Showing posts with label Federal Budget. Show all posts
Showing posts with label Federal Budget. Show all posts
Tuesday, July 17, 2012
Sunday, February 5, 2012
Reaganomics: Appropriate in early 80s, but not now
In their debates, ads and speeches, the candidates for the Republican presidential nomination are vying for the label of most Reagan-esque.
On taxes, “I take the Reagan approach,” former senator Rick Santorum said at a recent Florida debate.
On the economy, “under Ronald Reagan, we had . . . the right laws, the right regulators, the right leadership,” former House speaker Newt Gingrich said in a debate before his South Carolina primary victory.
Judging from the candidates’ tax proposals, they seem to believe that the most Reagan-like candidate is the one with the biggest tax cut. But, as the person who drafted the 1981 Reagan tax cut, I think Republicans misunderstand the premises upon which Reagan’s economic policies were based, and why those policies can’t — and shouldn’t — be replicated today.
I was the staff economist for Rep. Jack Kemp (R-N.Y.) in 1977, and it was my job to draft what came to be the Kemp-Roth tax bill, which Reagan endorsed in 1980 and enacted the following year. Kemp and Sen. Bill Roth (R-Del.) proposed cutting tax rates across the board by about a third, lowering the top rate from 70 percent to 50 percent and reducing the bottom rate from 20 percent to 8 percent. (Though when the Reagan tax cut was enacted in 1981, the bottom rate was reduced to 11 percent.)
While our aim was to increase growth and employment, we were intent on doing so in a way that did not exacerbate inflation, which was the nation’s top problem at that time.
After all, growth was not particularly sluggish in the late 1970s — the economy grew at 5.4 percent in 1976, 4.6 percent in 1977 and 5.6 percent in 1978. (We haven’t seen three consecutive years as good since.) But people didn’t feel very prosperous because inflation and unemployment were high. The unemployment rate was around 7 percent during those three years, and inflation accelerated, going from 4.9 percent in 1976 to an astonishing 13.3 percent in 1979.
We believed that inflation contributed to unemployment because when workers got cost-of-living pay increases, they were pushed into higher tax brackets. In turn, this required them to ask for bigger pay increases to try to maintain their after-tax income. This cycle increased the cost of employment for businesses and discouraged them from hiring more workers.
According to the Tax Policy Center, the total federal tax rate (including both the employer and employee share of the payroll tax) for a four-personfamily earning the median national income more than doubled between 1965 and 1979, from 11.5 percent to 23.1 percent. The marginal tax rate — the tax on each additional dollar earned — rose from 17 percent to more than 36 percent. This “tax wedge” — the difference between a business’s cost of employment and the employee’s after-tax reward — also explained why unemployment was high despite robust growth.
Keynesian economics, which was the dominant theory at the time, said that higher taxes would curb inflation by reducing people’s disposable income and spending, and that any tax cut would exacerbate inflation. Our thinking, by contrast, was that lower taxes would increase the incentive to work, save and invest; if that led to an increase in the supply of goods and services, then the impact would be anti-inflationary.
Mainstream economists also argued that the cost of bringing down inflation, even a little bit, would be extraordinarily high. In a May 1978 paper, Brookings Institution economist Arthur Okun calculated that bringing the inflation rate down by just one percentage point would cost 10 percent of a year’s gross national product.
If Keynesian theory was correct, the 1981 Reagan tax cut, which reduced revenue by close to 3 percent of GDP per year, should have been massively inflationary. But in fact, inflation dropped like a rock, from 12.5 percent in 1980 to 8.9 percent in 1981 and 3.8 percent in 1982, where it basically stayed for the rest of the 1980s.
Of course, the Federal Reserve’s tight money policy did the heavy lifting on reducing inflation. But if Okun’s estimate had been even remotely correct, we should have gone through another Great Depression. Although the 1981-82 recession was painful, it was brief and not very deep. Real GDP fell 1.9 percent in 1982 but bounced back nicely, rising 4.5 percent in 1983 and 7.2 percent in 1984.
