Most Americans agree that waste, fraud, and abuse in government programs is a problem. A recent poll of likely voters found that those surveyed believe an average of 42 percent of every dollar spent by the federal government is wasted. The same poll also found that 60 percent of those surveyed believe that problems with the federal budget can be solved by simply eliminating waste, fraud, and abuse. In fact, 40 percent strongly agreed with this position.1
Although the belief that the government’s budget problems can be solved by making bureaucracies simply run more efficiently is erroneous, the American people are correct that Washington does a poor job of managing their money. We have documented countless examples of waste at Cato’s website, www.DownsizingGovernment.org. And the newspapers seem to have fresh stories every day of federal agencies making poor financial decisions
However, most people know very little about the breakdown of the federal government’s $3.8 trillion budget, and many don’t accept that huge deficits are caused by programs that benefit them. For example, the same poll found that 49 percent disagreed that Social Security and Medicare are a major source of problems for the federal budget. Attempting to reduce waste, fraud, and abuse is fine, but it won’t solve our deficit‐spending problem.
Policymakers on both sides of the aisle recognize that examples of waste, fraud, and abuse do not sit well with the American people. Therefore, it is hard — if not impossible — to find a policymaker who doesn’t tell his or her constituents that they’ll work to eliminate government waste. For example, previous House Speaker Nancy Pelosi instructed her committee chairs to uncover waste, fraud, and abuse as part of an effort to “ensure fiscal discipline for the long term.” The House Republicans’ “Pledge to America” included a promise to “root out government waste.”
What few in Washington want to acknowledge is that waste, fraud, and abuse always comes with government programs — the same way a Happy Meal always comes with a toy and a drink. This is because the federal government is a vast money transfer machine. It spends hundreds of billions of taxpayer dollars each year on programs — from the massive Medicare to hundreds of more obscure programs that most people have never heard of.
Administrators don’t do enough to police these massive transfers because people always tend not to spend other people’s money as carefully as they spend their own money. And on the receiving end of programs, a vast number of people use the federal budget as a cookie jar to garner benefits to which they are not entitled.2 Families seek improper benefits through subsidies such as the school lunch program. Hospitals rip off taxpayers by double‐billing Medicare and Medicaid. Criminal gangs loot subsidy programs such as food stamps. Owners of nonprofit groups that are supposed to aid the needy line their own pockets with taxpayer funds.
For decades, there have been efforts to end such abuses, but federal programs are extremely complex and they deliver benefits to thousands or millions of recipients. When it comes to waste, fraud and abuse, government programs are always chasing their tail. In the private sector, businesses have a financial incentive to stop abuses before they happen. No such incentive exists with government programs. Instead, government administrators usually only uncover abuses after the fact, and often only after outside auditors or the media have investigated.
“Small Scandal Administration”
The Small Business Administration is no stranger to waste, fraud, and abuse. Indeed, the SBA was created in 1953 after the demise of the Depression era Reconstruction Finance Corporation, which lost support after allegations of influence peddling during the Truman administration. President Dwight Eisenhower was against creating the SBA in principle, but he signed the legislation as a politically expedient move that would counter criticisms that Republicans were beholden to “big business.”
The SBA’s problems started right away. In 1958, Eisenhower’s Budget Bureau warned that the SBA was “an uncontrollable program,” but both parties wanted to convey a message that they supported the “little fellow.“3 Members of Congress enjoyed using the SBA to distribute money and favors to their constituents. Members sometimes leaned on the agency to declare a particular business “small” or have a constituent’s competitor declared “not small.”
The 1960s and 1970s were marked by scandals and failures, including the reported use of SBA loans to establish “front” companies for the mafia. By the mid‐70s, the agency had earned the nickname “Small Scandal Administration.“4
The SBA has become one of the government’s chief instruments for pursuing affirmative action, which has led to numerous scandals. Successive administrations used the agency to direct lending and federal contracts to minority‐owned firms. Although stamping out discrimination is a laudable goal, the SBA’s set‐asides have bred corruption and abuse. For example, President Ronald Reagan supported an expansion of SBA procurement set‐asides for minority‐owned firms. That decision contributed to the “Wedtech Scandal” in which government officials knowingly assisted a corrupt defense contractor that had fraudulently obtained contracts through SBA minority set‐asides.
More recently, the SBA has made headlines over abuses of its 8(a) program, which sets aside federal contracts for minority‐owned or other “disadvantaged” small businesses. Alaskan Native Corporations, which were created by a federal law in 1971, were “intended to settle longstanding land claims by Alaska natives and provide economic opportunities.” After Congress allowed the ANCs to participate in the 8(a) program in 1986, powerful Alaskan Senator Ted Stevens won them additional contracting privileges.
In the past couple of years, controversy has erupted over the ANCs’ ability to subcontract work out to companies all over the country, including companies that are not small or “disadvantaged.” Because the 2009 stimulus bill required recipients to publicly report subcontractors, researchers at ProPublica have been able to get a clearer idea of who is benefitting from the ANC privileges: