Government contractor sentences to ponder

  1. What, then, is the one “must-know fact” about “Big Government” in America today?

It is that “Big Government” in America today is both debt-financed and proxy-administered.

The first half of that essential fact is well known, much discussed, and much debated.  For all but five post-1960 years, the federal government has run deficits, and the national debt is now bordering on $20 trillion.  But the latter half of that essential fact—rampant proxy administration—is little known, poorly understood, and, except in certain moments of crisis, ignored.

…Congress, the keystone of the Washington establishment, has spent half a century promising us that, so to speak, we can all go to heaven without needing to die first.  The American way of “Big Government” has produced massive deficits, both financial and administrative.

That is from John J. Dilulio, Jr., recommended throughout.


Why do you rob banks? Because that is where the money is.

Something I find amazing about that article is how much of that we could also apply to the majority of the SP500: It's not just hiring the services of third parties, like using a SaaS company to handle your email, but the hiring of both direct contractors that act just like employees but with different wages and different benefits (somethimes higher, sometimes lower), or vendors that, in practice, dedicate a team to replace a department, like outsourcing all your IT help desk.

Sometimes this is done for accounting purposes (You might prefer to spend $100 in Capex than $75 in Opex), other times it's in the name of efficiency, which is rarely achieved, and other times it's wanting to discriminate in ways that aren't legal otherwise. For example, We see companies use contractors to provide more attractive healthcare deals. A Silicon Valley company that is mostly hiring Software Engineers might be handing people healthcare benefits of $1500/mo, but there's no way a retailer can offer that to their own engineers, because those same costs are just too big a share of income for someone making under $10/hr. The same thing can happen the other way around, when your employees have huge benefits, but you don't want to pay that to, say, customer service reps. A contracting firm allows a firm to change the deal to provide benefits that match market preferences.

In the case of outsourcing specifically, results are often terrible: I've seen my fair share of post mortems where we see private prison style decreases in quality with cost overruns that mean zero, or almost zero savings, especially when we can put a dollar figure in the loss of quality. And yet we keep seeing the same kind of moves in the private sector, over and over again. My suspicion is that large enterprise is just as full of principal-agent problems as the government sector, and while a company might lose overall, the people in charge of the decisions might be winning, and something like outsourcing 1000 jobs might be irrelevant for your average CEO, so there's no real oversight.

The comparison of big, old fortune 500 companies and government is something that I think is underexamined in the literature, probably because getting to usable data is very difficult, but I sure wish we had more literature on the topic: Anyone on the ground can see the differences in dysfunction, and therefore in leverage, very quickly across employers and even departments, but only serious studies would let us quantify the difference, and I think it'd help us organize society far more efficiently.

Does the evidence show that private prisons are any worse? I thought the current state of the research was that they perform no worse on average?

This is exactly right, except that S&P500 companies that screw up simply stop being S&P500 companies. People stop paying them and spend their money on more efficient competitors.

The federal government... not so much.

So, highway or education spending is done at the state or local level - this is proxy-administered spending?

The Catholic Church runs non-profit hospitals, and the Red Cross runs disaster relief operations - this is proxy-administered spending?

And Eisenhower's military-industrial complex is full of for profit entities - this is proxy-administered spending?

Really? Because in all three cases (well, the non-profits might be a bit less federal), the examples predate 1960.

I'm sorry, but this is just too much - 'State and local governments and their governors associations, mayors associations, state legislatures, corrections commissioners, and more; big and small business lobbies; and, yes, nonprofit sector lawyer-lobbyists—all three federal proxies exert nonstop pressure in favor of federal policies that pay them to administer federal business, with as few strings attached as possible, and with lots of paperwork but little real accountability for performance and results.'

Not that it is wrong in a sense, just that calling them 'federal proxies' seems more than a touch of a stretch.

Because in public choice (or Will Rogers) theory, the above pretty much describes every single voting citizen of the U.S. too. As noted in the article, though obscuring it by using Republican and Democrat as proxies for voters - one could assumes that it is proxies all the way down. How are 401(k)s viewed through this lens?

'And it spends more than twice as much on Medicare beneficiaries as it does on the entire federal civilian workforce.'

