Graph of the Day: Privatizing Government is Bad Business

By Benjamin Landy

The unparalleled efficacy of the free market is the kind of conservative shibboleth that rarely involves qualification or nuance; for the modern GOP, the competitiveness of the private sector is nearly sacrosanct. The private sector can do anything cheaper and more effectively than the federal government, they argue, because private employees—with their typically lower incomes and worse benefits—face economic incentives to succeed that federal employees—with their inflated salaries and cushy pensions—need not concern themselves with. But when the independent non-profit organization Project on Government Oversight (POGO) investigated the issue, they found that privatizing government is actually far more expensive in practice than in theory. In fact, the average price paid to contractors is 83 percent higher than if the federal government had simply paid their own employees to do the same job.

Instead of focusing on the public-private pay differential, POGO examined the actual cost of the contracts auctioned to private businesses compared to the estimated cost of the same job being done in-house by public employees. After looking at 550 contracts across 35 different sectors and agencies, they found that in 94 percent of cases, the average billing rate of the contractors was nearly double what the government would have paid to do the job itself.   

The most egregious example of waste was the money spent on Claims Assistance and Examining, which involves the “examining, reviewing, developing, adjusting, reconsidering, or recommending authorization of claims by or against the federal government.” What should have cost the federal government $57,292 per year for a public sector employee (including benefits), or $75,637 for a fully compensated private sector employee, actually cost an average contractor billing rate of $276,598—nearly five times the in-house rate and 3.66 times the price of an outsourced private employee.

The authors of the report conclude,

“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.”

This is a serious failure of cost analysis and a major drain on the federal budget. Nearly a quarter of all discretionary spending now goes to service contractors. If, as POGO estiamtes, contractors cost the United States government an average 1.83 times more than if public sector employees had done comparable work, then many billions of taxpayers’ dollars are being wasted each year. According to the Washington Post, the number of federal contractors grew from an estimated 4.4 million in 1999 to over 7.5 million in 2005; that number is undoubtably even higher today. With over $320 billion spent on service contracts in 2010, it is high time we significantly reevaluate those outsourcing policies and start paying closer attention to the true cost of privatizing government.