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You are here: Home / Economics / Free Markets Solve Everything / Cui Bono

Cui Bono

by @heymistermix.com|  November 7, 20117:19 am| 42 Comments

This post is in: Free Markets Solve Everything

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The Times has a long piece about outsourcing at a Michigan veterans home, where 170 union aides making $15-20 an hour are going to be replaced by a contract services company that will pay closer to $10/hr. The story goes into great detail about how $10/hour isn’t really a living wage, and how the pay cut will affect the union employees. That’s true, and it’s probably just churlish of me to ask for more in a story that covers a lot of the important bases (like links to two pieces showing that contracts often cost the state more than the government services they replaced). But, let me be a churl for a moment and ask for more.

The Times’ coverage is typical of what the press misses about outsourcing, since it lacks analysis like this (click to embiggen):

That’s a totally made-up graph with numbers I pulled out of my ass, but any outsourcing project embodies a trade-off between giving a corporation some profit so they can cut workers wages. A graph that considers the amount of money currently spent as the whole pie, and shows the reader how that pie is cut under the new contracting setup is almost never shown. Instead, we get vague promises of savings, which as the article noted, often don’t pan out. Also missing is any discussion of the principals of the outsourcing company, including whether they live in the state or region, and to whom they’re making political contributions.

My guess is that there are two reasons the Times, like most of the press, devotes most of its space to quotes from workers who will either be losing their job or who are adjusting to the $10/hr job. First, talking to affected workers is easy and generates the conflict the press loves. Second, I assume the other information is hard to get, on purpose, because the outsourcing companies driving the discussion don’t want you to think about it. So, these stories end up with the reader being extremely well-informed on the obvious ($10/hr jobs suck), and still ignorant on whether the outsourcing contract is a deal worth taking.

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42Comments

  1. 1.

    Ben Cisco

    November 7, 2011 at 7:29 am

    The Ferengi aren’t interested in analysis b/c their paymasters aren’t either. Odd actually, since both the fact that the workers get screwed and the corp gets a cut amount to class war pr0n. You’d think they would stick it out there.
    __
    So to speak.

  2. 2.

    JPL

    November 7, 2011 at 7:34 am

    Often the private companies low bid in order to get the job and then the fees increase over time. The Times piece was weak by not doing the research necessary to make an informed decision. Dumbing down of America.

  3. 3.

    PurpleGirl

    November 7, 2011 at 7:59 am

    Your point about the profit that the corporation makes is a good one and one I’ve often thought went unremarked on, both in conversations with people about lowering government costs and in articles anywhere about government budgets and costs. I’ve worked as a temp and know the dynamics of the economic exchange; the company may pay me X an hour but they charge the entity I’m working for roughly double. (Based on my memory of a conversation with my temp counselor in 1980; I don’t think the pattern has changed.)

  4. 4.

    soonergrunt

    November 7, 2011 at 8:04 am

    I worked contract IT positions on and off for 10 years for the US Government. In every single case, I made less than my GS counterparts, but cost the government far more.
    As a GS-11/1 in career field 2210 (Information Technology Management), I make $59,339. After retirement and insurance, I probably cost the government somewhere in the region of $80-$85k/year.
    My last contract position, I made $45,007/year, and probably cost the company about $55-$60K/year. The company charged the government over $120/year for my position.
    Contractors almost never save the government money, whether state or federal.

  5. 5.

    RSA

    November 7, 2011 at 8:06 am

    Instead, we get vague promises of savings, which as the article noted, often don’t pan out.

    The article also mentions the problem of contract workers sometimes doing a poor job, but I’ll add another churlish suggestion: It would be nice to hear about steps being taken (if they are, which I kinda doubt) to find out whether the new system will work as well as the old. Aside from vague promises of savings, we get even vaguer promises that care won’t be degraded.

    The lawsuit, filed by Anthony Spallone, a resident, says that fill-in contract workers have, among other things, repeatedly dropped residents and left them in urine-soaked beds, and once fed a resident solid food despite specific instructions not to. Tim Frain, the chief executive of J2S, declined to comment.

  6. 6.

    Feudalism Now!

    November 7, 2011 at 8:21 am

    The reduction of payroll taxes and the economic stimulus to the area is rarely mentioned as well. This is just another of ‘heh indeed’ union busting and the vagaries of the Invisible Fist pounding down workers. If they would just apply themselves they wouldn’t be stuck in a $10/hr… Sorry need to pad the profit this quarter… Minimum wage job.

  7. 7.

    bjacques

    November 7, 2011 at 8:22 am

    Contracting out almost always ends up costing taxpayers more money.

    I’m going to leave out no-bid contracts to relatives, big donors and other cronies, because those are so rare in real life (haha).

