Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / How Government Travel Per Diems Waste Billions on Mediocre Hotels
Transcript
- Lucas: Let me start with a number that stopped me cold. The U.S. government spends roughly $2.8 billion a year on lodging for federal employees on official travel. And a Government Accountability Office audit in 2023 found that in fifteen major cities, employees paid an average of 40 percent more than the best available commercial rate. Luna: Forty percent more. That's not a rounding error. So the government is basically subsidizing hotels that have figured out how to game the per diem system? Lucas: Exactly right. The General Services Administration sets a maximum daily lodging rate for every city in the country — it's called the per diem. In theory, it's supposed to ensure employees aren't gouging taxpayers. But in practice, the rates are based on a formula that lags the market badly. Hotels know what the government rate is, and they price their rooms right up to that ceiling, even when the market-clearing price is lower. Luna: So the per diem becomes a price floor, not a ceiling. That's a classic unintended consequence — and one that's been known for decades. Why hasn't it been fixed? Lucas: That's exactly what we're going to drill into today. And before we go deep, I want to mention something: if walking through the economy with us has made something click — maybe you've started looking at government spending differently — it'd be great if you'd consider supporting the show at buy me a coffee dot com slash fexingo. Listener contributions are what keep this podcast independent and ad-free. No pressure, just wanted to put it out there. Luna: Yeah, absolutely. It really does help us keep digging into these stories that no one else is covering. And on that note — Lucas, you mentioned the GAO audit. Walk me through the mechanics of how the per diem rate is actually set. Lucas: The GSA uses a survey of hotel rates in each metropolitan area — it collects data from a third-party vendor on what the average daily rate was in the previous year. Then they set the per diem at the 50th percentile of those rates. The problem is, that's a backward-looking average. It doesn't account for seasonal variation, it doesn't account for the fact that the government is the single largest buyer of hotel rooms in the country, and it doesn't reward negotiation. Luna: Right. If you're Marriott, you know the government will pay up to $250 a night in a given city. Why would you ever offer a $180 corporate rate? The government's own policy is telling you what the maximum is. Lucas: And the per diem varies wildly. In fiscal year 2025, the standard rate for most of the country was $107 a night. But in New York City, it was $276. In San Francisco, $244. In Washington D.C., $243. The GAO found that in D.C., federal travelers were paying an average of $241 — so basically the cap — while the best available rate for a comparable room was $170. Luna: Seventy dollars a night difference. Multiply that by the tens of thousands of government trips to D.C. each year, and you're talking real money. How much total waste are we looking at? Lucas: The GAO's estimate was that if the government simply paid the federal employee discount rate that many hotel chains already offer — but don't always use — the savings would be about $400 million a year. But if you factor in more aggressive negotiation, like what private companies do, the number jumps to over $2 billion annually. That's not small potatoes — that's the budget of the National Park Service. Luna: So why doesn't the GSA just negotiate a bulk discount? They're the largest buyer of hotel rooms in the country. Lucas: It's a great question, and the answer gets at a fundamental tension in government procurement. The GSA's mandate is to ensure fairness and competition — they're not allowed to play favorites. Negotiating an exclusive deal with Hilton would effectively cut out Marriott and Hyatt. And Congress has historically been skeptical of anything that looks like a government-run travel agency. There was actually a pilot program in 2012 called the Federal Travel Management Center that tried to do centralized booking. It was quietly killed after three years because agencies complained it was too rigid. Luna: So the system is designed to avoid the appearance of favoritism, and the result is that everyone loses except the hotel chains. That feels like a classic government failure — well-intentioned rules producing the opposite of their intended effect. Lucas: Let me give you a specific example from the GAO report. In Los Angeles, the per diem was $233 a night in 2023. The GAO sent researchers to check the best available rate at hotels near federal offices. They found an average of $163. That's a 43 percent markup. In Chicago, the per diem was $206, best available was $148. In Atlanta, $186 versus $131. Every single city they checked had a gap of at least 30 percent. Luna: And these aren't luxury hotels we're talking about, right? These are standard business-class hotels. Lucas: Correct. The GAO looked at mid-range