IN 1975, THE AID TO FAMILIES WITH DEPENDENT CHILDREN PROGRAM COST FEDERAL AND STATE GOVERNMENTS $8.4 BILLION, OF WHICH $5.4 BILLION WAS PAID BY THE FEDERAL GOVERNMENT. BOTH FEDERAL AND STATE ADMINISTRATIVE COSTS HAVE RISEN DRAMATICALLY, ALTHOUGH THE NUMBER OF WELFARE RECIPIENTS HAS REMAINED RELATIVELY STABLE. THE DEPARTMENT OF HEALTH, EDUCATION, AND WELFARE (DHEW) HAS TRIED TO CONTROL RISING WELFARE COSTS BY ESTABLISHING MANDATORY QUALITY CONTROL LIMITS AND MANDATORY FRAUD DETECTION REQUIREMENTS. ANALYSIS OF STATE WELFARE FRAUD LAWS AND ADMINISTRATION, AS WELL AS FRAUD PROSECUTION IN TEXAS SHOWS THAT ADMINISTRATIVE COSTS OF FRAUD DETECTION OFTEN EXCEED 25 PERCENT OF THE MONEY PAID TO RECIPIENTS. THE SALARIES FOR THE TEXAS FRAUD INVESTIGATION UNIT COST OVER $4 MILLION PER YEAR, YET REDUCE WELFARE COSTS BY ONLY ABOUT $1.5 MILLION. ADDITIONAL FRAUD CONTROL COSTS INCLUDE OFFICE SPACE, EQUIPMENT, TRAVEL, PROSECUTION, STATE-PAID DEFENSE COUNSEL, AND JUDICIAL ADMINISTRATION. BY PUBLISHING ONLY ERROR RATES, DHEW HAS ENCOURAGED ERROR REDUCTION WITHOUT ATTENTION TO ATTENDANT COSTS. THE ANALYSIS SUGGESTS THAT CURRENT FRAUD DETECTION APPROACHES ARE NOT COST EFFECTIVE, AND ALTERNATIVE APPROACHES ARE NEEDED. ELIGIBILITY DETERMINATION SHOULD BE CHANGED FROM THE CURRENT COMPLEX AND SUBJECTIVE SYSTEM TO ONE WITH OBJECTIVELY VERIFIABLE CRITERIA WITH INCENTIVES FOR REPORTING INCOME. A NEGATIVE INCOME TAX SHOULD BE ESTABLISHED. OVERALL, A SIMPLE SYSTEM INCLUDING ACCOUNTABILITY, WORK INCENTIVES, AND A COST EFFECTIVE PRODUCT IS NEEDED. FOOTNOTES ARE INCLUDED. (CFW)