Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / Why the Government Pays a Fortune for Ordinary Items
Transcript
- Lucas: So there's a story from the 1980s that's become almost mythical in government spending circles. The Pentagon paid $640 for a hammer. Not a specialized tool, a normal claw hammer you'd find at any hardware store for ten or fifteen bucks. Luna: I've heard that one. It's always cited as the ultimate example of government waste. But what actually explains it? Was it just someone being careless? Lucas: Not exactly. The hammer story is a bit of a distortion. The $640 price tag included a lot more than the hammer itself. By the time you accounted for the engineering drawings, the testing, the administrative overhead, the per-unit cost spread across a small batch, it ballooned. But the underlying problem is real. The government, even today, routinely pays multiples of what a private company would for ordinary items. Luna: Right, so it's not that they're buying gold-plated hammers. It's the process around the purchase that makes it expensive. Lucas: Exactly. And that's what I want to dig into today. The Federal Acquisition Regulation, or FAR, is a massive document that governs how federal agencies buy everything. It's thousands of pages long. And it's designed to ensure fairness, transparency, and competition. But it also creates a huge amount of overhead for even the most mundane purchases. Luna: So a $20 stapler from the office supply store might cost the government $50 or more when you factor in the paperwork? Lucas: That's the idea. A 2016 report from the Government Accountability Office found that the Department of Defense paid on average about 30 percent more than commercial prices for commonly purchased items like fasteners, batteries, and o-rings. In some cases, the markup was over 500 percent. And this isn't just a Pentagon problem. Other agencies have similar issues. Luna: I remember reading about a coffee maker that cost the government $7,600. That one gets passed around on social media a lot. Lucas: That was a marine corps purchase that got a lot of attention. But again, the actual item might have been a commercial-grade brewer that costs over a thousand dollars, plus installation, plus shipping, plus the administrative burden. Still, there's no way around the fact that the government often doesn't get a good deal. Luna: Why is that? Why can't they just go to a store and buy in bulk like a big corporation would? Lucas: Part of it is the legal framework. The FAR was written to prevent fraud and cronyism, and it does that. But it also makes it very hard to use commercial buying practices. For example, agencies often have to do extensive market research, write detailed specifications, and go through a formal bidding process even for items that are already sold commercially. Luna: So they can't just say, 'We need 500 office chairs. Here's a credit card. Let's go to Staples.' Lucas: They actually can for small purchases under the micro-purchase threshold, which is currently $10,000 for most agencies. But above that, they have to follow more complex procedures. And there's another factor: the preference for small businesses. Luna: Ah, the small business set-asides. That's where the government reserves certain contracts exclusively for small businesses, even if they're not the cheapest option. Lucas: Right. The Small Business Act requires that a certain portion of federal contracting dollars go to small businesses. That's a policy goal, and it has real benefits. But it can also mean that a small business with higher prices wins a contract over a larger company that could have done it cheaper. Luna: So you're saying the government is willing to pay more to spread the money around. That's a deliberate choice, not an accident. Lucas: Exactly. And that's an important point. Some of the premium we pay is intentional. It's the cost of maintaining a diverse supplier base and supporting small businesses. But there's also a huge amount of waste that comes from the process itself. One audit found that the Defense Logistics Agency paid $7,000 for a coffee maker that was available for under $500 on the open market. Luna: That's not just policy, that's a failure of oversight. Lucas: Right. And the thing is, there have been attempts to fix this. In the 1990s, Congress passed the Federal Acquisition Streamlining Act, which created a special category called 'commercial items.' The idea was that if you're buying something that's sold to the general public, you shouldn't have to go through all the government-specific red tape. You should be able to just buy it like a regular customer. Luna: Did that work? Lucas: It helped, but not as much as expected. The commercial item definition is actually pretty narrow. For example, a product that has been modified even slightly for government use might not qualify. And there's a lot of pressure from both agencies and contractors to stick with the old ways. Change is hard, especially in a system this large. Luna: So what would a real fix look like? Is it even possible to make the government buy like a rational consumer? Lucas: There are people who think we should go much further. Some experts argue for something like a central procurement agency that could leverage the government's buying power the way Walmart or Amazon does. Others push for more transparency, so that every price paid is public and can be compared with commercial prices. And there are pilot programs where agencies have been given more freedom to buy off-the-shelf, with promising results. Luna: But those pilot programs are usually small and don't change the culture. Lucas: Right. And part of the problem is that the people making the purchasing decisions are often not rewarded for saving money. They're rewarded for following the rules. If you deviate from the FAR, even to save a million dollars, you could face personal liability. But if you follow the rules and overpay by a million dollars, nobody blames you. Luna: That's a perverse incentive. It's like the audit culture we talked about in the Pentagon episode. Lucas: Exactly. And that's why the hammer story keeps resonating. It's not just about the $640. It's about a system that seems designed to produce those numbers. And yet, we haven't been able to change it. Luna: And that's a problem because every dollar wasted is a dollar that could go to something else. Maybe not a program you like, but something. Lucas: Right. And it also erodes trust in government. When people hear these stories, they think, 'These people can't manage money.' And that's a real cost. Luna: You know, it's funny. We talk about these big systemic issues all the time. And often it feels like there's nothing a single person can do. But there's actually something that keeps this show going. A small group of listeners who support us monthly through buy me a coffee dot com slash fexingo. Lucas: Yeah, that's been a game changer. It means we can stay independent and keep digging into these topics without worrying about advertisers. And it's not a huge number, but it's enough to keep us going. Luna: And we're grateful for every single one of them. It's what allows us to spend hours on episodes like this one. Lucas: Absolutely. So, back to the procurement problem. There's one more angle I think is worth mentioning. The rise of online marketplaces like Amazon Business could be a way for the government to buy more efficiently. The GSA has actually set up a program called 'Amazon Business Prime' for federal agencies. Luna: Oh, I didn't know that. Does it work? Lucas: It's early days, but the idea is that agencies can order directly from a catalog, with prices pre-negotiated, and skip a lot of the traditional paperwork. It's still the government, so there are limits. But it's a step toward the kind of simplified buying that reformers have been pushing for. Luna: So maybe the future of federal procurement is just a really big Amazon shopping cart. Lucas: Maybe. But the challenge is that even with a better platform, you still have the cultural and legal inertia. And you have to make sure that small businesses aren't left out. So it's not a silver bullet. Luna: Still, it's something. A small improvement is better than nothing. Lucas: Absolutely. And I think that's the key takeaway here. The problem isn't that no one has good ideas. It's that the system is built to resist change. But if we can keep chipping away at it, maybe the next generation won't be telling stories about $640 hammers.