    From the start, any savings from firing state/federal/union workers will be canceled out by executive management salaries higher than those of the GS-## (if federal) managers who were canned, reassigned or whatever. Gotta attract the private sector talent, after all.

    Second, profit has priority over servicing the contract, which drives the contractor’s future decisions, such as periodically chasing ever cheaper (and lower-quality) labor.

    Third, businesses save money by dumping unprofitable or marginally profitable customers, or not taking them on in the first place. Governments don’t have that option. Contractors know this, so the contracts often have the taxpayers ensure future profits and cover any rises in costs during the life of a contract.

    Fourth, the contract is usually renewed barring incompetence so blatant it doesn’t blow over (or incompetence in gaming whatever metrics are used to track success). It has to be, because the government has by now dismantled its capability for delivering the service. And the contractor knows this too.

    Both the major parties love outsourcing. Conservatives think government should be run like a business, delivering a public service only grudgingly and at a profit (to those who deserve it). Democrats (or Labour), from their long periods in the political wilderness and envy at conservative success at the polls, have developed a cargo-cultlike faith in Teh Market, so the result is the same.

    As the UK’s Private Eye noted, wait 20 years for a decent study on Private Finance Initiatives and two come at once. I can’t find the links, but I gather the studies support the above, more or less.

  8. 8.

    Hillary Rettig

    November 7, 2011 at 8:22 am

    @RSA 5 – the WSJ did a series of articles a few years ago about what happened when privately-run nursing homes were bought by corporations whose priority was cost-cutting and ROI. Care worsened, and people suffered and died.

    In many cases, the company that owns the nursing home is a shell owned by another shell etc. – the WSJ went to great pains to trace ownership and still had trouble. And so, in cases were patients died, you literally couldn’t figure out whom to sue.

  9. 9.

    Mino

    November 7, 2011 at 8:25 am

    Politician have to help corporations generate the profits that will come back to politicans as campaign contributions.

    See. And the Supreme Court agrees with this. So long as you never THINK it’s corruption, it’s not.

  10. 10.

    Woodrowfan

    November 7, 2011 at 8:38 am

    @soonergrunt:

    Supposedly the savings come with retirement, the government has to pay the govie’s retirement, but not the contractors.

    Supposedly..

  11. 11.

    Davis X. Machina

    November 7, 2011 at 8:39 am

    @soonergrunt, et al:

    Contractors almost never save the government money, whether state or federal.
    __Contracting out almost always ends up costing taxpayers more money.

    It’s not an argument from efficiency. It’s a theological argument

    Anything that is, can be bought and sold.
    Anything that cannot be bought and sold, is not.
    Everything private is better than anything public is, or ever could be, because it’s private.
    And so long as one of us, anywhere, is covered by a collective bargaining agreement, none of us can truly be free.

    You can’t refute a theology.

  12. 12.

    marcopolo

    November 7, 2011 at 8:39 am

    Here is some good news this morning and actually topical to this thread!

    A new poll out tonight shows Ohio Democrats and public employees unions poised to deliver a crushing rebuke to Gov. John Kasich (R) at the polls on Tuesday. 59% say they plan to vote to repeal SB-5, Kasich’s signature anti-union legislation passed earlier this year.

    Even the more conservative side of the family which resides in NW Ohio are all voting for repeal.

  13. 13.

    batgirl

    November 7, 2011 at 8:43 am

    Government outsourcing doesn’t save money or improve services. Government outsourcing is corporate welfare pure and simple, the GOP paying off their wealthy donors. It costs the government more money and increases income inequality as the CEO and top corporate people siphon off government funds for large salaries and bonuses while cutting wages and benefits for the workers.

  14. 14.

    jayackroyd

    November 7, 2011 at 8:44 am

    Trouble is that the graph I woulda pulled outa my ass would have had two pies, the outsource pie bigger than the civil service pie. I really, really doubt the net effect is a reduction in costs. Leave aside the downside associated with losing institutional memory, and the disincentive that the contractor or its employees have to embrace whatever the agency agenda is. (And even DMV has such an agenda.) I really don’t think that paying for contractor management, profit and administrative overhead will really end up being cheaper than just hiring people.

  15. 15.

    Ohio Mom

    November 7, 2011 at 9:03 am

    @marcopolo: what I read over at Plunderbund yesterday was that Kasich now sees that including fire and police was a mistake, and that the next attempt will be focused on teachers only. Which means he may be smarter than I’ve given him credit for, he’s learning from his mistakes. Which is too bad for all of us.

  16. 16.

    Steve

    November 7, 2011 at 9:21 am

    Why don’t the newspapers just run a pie chart showing how much the NBA owners make in profits? It’s a mystery.

  17. 17.

    Ken B.

