This pandemic wreaked a lot of havoc, but the government response to the pandemic brought a lot of so-called "joys" to our world: harmful lockdowns, ineffective face masks, school closures that caused delays in education, travel bans, mixed messaging that eroded the people's trust in government providing health advice, inflation. The government gave us another "joy" during the pandemic: expanded unemployment insurance (UI) benefits.
When the pandemic hit, various jurisdictions decided to lock down large swathes of the economy. This left millions without a job during the lockdowns. In response, Congress enacted the Coronavirus Aid, Relief, and Economic Security [CARES] Act. Part of the CARES Act included an additional $600 per week in UI benefits, federal funding for state UI funds up to 39 weeks, and additional federal funding for up to 13 weeks if the state funds were depleted.
The premise of this UI expansion was to provide households with economic stability while people stayed at home to wait until COVID blew over. Clearly COVID still exists, but at least higher rates of unemployment were one result of lavish unemployment benefits. What else did the taxpayers get as a result of the unprecedentedly excessive unemployment benefits? A report released nearly a month ago from a government watchdog, the Government Accountability Office, gives us an answer. The UI benefits expansion came with high rates of abuse and fraud.
Between April 2020 and September 2022, the expanded UI programs that were created as a result of the CARES Act and subsequent legislation allocated $878 billion. In total, the GAO estimated that $60 billion out of the $878 billion were allocated for fraudulent payment (GAO, p. 17). This high fraud rate is on top of an earlier GAO report showing that improper payment rate for UI benefits was 18.9 percent. For reference, fraud is a type of improper payment, along with overpayments, underpayments, or payments not made in strict adherence with the given statute.
However, there is reason to think that the UI fraud rate is higher than the GAO's estimated 6.8 percent. The Department of Labor (DOL) released a paper called "OIG Oversight of the Unemployment Insurance Program." The DOL points out that pre-pandemic fraud rates were 10 percent. These rates were likely higher during the pandemic. Why, aside from the fact we saw a similar phenomenon with the Paycheck Protection Program?
In addition to the increased amount in benefits, the Pandemic Unemployment Assistance (PUA) reliance on self-certification incentivized criminals to attack and defraud (GAO, p. 10). The PUA certification did not require documentation to confirm self-employment or prior employment (GAO, p. 11). The expanded coverage also made it more difficult for states to determine initial and continued program eligibility (ibid.).
You might think that the UI program is something of the past and this is merely an academic exercise. This is not simply because between 2005 and 2021, the GDP grew 79 percent, federal government programs grew 228 percent, and improper payments shot up by 522 percent. That argument is problematic because many economists are anticipating a recession this year. An increasingly common government response to recession is more UI benefits. The other disturbing part of the recent GAO report is that Department of Labor did not implement any measures of the antifraud strategy that the GAO recommended back in October 2021 to manage the UI fraud risks (GAO, p. 32). To quote the report, "Without an antifraud strategy, DOL is not able to ensure that it is addressing the most significant fraud risks facing the UI system in alignment with the Fraud Risk Framework."
This goes beyond not being able to estimate the full extent of fraud committed (GAO, p. 29). If we have another major economic downturn, especially if it happens this year, the government is not ready to withstand another onslaught of fraudulent payments. The GAO makes recommendations to improve government operations and bureaucrats are not responsive to make changes that would save taxpayers billions. To quote Nobel Laureate Gary Becker, "on the whole, government failure is far more pervasive, damaging, and less self-correcting than is market failure." In case I did not have enough reminders of that reality, the GAO's report on unemployment insurance fraud adds enough reasons to my long list.
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