Republicans like to say that massive growth followed the Reagan tax cut. But average real GDP growth during Reagan’s eight years in the White House was only slightly above the rate of the previous eight years: 3.4 percent per year vs. 2.9 percent.The average unemployment rate was actually higher under Reagan than it was during the previous eight years: 7.5 percent vs. 6.6 percent.
Liberals argue that the real economic effects of Reagan’s policies show that they failed. However, I believe that these critics overlook the enormous importance of breaking the back of inflation at a relatively small economic cost — certainly far less than any economist would have thought possible in 1981. Reagan’s results should be measured against the (incorrect) expectation that a far more severe economic downturn would be needed to reduce inflation. On that basis, his policies were overwhelmingly successful.
When comparing Reagan’s policies with Republican proposals today, several things stand out. Inflation is low now. We are not looking at “bracket creep” or sharply rising taxes, as we were in the late 1970s. The top income tax rate is 35 percent, half the rate Reagan inherited. And federal revenue is at a 60-year low of about 15 percent of GDP, compared with a post-World War II average of about 18.5 percent.
These differences are essential to understanding why Reagan’s policies worked when they did — and why they are not appropriate today.
All of the evidence tells us that the economy’s fundamental problem today is not on the supply side but the demand side. According to a recent study by Credit Suisse, two-thirds of the difference in growth at this point in the business cycle, compared with previous cycles, is due to slower consumer spending. And low inflation — as well as widespread unemployment, vast stocks of unsold houses, empty factories and other indicators — tells us that money is tight, not loose, as was the case in the late 1970s.
“Low interest rates are generally a sign that money has been tight,” economist Milton Friedman wrote in 1997. Yet, absurdly, Republicans continually berate the Federal Reserve for being too easy; some even insist, insanely, that the United States should return to the gold standard, even though it was a key cause of the Great Depression.
Because inflation and interest rates are low, Fed policy is constrained today in ways it was not in the early 1980s. Back then, the Fed could bring down the federal funds rate to a little less than the inflation rate and create negative real rates, thus stimulating borrowing, investment and consumption. It can’t do that now because it can’t reduce market interest rates below zero.
Economic conditions are entirely different today than they were in Reagan’s era, and different conditions demand different policies. Those who say otherwise are simply engaging in cookie-cutter economics — proposing whatever was popular and seemed to work once, without regard to changing circumstances.
Bruce Bartlett was a domestic policy adviser to President Ronald Reagan and a Treasury official during the George H.W. Bush administration. His latest book is “The Benefit and the Burden: Tax Reform — Why We Need It and What It Will Take.”
Monday, January 9, 2012
Krugman on Keyes in 2011
OP-ED COLUMNIST
Keynes Was Right
By PAUL KRUGMAN
Published: December 30, 2011 LINK
"The boom, not the slump, is the right time for austerity at the Treasury." So declared John Maynard Keynes in 1937, even as F.D.R. was about to prove him right by trying to balance the budget too soon, sending the United States economy - which had been steadily recovering up to that point - into a severe recession. Slashing government spending in a depressed economy depresses the economy further; austerity should wait until a strong recovery is well under way.
Unfortunately, in late 2010 and early 2011, politicians and policy makers in much of the Western world believed that they knew better, that we should focus on deficits, not jobs, even though our economies had barely begun to recover from the slump that followed the financial crisis. And by acting on that anti-Keynesian belief, they ended up proving Keynes right all over again.
In declaring Keynesian economics vindicated I am, of course, at odds with conventional wisdom. In Washington, in particular, the failure of the Obama stimulus package to produce an employment boom is generally seen as having proved that government spending can't create jobs. But those of us who did the math realized, right from the beginning, that the Recovery and Reinvestment Act of 2009 (more than a third of which, by the way, took the relatively ineffective form of tax cuts) was much too small given the depth of the slump. And we also predicted the resulting political backlash.
So the real test of Keynesian economics hasn't come from the half-hearted efforts of the U.S. federal government to boost the economy, which were largely offset by cuts at the state and local levels. It has, instead, come from European nations like Greece and Ireland that had to impose savage fiscal austerity as a condition for receiving emergency loans - and have suffered Depression-level economic slumps, with real G.D.P. in both countries down by double digits.
