Wednesday, May 21, 2014

US, Inc., and the privatization scam

The United States has been on an outsourcing spree since Ronald Reagan set up his Privatization Unit in 1987. The installation of "Reagonomics," aka, "The Reagan Revolution," was Reagan's attempt at a neoliberal plan to eliminate much of the federal government by providing Wall Street the chance to takeover those programs and duties that he and his Commission on Privatization (12-member panel whose purpose was to ''probe the entire dimension of Government operations'' according to the chairman, Prof. David F. Linowes, a political economist at the University of Illinois).

From "Privatization and the Reagan Administration: Ideology and Application," Michal Laurie Tingle, Yale Law & Policy Review, Vol. 6, No. 1 (1988), pp. 229-257; Published by: Yale Law & Policy Review, Inc.; Article Stable URL:

Ronald Reagan arrived at the White House in 1981 armed with a quixotic strategy for reducing the size and scope of federal government and for closing the budget deficit.  The President;'s strategy required a massive reduction in taxes and, simultaneously, even greater reductions in expenditures, But by 1984, President Reagan had failed to translate his commitment to minimalist government into reality.  Although President Reagan sought and achieved large tax reductions in 1981, his budget proposals, due to sustained real growth in defense expenditures, actually increased gross federal spending.
The Reagan administration's initial approach failed, in part, becasue it ignores the strength of coalitions of beneficiaries, service providers, activists, and members of Congress, all of whom had definite interests in the preservation and expansionism of particular programs.  Members of the Reagan Administration erroneously had assumed that an arithmetical imperative would constrain federal expenditures once the President was successful at choking off the revenue sources that finance federal programs.  Despite the failure of its earlier efforts, the Administration did not give up its hope of somehow reducing the size and the scope of the federal sector.  In President Reagan's second term, the Administration  embraced "privatization" as a new, supplementary strategy  for minimalist government and deficit reduction. 
"Privatization" defies easy definition; advocates do not agree on a single definition, nor do they agree on the practical limitations of privatization policy.  However privatization advocates share a common assumption, whether grounded in ideology or in economics, that the public sector is too large and that it engages in activities more properly or more efficiently performed by the private sector.  This belief is echoed in the Administration's own definition of privatization. It defines privatization as:
a strategy to shift the production of goods and services from the government to the private sector in order to reduce Government expenditures and to take advantage of the inefficiencies that normally result when services are provided through the competitive marketplace.

That "strategy to shift the production of goods and services from the government to the private sector" has proven to do little more than increase costs, adding to the growing federal deficit and budget, decrease efficiency, assure corruption and cost overruns, destroy any transparency and accountability unless and until someone blows a whistle or two (even then those whistleblowers are prosecuted and have their lives destroyed).

Since Reagan, subsequent presidents and Congress, as well as state and local governments,  have continued the process of privatization of nearly every aspect of government - from Mental Health to National Defense (NSA, military contractors acting as security and ground forces in war zones) to prisons - contractors replacing personnel, companies replacing divisions, voucher programs replacing direct payment.

The problems with Privatization American Style are fairly obvious to most of us since it is the American public that suffers the consequences, but for those who can't quite figure them out or need a refresher course, "In The Public Interest," a web-based resource center on privatization and contracting, has listed them:

1. Costs - Higher costs to consumers, cost overruns, and hidden costs to the government and the community
2. Quality - Reduced quality of services and the degradation of assets through poor maintenance
3. Accountability and Transparency - Lack of public information, lack of public input in decisions affecting the public interest, and loss of recourse if the public is harmed
4. Access - Loss of public access to services or assets, and inequitable access based on race, class, income, gender, or other factors.
5. Corruption - Conflicts of interest, insider dealings, kickbacks, price-fixing or bid-fixing, fraud, misconduct, and revolving doors between government and contractors
6. Environment - Practices that are wasteful or harmful to the environment, inadequate assessment of environmental impact, and bypassing environmental regulations
7. Core Public Capacity - Loss of institutional knowledge and workforce capacity to perform public functions, and loss of the ability to recruit and retain staff if the contractor fails or leaves
8. Human Rights - Violation of human rights and basic constitutional rights, privacy violations, and the lack of adequate avenues for redress
9. Workforce issues - Loss of wages and health benefits, reduced labor standards, worksite safety problems, and inequitable treatment

For decades we’ve been subjected to constant propaganda that government is inefficient, bureaucratic and expensive. We’re told that the answer is to “privatize,” or “outsource” government functions to private businesses and they will do things more efficiently and everyone comes out ahead. As a result we have experienced decades of privatization of government functions.
So how has this wave of privatization worked out? Has privatization saved taxpayers money and improved services to citizens? Simple answer: of course not. If a company can make a profit doing something the government had been doing, it means that we’re losing out one way or another. It’s simple math. And the result of falling for the privatization scam is that taxpayers have been fleeced, services to citizens have been cut way back and communities have been made poorer. But the companies that convinced governments to hand over public functions have gotten rich off of the deal. How is this a surprise?
From POGO report, 2011, 
"Bad Business: Billions of Taxpayer Dollars Wasted on Hiring Contractors"

Let's look at just one of the problems with privatization US, Inc, style...
It doesn't save money, it actually costs more money to outsource government jobs and government functions.

