In late January, the Trump administration issued a series of executive orders that paused Treasury payments to a variety of federal contractors and grantees. These orders also often cancelled contracts with NGOS and other contractors altogether. Soon afterward, we began to see countless media stories about job losses at private NGOs and for-profit federal contractors. Many were so heavily reliant on revenue from taxpayer cash that they immediately began laying off employees.
This media frenzy over these job losses has helped to highlight the immensity of the world of federal contractors and grantees. Among workers in the real private sector—i.e., not in the tax-funded sector of government contracting—many often forget that millions of Americans work for these supposedly private organizations. Some of these are explicitly for-profit and some are non-profit. Federal contractors employ more than seven million workers while there are only three million federal employees who work directly for the federal government.
Even though there are more contractors on the federal dole than federal employees, we rarely hear about them in the context of budget cuts or federal deficits. Part of the reason for this is the fact that conservatives have long pushed the idea that federal contractors, unlike federal employees, are efficient workers who deliver a valuable service.
But there’s a problem with this characterization of contractors. Economically speaking, there isn’t much daylight at all between a tax-funded “private” contractor and a federal employee who works directly for a government agency. Whether a tax-funded federal employee, or a tax-funded contractor, the economic mechanism is the same: remove wealth from the private economy via taxation, then spend that money where central planners have decided to spend it. As such, both government employees and government contractors provide goods and services in line with political decision making, and not in line with the needs of the marketplace. In this equation, there is no room for actual efficiency, freedom, or voluntary exchange.
The Economics of Government Contractors
Federal contractors often behave like any other interest group in that they use lobbyists and public relations to convince politicians to hand over taxpayer money to their tax-fueled industry. The argument often given is that when governments use private contractors, government is operating “on a business basis.” Yet, the idea that government spending can ever be done “like a business” is a fallacy. Murray Rothbard has illustrated the lie beneath this claim:
This is often the cry raised by conservatives—that government enterprise be placed on a “business footing,” that deficits be ended, etc. … This, however, is incorrect. There is a fatal flaw that permeates every conceivable scheme of government enterprise and ineluctably prevents it from rational pricing and efficient allocation of resources. Because of this flaw, government enterprise can never be operated on a “business” basis, no matter what the government’s intentions. […]
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