Considering that essentially all American citizens over 65 are Medicare beneficiaries, this is supposed to be surprising how? Particularly as it seems - - those retired from the federal civilian workforce are also Medicare beneficiaries.

To sum up, it is almost as if the author is unaware that something like JPL is also a federal proxy - 'The project took on the name Jet Propulsion Laboratory in November 1943, formally becoming an Army facility operated under contract by the university.' Plenty of other examples from that golden age of less proxy administered government during WWII and the early Cold War (think national labs run by universities).

Good points. I'd also agree that it's a weird comparison to compare the federal workforce to Medicare payments. If anything this indirectly proves that Medicare (and I'd argue Social Security) are generally efficient in terms of administration. (I mean, find me another annuity insurer that proves monthly payments at even twice the expense.)

That said, I don't think he's unaware of the JPLs of the world. He definitely discusses private contractors of which JPL is one. (In fact nearly all of the DOE and National Labs are run by private contractors). All that said, I agree his argument is pretty incoherent overall.

I wonder how much of that deficit money is just money that was spent on senseless wars, toppling "enemy" regimes, financing terrorism, etc. And not the mention this : "U.S. Army fudged its accounts by trillions of dollars, auditor finds" .

, toppling “enemy” regimes,

I don't think knocking out Jacobo Arbenz and Ngo Dinh Diem are currently breaking our bank (or did then).

It's true that the federal government has consistently had deficits, but the deficits, as a percentage of GDP, have varied widely, the highs during the Great Depression, during WWII (the highest), during the Reagan and George W. Bush administrations, and during the great recession, with surpluses following WWII and during the Clinton administration. Likewise, the reasons for the deficits have varied, some deficits due to outside forces (e.g., war), some due to economic downturns (the great depression and the great recession), and some due to the greed of the patrons of powerful politicians who don't want to pay taxes. The must know fact reproduced in Cowen's blog post implies that all deficits are essentially the same, the product of the greed of the patrons of powerful politicians who don't want to pay taxes. My observation is that wealth, or the concentration of it, has indeed become a major and continuing force in recurring deficits, the evidence being the soon-to-be-repeated massive tax cut for the wealthiest Americans producing massive deficits as far as the eye can see, just like the massive deficits produced during the Reagan and GWB administrations that resulted from the same thing.

An interesting about 'reducing the Federal gov't and giving back to the states' are actually expansions of big gov't as the states are effectively 'proxies' for the Fed. gov't in the article. Giving to the states simply mean instead of one guy administering a $50M program 50 guys (most working for Republican governors) get hired to handle $1M block grants.

"[W]e can all go to heaven without needing to die first". I will give this an Ecclesiastes 3:1-8 reading, meaning that there is a time for everything, including cyclical downturns and deflation (a time to die); otherwise, we are only fooling ourselves into believing renewal is possible without first suffering death. Our Austrian friends believe economic cycles are our friend, to be embraced not avoided, for after death comes resurrection and renewal. But is it a painful death? I suppose pain is acceptable if necessary to achieve resurrection and renewal, but only if everyone shares in the pain. The metaphor is meant to capture collapsing asset prices along with unemployment, suffering by both those who own the assets and those who own only their labor. Neither fiscal stimulus nor monetary stimulus: a time to die followed by resurrection and renewal. Depression economics: who's buying it?

These statistics prove the opposite. The volume of regulations, for instance, has remained constant despite huge growth in the complexity and size of the economy and the population. What does that tell you?

Yes, and the number of pages in the Federal Register are misleading. The increase in page number is a result of the Administrative Procedures Act and the need to discuss all the rationale that goes into the various rule making. Dilulio overlooks the massive expenditures that come about by executive political choice, namely the wars in the Mid-East which were never honestly budgeted. Joe Stiglitz has written a whole book on this.

The rise in state bureaucratic employment is no surprise as a lot of what Washington does gets delegated down and each of the 50 states has to implement things so you have a significant multiplier effect here. Federal employment stays constant or slightly decreases and state employment dramatically increases; it's basic math. Also some of the additions since 1960 have brought forward tangible results. There is much better regulation of toxic chemicals, pesticides, as well as air and water that are administered by the EPA. There is very little (always cannot say zero) creation of potential 'new' superfund sites. FEMA has been critical to emergency response (most of the time) when natural disasters strike.

