U.S. Government Outsourcing: Economics, Law, and Policy

Introduction to Government Outsourcing

Outsourcing of government functions is one of the most highly controversial practices of the 21st century. There are several prevailing positions regarding the outsourcing of government contracts to private companies. Valid arguments exist both for increasing government outsourcing and for limiting it in the future. Regardless of which side one happens to be on, one thing is certain: outsourcing is a trend that is likely to continue, particularly in the face of the global economy and advances in communication that make it easier than it was in the past.

By March 2007, the number of government contractors had risen to 7.5 million — currently four times the size of the federal workforce itself. The job of the U.S. government continues to grow as the population increases. The tasks the government must take on have increased tremendously over the past several years and are expected to expand even further in the future. Government outsourcing is one of the fastest-growing sectors in the U.S. economy and was expected to more than double over the following five years. From 2001 to 2006, government outsourcing reached $13.2 billion in revenue, leaving little doubt that it represents a major and growing trend in the U.S. economy.

The U.S. government has a history of outsourcing that dates back to the early roads built in the 18th century. President Reagan played a key role in the recent trend toward increasing the role of the private sector in government functions. Among the reasons cited for using private entities, respondents listed cost savings, lack of in-house personnel and expertise, lack of state support or political leadership, flexibility, less bureaucratic red tape, speedy implementation, increased innovation, and high quality of service.

Outsourcing is used to perform a number of functions within society. The U.S. government employs a large list of private entities. It uses them to help build roads and collect tolls on those roads. It uses them to build and operate water and wastewater treatment plants. It uses them to staff prisons.

Who Uses Outsourcing?

There have been several cases of privatization of public facilities. For example, the State-owned Stewart Airport in New York State was leased to a private entity under a long-term arrangement. In some cases, facilities are leased out; in others, they are sold to private entities outright. This is what happened to a small water system in Pennsylvania, which was put out to bid by a local authority and sold to a private water firm.

The U.S. Defense Department uses a wide array of private contractors in many positions so that it can focus on its primary mission — protecting the country. The Defense Department relies on private contractors for infrastructure functions such as electricity, telecommunications, and water and sewage treatment. The use of outsourcing in the Defense Department is perhaps one of the most controversial areas of government contracting. Many are concerned that outsourcing in this area may place the country at risk. However, the Defense Department maintains that outsourcing non-military roles frees its personnel to remain focused on their primary tasks without distraction.

The U.S. government is one of the largest consumers of goods and services from the private sector. It is a high consumer of technology, technical services, food, clothing, office supplies, and virtually any commodity one can imagine. Policies on government procurement often dictate that the U.S. government purchase goods or services from U.S. companies unless the product or service cannot be found domestically. If a company makes it, a government agency likely uses it.

The practice of outsourcing itself is not what has drawn the greatest amount of criticism. Most agree that the government should support its own country and economy. Government outsourcing provides stimulus to the economy by creating jobs for workers and income for companies ranging from small to large. Most would agree that the government's support should go to its own citizens, rather than supporting the economy of a foreign entity. From the standpoint of economic stimulus, the government often provides a source of revenue to small and medium-sized companies that would not otherwise be able to compete.

Economics of Outsourcing and Offshoring

One of the key points of contention among analysts and the public is the practice of offshoring. Offshoring poses a serious challenge to the government. With unemployment at high levels and the necessity of economic stimulus measures, it is difficult to support a practice that robs the American public of jobs and economic growth.

Offshoring occurs when the government hires a company to perform a task or provide a service, and that company then moves operations overseas to take advantage of a more favorable tax structure or lower-wage workers. Government support of companies that engage in this practice is the most controversial topic in government contracting of the private sector.

In cases where the work, wages, and taxes are kept within the country, and the goods and services are of acceptable quality, outsourcing to the private sector represents the best of both worlds. It represents the government taking care of its own by providing jobs and economic growth to those who, in turn, return money to the government through taxes. Offshoring, however, does nothing to stimulate the domestic economy. Any taxes collected would go to foreign governments, and jobs are given to foreign workers rather than secured for American citizens.

For the companies involved, offshoring makes economic sense. In a capitalist market, the goal is to reduce costs, improve efficiency, and turn a higher profit. Sometimes this means going where labor is cheap or operating costs are lower. The decision to offshore is an economic one — companies are attempting to provide a good or service at a reduced cost in order to retain a larger portion of profits. Often, patriotism or loyalty does not factor into the decision. From a strictly capitalist standpoint, this would appear to be a prudent decision.

However, arguing that offshoring is prudent from the standpoint of company profits is to take a micro perspective of the situation. From the company's perspective, offshoring may make sense. But if the purpose of the U.S. government is to serve the American people, then the practice of offshoring is self-defeating. Offshoring increases unemployment, and unemployed people do not contribute as much to the U.S. economy as those who are employed. Money from offshoring provides stimulus to foreign economies and tax revenue to foreign governments.

The only perceived advantage to offshoring is that it may help to reduce purchase costs for the government. In theory, if companies can reduce costs, they can pass these savings on to the government or other end purchasers. In practice, however, prices are often driven up by transportation costs, excise taxes, and other factors affecting the price of commodities. These prices can actually be higher than those for domestically produced goods. If an offshore company does succeed in reducing costs, the savings are not necessarily passed on to the U.S. government; instead, they are taken as greater retained profits.

If one examines the practice of offshoring from an economic standpoint, there are few perceived benefits to the American people or the American government. This practice reduces domestic income and gives any perceived benefits to a foreign entity. One of the most controversial issues in government procurement today is that the U.S. government continues to support companies that have moved their processes offshore.

The difference between opposing views on this issue is the difference between taking a macro view and a micro view. A macro view considers the impact of offshoring on the overall economy. A micro view considers the interests and rights of the individual company as the primary concern. Both views are valid depending on one's lens. The problem arises when the government must develop policies in this volatile debate — deciding whether to favor the rights of companies or to prioritize the interests of the American people.