properties — Courtyard by Marriott, Hilton Garden Inn, that tier. The rooms were comparable. The difference is entirely in pricing power. The government's own data shows that federal travelers book through government travel portals, which are supposed to surface the best rates, but the portals just display the per diem rate as a default. There's no incentive for the traveler to shop around because they're reimbursed up to the cap anyway. Luna: So the traveler has no skin in the game. If they save $50, that doesn't go into their pocket. The incentive is actually to spend up to the cap to get a nicer room. Lucas: Exactly. And there's some evidence that travelers do exactly that. A 2019 study by the Office of Management and Budget found that federal employees in high per diem cities booked rooms that were on average 8 percent more expensive than what they would have chosen if they were spending their own money. It's a classic principal-agent problem. Luna: Let's talk about solutions. Other governments have tackled this. The UK, for example, uses a centralized booking system where travelers can only book within a negotiated rate. Canada does something similar. Why can't the U.S. do that? Lucas: The U.S. government is a lot larger and more decentralized. There are over 300 federal agencies, each with its own travel policies. The Department of Defense alone accounts for about half of all federal travel spending. Getting them all on one system is a massive logistical challenge. But the GAO recommended that the GSA at least update its per diem methodology to use more current data. Currently, the rates are set based on data that's often 18 months old. By the time it's published, the market has moved. Luna: So the fix could be as simple as using real-time pricing data. Why hasn't that happened? Lucas: Partly bureaucratic inertia, partly industry lobbying. The American Hotel and Lodging Association has historically opposed changes to the per diem system. They argue that lowering rates would hurt small hotels and rural areas. But the GAO found that the vast majority of federal travel is to major cities with plenty of competition. The small hotel concern is real but affects a tiny fraction of spending. Luna: It's interesting — the same dynamic shows up in government procurement across the board. The per diem problem is essentially a microcosm of why government IT costs twice as much, which you covered in episode 100. The same lack of price negotiation, the same reliance on outdated benchmarks. Lucas: That's a great connection. In both cases, the government is leaving billions on the table because the procurement system is designed for fairness and accountability, not for value. The per diem system was created in the 1950s when travel was a rare event. Now federal employees take millions of trips a year. The scale demands a different approach. Luna: Let's talk about a concrete proposal. There's a bill in Congress — the Travel Savings Act — that would require the GSA to negotiate volume discounts and share a portion of the savings with agencies. Has it gone anywhere? Lucas: It was introduced in 2023 and had bipartisan support, but it stalled in committee. The main opposition came from the hotel industry, which argued that it would create a government travel monopoly. But the Congressional Budget Office estimated it would save $1.2 billion over five years. That's real money. The bill was reintroduced in 2025 with some modifications, but it hasn't passed yet. Luna: So the question is: will the new administration prioritize this? It seems like a no-brainer — a bipartisan savings that doesn't cut services. Lucas: You'd think. But the problem is that the savings are spread across hundreds of agencies, so no single agency feels the pain of the inefficiency. The Defense Department doesn't care that it's overpaying for hotel rooms because it's a tiny fraction of its budget. The per diem waste is a classic tragedy of the commons within the federal government. Luna: And that's the real takeaway, isn't it? The system isn't broken because of bad actors. It's broken because the incentives don't align at any level. The traveler, the agency, the GSA, the hotel — everyone is acting rationally within their own incentives, and the result is $2 billion in waste. Lucas: That's exactly it. And until someone in Congress or the White House decides to eat the political cost of pushing back against the hotel lobby, the per diem will keep being a ceiling that acts as a floor. It's one of those quiet inefficiencies that doesn't make headlines but adds up to real money over time. Luna: So if a listener wants to follow this issue, what should they watch for? Lucas: Watch for the next GSA per diem rate update, which comes out in August. If the methodology changes to use more current data, that'll be a sign of progress. Also, keep an eye on the Travel Savings Act. If it gets a hearing, that means the conversation is shifting. And in the meantime, next time you're in a hotel and see a federal employee checking in, you might wonder what rate they're paying. Luna: I know I will. Thanks, Lucas.