Tuesday, February 2, 2021

White House Attitudes toward Fraud: Evidence from 75 ERPs

Judging from their Economic Reports, few Presidents have given much thought to the problems of fraud.  When they do, typically private sector fraud is cited as a reason for government regulation.  Prior to 2019, ERPs rarely included analysis of incentives to prevent fraud, and never explained why those incentives would be different when the victim of fraud is a private entity as opposed to taxpayers.  Does this reflect a (noneconomic) view that fraud is a consequence of bad people rather than poor incentives?

ERPs hardly mentioned fraud before Clinton.  His ERPs cite financial fraud (especially credit card fraud, which had grown with the industry itself) and healthcare providers that fraudulently miscode treatments in order to enhance their receipts from government and other insurance.

George W. Bush has two interesting chapters on "The Tort System" (2004, explaining how the threat of future tort damages is a disincentive for fraud) and, following the Enron scandal, a chapter on "Corporate Governance" (2003).  These are the two exceptions where incentives are noted, although the analysis is not applied to frauds perpetrated against taxpayers.  Bush's ERPs also discuss fraud in the growing ecommerce industry.

The Affordable Care Act was sold on many false pretenses, one of which is that it would be cracking down on fraud.  President Obama's ERP repeated this talking point in 2010, 2011, and 2013 without an analysis of what the ACA was actually doing to incentives to perpetrate fraud or to incentives to prevent it.  Here is a clip of President Obama himself bragging about "cracking down on fraud."

A prime example of what was missing: the fact that the states, which administer eligibility for Medicaid, would have hardly any financial responsibility for the new parts of Medicaid (by no coincidence, the new parts require more effort to police eligibility).  Are we surprised that in reality "Improper Medicaid Payments have Soared Since Obamacare"?  More well known is the "epidemic of identity theft" that followed the opening of ACA insurance applications.

In a chapter about the Economics of Socialism, the 2019 ERP discusses the incentives associated with  "spending other people's money on other people."  On this basis, government health insurance programs are not expected to put much effort into policing fraud -- turning down a legitimate claim makes for political embarrassment whereas quietly paying a fraudulent claim falls on the taxpayer who has no part in managing the plan.  While they brag about "low administrative costs," the government plans are implicitly acknowledging how little effort they put into administration as compared to plans with a profit motive or that must attract voluntary consumers with low premiums.

Although it does not discuss the incentives, the 2016 ERP offers an empirical observation along these lines.  Several pages discuss the lightly regulated "On-Demand Economy," and compliments private industry for innovative ways (especially, rating systems) of reducing fraud against the consumer.

The 2018 ERP included a popular chapter about cyberthreats.  Another half chapter followed in 2019.  The 2021 ERP looked at the role of trade agreements with China in encouraging them to partner with the U.S. in preventing cyber-theft.  It also looked ahead to infrastructure investment, including attention to cyberthreats.

President Biden's economic team may not be in a good position to consider fraud.  So far it has emphasized setting records on metrics like the size of the weekly unemployment benefit, the speed of delivering stimulus payments, and the number of people participating in the programs.  Nigerian criminals have found Biden's appointment for administering federal UI to be an especially incapable gatekeeper.  She will have near veto power over anything Biden's economic team publishes on this subject.

2021 has begun with another epidemic of identity theft, especially in blue states.  President Biden's economic team can help, if they are willing and able.

[Some economists may say that fraud is just a transfer and therefore that policing fraud is a social waste (from a worldwide perspective).  But the criminals also use resources in their craft, not to mention that the funds they steal must be extracted from taxpayers which involves another deadweight cost.]