Transactional Costs (and Hidden Flaws)

Katherine Mangu-Ward offers up a seemingly great metaphor for how government contracts waste money in her most recent editorial for Reason:

Imagine you want a cone of mint chocolate chip ice cream. You walk into an ice cream store and say, “How much for mint chocolate chip, please?” They either say, “That’ll be $3,” or, “We don’t have that flavor right now. Try the shop next door.”

[The U.S. government] stands in the middle of the street and shouts, “I WANT ICE CREAM” until someone who makes a related product–pudding, say–comes by and says, “I might be able to make you some ice cream. What were you looking for?” Then the government says, “Great, we will draft hundreds of pages of specifications for the ice cream, and send officials to your R&D facility, your factory, and your distribution warehouses to supervise and advise you while you make it. That way we can be sure to get the ice cream we want. Also, you can’t hire any foreigners and you can only make the ice cream with American ingredients. At the end of the process, you can add up all the costs you incurred to make our special ice cream, charge us the full amount, and then add a little extra on top so that you make a profit.” Four years later, the government gets a $1,263 cup of slightly melted fudge ripple.

Lockheed Martin and Boeing are the bespoke pudding peddlers. SpaceX and Orbital Sciences are Haagen Dazs and Ben & Jerry’s.

A few problems, though, that the ice cream overgeneralizes. To begin with, the government is rarely asking for a product that already exists. Compounding that, they’re often seeking technology for military or other secretive applications; the government has the ability and wallet to buy a wide range of already existing airplanes, but they want the flying fortress that is Air Force One, and they pay a premium to make sure nobody gets their hands on the plans.

Then again, current contracts with Lockheed Martin or Boeing still put the government in a situation in which they’re trusting a private contractor to handle secret information, and for all that Mangu-Ward suggests that the government “supervises and advises,” it’s fairly clear from the multitude of over-budget and past-deadline projects that they’re not actually keeping their eyes on the ball, nor holding their contractors liable. To use the ice cream example, this is akin to asking Ben & Jerry’s to cater your wedding, having a terrible experience, and then continuing to hire them anyway, a non-competitive situation that doesn’t exactly inspire the best work and is basically as far from capitalism as it gets.

Reason suggests that we have a wonderful marketplace; our government really should make use of it, at least so far as to lower the costs from its more “trusted” partners.

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