James Bovard of Cato wrote an article entitled “The Food-Stamp Crime Wave” on June 23, 2011 for the Wall Street Journal.
Bovard shows no awareness of criminology, but what he described was the creation of a criminogenic environment. A criminogenic environment has such perverse incentives that it produces widespread crime in a particular field of activity. Non-criminologists frequently have difficulty believing that fraud can become common.
They often believe that fraud can only arise among “a few rotten apples.” This view is naïve and crimionological research falsified the claim over a half century ago. Bovard is correct, therefore, that fraud can become common in an industry. This is particularly true if fraud produces a “Gresham’s dynamic.” George Akerlof explained this point over 40 years ago in his famous article on a market for “lemons” (1970).
“[D]ishonest dealings tend to drive honest dealings out of the market. The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence.”
Bovard purports to be a libertarian, yet he ascribes the creation of the criminogenic environment in food stamps to the three “de’s” – deregulation, desupervision, and de facto decriminalization. He is also upset that the federal government, in the context of food stamps, has failed to sufficiently distort consumer decision making. I address his substantive position on food stamps in another column.
This column explains his argument as to how the three de’s created a criminogenic environment in food stamps and shows how his reasoning would compel him to demand the end of the far more powerful and destructive criminogenic environments that drove the Great Recession (and the second phase of the S&L debacle and the Enron-era accounting control frauds).
The first element Bovard cites as producing a criminogenic environment is deregulation. “30-five states have abolished asset tests for most food-stamp recipients. These and similar “paperwork reduction” reforms advocated by the United States Department of Agriculture (USDA) are turning the food-stamp program into a magnet for abuses and absurdities.”
The second element he cites is de facto decriminalization due to the Obama administration’s near indifference to fraud.
“The Obama administration is far more enthusiastic about boosting food-stamp enrollment than about preventing fraud.”
Bovard argues that desupervision led to de facto decriminalization. “The USDA’s Food and Nutrition Service now has only 40 inspectors to oversee almost 200,000 merchants that accept food stamps nationwide. The Government Accountability Office reported last summer that retailers who traffic illegally in food stamps by redeeming stamps for cash or alcohol or other prohibited items “are less likely to face criminal penalties or prosecution” than in earlier years.”
Bovard is implicitly raising the danger of a Gresham’s dynamic among retailers. Large, fraudulent retailers can obtain vastly more from food stamp fraud than can recipients. An honest retailer cannot compete against a large, fraudulent retailer. This turns market forces perverse and can drive honest retailers out of business. Fraud begets fraud.
Bovard appears to recognise that vigilant regulation is essential to successful fraud prevention and prosecution. When the regulators do not make anti-fraud efforts a priority the prosecutors are so overwhelmed that the criminal justice system breaks down. He cites the example of Wisconsin.
“The Wisconsin Policy Research Institute concluded: “Prosecutors have simply stopped prosecuting the vast majority of [food-stamp] fraud cases in virtually all counties, including the one with the most recipients, Milwaukee.””
In criminology, we refer to this as a “system capacity” problem. Bovard argues that the desupervision has effectively destroyed the capacity of the system to respond to the “crime wave” produced by the criminogenic environment. Bovard concludes that the criminogenic environment was inevitable because cheaters can profit with greatly reduced risk of prosecution.
Environments become intensely criminogenic when the federal government engages in the three “de’s” and preempts state anti-fraud efforts. This was an infamous feature of the Bush administration’s response to the fraudulent mortgage lenders, and Bovard argues that the Obama administration is intensifying a criminogenic environment in food stamps by following similarly fraud-friendly policies.
“The Obama administration is responding by cracking down on state governments’ antifraud measures. The administration is seeking to compel California, New York and Texas to cease requiring food-stamp applicants to provide finger images.”
So, how much does the food stamp fraud cost? Bovard does not provide the published estimates, but notes that 44 million Americans are recipients of food stamps at a total cost of $77 billion, or under $2000 per recipient. Individual frauds, therefore, obtain relatively small proceeds. Fraudulent retailers are the ones who are enriched by food stamp fraud. Bovard, however, concentrates entirely on fraudulent recipients and several corrupt public officials.
The GAO estimated, prior to the adoption of electronic benefit transfers (EBT) that food stamp trafficking represented 3.7% of annual benefits. Food stamps are now paid through EBT. This has greatly reduced the incidence of fraud by recipients, in some studies by an estimated 75-81 per cent. Whitmore, Diane. “What are Food Stamps Worth?” (July 2002: p. 6 & n. 5).
Bovard missed the real food stamp crime wave (in terms of a much higher incidence of fraud) that peaked over a decade ago.
What we need now is to get Bovard and the Wall Street Journal to apply this same reasoning and passion about the dangers of the three “de’s” producing intense criminogenic environments to the three “de’s” that produced our recurrent, intensifying financial crises. My prior columns have explained at length how the three “de’s” produced the criminogenic environment that drove the “epidemic” of accounting, securities, mortgage, and appraisal fraud that hyper-inflated the bubble and led to the Great Recession.
Bovard’s column was the most e-mailed WSJ article for two days. Food stamp fraud is important and Bovard’s rhetoric stirred the WSJ readership to rage. The accounting control frauds that drove the S&L, Enron era and ongoing crises are massively greater and more destructive and they involve our most elite CEOs becoming spectacularly wealthy at the expense of the public. The incidence of banking and mortgage fraud is far greater than food stamp fraud.
The direct dollar losses due to these frauds are massively greater than food stamp fraud. The moral culpability and the financial gain of the CEOs who led the accounting control frauds are incomparably greater than that of a typical fraudulent food stamp recipient. The typical fraud consists of a recipient who is actually eligible for food stamps because she is impoverished selling some of those stamps to obtain income to purchase non-food items.
Those non-food items can range from paying the rent and health care costs to illegal drugs. The systemic damage caused by the fraudulent CEOs – the Great Recession – has no counterpart in the food stamp context.
Bovard’s column allows us to test two rival theories. Hypothesis one: Bovard and the WSJ readers were enraged that the three “de’s” produced a criminogenic environment and led to a “crime wave” of fraud because they are enraged by fraud and the theoclassical dogmas that lead us to repeatedly adopt the three “de’s” despite the recurrent disasters they cause. Hypothesis two: Bovard and the WSJ readers were enraged by fraud by poor people and refuse to apply the same logic and moral outrage to the vastly greater and more damaging crimes led and generated by elite financial CEOs. Instead, they will blame “the government” and make excuses for the elite frauds. My bet is on the second hypothesis, but I hope to be proven wrong.
Bill Black is the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.
Bill writes a column for Benzinga every Monday. His other academic articles, congressional testimony, and musings about the financial crisis can be found at his Social Science Research Network author page and at the blog New Economic Perspectives.
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