This wasn't supposed to happen, according to the ideology that dominates much of our political discourse. In March 2011, the Republican staff of Congress's Joint Economic Committee released a report titled "Spend Less, Owe Less, Grow the Economy." It ridiculed concerns that cutting spending in a slump would worsen that slump, arguing that spending cuts would improve consumer and business confidence, and that this might well lead to faster, not slower, growth.
They should have known better even at the time: the alleged historical examples of "expansionary austerity" they used to make their case had already been thoroughly debunked. And there was also the embarrassing fact that many on the right had prematurely declared Ireland a success story, demonstrating the virtues of spending cuts, in mid-2010, only to see the Irish slump deepen and whatever confidence investors might have felt evaporate.
Amazingly, by the way, it happened all over again this year. There were widespread proclamations that Ireland had turned the corner, proving that austerity works - and then the numbers came in, and they were as dismal as before.
Yet the insistence on immediate spending cuts continued to dominate the political landscape, with malign effects on the U.S. economy. True, there weren't major new austerity measures at the federal level, but there was a lot of "passive" austerity as the Obama stimulus faded out and cash-strapped state and local governments continued to cut.
Now, you could argue that Greece and Ireland had no choice about imposing austerity, or, at any rate, no choices other than defaulting on their debts and leaving the euro. But another lesson of 2011 was that America did and does have a choice; Washington may be obsessed with the deficit, but financial markets are, if anything, signaling that we should borrow more.
Again, this wasn't supposed to happen. We entered 2011 amid dire warnings about a Greek-style debt crisis that would happen as soon as the Federal Reserve stopped buying bonds, or the rating agencies ended our triple-A status, or the superdupercommittee failed to reach a deal, or something. But the Fed ended its bond-purchase program in June; Standard & Poor's downgraded America in August; the supercommittee deadlocked in November; and U.S. borrowing costs just kept falling. In fact, at this point, inflation-protected U.S. bonds pay negative interest: investors are willing to pay America to hold their money.
The bottom line is that 2011 was a year in which our political elite obsessed over short-term deficits that aren't actually a problem and, in the process, made the real problem - a depressed economy and mass unemployment - worse.
The good news, such as it is, is that President Obama has finally gone back to fighting against premature austerity - and he seems to be winning the political battle. And one of these years we might actually end up taking Keynes's advice, which is every bit as valid now as it was 75 years ago.
Sunday, October 23, 2011
Cost of Libyan Operation vs. Iraqi and Afghani
For $1 billion, one dictator
Exclusive – Fri, Oct 21, 2011 LINKBy Kevin Baron
National Journal
Call him the billion-dollar man. One billion for one dictator.
According to the Pentagon, that was the cost to U.S. taxpayers for Muammar el-Qaddafi's head: $1.1 billion through September, the latest figure just out of the Defense Department.
And that's just for the Americans.
The final totals will take some time to add up, and still do not include the State Department, CIA, and other agencies involved or other NATO and participating countries. Vice President Joe Biden said that the U.S. "spent $2 billion total and didn't lose a single life." NATO does not track the operational costs to each member country, but the funds directly taken from a common NATO account for Libya operations have totaled about $7.4 million per month for electronic warfare capabilities and $1.1 million per month for headquarters and command staff, a NATO spokesman said.
From the beginning of Operation Unified Protector in March, critics have questioned whether the U.S. could afford to open a third front. The Congressional Research Services estimate the Afghanistan war has cost nearly $500 billion so far. With Iraq, the figure easily tops $1 trillion.
In the first week of Libya operations, bombs were dropped from B-2 stealth planes flown from Missouri and roughly 200 missiles launched from submarines in the Mediterranean, causing alarm that any extended campaign would quickly cost billions more.
But after the U.S. military ramped up the operation, other NATO countries shouldered most of the air burden. Americans took a supporting role: aerial refueling tankers, electronic jamming, and surveillance.
