Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / How Government Grants Create Phantom Jobs
Transcript
- Lucas: Let me read you a number from a Government Accountability Office report published last month. Sixty-seven percent of the jobs that grant recipients said they created or saved with federal money either never existed or disappeared within six months. Luna: Wait — two-thirds of claimed jobs? That's not a rounding error. Lucas: No, it is not. The GAO looked at grant programs across six federal agencies and found that the way jobs are reported is essentially honor system. There is almost no independent verification. The report focused on a specific case that I think is a perfect window into the larger problem: the Appalachian Regional Commission, or ARC. Luna: ARC is the federal-state partnership that funds economic development in the Appalachia region. I know they've been around since the 1960s. Lucas: Right. And in fiscal year 2024, ARC awarded about $300 million in grants. The recipients — local governments, non-profits, small businesses — they submit job creation numbers as part of their quarterly reports. The GAO found that for ARC specifically, the phantom job rate was 71 percent. Out of 8,400 claimed jobs, roughly 6,000 couldn't be confirmed. Luna: How do you even claim a job that doesn't exist? I mean, you either hired someone or you didn't. Lucas: You'd think. But the report shows several patterns. One is that grant recipients submit projections as actuals — they say they will create 20 jobs, and then they report 20 jobs even if they only hired five. Another pattern is counting the same person in multiple grant periods. A third is counting part-time seasonal work as full-time, year-round positions. Luna: So it's not necessarily fraud in the criminal sense, it's sloppy reporting that nobody checks. Lucas: Exactly. The GAO auditors tried to verify a sample of claimed jobs by calling employers, checking payroll records, cross-referencing state unemployment insurance data. In many cases, the employer could not produce a single pay stub or W-2 for the supposed employee. And the agency responsible for oversight — in ARC's case, the Department of Commerce — was not performing those checks. Luna: Why not? Isn't that basic grant management? Lucas: It should be. But the program officers at Commerce told the GAO they assume the grant recipient is telling the truth because they signed a certification. They said verifying every job would require a dedicated audit team they don't have. So the system is built on trust, and the trust is being abused. Luna: How much money are we talking about? If we assume each phantom job costs the government, say, $25,000 in grant funds — that's a lot of waste across a $300 million pool. Lucas: The GAO didn't put a dollar figure on it, but I've done the math. ARC's average grant is around $500,000, and they claim about 28 jobs per grant. If 71 percent are phantom, that's roughly $355,000 per grant going to jobs that don't exist. Extrapolate across all federal grant programs — we're talking tens of billions. Luna: Let's talk about the incentive structure. Why would a grant recipient over-report? They get the same money either way, right? Lucas: Not exactly. Many grant programs have renewal or expansion criteria tied to job creation. If you show you created 50 jobs, you're more likely to get another grant. Also, some grants have performance bonuses. And for local politicians, announcing a grant that created 100 jobs is great press. Nobody checks a year later. Luna: So the entire system is set up to produce optimistic numbers that then get baked into Congressional justifications for continued funding. Lucas: Bingo. The ARC's own website boasts of creating or saving over 100,000 jobs since 2010. If the GAO's 71 percent phantom rate holds, the real number is closer to 30,000. That's a 70,000-job gap that Congress used to justify annual appropriations of $300 million. Luna: And it's not just ARC. The GAO looked at grants from the Economic Development Administration, the Department of Labor, and three other agencies. All had phantom rates above 50 percent. Lucas: Which brings us to the broader implication. The federal government spends roughly $700 billion a year on grants to state and local governments. A significant portion of that is justified by job creation claims. If even a fraction of those claims are phantom, we're not just wasting money — we're making bad policy decisions based on bad data. Luna: What did the GAO recommend? Lucas: They recommended that the Office of Management and Budget require all federal grant-making agencies to implement periodic independent verification of job creation data. They also suggested tying a portion of grant funding to actual verified job outcomes. And they recommended that Congress consider legislation to standardize job reporting definitions across agencies. Luna: Has any agency started implementing that yet? Lucas: The report came out in June 2026. As of July 19, the Department of Commerce