    November 7, 2011 at 9:23 am

    Nice post, thanks. A picture is worth a thousand words, even if you have to pull the picture out yer ass.

  18. 18.

    David Fud

    November 7, 2011 at 9:43 am

    How many of these folks will go on food stamps? On other assistance programs? The whole thing about saving the state money is such bunk. It’s like cutting off your foot to be able to say you lost weight.

  19. 19.

    soonergrunt

    November 7, 2011 at 9:44 am

    @Woodrowfan: The company doesn’t end up paying retirement either because once the contract ends, the staff are terminated. All four of these companies that I worked for had vesting terms that were longer than their contracts with the government.
    I have rolled my 401K over three times, and now I’m getting ready to fold it into the Federal Employees’ Retirement System as soon as I can get a judgement on the conversion cost of my military retirement to FERS.

  20. 20.

    The Moar You Know

    November 7, 2011 at 9:46 am

    I was part of a software outsourcing effort once. Not only does it not work, it cannot work. Full stop. No exceptions.

    Anyone who does this is just looking to give the current quarter’s numbers some polishing. That’s it. It is not and cannot be a legitimate alternative to any skilled labor.

  21. 21.

    Linda Featheringill

    November 7, 2011 at 9:51 am

    @marcopolo: #12

    Vote no on #2:

    Already voted but it’s good to hear that this is getting widespread support.

  22. 22.

    Linda Featheringill

    November 7, 2011 at 9:55 am

    @Ohio Mom:

    What I read over at Plunderbund yesterday was that Kasich now sees that including fire and police was a mistake, and that the next attempt will be focused on teachers only. Which means he may be smarter than I’ve given him credit for, he’s learning from his mistakes. Which is too bad for all of us.

    What makes him think that people hate public school teachers?

  23. 23.

    Redshift

    November 7, 2011 at 10:06 am

    @Davis X. Machina:

    It’s not an argument from efficiency. It’s a theological argument

    True, but it’s always presented as an argument from efficiency. Never talking about profit is what allows antigovernment types to even pretend that “the private sectors is more efficient, so of course it saves money.” Without that obfuscation, the question would be does it save more than the added profit margin, and do “market forces” drive “efficiency” by any other means than just not doing the job right.

  24. 24.

    SectarianSofa

    November 7, 2011 at 10:08 am

    @mistermix more outsourcing articles, please. What a fun, distressing subject. It’s like the privatizing SS stuff, but ubiquitously practiced and beloved by asshats of industry everywhere.

  25. 25.

    marcopolo

    November 7, 2011 at 10:31 am

    @Ohio Mom: My experience tells me that Kasich doesn’t get two bites at this apple. The initial legislation has forced citizens in Ohio to do some thinking and choose a side (become polarized). The side they are overwhelmingly choosing is pro-union and now that they have walked down that path a few steps, most will not go back.

  26. 26.

    balconesfault

    November 7, 2011 at 10:46 am

    Having worked as a consultant for the EPA during the Reagan-Bush I years, I can attest that the primary value of outsourcing is to make money for private firms.

    We were doing work that would previously have been done by an EPA employee – but inevitably that work was assigned to the most junior employees wherever/whenever possible, whose hours were billed at multiplier approaching 3x to the government. And at the end of the day, the process left EPA with less institutional knowledge, and more dependency on the contractors, who could start to push higher end work (not just tech support, but program management and planning) up the food chain to more expensive managers.

    There’s a reason that real estate values in DC exploded while Reagan was in office. Beltway bandits made out like … well … bandits.

  27. 27.

    Barry

    November 7, 2011 at 11:36 am

    @Linda Featheringill: “What makes him think that people hate public school teachers?”

    He and everybody he knows does.

  28. 28.

    Enhanced Voting Techniques

    November 7, 2011 at 11:48 am

    @JPL:

    Often the private companies low bid in order to get the job and then the fees increase over time. The Times piece was weak by not doing the research necessary to make an informed decision. Dumbing down of America.

    Equally often companies will bid to low on a contract for status, find they can’t make a profit and end up doing a shitty job until the contract ends.

    But you got to love how $30K a year now is “over paid” in Ferengi land.

  29. 29.

    someofparts

    November 7, 2011 at 11:51 am

    I’ve worked both sides of it. As a contractor, yes, I cost the client company more and I got less than comparable vested employees. Now, as a vested employee myself, I’ve seen our tech support outsourced with the result that quality of service has tanked and costs have quadrupled. Also, our former vested tech support folks have been re-hired as contractors by (hell yeah I’ll use names) Dell.

    Where are the people who still don’t get this, btw? Shoot, I used the privatized tech support fiasco here at work to explain corporate welfare to my own boss last month. Anyone who has worked, as vested or contract, over the last thirty-plus years, must understand this process if they have enough sense to get and keep a job in the first place.