From 2011, the following infographic ("How Outsourcing Government Work Fattens the Federal Budget")
based on POGO's (Project On Government oversight) research and report, Contract Oversight :

The Executive Summary from that report:
Based on the current public debate regarding the salary comparisons of federal and private sector employees, the Project On Government Oversight (POGO)[1] decided to take on the task of doing what others have not—comparing total annual compensation for federal and private sector employees with federal contractor billing rates in order to determine whether the current costs of federal service contracting serves the public interest.

The current debate over pay differentials largely relies on the theory that the government pays private sector compensation rates when it outsources services. This report proves otherwise: in fact, it shows that the government actually pays service contractors at rates far exceeding the cost of employing federal employees to perform comparable functions.

POGO’s study analyzed the total compensation paid to federal and private sector employees, and annual billing rates for contractor employees across 35 occupational classifications covering over 550 service activities. Our findings were shocking—POGO estimates the government pays billions more annually in taxpayer dollars to hire contractors than it would to hire federal employees to perform comparable services. Specifically, POGO’s study shows that the federal government approves service contract billing rates—deemed fair and reasonable—that pay contractors 1.83 times more than the government pays federal employees in total compensation, and more than 2 times the total compensation paid in the private sector for comparable services.

Additional key findings include:

Federal government employees were less expensive than contractors in 33 of the 35 occupational classifications POGO reviewed.
In one instance, contractor billing rates were nearly 5 times more than the full compensation paid to federal employees performing comparable services.
Private sector compensation was lower than contractor billing rates in all 35 occupational classifications we reviewed.
The federal government has failed to determine how much money it saves or wastes by outsourcing, insourcing, or retaining services, and has no system for doing so.

POGO’s investigation highlights two basic facts about outsourcing government work to contractors. First, comparing federal to private sector compensation reveals nothing about what it actually costs the government to outsource services. The only analysis that will shed light on the true costs of government is that of contractor billing rates and the full cost of employing federal employees to perform comparable work. The Commission on Wartime Contracting in Iraq and Afghanistan recently completed a fundamental study of costs, and found that, in certain contingency operations, although savings resulted from hiring local or third-country nationals, military and civilian employees cost less than hiring American contractors.

Second, the federal government is not doing a good job of obtaining genuine market prices, and therefore the savings often promised in connection with outsourcing services are not being realized. The argument for outsourcing services is that, by outsourcing services on which the government holds a monopoly, free market competition will result in efficiencies and save taxpayer dollars. But our study showed that using contractors to perform services may actually increase rather than decrease costs to the taxpayers.

POGO found several failures in government procurement, employment, and data systems that limit the government’s and the public’s abilities to assess and correct excessive costs resulting from insourcing or outsourcing federal services. Failures included the lack of standards for calculating cost estimates and justifying insourcing or outsourcing decisions; the lack of data related to negotiated service contract billing rates; not publishing government information about the number of actual contractor employees holding a specific occupational position under any given contract; and that there is no universal job classification system.

For decades there have been increasing political pressures to reduce the size of the federal government. In response the government has awarded service contracts, resulting in an expanding “shadow government” that costs hundreds of billions of dollars annually. The focus on comparing federal and private sector salaries needs to shift because they have nothing to do with what the government actually pays for services. Instead, the focus properly belongs on analyzing the full costs of paying contractors to perform federal services. Given the nation’s ongoing economic problems, this analysis has become even more relevant—approximately one-quarter of all discretionary spending now goes to service contractors.

POGO’s recommendations include:

Congress should require all federal agencies, when awarding service contracts, to use service coding systems that are consistent with OPM’s job classification system. Congress should also require the collection, reporting, and oversight of life-cycle costs associated with government services performed by federal employees or contractors.
Congress should pass legislation requiring greater transparency and improved pricing on GSA Schedule service contracts.
Congress should strengthen the FAIR Act to enhance service contract reporting.`
Congress should remove full-time equivalents ceilings, and decrease the maximum benchmark compensation amount applicable to contractor employees.
Agencies should use their existing authorities to hire federal employees for short-term projects.
Unfortunately, the US government is hell bent on shirking its responsibility to the people by outsourcing everything they can. There is a lot of money to be made by handing the keys to the kingdom to Wall Street and job security in being the politicians who do it.

Based on the above analysis, Reagan failed miserably in his privatization scheme to downsize government and reign in costs.  Actually, what he succeeded in doing was raising costs, expanding the budget and increasing the deficit.

Of course, we can't blame it entirely on Reagan. Every president and Congress, since Reagan, has increased privatization and outsourcing of government services.

Unfortunately for the American people, the US government is hell bent on shirking its responsibility to the people by outsourcing everything they can. There is a lot of money to be made by handing the keys to the kingdom to Wall Street and future job security in being the politicians who do it.

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