Remember the dressing-down King Arthur gave Guinevere in the nunnery? It was stern, but not more so than Steven Kelman's analysis of the Grace Commission report on government "cost control."
The commission gave Ronald Reagan the idea that there are 2,478 ways of eliminating "waste" and thereby saving, in just three years, $424 billion. Hence Reagan's belief that the budget deficit can be tamed by "growth and Grace" -- by economic growth and by eliminating only things that no one wants.
The initial press release trumpeted: "Commission Discloses $424 Billion in Waste." But much of what it chose to call waste is just policy -- the reasonably efficient operation of programs the commission considers unnecessary. (Hence the commission's assertion that $424 billion could be saved in three years "without in any way harming necessary social welfare programs.") Fourteen percent of the $424 billion ($58 billion) was to come (in years 2001-3) from cutting federal, civilian and military pensions.
Now, in the winter issue of The Public Interest -- no liberal journal -- Kelman, of Harvard's Kennedy School of Government, argues that the horror stories about waste "are almost always gross exaggerations." The commission specialized in such stories as: "The Pentagon has been buying screws, available in any hardware store for 3 cents, for $91 each."
Make your blood boil? Simmer down.
Pentagon acquisition rules stipulate that "overhead" expenses be allocated to each shipment at some fixed proportion of the value of the product. If the value is $5 million, the corporation might be entitled to add, say, 20 percent ($1 million) for overhead. Overhead includes costs above materials, machines and labor -- costs of everything from legal departments to company headquarters.
The Pentagon orders many kinds of parts simultaneously. As an approved accounting convenience, many contractors allocate overhead on an "item" rather than "value" basis. Kelman illustrates this with an example of a $20 million order for 10,000 parts, some of which have a direct cost of $25,000 each and others of 4 cents each.
"Instead of apportioning the $1 million total overhead such that the $25,000 part gets a lot and the 4-cent part a little, the computer printout will allocate $100 to each part. This produces a charge to the government of $25,100 for the expensive part and $100.04 for the cheap one."
The Grace Commission charged that in "comparison to a private sector company, managing comparable building space, the General Services Administration employs 17 times as many people and spends about 14 times as much on total management costs." Outraged? Do not be.
The commission committed two howlers. It compared GSA with an actual insurance company managing 10,000 buildings -- but the company really managed only 1,000. Also, the commission said the company employed just 200 management professionals under contract. Kelman found that the company actually had 200 management firms under contract.
The commission charged: "The Veterans Administration spends $61,250 per bed to construct nursing homes -- almost four times the $16,000 per-bed cost of a major private-sector nursing home operator." Kelman found that the commission averaged the cost of six VA homes, and the average was radically inflated by including a West Virginia home, the cost of which included a related facility that was part of a whole medical facility built adjacent to it. The costs of three of the other five homes were significantly raised because of site difficulties. The sites were dictated by the VA policy of locating homes near VA hospitals.
Furthermore, VA costs are raised by government policies of providing certain quality features (such as balconies for the rooms) and giving preference to American-made products and minority and small businesses. The wisdom of such policies is debatable; but the policies are not "waste."
Kelman demolishes several other Grace horror stories, but mere facts are no match for the desire to believe politically convenient things. The Grace report, and especially the president's love of it, demonstrates the extraordinary things people will believe in order to avoid facing unpleasant facts, such as the fact that the deficit cannot be substantially shrunk painlessly.
Do you really believe the government is paying $110 for a 4-cent diode, and that if it would just quit doing such things it could save $424 billion in three years? Remember in "Through the Looking Glass," when Alice says it is impossible to believe impossible things and the Queen (who should be the chairman of the Council of Economic Advisers) says: Fiddlesticks, I've believed as many as six impossible things before breakfast? The Queen was no slouch, but not in the league with the Grace Commission and its believers.