Joint Strike Figher Cost Overruns
The Pentagon has informed Congress about another of its procurement projects that is plagued by cost overruns. In other news, the sun will rise and set today, and the pope is Catholic.
Pentagon officials told the Senate Armed Services Committee on Thursday that costs for the F-35 Joint Strike Fighter have jumped more than 50 percent since the program began in 2001. Testifying before the committee, the Government Accountability Office noted that it has reviewed the JSF effort five times and the findings haven’t been positive:
We have consistently reported on the elevated risk of poor program outcomes from the substantial overlap of development, test, and production activities and our concerns about the Government investing in large numbers of production aircraft before variant designs are proven and performance verified in testing.
In our March 2009 report, we again noted development cost increases, additional delays in manufacturing and testing schedules, and the government’s increased financial risk from plans to increase procurement in advance of testing.
The GAO reports that just since 2007 the “total estimated acquisition costs have increased $46 billion and development extended 2 ½ years.” Incredibly, the GAO says that the Pentagon still “does not have a full, comprehensive cost estimate for completing the program.”
In private industry, it would be hard to imagine that a company and its contractors would put in such a poor performance, at least as a matter of routine, which it is with weapons procurement.
Bungled weapons procurement is not just the Pentagon’s fault. Congress is often at fault as well, as a Cato essay on cost overruns points out:
Still, Congress, not the Pentagon, deserves the main blame for cost overruns since it holds the purse strings. Rather than looking out for taxpayer interests, most members of Congress fight attempts to reduce defense spending in their districts, including spending on weapons that the Pentagon doesn’t even want.
Defense contractors exploit this parochial self-interest of legislators, and they skillfully spread out research and production work across many states and districts to maximize congressional support. The $70 billion F/A-22 fighter program provides an example. The Washington Post noted in 2005 that the F/A-22 “is an economic engine, with 1,000 suppliers — and many jobs — in 42 states guaranteeing solid support in Congress.” In 2009, Defense Secretary Robert Gates wanted to cancel further orders of the aircraft, but hundreds of lawmakers and state governors lobbied President Obama to keep the production lines going to preserve the 95,000 related jobs.
Filed under: Foreign Policy and National Security; Tax and Budget Policy
Cost Overrun Incompetence at Energy
OMB director Peter Orszag is blaming the inefficiencies of the federal government on outdated personal computers. That is hard to understand given that federal IT spending amounted to $200 million a day last year.
A new GAO report on cost overruns at the Department of Energy undercuts Orszag’s argument that the solution to government incompetence is new computers. DOE cost overruns are nothing new. As far back as 1982 the GAO was reporting that “DOE lacked sufficient guidance to provide to its contractors for developing cost estimates.” A 2007 GAO report found that eight of 12 DOE projects it examined had exceeded their initial cost estimate by almost $14 billion due to “ineffective DOE project oversight and poor contractor management.” In 2008, GAO reported that nine out of 10 environmental cleanup projects it examined had cost overruns that DOE estimated would require an additional $25 to $42 billion.
For the new report, the GAO looked at DOE’s contract management procedures and here are some of the highlights:
- “DOE has not had a policy that establishes standards for cost estimating in place for over a decade, and its guidance is outdated and incomplete, making it difficult for the department to oversee the development of high-quality cost estimates by its contractors.”
- “DOE’s only cost-estimating direction resides in its project management policy that does not indicate how cost estimates should be developed.” (This statement has to be read several times to actually be believed.)
- “DOE’s outdated cost-estimating guide assigns responsibilities to offices that no longer exist.”
- “DOE does not have appropriate internal controls in place that would allow its project managers to provide contractors a standard method for building high-quality cost estimates.”
- “DOE has drafted a new cost-estimating policy and guide but the department expects to miss its deadline for issuing them by more than a year.”
There’s nothing here that a supercomputer is going to change. Cost overruns in government programs will continue to occur for the simple reason that policymakers and administrators are playing with other people’s money. Moreover, the market forces that compel private firms to manage resources effectively or risk going out of business (unless they are in the auto or finance industries) are absent. DOE won’t be put of business for its cost overruns (although it should be); it’ll just go ask Congress for more taxpayer money.
See this Cato essay for more on cost overruns at the Department of Energy and other government agencies.
