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Competing With Uncle Sam
 

If small business can handle it, the job shouldn't be done by government.
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How's your adrenaline on this peaceful summer day? Try this for blasting it into action.

Some time ago, a news item appeared about federal government competition with private industry. It reported that 400,000 federal employees are working at more than 11,000 "commercial or industrial activities." These include such categories as audio-visual services, automated data processing, and the maintenance of buildings. The cost to the taxpayers for government employees to do these jobs is about $20 billion a year.

Some $5 billion of this amount could be saved in the next five years, according to the director of the Office of Management and Budget (OMB), if some of these commercial activities were shifted to the private sector. And as many as 154,000 federal jobs could be abolished if the President and Congress got tough on this issue together.

That may be hard to do. For example, the House Armed Services Committee has proposed a "moratorium" for one year on any new contracting-out by the Department of Defense to the private sector. In doing this it reinstated 17,000 civilian jobs previously cut by the budget director -- nonmilitary jobs paid for by the department.

The committee took these actions to "punish" the OMB for cutting those same 17,000 civilian jobs from the defense budget. It seems that the cost of doing several hundred Defense Department civilian chores using federal employees was compared with the cost of contracting out those jobs to private industry. In about 60% of the comparisons, the in-house cost was at least 10% higher.

The budget director saw a chance to save a little money by simply chopping 60% of the Defense Department's 29,000 civilian slots, an estimated savings of at least $40 million a year.

He gave the Defense Department managers and base commanders an ultimatum: Either contract out 60% of your commercial activities or lose those 17,000 jobs elsewhere in the department.

When the Armed Services Committee restored the jobs, it defended itself against the charge of wastefulness. Its report said that by buying these goods and services outside the government, OMB would have spent almost the same amount of money as the jobs cost.

The country is facing a deficit of $104 billion (the House Democrats' goal) to $182 billion (the estimated deficit if no agreement can be reached between the Administration and Congress). But the House Armed Services Committee doesn't think that the 10% savings is worth bothering about.

All this may move you to take pen in hand and dash off a few courteous and constructive, if pointed, words to your representatives and senators. By all means do it -- and don't forget to send a carbon to the budget director. He's supposed to be coming up with a tough new directive on how to bring federal competition with private industry under control. Not surprisingly, the budget director receives 10 outraged letters criticizing him for this expected effort for every letter he receives supporting him. Don't forget, perhaps 1 million government workers are in unions, and if there is one labor action they understand, it is threatening letters to politicians and administrators.

This stubbornly defended government competition is a direct challenge to the desire of many of us for the biggest small business sector possible. To us, the issue of federal government competition wins the big Red Herring Award hands down for the longest-running political slapstick and pratfall comedy in Washington. Big talk, small actions. It is true we have won a few rounds. From 1970 to 1980, the number of federal employees decreased from 1.4 to 1.3 per 100 Americans. As a matter of fact, 1981 was probably the first time in 50 years that the total number of public workers -- state, federal, and local -- did not increase. But it is hardly time to throw our hats in the air. Bear in mind that the number of state and local government workers per 100 Americans rose from 2.7 in 1950 to 5.9 in 1980.

Government competition with private industry is certainly not a new issue. It is not even an old issue; it is a permanent issue in a self-governing republic. It is where the citizenry draws the line between the proper realm of government and forbidden government intrusion.

Over the past 27 years, Presidential directives have eroded what was initially a clear preference for the private sector in government procurement. In 1955, Bureau of the Budget Bulletin 55-4, theoretically binding on agencies answerable to the President, said:

It is the general policy of the Administration that the Federal Government will not start or carry on any commercial activity to provide a service or product for its own use if such product or service can be procured from private enterprise through ordinary business channels.

The circular explained that private sector and government accounting methods were not alike -- the government, for example, doesn't pay taxes, and it computes overhead, depreciation, and fringe benefits differently. Therefore, most cost comparisons between the two sectors are unrealistic. Government should never perform a commercial activity itself, the bulletin continued, except when goods or services cannot be bought in the private market at a reasonable price.

Bulletins in 1957, 1960, 1966, and 1979 further whittled that principle. The first three added loopholes. The last switched a preference for the private sector to acceptance of the federal government as a direct competitor if it could perform a commercial activity more cheaply. It also shifted to a preference for nonfederal sources. This aggravates an historic problem -- treating universities and nonprofit institutions the same as taxpaying private-sector organizations -- by also treating state and local governments the same as private businesses.