The behind-the-scenes role was something President Obama celebrated in remarks in the Rose Garden on Thursday.
"Without putting a single U.S. service member on the ground, we achieved our objectives and our NATO mission will soon come to an end," Obama said.
As to when that mission would end, NATO Secretary General Anders Fogh Rasmussen said in a statement NATO issued from Brussels, "We will terminate our mission in coordination with the United Nations and the National Transitional Council."
U.S. and NATO officials steadily maintained their mission was never to hunt, capture or kill the Libyan leader. The mission, they said, was to enforce the arms embargo, establish and hold a no-fly zone, and take actions to protect civilians from attack or the threat of attack.
That last directive seemed to give plenty of reason to target Libya's top commander. But Pentagon officials said for months that if Qaddafi should happen to be at one of those locations when NATO missiles strike, so be it.
Since the operation began on March 31, getting to Qaddafi's final stand required 7,725 air sorties and 1,845 strike sorties, 397 of which dropped ordnance, and 145 Predator drone strikes.
NATO aircraft, including those supplied by the U.S., totaled 26,089 sorties and 9,618 strike sorties through Wednesday.
More than 70 U.S. aircraft have supported the operation, including Predator drones.
NATO flew 67 sorties and 16 strikes sorties over Libya one day before Qaddafi was killed.
The NATO mission also employed submarines, aircraft carriers, amphibious assault ships, destroyers, frigates, and supply ships—as many as 21 vessels at one time.
Additionally, as of one week ago, the U.S. had sold participating countries in the operation roughly $250 million in ammunition, parts, fuel, technical assistance, and other support, according to the Pentagon.
Several members of Congress put out statements celebrating Qaddafi's downfall but did not comment on the cost. Several offices contacted did not provide additional reaction to the monetary figures.
But presidential candidate Ambassador Jon Huntsman did question the cost of the Libya operation. His statement on Thursday said, "I remain firm in my belief that America can best serve our interests and that transition through non-military assistance and rebuilding our own economic core here at home."
Visit National Journal for more political news.
Thursday, October 13, 2011
Priv Sector Wastes Tax-payer Money, Too
Bad Business: Billions of Taxpayer Dollars Wasted on Hiring Contractors
September 13, 2011 LINK
Service contract award dollars have dramatically increased in recent years based on the assumption that shifting work to the private sector saves taxpayer dollars. POGO’s report compares 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. Previous analyses have only focused on employee salaries and compensation and not federal contractor billing rates. POGO’s study shows that the federal government approves service contract billing rates that, on average, pay contractors 1.83 times more than the government pays federal employees in total compensation, and more than 2 times the full compensation paid in the private sector for comparable services. Given that one-quarter of all discretionary spending now goes to service contractors, a reassessment of the total federal work force, with a focus on contractor billing rates, could save taxpayers billions of dollars annually.
Table of Contents
Contractors Overseeing Contracts
Protesting West PointOutsourcing
TSA’s Screening Partnership Program
Cautionary Notes Relating to Other Cost Analyses
Savings Risked by Long-Term Contracts and Federal Employment Restrictions
Need for a Special Pool of Part-Time and Full-Time FederalEmployees
Appendices
Appendix A: Methodology
Appendix B: Occupational Salaries and Compensation for Federal and Private Sector Employees, and Contractor Billing Rates
Appendix C: Descriptions of OPM, SOC, and GSA Job and Service Titles and Codes
Appendix D: GSA Contract Billing Rates
Appendix E: Commission on Wartime Contracting in Iraq and Afghanistan, Appendix F of Final Report to Congress
Follow the link to view a pdf of all Appendices (please note this is a large document and may have a long download time)
Job Summary Pages
Executive Summary
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.
Introduction
There is no doubt that contractors play a substantial role in supporting government operations, missions, programs, and projects domestically and abroad. For many years the federal government has increasingly relied on contractors to perform government functions. This shift to outsourcing[2] followed the call to reduce the size of the federal employee workforce, even as the U.S. population and demand for government services grew.[3] Now, in some federal offices contractor employees outnumber federal employees.[4] Unfortunately, the government has turned to contractors without an eye toward cost savings.[5]
Since 1999, the size of the federal employee workforce has remained relatively constant at about 2 million,[6] while the contractor workforce has increased radically—from an estimated 4.4 million to 7.6 million in 2005.[7] In other words, the federal contractor workforce dwarfs the federal employee workforce nearly four-fold.
