The scale of fraud uncovered in recent years has exposed how government transfer programs function, even as meaningful public or legislative reckoning remains largely absent. What began as a series of pandemic-related scandals has revealed something broader and more troubling: large-scale fraud is not an anomaly within the modern welfare state. The federal government, taxpayers, lose between $233 billion and $521 billion annually to fraud, based on data from 2018 to 2022.
It is a predictable outcome of systems that distribute vast sums of money without market discipline, rely on third-party payment structures, and diffuse responsibility across layers of bureaucracy. As Murray Rothbard argued, welfare gains can only be demonstrated through voluntary exchange, while state transfer programs necessarily rely on coercion and therefore cannot be said, in economic terms, to increase social welfare, only to redistribute resources while masking loss.
Minnesota provides one of the clearest illustrations of this dynamic, especially since a private reporter revealed massive fraud in the state at the end of last year. In the Feeding Our Future scandal, federal prosecutors alleged that more than $250 million intended for child nutrition was siphoned through non-profit organizations that billed the government for meals that were never served. A federal judge has since ordered the forfeiture of more than $52 million connected to the scheme, underscoring both the scale of the losses and the failure of oversight mechanisms designed to prevent them. The case involved federal funds administered by state agencies and distributed through private entities, with little meaningful verification before reimbursement.
This was not an isolated incident. Prosecutors in Minnesota have charged defendants in a wide range of fraud schemes involving pandemic unemployment benefits, economic injury disaster loans, autism-related health services, transportation programs, and other federally funded initiatives. These cases mirror prosecutions across the country. In Texas, defendants have been sentenced for multi-million-dollar disaster relief fraud. In Massachusetts, companies have paid millions to resolve allegations of PPP loan fraud and emergency rental assistance schemes. Similar cases appear regularly in Department of Justice press releases, spanning Medicare covid testing fraud, SNAP abuse, PPP and EIDL loan abuse, unemployment insurance fraud, and false claims against federal health care benefit programs.
Nationally, the numbers are staggering. Government watchdogs have estimated that fraud in pandemic unemployment programs alone may exceed $100 billion. Well over 200 billion was lost to fraudulent PPP and EIDL claims. Medicare billing schemes tied to covid testing generated billions in false claims. These figures do not represent marginal losses. They reflect a system operating at a scale where fraud becomes organized, repeatable, and profitable.
The same incentive structure is especially visible in programs administered by the United States Department of Agriculture, where oversight is diffuse and fraud is both widespread and difficult to quantify. Abuse of SNAP benefits, including the resale of EBT assistance for cash or prohibited goods, is widely acknowledged but rarely treated as a systemic failure. At a higher level, USDA grant and relief programs distribute billions of dollars annually through initiatives such as emergency commodity assistance, farm and food worker relief, disaster aid, and trade mitigation programs.
During the covid period, programs such as the Coronavirus Food Assistance Program generated additional fraudulent transactions measured in the tens of millions of dollars, often identified only after funds had already been disbursed. Commodity checkoff programs, which compel producers to fund collective marketing and research efforts, operate with limited transparency and are especially vulnerable to misallocation and abuse.
The Department’s Rural Development mission alone encompasses more than fifty separate financial assistance programs, further fragmenting oversight and accountability. As common as fraud is with Department of Defense contracting, the sheer scale of USDA spending, combined with politically-insulated programs and layered administration, ensures that a substantial portion of fraud remains unnoticed or unprosecuted. It is also not incidental that the USDA traces its origins to the Lincoln administration, which, under Abraham Lincoln, encouraged federal subsidies and centralized agricultural support as permanent features of national policy, laying the groundwork for price distortions, political allocation, and the persistent fraud that follows large-scale transfer systems.
The common explanation offered for these outcomes is that emergencies require speed, and speed requires relaxed controls, but this framing misses the larger point. The same structural features that enabled pandemic fraud exist throughout the welfare state. Transfer programs—whether justified as relief, social insurance, or public benefit—operate by separating payment from production. Benefits are allocated through claims rather than exchange, reimbursed after the fact, and funded by taxpayers who bear no direct relationship to the transaction. In such systems, verification is costly, incentives are misaligned, and accountability is diluted.
This is precisely the critique advanced by Rothbard, who argued that welfare programs invite abuse not because recipients are uniquely dishonest, but because the system rewards claiming rather than producing. When income is disconnected from market exchange, the primary skill becomes navigating bureaucracy rather than satisfying consumer demand. Fraud is not a deviation from the system’s logic, it is an adaptation to it. Large-scale welfare programs create opportunities for false claims, inflated billing, and organized exploitation because they lack the price signals and feedback mechanisms that discipline private transactions.
Friedrich Hayek identified a related problem: knowledge. Centralized authorities cannot possess the localized, granular, subjective information required to verify millions of individual claims across diverse programs. Bureaucracies must rely on standardized forms, self-certification, and delayed audits, all of which are poor substitutes for real-time market validation. As programs grow in size and complexity, the information gap widens, and enforcement becomes reactive rather than preventive. Fraud flourishes in that gap.
The same pattern appears across the welfare state. Unemployment insurance programs distribute cash based on eligibility assertions that are difficult to verify at scale. Healthcare reimbursement systems pay providers after services are allegedly rendered, making them vulnerable to fabricated or exaggerated claims. Housing assistance programs rely on intermediaries to certify need and compliance. Child nutrition and social services programs reimburse non-profits based on reported activity rather than market demand. In each case, the structure encourages overclaiming and discourages rigorous verification.
Efforts to address fraud typically follow a familiar script. After losses are exposed, some people are prosecuted, governments expand compliance regimes, add reporting requirements, and increase enforcement budgets. These measures may recover some funds, but they rarely alter the underlying incentives. The programs remain large, centralized, and detached from market discipline. Fraud persists.
This cycle was repeatedly warned against by Ron Paul, who argued that welfare programs and massive federal spending inevitably produce corruption because they concentrate benefits while dispersing costs. Paul consistently maintained that fraud is not solved by better oversight alone, but by reducing the size and scope of programs that make fraud lucrative in the first place. When trillions of dollars are distributed through political channels, opportunities for abuse multiply, and enforcement becomes a perpetual game of catch-up.
The lesson of recent fraud scandals is not poor management, or that officials failed in their duties. It is that a system built on large-scale redistribution, third-party payment, and centralized administration cannot reliably prevent abuse. Pandemic-era programs merely accelerated and exposed dynamics that already existed within the welfare state. When government “gives money away,” it does not disappear into a void, it creates incentives. It attracts organized actors who treat fraud as a business model. It expands bureaucracies that lack the information needed to police their own programs. Despite the scale and persistence of fraud across welfare and transfer programs, the issue is rarely addressed in Congress.
Fraud at this scale is not an implementation flaw to be fixed with more regulation, it is a predictable consequence of welfare systems that sever income from production and exchange and accountability from decision-making. As Rothbard argued, and as Ron Paul reiterated for decades, the only durable solution is to shrink the scope of government programs that make such fraud possible. Smaller government does not eliminate dishonesty, but it sharply reduces the rewards for it. Until that reality is confronted, fraud will remain an enduring feature of the welfare state and operate like a warehouse that issues payments based on shipping manifests submitted by the shippers themselves, with inspections conducted months or years later.