The government now gives equal preference to buying from nonprofit, non-taxpaying institutions and from state and local government agencies. Indirect government competition from untaxed, subsidized nonprofit entities is thus an accepted policy.

During the war, the government had financed the construction of large-scale war plants -- including manufacturing installations and research and development laboratories. When the war ended, it had to decide whether to continue to own and operate these facilities itself or sell them to the large private companies that had the resources to run them.Or the government could continue to own the plant with a private company operating it under contract.

The issue became more pressing for smaller companies with the growth, and then the explosion, of the economy's service sector. At the same time, the government itself kept taking on functions that involved the delivery and performance of services. Its first impulse was always to get these jobs done by people on its own payroll. Yet technological and business innovation were increasing the ability of smaller companies to perform more and more of these same services well and cheaply. Government and the small private service companies were on a collision course. And, as government gave more and more financial support to universities, health programs, and other nonprofit institutions, the headaches for more small companies became more painful. A growing number felt they were paying taxes to subsidize unfair competitors who were not themselves taxed.

By 1979, small businesspeople in many industries were complaining. To address their grievances, the Office of Advocacy of the Small Business Administration set up a task force on government competition made up entirely of small businesspeople. The task force easily found more than 100 examples of direct government agency competition with small companies. Included were such categories of work as landscape design, laundry and dry cleaning, vending machine installation and maintenance, and a range of professional services. In addition, the task force pointed to a second level of direct competition -- which had begun as necessary and proper government functions with explicit legal standing. This ranged from the Postal Service, the federal laboratories, and the General Services Administration's stores and depots to the Army Corps of Engineers.

A third group of rapidly growing irritants to small business were those institutions that are theoretically nonprofit. These run the gamut from day-care centers for working mothers to universities that sell time on scientific instruments given to them by the government for teaching and research purposes.

As the task force report indicated, the economic interest of small business in the issue of government competition is increasingly significant and likely to grow. But like almost every other issue that affects the nation's 15 million independent owners and managers, it doesn't hit them all equally hard in financial terms. For only a few is it a matter of economic life or death at any one time. For most it is an issue of principle.

Originally, democratic theory dictated that government should not do for citizens those things that citizens could do for themselves. Small business will increasingly be able to do things for citizens that government now does.

One of the most promising developments for small business is a rumored OMB revision of OMB Circular No. A-76. Under the proposed revision, some commercial activities would be transferred to the private sector without the need for cost comparisons. The transfer would be phased in gradually. First, any commercial activity that can be performed by fewer than 10 federal employees would automatically be transferred to the private sector. About 18 months later, activities costing the equivalent of 25 employees would be moved to the private sector.

Whether the budget director and the President can stand the political heat already generated from unions by this proposal is unclear. The White House has much bigger budgetary fish to fry. It may well be tempted to pass or stall on this one. This has happened many times. It will be a shame if it happens again.

Congress must finally settle the policy issue of government competition with a permanent law rather than with these too vulnerable regulations. It would at least be harder for pressure groups to puncture such a law with loopholes. But Congress has as yet had no stomach for the battle. Given Capitol Hill's internal divisions, the issue is simply too hot to handle. And the principal antagonists -- government workers, unions, government managers, and private-sector lobbyists who want or have government contracts -- have not really demanded a general law settling it. Each is afraid it will lose more than it will gain.

Three steps are necessary for long-range settlement of the issue. First, the President and the budget director have to take the heat and put out a solid, sensible revision of A-76.Such a revision must provide necessary and fair treatment for small companies and activities that compete with them. Second, nongovernmental private-sector coalitions must form behind such a revision. Large companies, small business entrepreneurs, nonprofit groups, and nongovernmental unions (their members, like the rest of us, pay for all of this) need to find common ground that will allow them to unite behind such a revision.

Third, this private-sector coalition must support a broad, bipartisan, middle-of-the-road congressional drive to embed the principle underlying the A-76 revision into law. Legislating the details is neither necessary nor desirable; legislating the general principle is indispensable. The law would then be binding on future administrations -- at least until it was amended or repealed by Congress. Such a law may only make it more difficult for the bureaucracy to undercut the principle. Even so it will be a real achievement.

Last updated: Jul 1, 1982




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