There is currently no way to quantify the actual number of contractor employees who perform government functions at a particular department or agency at any given time.[8] Because the federal government does not keep timely and accurate statistics of the actual size of its contractor workforce, Congress mandated that civilian agencies and the Department of Defense (DoD) keep such records.[9] However, as there is no consistency in the methodologies employed by the various agencies, data from these inventories are unreliable and do not provide a complete picture of jobs, functions, or activities being provided by service contractors. In addition, even with the changes, the inventories still fail to provide timely and accurate data on contractor employees or cost information that would be helpful when comparing federal with contractor employees.[10] Improvements are forthcoming—a proposed regulation will require annual disclosures of inventories for service contracts that will include a description of the services, how those services will achieve agency objectives, the total dollar amount obligated and invoiced for services under the contract, and additional contract-related information.[11]
This is important because the federal government currently spends over $320 billion on service contracts each year.[12] Often, those expenditures rest on the claim that the private sector can provide services at substantial cost savings to the government and taxpayers[13] because of the free market’s ability to conduct business more cost-effectively than the government.[14]
POGO’s study tested the accuracy of the cost-savings claim. A few other studies have compared specific jobs and the associated costs, but POGO has gone one step further by looking at a larger sampling of comparable jobs and their costs when they are performed by government, private sector, and contractor employees.[15]
POGO’s investigation into the costs of outsourcing seems particularly timely in light of recent efforts to reduce government spending and considering that government spending on services now eclipses its spending on goods.[16] If POGO’s recommendations are implemented, government officials, both legislative and executive, will be better informed in deciding when insourcing or outsourcing services is cost-justified. They also will be better informed when debating what legislative or regulatory reforms to institute to eliminate billions of dollars in waste each year.[17]
Background
Reducing the size of the federal employee workforce and increasing budgetary savings have been pet projects of policymakers for decades.[18] Yet it wasn’t until the 1950s during the Eisenhower administration that there emerged a formalized policy favoring the outsourcing of federal services if it could be shown that those services were commercially available at a cost savings to the taxpayer.[19]
In 1966, the Office of Management and Budget (OMB) incorporated this policy in its Circular A-76, an administrative vehicle for handling personnel needs by competing agency work between government offices and contractors.[20] OMB has supplemented the A-76 Circular with a handbook that includes procedures for determining which government jobs should remain in-house, and which could be transferred to contractors by either cost comparison[21] generally depending on which bid was more cost-efficient[22] or by direct conversion.[23] As part of the public-private competition process, the government identifies the work, prepares an in-house cost estimate (which can include a mix of federal and contractor employees), and compares the agency’s bid to the best offer from contractors.[24]
Both political parties have taken issue with the proper size of the federal civilian workforce and the proper balance between government employees and contractor employees.[25] In the 1980s, the Reagan administration was a strong advocate for a smaller government. In its attempt to shrink the size of government, the administration frequently clashed with Congress over whether the government or private industry should perform certain functions.[26]
When President Reagan was sworn into office in 1981, he declared, “In this present crisis, government is not the solution to our problem; government is the problem,”[27] and his administration began pushing agencies to outsource commercial functions.[28]
When President Clinton took office in 1993, he also took up the mantle of “small government,” promising to reduce the federal workforce by 300,000 employees.[29] The Clinton administration instituted the “reinventing government” initiative and oversaw the implementation of the Federal Activities Inventory Reform (FAIR) Act[30] with the goal of increasing the outsourcing of commercial functions. The FAIR Act was originally introduced as the Freedom from Government Competition Act, which would have prohibited agencies from engaging in any activity producing goods or services that could be provided by the private sector.[31]