$98 Billion in Improper Payments
The Obama administration and its allies in Congress want the federal government to expand its role in subsidizing health care. We are told that this expansion will restrain rising health care costs. But an OMB report yesterday that the government made $98 billion in improper payments last year — $55 billion of which came from Medicare and Medicaid — ought to raise suspicions about that claim.
According to Reuters, OMB Director Peter Orszag told reporters that the embarrassing figures from Medicare and Medicaid demonstrate the need for health care reform. I would concur if “reform” meant reducing the government’s role in health care. However, he means the opposite, which raises the question of how giving more money to an already waste-prone and bureaucratic federal health system can possibly make sense for the economy.
The administration has promised to cut down on improper payments with the aid of a new executive order. According to the Associated Press:
Under the executive order, every federal agency would have to maintain a Web site that tracks improper payments, error rates and outstanding payments. If an agency doesn’t meet targets for reducing error rates for two years in a row, the agency director and responsible official will have to directly report to OMB to explain the delinquency and new actions they will take.
Somehow I doubt this will amount to much of a deterrent. The AP also said the administration plans to impose penalties on government contractors who receive improper payments. But last month it was reported that “the Department of Defense awarded nearly $30 million in stimulus contracts to six companies while they were under federal criminal investigation on suspicion of defrauding the government.”
Democrat Tom Carper, chairman of the Senate subcommittee on federal financial management, seemed to partly understand the broader meaning of the improper payment estimates:
It goes without saying that these results would be completely unacceptable in the private sector, as they should be in government, especially at a time of record deficits…Unfortunately, these numbers may still be just the tip of the iceberg since they don’t even include estimates for several major programs, including the Medicare prescription drug plan.
Yes, Senator, which is precisely why bigger government – be it stimulus, bail outs, or health care reform – is an inferior option to letting the marketplace provide for our wants and needs.
Carper is also right about the $98 billion figure being the “tip of the iceberg.” As has been noted here before:
The Government Accountability Office estimates that the two major government health programs are currently losing a combined $50 billion annually to such payments. But that estimate probably low-balls the actual losses. Harvard’s Malcolm Sparrow, a top specialist in health care fraud, estimates that 20 percent of federal health program budgets are consumed by improper payments, which would be a staggering $150 billion a year for Medicare and Medicaid.
See this essay for more on fraud and abuse in government programs.
Government Mail Loses $3.8 Billion
The U.S. Postal Service reported that it lost $3.8 billion last fiscal year and that it expects to lose $7.8 billion this year. The loss occurred despite cost-cutting measures and legislation that allowed the USPS to forgo $4 billion in required payments to pre-fund retiree health benefits.
From the Associated Press:
The post office has been struggling to cope with a decline in mail volume caused by the shift to the Internet as well as the recession that resulted in a drop in advertising and other mail. Total mail volume was 177.1 billion pieces, compared to 202.7 billion pieces in 2008, a decline of almost 13 percent. For the fiscal year that ended Sept. 30 the agency had income of $68.1 billion, $6.8 billion less than in 2008. Expenditures were down $5.9 billion to $71.8 billion.
The recession and the rise in electronic communications are generating huge financial problems for the lumbering government monopoly. Despite its efforts to reduce headcount, the USPS remains overburdened by a costly and heavily unionized workforce. As I noted previously:
The average USPS worker earns $83,000 per year in compensation, which is considerably more than the average U.S. worker. And the Government Accountability Office recently noted that ‘compensation and benefits constitute close to 80 percent of USPS’s costs — a percentage that has remained similar over the years despite major advances in technology and the automation of postal operations.’
Radical reform is needed, but I suspect that Congress will just paper over the problems for now and also continue allowing the agency to defer funding its retirement obligations:
The post office is required to make an annual contribution of about $5 billion to pay in advance for medical benefits for future retirees. Congress reduced that by $4 billion for 2009, but that change was for one year only. The agency’s independent auditor, Ernst & Young, questioned whether the post office would have enough money to make the next payment on Sept. 30, 2010, when $5.5 billion will be due.
This will just kick the can down the road. It shows that even when Congress gets something right — as it did with making the USPS pre-fund its retiree health benefits — it lacks the will to see it through when the going gets tough. Meanwhile, the Europeans continue to make progress toward deregulating their national postal services and allowing for competition. Unfortunately, it seems that Congress only looks to Europe for guidance on expanding the welfare state.