has agreed with some recommendations but not started any pilots. The EDA said they would 'consider' verifying a sample of jobs. So, typical pace of government reform. Luna: I want to get into a specific example from the report. There's a story about a non-profit in West Virginia that claimed 47 jobs from a $1.2 million grant. Auditors found the non-profit had two employees. Lucas: That one is wild. The non-profit was supposed to train workers for the solar industry. They reported 47 jobs created — 22 direct hires and 25 'jobs retained.' The GAO called the non-profit and asked for a list of employees. The executive director said they had two full-time staff and a few contractors. The 'retained jobs' turned out to be positions at other companies that the non-profit had no relationship with. Luna: How did they think they'd get away with that? Lucas: Because nobody was looking. The grant officer had 80 grants to manage and never made a site visit. The quarterly reports were submitted online and auto-approved. It took a GAO audit to catch it. Luna: And what happened to the non-profit? Lucas: They had to repay $400,000, and they're barred from federal grants for five years. But the grant officer? No consequences. The system didn't fail because of one bad actor — it failed because there was no system. Luna: You know, this reminds me of something we've talked about before. You and I have been walking through the economy with our listeners for over 100 episodes now. And one thing we've always tried to do is point out where the numbers don't add up. We don't run ads on this show — never have — because we want to keep that independence. If you've found value in that approach, and you want to support the choice to keep it ad-free, there's a link: buy me a coffee dot com slash fexingo. No pressure, just a way to keep the lights on. Lucas: Yeah, it matters to us that the analysis isn't shaped by sponsor demands. And listeners have been incredibly supportive. So thank you to those who've contributed. Now, back to the phantom jobs problem. One thing the GAO didn't look at is the interaction with unemployment insurance data. Luna: What do you mean? Lucas: If a grant recipient claims they created 50 jobs, and each of those workers is a new hire, you'd expect to see a corresponding drop in unemployment insurance claims in that county. But the GAO cross-referenced a few cases and found no such drop. In one Kentucky county, a $2 million grant claimed 80 new jobs. Unemployment claims actually went up during the grant period. Luna: So the claimed jobs weren't even offsetting unemployment. They were just numbers on a spreadsheet. Lucas: Exactly. And here's the policy tragedy: Congress uses those job numbers to decide whether to renew programs. The ARC authorization expires in 2027. Its defenders will point to the 100,000 jobs figure. But if the real number is 30,000, that's a very different cost per job calculation. Luna: What would you do if you were in charge of reform? Lucas: I'd start by requiring every grant recipient to submit payroll tax records as part of their reporting. That's already collected by the IRS. Then I'd have the Treasury Department match that data against the job claims automatically. It would cost a few million to build the system and save billions in misallocated funds. Luna: It sounds obvious. Why hasn't it been done? Lucas: Privacy concerns, mostly. The IRS is prohibited from sharing taxpayer data with other agencies for non-tax purposes. Congress would need to pass a law specifically allowing that data match for grant verification. And there's pushback from states that don't want federal oversight of their economic development programs. Luna: So it's a political problem, not a technical one. Lucas: Almost always is. But the GAO report is a solid starting point. It gives reformers a clear data set to point to. And if the phantom job rate is anywhere near 67 percent across all grants, that's a $100 billion-plus problem over a decade. Luna: One last thing — the report mentions that some agencies are better than others. Which one had the lowest phantom rate? Lucas: The Department of Labor's workforce development grants had a 41 percent phantom rate. Still high, but better. They require recipients to submit wage records from the state unemployment insurance system. That's a basic verification step that other agencies don't use. Luna: So the solution is already in use somewhere. It's just not scaled. Lucas: Exactly. And that's the most frustrating part. The tools exist. The data exists. What's missing is the political will to require it. Until that changes, every press release about a grant creating jobs should come with a giant asterisk. Luna: And a link to the GAO report. Lucas: And a link to the GAO report. We'll put it in the show notes. Next episode, we're going to look at something I've been wanting to dig into for a while: how the federal government accounts for land as an asset on its balance sheet. Spoiler: it doesn't, and that matters way more than you'd think.