Dilulio's final point about decrease in resources at IRS, SSA, and EPA is well taken, particularly the loss of veteran leadership.

"The rise in state bureaucratic employment is no surprise as a lot of what Washington does gets delegated down and each of the 50 states has to implement things ..."

The states don't 'have' to implement anything. They want too. Republican governors who oppose Obamacare take credit when they 'expand coverage' in their own Medicaid programs leaving out the fact that every dollar they spend on covering people in their state is matched by a dollar or more of Federal spending. On top of that they get to hire their own people to administer these programs on the state level AND work over state level lobbyists for the spoils.

Contrast that with, say, Social Security. A few people manage the department and for most people it is on autopilot. For those collecting Social Security, they need not care what state they live in and will never have to go to a state government office regarding their social security payments.

Don't buy the argument that states are being 'put upon' by the Federal gov't. The states love it or more to the point the state governors love it.

There are a variety of Federal Regulations that explicitly delegate things to the state. The base Medicaid program is Federal money that is distributed by the states and the states need to have a bureaucracy to do this. Contrast this to Medicare and SSA which are explicitly Federally run. There are clean air and clean water standards that have to be run by the states as well.

Don’t buy the argument that states are being ‘put upon’ by the Federal gov’t. The states love it or more to the point the state governors love it.

No, the state governors prefer it given what they surmise are likely alternatives. Most would be better off if the federal government appropriated fewer resources and they were free of federal compliance requirements attached to service delivery. All would be better off if the federal government just cut revenue sharing checks and were left alone to set up their own programs.

What does that tell you?

That you haven't a metric to measure 'complexity'.

I would think most readers of this blog would know that federal payroll leveled off some time ago.

Also that the inflection to higher debt and spending came in 2000.

Debt financed wars were a bit part.

I am not sure this article focuses on the big drivers of the post 1990s change.

The article appalls me, because it's old-time socialism. He's saying that the problem with the federal government is that it's too decentralized and privatized. We get cost overruns on defense projects, which are contracted out to private companies like Boeing. His solution? The government should make the jet fighters! Then we wouldn't have corrupt lobbyists and inefficient and costly construction, because they do things better in Washington than in places like Seattle.
And take Medicaid. We should remove state control from that, and have it all run from Washington, smoothed and centralized. Don't let the states have all that power, and get rid of all the state variation in programs. Why should Wyoming have a different medical program than Rhode Island, after all? They're all just federal citizens, inputs into the machine.
Of course, taken to its logical extreme, there's no reason why the federal government should delegate phone service to Sprint and chips to Intel rather than running those organizations itself.

On the other hand, DiIulio's very interesting observations---as opposed to his conclusions--- do give hope to the "drain the swamp" idea, contrary to what he says. They tell us that a lot of things can be fixed by changing rules in Washington rather than firing employees there, because most of the swamp is in the hinterland, and only the water valves are in DC.

1. Where does he say the US gov't should just make jet fighters?

2. Why is 'state variation' in Medicaid a good thing? In fact, why should states have power over Medicaid? If 'variation' is so good why not let each state build their own jet fighters and donate them to the US air force? Nothing stops states from having their own programs just like states have elderly programs even though the states don't run social security.

A lot of medicaid expenditures occur within the state's education department/program.

2. Why is ‘state variation’ in Medicaid a good thing? In fact, why should states have power over Medicaid? If ‘variation’ is so good why not let each state build their own jet fighters and donate them to the US air force? Nothing stops states from having their own programs just like states have elderly programs even though the states don’t run social security.

Raising an army is a delegated power. It's also unlikely to improve military effectiveness to run it on donated equipment.

States should have power over Medicaid because collective purchase of medical services or long-term care services is not a delegated power nor is it something necessary or necessarily improved if done on a national scale. States lacking in general population or in concentrated population centers could erect inter-state compacts to handle public medical insurance in common. Doing so would allow local publics discretion over the quanta of public commitment to medical services, allow local publics to define the boundaries of service provision, and allow insurers contracted to take ready account of local cost schedules.

In fact, why should states have power over Medicaid?