The George W. Bush administration continued the Clinton administration’s pro-outsourcing agenda. In his President’s Management Agenda, President Bush announced early in his first term his intention of making the federal government more “market-based.”[32] The Bush administration also “proposed amending OMB Circular A-76 so that all functions were presumed to be commercial unless agencies justified why they were inherently governmental.”[33] The Bush administration employed contractors in the military and reconstruction operations in Iraq[34] and Afghanistan,[35] and in the cleanup efforts after Hurricanes Katrina and Rita in the Gulf region.[36] In May 2003, the Bush administration revised OMB Circular A-76 to emphasize competition of services with “streamlined cost comparisons.”[37]
In 2002, the Commercial Activities Panel[38] concluded that A-76 competitions had achieved significant savings and efficiencies for the government.[39] The panel “strongly supported a continued emphasis on competition as a means to improve economy, efficiency, and effectiveness of the government.”[40]
Six years later in May 2008, OMB reported that from FY 2003 through FY 2007 the federal government conducted 1,375 A-76 competitions, which, at the time of the report, resulted in accrued actual savings of $1.88 billion.[41] OMB projected that, over the long run, there would be $7.2 billion in total savings.[42] In the majority of cases, the savings did not result from outsourcing to contractors, but rather from keeping the work in-house. In fact, 83 percent of the competitions were won by federal employees (as a percentage of total FTEs competed).[43] Consequently, the vast majority of projected savings might not be a function of private sector efficiencies, but may instead have been due to the government’s structural reengineering of the federal employee workforce.[44] In many instances, government agencies cut their workforces through measures “including buyouts, early retirements, [and] reassignment to priority programs within the agency or at another agency.”[45]
Despite the cost savings associated with the A-76 process, it has been criticized by both government officials and contractor trade groups for a number of reasons. For instance, both sides claim the process favors the other side.[46] Additionally, some agencies have been criticized for their inability to effectively administer the competitions and document the actual savings achieved.[47] Other criticisms include the fact that, generally speaking, the A-76 process only provides a small look into overall outsourcing activities and that it is a political vehicle to place government services in the hands of contractors.[48]
The Obama administration’s policy on the issue of outsourcing has fluctuated. President Obama issued a March 4, 2009, memo on government contracting that expressed concerns about federal contract spending, including the level of competition, the use of risky contracts, and the need to protect functions that should be performed by federal employees.[49] The President directed OMB to develop and issue government-wide guidance to assist agencies in reviewing “existing contracts in order to identify contracts that are wasteful, inefficient, or not otherwise likely to meet the agency’s needs, and to formulate appropriate corrective action in a timely manner.”[50] As a result, agencies received guidance to improve the insourcing process and better manage the multi-sector workforce.[51]
The insourcing effort was short-lived and, despite the concerns about government contracting President Obama expressed in his March 2009 memo, the administration appears to have backed away from that policy.[52] Specifically, President Obama signed into law a two-year freeze on federal employee salaries,[53] which could have the effect of harming the government’s ability to hire and retain federal employees and thus increase the need for contractors.[54] In addition, the government has temporarily banned new A-76 competitions at DoD,[55] and has made little effort to identify and eliminate any excessive costs of outsourcing the over $320 billion in services contracts awarded each year while this ban is in effect.[56] In fact, only one federal agency has taken any meaningful steps to rein in contractors during this period of time. The Department of Energy (which is uniquely positioned because of its significant contractor workforce) has taken the unprecedented move of freezing contractor employees’ salaries.[57] Although this is a good move, other agencies may be less effective in controlling excessive contract prices.[58] Generally, most contracts include annual escalation clauses or increased rates for each option year of the contract—and, in some instances, those contracts include options for nine years or more.[59]
The 112th Congress is even taking steps to promote the government’s hiring of contractors, no matter the cost. The House version of the FY 2012 Defense Authorization bill includes a “sense of Congress” provision that states that insourcing should only occur when it involves inherently governmental functions.[60]
No matter the reasons for shifts in policies, the fact remains that the overall size of the blended federal workforce and the dollars spent on service contracts have dramatically increased. As budgets decrease, federal employee total compensation will receive increased scrutiny despite policymakers not having all the facts.[61]
Summary of Methodology [62]
