Part VI

Balancing the budget by eliminating government waste.

This idea is a popular one that gets a lot of attention in the news and gets traction among Conservative, Moderate, and Liberal politicians alike (the major difference is which government functions each group wants to put under the microscope). We have all heard news stories about people defrauding the government, wasted government money on foolish projects, or government workers abusing privileges. When you hear these stories it can seem like an astronomical amount of money is being wasted. But if we could end (or even severely curtail) government waste, fraud, and abuse what effect would it actually have on the budget?

Before we can crack open the books we have to set some ground rules. Government budgets are open to the public but no program or agency has a budget category called “wasteful spending” (please no jokes from Libertarians). So we have to define what is wasteful spending? For my purposes I am not going to consider whether money that is spent on a program that I deem worthwhile a determination of whether or not it was wasted because that is subjective. The definition I will use for waste will be whether the money was spent on something other than what it was intended for. Even with that definition, the exact amount is a matter of debate. But I did a little research and found a government website called http://www.paymentaccuracy.gov/. It is a public information site that shows, based on internal government review, how much money federal agencies and programs improperly pay out to contractors, businesses, and individuals. These improper payments are due to clerical errors, administrative mistakes, and fraud. The statistics published for 2010 showed that the federal government over paid contractors, businesses and individuals by 5.49%, but not all of this money is wasted. It is possible for the government to reclaim overpayments (by prosecution in case of fraud or people voluntarily paying it back in cases of clerical error) the government has averaged an 80.6% reclaim rate since 2004. So if we figure the government reclaimed 80% of overpaid funds in 2010, that means that in the end, the government overpaid contractors, businesses, and individuals by 1.09 % (plus the administrative cost to get the money back).

Now these statistics are interesting, but they do not accurately tell us how much money the government actually wastes. This is because these statistics are only dealing with agencies and programs that directly pay money out, and do not reflect any poorly spent funds or inefficiencies. But I do think these numbers give us a ballpark figure of what percentage of funding is difficult to track in a large organization like the federal government. So let's assume for a moment that 5.5% of government funding across the board is lost due to waste, fraud, and abuse. Now let's assume that in 2010 Congress and the Presidency instituted sweeping regulations and policy reform that reduced waste, fraud, and abuse and increased efficiency to the point that the federal government was able to reduce their costs by 5.5% without losing any functionality (with the exception of the interest on the national debt because that amount can’t be reduced by efficiency). If that were the case the cost of government spending would have been reduced by $167 billion dollars and that would have in turn, reduced the deficit to $1,126 billion a year.

So what is the verdict? Well the fact of the matter is, waste and inefficiency are part of human nature. There will always be some degree of human error, incompetence, or people trying to cheat the system. So I think it is fair to say that even if we could set up perfect policies and regulations, we could only reduce waste, fraud, and abuse by so much, because human beings run the programs. But hypothetically speaking if we could achieve the extremely optimistic goal to reduce costs by 5.5% (or the total amount of money the government is willing to acknowledge was miss spent in 2010) through increased efficiency, the lion’s share of the deficit would stay intact. To put things in perspective if we go back to our "federal government as a household" budget (see Part II), that family would have trimmed their bills by $334 a month. Now this sounds great, but this family still has $2,254 in bills each month that they cannot pay.

So what does this mean? The budget cannot be balanced by relying on cutting government waste as its primary focus. The reason is, that even if the government were wildly successful at rooting out waste it would only reduce the defect by 12.9%. But even more problematic with the idea of reducing government waste is how do we even do it in the first place and how can we predict how effective our efforts will be? The question is a bit like how do we reduce crime or poverty? There are lots of ideas out there to deal with these types of problems, but it is difficult to quantify how effective a program will be. For example a police department can propose a plan to reduce crime, but it cannot propose a plan to reduce household robberies by 23%. It gets even more complex with cutting waste because if you are spending $1 on additional oversight for every $5 you cut in waste your net gain is only 80% of the waste you cut. So true savings are very hard to calculate until after the fact.

Ultimately it is important to push our government to be more efficient because it can only help and it would be a step in the right direction when it comes to balancing the budget. However, I think that the important thing to take away here is that if a politician is telling you that they will balance the budget without cutting a single program or raising any taxes, they are trying to sell you snake oil.

So by the numbers:

Percentage this idea could reduce the federal budget deficit by: N/A (My guess is no more than 12.9%)*
Total dollar amount this idea could cut the deficit by: N/A (My guess is no more than $167 billion)*

*Since there is no official number on the amount of government waste and there is no way to know how effective reform would be at eliminating waste it is hard to quantify how effective this strategy would be at cutting the deficit. But it seems it would be unlikely that it would be more than $167 billion total waste according to the available evidence (and a little bit of estimation on my part) and even if all this waste could be eliminated it would only take care of 12.9% of the deficit. But since my analysis relied a little more estimation than I am comfortable with, I am not going to consider these numbers as certain.