Wednesday Morning Rant

The fraud problem in government programs is blowing up in a way that may cause serious problems for the government at all levels. What Nick Shirley exposed began as "Somali daycare fraud in Minnesota." It quickly ballooned to "Somali program fraud in Minnesota" and then to "Somali program fraud in multiple states" and is now in the process of becoming "widespread fraud everywhere." This is, to put it mildly, bad and presents a conundrum in terms of how the government will respond to it.

It's a tough problem because of widespread it is, how long it has been going on, record low trust and the need to maintain legitimacy. There are a few ways to try to address what is clearly a systemic, all-levels problem and I suspect Bessent's declaration yesterday that "5%-10%" of the federal budget is stolen is a key part of framing a response that can thread the needle.

When Shirley exposed the Somali daycare fraud in Minnesota, he ended up - I suspect completely accidentally - causing an entire vast of edifice of fraud to be exposed like never before. In so doing, he has precipitated a crisis that continues to worsen as information continues to leak out. What Shirley exposed was merely the very small tip of a very large iceberg. What he exposed in Minnesota is not unique to that state or those programs, but turns out to be extremely widespread with a ton of official support for and enablement of it from within the government. The sums involved are both eye-watering and rage-inducing to a degree so severe that it may present a general legitimacy crisis if it goes unchecked.

So how the heck can the government deal with a crisis like that? There are a few approaches I can think of:
1. Sweep it under the rug. Pretend the problem doesn't exist. Call it a local issue, sacrifice a few corrupt Party Men in Minnesota and call it a day.
2. Respond in mass. Suspend programs until legitimacy can be established. Aggressively prosecute people from the government to the NGOs to the cut-outs and straw claimants. Provide detailed results to the public and fill the prisons.
3. Try to split the difference. Acknowledge that the problem is much bigger than Somalis and Minnesota, but much smaller than an all-of-government complex of fraud. Sacrifice some people across the board, put up some modest gains/savings and declare victory.

The "nothing" approach will result in a lot of fury among the public. Blatant, obvious fraud going completely unpunished while State and Party continue to laugh their way to the bank as they light their cigars with stolen C-Notes will not go over well. It will not trigger revolution, but it will broadly increase the rage level among the public, and simultaneously disincentivize anyone from working hard to support or risking anything to defend a government that behaves this way. The anger will be cold, but will have fairly quiet long-term consequences. Young people who are inclined to work will check out even more than they already have and nobody will view anything the government does as honest or legitimate. It will be steal as steal can, and compound the problem into oblivion. But the Party Men remain by and large safe and they continue looting the empire as they push it toward collapse even faster.

The "all" approach runs a real risk of collapsing the government in on itself if the fraud and theft are as widespread as is feared. It may result in systemic failure if fraud at that scale is exposed and acknowledged. If a third or a half of every tax and debt dollar has been stolen - and likely stolen for decades - then people might actually demand blood. There could be no targeted prosecution, it would necessitate a general purge. We'd need a penal colony to deal with the guilty. The economic dislocation would be enormous. If the system survives that kind intervention, it may be a decade or more before it all shakes out. The government may not survive it, and the parties probably wouldn't.

The "split the difference" approach is a way of acknowledging a serious problem and reining in some of it, while pretending that it is the entire problem. This is a tricky proposition, but probably very appealing. Don't just sweep it under the rug. Bring some consequences to some of the wrongdoers, be very public about everything and claim the problem is now solved.

I think it's going to be Door Number Three, and that Bessent's declaration yesterday is laying the groundwork for it. The reaction to Bessent's declaration around these parts was, to summarize, "yeah, whatever - we all know that's BS and it's way worse than that." This is probably true, and I would be shocked if the real number is less than double or triple that, but I also don't think Bessent is directing that message at those who are really tuned-in to what is going on. Most people aren't that tuned in, and I think it is for them that he is doing this. Frame the problem as being big enough to matter, but small enough to contain - and create the environment to go after that much and no more.

In so doing, I suspect the hope is to throw a bone to the people, crucify some insiders, tally up some savings and retain legitimacy through the appearance of responsiveness and effective accountability and enforcement. The problem can't be safely ignored and the full problem is so large it can't be safely addressed, so try to split the baby to maintain legitimacy.

It's going to be a very tough needle to thread.

posted by Joe Mannix at 10:55 AM

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