Research Says Big Federal Grants to Local Governments Breed Corruption
DOGE may not just save money; it may encourage honesty.
If you need another reason to hope for success from the Department of Government Efficiency (DOGE)—you probably don't, but there are plenty to go around—it turns out that efforts by the waste-hunting, government-shrinking (we hope) body may not just save money; it may help make people more honest. That's because, after decades of increasing flows of federal grants to local governments, there's strong evidence that the money fuels corruption.
Federal Money and the Surge in Corruption
In a paper published this month, Windfall federal grants and local government corruption, authors Xiangpei Chen (an assistant professor of accounting at Loyola University Chicago) and Angela K. Gore, Jennifer Spencer, and James Wade (all of George Washington University) note that federal grants to local governments increased from $135 billion to $1.2 trillion between 1990 and 2022. The money came from 1,670 federal programs, prompting concern from agencies including the Office of Management and Budget (OMB) and the Government Accountability Office (GAO).
"Long-standing concerns remain about the federal government's grants management and the lack of effective oversight tools to reasonably assure that grants are used for their intended purposes and that risks of fraud, waste, and abuse are minimized," the GAO warned in 2011.
With all that money in the wind, the authors of the windfall grants paper looked at local government recipients of grants to see if there is anything to support such worries. Their answer is a big yes.
"We begin by examining whether federal grant windfalls are associated with more local corruption, and find significantly positive relations between windfalls and the number of public sector employees charged with corruption in the subsequent two years," write the researchers. "The economic magnitude is significant, with the presence of a windfall associated with a 28% increase in public officials charged."
For the purposes of the study, the researchers matched similar localities with one another. They controlled for population size, personal income, cash holdings, and general revenue collected by local governments to get as close as possible to an apples-to-apples comparison.
The researchers then examined federal public corruption court case filings against local officials, with extra information drawn from news stories and U.S. Justice Department press releases. "Our sample includes all identifiable local public officials charged with corruption between 2005 and 2018, reflecting 1,174 local public criminal defendants."
The results showed that "federal grant windfalls are significantly associated with subsequent local public official corruption filings."
A Flood of Cash and Weak Oversight
Why would federal grants lead to large increases in corrupt behavior by local officials? The researchers speculate that the growing flow of federal grants, especially as they come from increasing numbers of sources in D.C., overwhelm local oversight capabilities and "provide opportunistic actors with an expectation that they can engage in corrupt practices before such systems are adequately implemented." New and expanding flows of cash also mean practices for using the money aren't well-established, making diversion harder to detect. While the authors don't address the issue, it might also be that local officials feel less moral responsibility for money rained on them by distant federal bureaucrats rather than extracted from taxpayers they may know and see on the street.
Given that the flow of federal funds to state and local governments has been increasing for decades, we can assume that the corruption encouraged by such money is also a growing problem.
It's worth noting that, while the George Washington University researchers did their best to count federal grants, they may have missed a few. In 2019, the Congressional Research Service conceded that "there is no consensus on the methodology used to count federal grants to state and local governments" but that the number has grown in fits and spurts over time and "the number of federal grants to state and local governments continued to increase during the 1990s, and has continued to do so." That inherently gives the feds some leverage over state and local governments.
Federal Grants Erode Independence
"The federal government is sending more money to state and local governments, resulting in states to become increasingly reliant on debt-financed federal funds," the House Budget Committee cautioned in a 2023 working paper. The paper noted that in the previous decade, federal funding to state and local governments increased by an average of 9 percent per year, reaching $1.2 trillion in 2022 or 19 percent of federal outlays and 4.8 percent of GDP. By 2020, more than a third of state revenues were derived from federal funds.
It's not just governments, either. Last September, an Economic Innovation Group paper, The Great "Transfer"-mation, pointed out that "income from government transfers is the fastest-growing major component of Americans' personal income." The authors added that "in 2000, only about 10 percent of counties received a quarter or more of total personal incomes from transfers. By 2022, the most recent data year, 53 percent did."
Reliance on government handouts necessarily erodes independence among those who rely on government money with strings attached rather than the proceeds from jobs and businesses. It also raises questions about how many people are still engaged in the productive activity needed to build prosperity for themselves, as well as to provide taxes to support those grants and transfers. And, of course, it breeds corruption.
The Challenge of Fighting Corruption
Reining in corruption isn't easy. Research into federal audits "is surprisingly limited and mixed" write the authors of Windfall federal grants and local government corruption. There's evidence that negative audits "do not result in a subsequent reduction in federal grant award." State-level audits can reduce corruption, but diligence varies from state to state. The authors believe "a visibly strong fraud auditing function will deter improper actions, thus preventing corrupt practices from occurring." Unfortunately, at the local level where so much money is received, many local governments have weak audit procedures for grants which "exacerbate the windfall-corruption relationship"—that is, worsen corruption.
The much-reviled media—especially local outlets—may be the best watchdog. Research shows that "a daily newspaper closure magnifies the positive relationship between windfalls and local corruption by 83%." In the absence of regular reporting on their shenanigans, politicians' behavior gets worse.
So, should DOGE turn some attention to cutting states' and localities' dependence on the federal government? That's likely the key to not just balancing the books but making the country more honest.
