

Today, in what seems like an endless string of 3-2 votes, the SEC moved to restrict the ability of investors to short stocks, claiming that such restrictions would restore stability and protect our financial system.  The truth couldn’t be more different.  Short sellers have long been the first, and often only, voice raising questions about corporate fraud and mismanagement.  For instance, shorts exposed the fraud at Enron, WorldCom and other companies while the SEC largely slept.

Bush’s SEC, lead by former Congressman Chris Cox banned the shorting of various financial industry stocks during the crisis.  The SEC then, as now, would have us believe that Bear, Lehman, AIG, Fannie, Freddie and others were not the victims of their own mismanagement, but rather victims of bear raids by short sellers.  In another instance of Obama and his appointees reading from the Bush playbook, SEC Chair Mary Shapiro finds ever creative ways to expand Cox’s misguided policies.

Short sellers only profit if they end up being correct.  Sadly Washington instead believes in punishing market mechanisms that work and throwing increasingly more money at failed agencies, like the SEC.  Rather than attacking short sellers we should applaud them for doing the SEC’s job.  But then if we had more short selling, providing greater incentives for investors to root out fraud, we might start to question why we even have the SEC.

Ban on Short Sales Benefits Banks and Hurts Investors is a post from Cato @ Liberty - Cato Institute Blog