‘The End of Privacy’ and the Surveillance-Industrial Complex
National Public Radio’s All Things Considered ran a series on “The End of Privacy” all last week that’s worth a listen. They’re primarily concerned with the ways private companies have access to vast quantities of information about individuals in the digital age—something that civil libertarians have traditionally been less concerned about than government access, for many perfectly valid reasons. But it’s worth noting how porous that distinction can be. A 2006 survey by the Government Accountability Office found that just four government agencies—the Justice Department, Department of Homeland Security, State Department, and Social Security Administration—spent at least $30 million annually on contracts with information resellers like Choicepoint. The vast majority of that data (91%) was used for law enforcement or counterterror purposes. And GAO found that the resellers weren’t always in full compliance with the privacy practices that the agencies themselves are supposed to follow.
Choicepoint, coincidentally, is one of the largest clients of the consulting firm run by former Attorney General John Ashcroft. Little wonder given the amount of cash at stake: As reporter Tim Shorrock has documented, some 70 percent of our vast intelligence budget is channeled through private-sector contractors, which means that we need to understand government surveillance policy in the context of a “surveillance-industrial complex” that parallels the more familiar military-industrial complex known for bringing us $600 toilet seats and other forms of pork in camo gear. It’s worth bearing in mind that it’s not just investigatory zeal and public fear driving the expansion of the surveillance state—a lot of people are making a lot of money off it as well.
Filed under: Law and Civil Liberties; Telecom, Internet & Information Policy
Nice Insurance Company. Shame If Anything Were to Happen to It.
Just days after the health-insurance lobby released a report criticizing the Senate Finance Committee’s health care overhaul (for not expanding government enough!), Democrats and President Barack Obama lashed out at health insurers, threatening to revoke what the Government Accountability Office calls the insurers’ “very limited exemption from the federal antitrust laws.”
Democrats say they’re motivated by the need to increase competition in health insurance markets. Right.
According to Business Week:
David Hyman, a professor of law and medicine at the University of Illinois College of Law and adjunct scholar at the Cato Institute…considers it unlikely that repeal would fundamentally change the nature of the market. While it might increase competition in some markets, he says, it could actually decrease it in others, such as those where small insurers survive because they have access to larger providers’ data. Changes to the act could therefore hurt smaller companies more than larger ones, he says.
Because the act doesn’t outlaw the existence of a dominant provider but simply prohibits collusion, says Hyman, a repeal would fall short of breaking up existing market monopolies that are blamed for artificially inflating prices. The current move against [the] McCarran-Ferguson [Act], he says, “has more to do with the politics of pushing back against the insurance industry’s opposition to health reform than it does with increasing competition in health-insurance markets.”
Combined with what The New York Times described as the Obama administration’s “ham-handed” attempt to censor insurers who communicated with seniors about the effects of the president’s health plan — the Times editorialized: “the government’s Centers for Medicare and Medicaid Services had to stretch facts to the breaking point to make a weak case that the insurers were doing anything improper” — it’s hard to argue that this is anything but Democrats threatening to use the power of the state to punish dissidents.
When Republicans were in power, dissent was the highest form of patriotism. Now that Democrats are in power, obedience is the highest form of patriotism.
Filed under: Cato Publications; General; Government and Politics; Health, Welfare & Entitlements; Law and Civil Liberties
Waste, Fraud, and Stimulus
At Capitol News Connection, brought to you each morning by your tax dollars, they reported this morning:
With more than a trillion tax dollars tied up in the Troubled Asset Relief Program and stimulus spending, Congress is trying to figure out how to account for every penny.
Uh-huh. Congress is always on top of our federal dollars.
Coincidentally, just hours after the CNC report, the Government Accountability Office released a report warning about the lack of oversight procedures in the kitchen-sink stimulus bill. And a few days earlier the inspector general for the TARP program reported that Treasury has no real details on how TARP funds are being spent. In fact, IG Neil Barofsky told Congress that there were 20 criminal investigations into possible TARP fraud already underway.
Two months ago Barofsky and the comptroller general had warned of the likelihood of waste in huge new government programs:
Neil Barofsky, the special inspector general for the $700 billion Troubled Asset Relief Program, told a House subcommittee that the government’s experiences in the reconstruction of Iraq, hurricane-relief programs and the 1990s savings-and-loan bailout suggest the rescue program could be ripe for fraud…
Gene Dodaro, acting comptroller general of the U.S., told the subcommittee that a reliance on contractors and a lack of written policies could “increase the risk of wasted government dollars without adequate oversight of contractor performance.”
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