Why is the federal government so wasteful?

I’ve followed federal budget issues for two decades, and there has been a never-ending stream of scandals regarding wasteful spending. Programs do not work, officials get caught frittering away taxpayer money, and many unscrupulous people are ripping off federal benefits. The Obamacare website disaster and the recent (and huge) disability fraud bust in New York City are just the latest scandals.

Federal waste is not a modern phenomenon. As far back as the 19th century, the Bureau of Indian Affairs was rife with corruption and the Army Corps of Engineers was already known for pork-barrel spending and chronic cost overruns on projects.

Wasteful spending is a fundamental problem with the way the government works. Private businesses can also make bad decisions, have cost overruns, and misallocate investments. But private markets have built-in mechanisms to minimize those problems, whereas the government does not.

Here are 15 reasons for federal government wastefulness:

1.  The government has become so huge that federal auditors, private watchdogs, and congressional oversight committees cannot even begin to review all the spending. The federal government funds more than 2,200 subsidy and benefit programs, and they are all susceptible to waste, fraud, and abuse.

2.  People tend not to spend other people’s money as carefully as they spend their own. For federal decisionmakers, the source of funding for their favored programs can seem to be distant or abstract, but private-sector decisionmakers must weigh the costs and benefits of spending their own money.

3.  Unlike in the private sector, poorly performing federal agencies are not subject to takeover bids, nor do they go bankrupt, and thus there is no built-in system to eliminate failed activities. In the private sector, roughly 10 percent of U.S. companies go out of business each year, and corporate executives get ousted all the time. In the private sector, poor performance gets punished.

4.  There are more political rewards for federal policymakers to add new programs and expand existing ones than to weed out low-priority programs and waste. By contrast, private-sector decisionmakers are forced by bottom-line pressures to make tough decisions.

5.  Federal managers face no profit incentive, giving them little reason to proactively reduce waste and cut costs. Indeed, without profits to worry about, federal managers often favor budget increases without any idea about whether expansion will add net value to society above the taxpayer costs.

6.  Without the profit motive, there is little incentive for government workers and managers to innovate. There is less motivation than in the private sector to try and produce better services of higher quality.

7.  To policymakers, costs are benefits, and that creates bad incentives. If a Pentagon project has a cost overrun, members with related jobs in their districts may not be worried because an overrun means more spending on their constituents. Academic research has shown that cost overruns are more frequent on government projects than on private-sector projects.