POGO reviewed 35 occupational classifications for this study. We employed two critical selection criteria: (1) whether the occupational classifications involved a “special interest function,”[63] and (2) whether the occupational classification had been converted to a “commercial” function for the purposes of a FAIR Act inventory or subject to outsourcing pursuant to Circular A-76.[64] POGO analyzed classification systems from the Office of Personnel Management’s (OPM) General Schedule (GS) and Job Grading Standards for Trades, Craft, and Labor Positions (WG) series (which we refer to throughout the report as GS series),[65] Bureau of Labor Statistics’ (BLS) Standard Occupational Classification (SOC) system, and General Services Administration’s (GSA) service activities as classified in its Special Item Number (SIN) system to establish comparable occupational services. (Appendix C) POGO then identified appropriate data tables published by each agency that allowed POGO to determine and compare the average rate of full annual compensation paid to federal and private sector employees with the average annual billing rates for contractor employees performing comparable services at government sites. (Appendices B and D) Because the contractor billing rates published by GSA include not only salaries but also other costs including benefits contractors provide their employees,[66] POGO added OPM’s 36.25 percent benefit rate to federal employee salaries[67] and BLS’s 33.5 percent loading to private sector employee salaries to reflect the full fringe benefit package paid to full-time employees in service-providing organizations that employ 500 or more workers.[68] All supporting data for this study are found in Table 1 and Appendices B through D.[69]
POGO is aware that its methodology does not incorporate some governmental cost factors: i.e., non-directly associated overhead (e.g., executive management and administration, information technology, and legal support), material and supplies (e.g., insurance and maintenance), or facilities (e.g., depreciation, rent, insurance, maintenance and repair, utilities, capital improvements).[70] However, given the fact that POGO relied exclusively on GSA’s listed contractor billing rates for performance at government sites, many of those cost factors would essentially be canceled out.[71] In fact, when contractors perform work at contractor sites, POGO found that contractor billing rates were, on average, 15 percent higher than rates for work performed at government sites. In addition, POGO did not include in its comparative analysis additional costs that the government incurs as a result of outsourcing services to contractors. Those costs would only add to the costs associated with outsourcing documented in this report.
POGO made every effort to ensure that its study is as accurate as possible. However, there are a number of factors that potentially limit the accuracy of POGO’s findings. For instance, over the course of our investigation, we discovered some disturbing limitations to the federal databases available to us. The most critical limitations are that: 1) the government’s coding, classification, and data collection systems are inconsistent and do not allow for reliable cost analyses[72]; 2) government websites do not provide access to agency documents that detail cost estimates and the justifications for outsourcing decisions; 3) the government does not publish information on the number of actual contractor employees holding a specific occupational position under any given contract; 4) the government only lists the ceiling prices that it can be billed by contractors for the specific occupational positions—the government is at liberty to negotiate prices that are lower than those listed, but it does not publish those negotiated rates (however, based on POGO’s review of GSA contracts, and anecdotal evidence, the government tends to pay the listed billing rates rather than negotiating lower rates[73]); and 5) government websites do not disclose what the expected cost savings for service contracts are, nor the actual savings (or lack of savings) that result from those contracts. These shortcomings prevent government officials, as well as the public, from accurately assessing outsourcing costs. There are other factors that may limit the accuracy of POGO’s findings, and we detail those in the full methodology in Appendix A.
POGO’s Cost Analysis
POGO’s study evaluates whether the current practice of outsourcing federal services to contractors is actually cost beneficial.[74] To do this, POGO compared the average of GSA’s listed annual contractor billing rates (which we refer to throughout the report as “average annual contractor billing rates”)[75] with the full costs of federal employee annual compensation for comparable services. POGO also compared federal employee full annual compensation with private sector employee full annual compensation, as well as average annual contractor billing rates with private sector employee full annual compensation, in order to evaluate the validity of the current private-sector versus federal-employee debate. These three comparisons are set forth below in Table 1.
Subscribe to:
Posts (Atom)