  30. 30.

    Villago Delenda Est

    November 7, 2011 at 11:54 am

    @bjacques:

    Stop making sense.

  31. 31.

    Xulon

    November 7, 2011 at 12:08 pm

    That red wedge is usually the missing piece. At my company, Management asked for wage concessions to save $1 Billion. As soon as it passed the sales force sent out letters to clients saying “we are going to pass the savings to you” and the next year, with the company in worse shape, management was back asking for another $500 Million in concessions. When asked about the “savings” from before, they replied “That was potential savings. It’s not like you wrote us a check for $1 Billion.”

  32. 32.

    kuvasz

    November 7, 2011 at 1:20 pm

    This is the tip of the iceberg here in Michigan. Another pig fest is going on with the state-private coordination with foster kids. The state, with Republican backing has developed a system where foster kids up for adoption are under the control of a private entity that not only costs more per child compared to having the state government run the program, but the private company (CFS) is designated as payee for disability benefits, yet the contract with DHS says CFS (the private agency) has to reimburse DHS if it’s being paid by another source for the child’s care……

    http://www.napcwa.org/Home/docs/RL33855_04-27-2011.pdf This is an April 2011 report.

    The placement company routinly claims that the foster child has emotional disabilities whic brings into the placement company an extra couple of hundred dollars per child… and miraclously over 95% are categorized as emotionally disabledby this organization! Additionally, this private organization has had a tradition of not allowing non-Michigan natives from adopting children. The issue is money, the metric is not “what is best for the child” because if the child is not in Michigan the placement service company does not get any money from the state.

    Mark my words, the shit is going to hit the fan about this over the next 18 months, and it is going to reach into the Governor’s office.

    btw the person running the private business makes $75k/year……and lives in a $600,000 home.

    What infuriates me is that these people are using the most vunerable members of society to make a fast buck.

  33. 33.

    4jkb4ia

    November 7, 2011 at 1:29 pm

    The NYT has covered two angles of this kind of a story. The first one was the one that was obvious here–what are these people worth now? What is it worth society to pay people who have some pride in their work and will take care of all of us at some later time? But then there is the whole mess with Central Falls, RI. What are these people worth in the future when you have to pay for them to retire? Phrased more properly, what do you owe them? So I would like to see a pie like that that took account of pension costs.

  34. 34.

    bjacques

    November 7, 2011 at 1:48 pm

    I’m making flippy floppy instead!

  35. 35.

    Ohio Mom

    November 7, 2011 at 1:53 pm

    @marcopolo: I really hope you’re right about Kasich not getting a second chance at busting unions, even if it’s *only* the teachers the next go round.

    And in response to why he might think teachers are more vulnerable, I think it’s based on the assumption that the sort of people who voted him in are committed to supporting police and fire, but teachers not so much.

  36. 36.

    Carol from CO

    November 7, 2011 at 2:19 pm

    wingers don’t care if privatizing costs more. It accomplishes two things for them: 1) It gets them another source of funds and 2) It screws those librul public employees.

  37. 37.

    Woodrowfan

    November 7, 2011 at 2:54 pm

    @soonergrunt:

    I figured, that’s why I said “supposedly.”

    I hope you can get into FERS ok…

  38. 38.

    russell

    November 7, 2011 at 3:05 pm

    Tomorrow Is Already Here

  39. 39.

    comrade scott's agenda of rage

    November 7, 2011 at 4:04 pm

    @soonergrunt:

    I’m your Fed counterpart. I know right now the agency I work for pays it’s contractors roughly 45-50K per year and charge us 135K per year.

    They have trouble keeping people because the pay is shit and they’re worked like rented mules.

    I watched the Bushies trip over themselves to outsource everything under the guise of “better service/save money”. Neither occurred.

  40. 40.

    genghisjon

    November 7, 2011 at 4:20 pm

    @kuvasz: Over at DKO ther was a post about this in the dakoetas.I can’t find the link.It has to do with adoption of native americans being privetised.It will realy realy piss you off.

  41. 41.

    genghisjon

    November 7, 2011 at 4:32 pm

    http://www.dailykos.com/story/2011/10/26/1030339/-South-Dakota-kidnaps-Indian-children-and-sticks-them-in-white-foster-care Here it is.

  42. 42.

    wobbly

    November 7, 2011 at 4:48 pm

    Did you read the whole NYT piece? It discusses how contractors can cost taxpayers more as their low wage workers often qualify for Medicaid, food stamps, subsidized daycare, and the like. It also mentions that some municipalities have stopped privatization and gone back to hiring directly, paying higher wages and benefits because studies showed the traditional practice was more overall cost effective.

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