THE ARGUMENT over fraud, waste and abuse has now come full circle. President Reagan's campaign emphasized eliminating government misspending as the primary way to finance his program of defense increases and tax cuts. Once in office, the administration quickly recognized that only real cuts in program services could produce savings of the required magnitude. Now House Budget Committee Chairman James Jones has raised the issue again by including almost $5 billion in administrative savings in his Democratic budget alternative -- savings that OMB Director David Stockman promptly labeled "questionable, soft or non-existent."

Mr. Stockman is right to be skeptical about the possibility of error-free operations in either the public or private sector. However, the GAO studies on which Chairman Jones based his recommendations show that a determined effort to improve government operations could yield substantial savings -- if it's done right. One good way to start would be with forthright recognition that, while out-and-out fraud wil not be tolerated, the source of most government misspending -- 70 percent by one authoritative estimate -- is simple mismanagement at all levels of government. This includes failure to install continuing audit controls, to monitor disbursements and collect debts when due. The answer is better day-to-day management, not just after-the-fact enforcement.

Picking the right kind of people to run the anti-waste effort is essential. Too often the people chosen have been super-sleuths with little knowledge of or sympathy for the agency's mission. This doesn't work. Corporations don't tend to select financial or operations control managers who, in their hearts, think the company ought to go out of business.

And scaring bureaucrats won't produce efficient programs. Program operators have many useful ideas on how to run things better, but they won't share them with someone they suspect is out to get them. Getting permanent reductions in waste and abuse also requires winning down-the-line cooperation in building controls into everyday operations. Getting the type of manager needed isn't easy, but the administration has started off well in choosing an experienced corporate executive, Deputy Budget Director Edwin Harper, to head the interagency waste control effort.

The administration might also concentrate at first on a few targets of maximum opportunity. The departments of defense and health and human services are obvious choices. Together they account for over half of federal spending, and there has long been evidence of extensive misspending in both. But within HHS there are further choices. Many of its programs are slated for conversion into block grants to states and localities. However, spotty the state and local management record, federal waste-control efforts should now be focused on those programs -- Social Security, Medicare and Supplemental Security Income -- that are direct federal operations. These have been treated very gently thus far in the budget-cutting process.

Perhaps the prime candidate for additional management resources is the Internal Revenue Service. Estimates of tax fraud dwarf losses from program waste. IRS's audit and enforcement capability lags woefully behind the growing number and sophistication of tax evaders. Whatever people's concern for reducing taxes generally, there can be no support for letting cheaters shift their share of the burden onto honest taxpayers or program beneficiaries.

There are many ways to prevent fraud, waste and abuse -- and some of the most important of those aren't on the spending side.