The program is jointly funded by federal and state tax revenues, that's why.

And take Medicaid. We should remove state control from that, and have it all run from Washington, smoothed and centralized.

That's funny, because a huge portion of Medicare funds are effectively doled out by private organizations, either Medicare MCO's for Part C (and lots of D) claims or MACs for Part A and Part B:

Perhaps we shouldn't read too much into the rest. It's these sentences which are just a reminder of the increasingly sub-contracted state.

oops, forgot to close the bold on the word sentences.

This is the same John J Diulio who briefly worked in the Bush administration, on faith based initiatives, IIRC. Shouldn't he be radioactive?

Why should he be radioactive?

Seven new federal Cabinet agencies have been established since 1960—from Housing and Urban Development in 1965, to Homeland Security in 2002.

Dozens of new sub-Cabinet agencies were also established, like the Environmental Protection Agency in 1970 and the Federal Emergency Management Agency in 1979.

C'mon, Dr. DiIulio, you can do better than that. Homeland Securty was an assemblage of already existing agencies. The only additions were an intelligence clearinghouse and the TSA. TSA's functions were not novel. The previous addition was the Department of Veterans Affairs. All that was done there was to renominate and extant federal agency and change the title of it's director from 'Administrator' to 'Secretary'. That previous was the Department of Health and Human Services, which was just the old 'Health Education, and Welfare' department with the commissioner of education removed. That previous was the Department of Education, which, again, assembled a mess of programs and offices which had been parceled out amongst HEW, HUD, &c. As for FEMA, it's a renomination of the old Civil Defense Agency, which was incorporated 40 years earlier. The Department of Energy included some novel agencies (devoted to statistical collection, for example), but it mostly assembled authorities and laboratories which had been in existence for decades.

If you find a federal agency incorporated after 1970, dollars to doughnuts it has a budget under $1 bn or it was entirely derived from one or more agencies which passed out of existence when it was incorporated.

It's not surprising he's advocating hiring federal workers rather than suggesting the federal government replace special-purpose grants to state and local governments with unrestricted revenue sharing with a distribution formula biased in favor of impecunious locales, or suggesting the federal government quit financing philanthropic enterprises, or suggesting the federal government quit financing state colleges and universities, or suggesting the federal government quit financing people with institutional addresses, or suggesting the federal government quit manipulating the household allocations of the impecunious and just cut them a check or cut them off.

And, no, I don't think we'd be better off replacing Medicare and Medicaid with a version of the Veterans' Health Service.

It just shows that the difference between democrats and republicans is that democrats tax and spend while republicans borrow and spend.

You fancy the budgets for FY 2008, 2009, 2010, and 2011 did not incorporate 'borrowing'???

If you look at the deficit as a share of GDP it fell from about 10% when Obama took office to about 3% currently. That is the largest drop in the deficit in history except for right after WW II.

Interestingly, since Truman every democratic president left office with a smaller deficit than they inherited ( as % of GDP) while every republic president left office with a larger deficit than they inherited.

This silliness doesn't require much unpacking. One-off expenditures related to the financial crisis were largely over by the end of FY 2010. As for the remainder, BO's contribution to bringing the deficit under control was just about nil. It declined because there were only so many cards he could play to get the expenditures he wanted.

If you examine the debt to GDP ratios during the period after 1990, you'll notice they began to decline in 1995, right when the Democratic Party lost control of the committee architecture in Congress. Funny thing about that.

Perhaps Congressional make-up has something to do with taxes and spending too.

What diIulio neglects to emphasize is that we've a debt exceeding 100% of gdp. The last occasion in which we were in that debt stratosphere was subsequent to a war of general mobilization wherein 1/3 of productive capacity was devoted to military uses over a period of 6 years (the mean from 1940 to the present has been about 6.5%). This had occurred subsequent to an business depression which had the economy producing below capacity for 12 years. There'd been another general mobilization in 1917-20. We have not been in a general moblization or anything resembling it since the end of the Korean War. Clearing a banking crisis adds to the public debt, but the amount puked into AIG, the auto industry components, Fannie Mae, and Freddie Mac was < 2% of gdp when the dust settled.

How much of this is due to affirmative action in the civil service requiring proxy administration by private contractors?

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