Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / How Government Procurement Funds the Pentagon's Coffee Cups
Transcript
- Lucas: So the Department of Defense bought about nine million coffee cups last year. Not a typo. Nine million. Luna: And I'm guessing they didn't buy them from IKEA. Lucas: Right. They paid an average of about seven dollars per cup. You can walk into any office supply store and get a ceramic mug for three bucks. But the Pentagon's are special — they meet Berry Amendment requirements, meaning they're made entirely in the United States with domestic materials. Luna: That law is meant to protect national security supply chains, but it also drives up cost on things that have nothing to do with combat. Lucas: Exactly. And it's not just cups. The Government Accountability Office did a deep dive in 2024 on what they call 'tailored sourcing' — basically, small purchases that agencies make outside of big contracts. They found that the military pays two to three times more for basic office supplies than a typical large corporation does. Luna: What kind of stuff are we talking about? Lucas: Pens, paper clips, printer toner — all the boring stuff that keeps an office running. But when you buy them through dozens of separate small contracts instead of one bulk deal, each with its own compliance paperwork, the unit costs skyrocket. The Defense Department alone manages over one point five million contracting actions per year. Luna: That's insane. One point five million separate contracts? That's administrative overhead on top of overhead. Lucas: Exactly. And each of those contracts has to be reviewed, approved, and audited. The labor cost of processing a single contract can easily exceed the value of the items being purchased. A 2022 study by the Project on Government Oversight found that some contracts for basic supplies end up costing more to administer than the supplies themselves are worth. Luna: So we're spending tax dollars to create paperwork that costs more than the stuff we're buying. That's the definition of waste. Lucas: It gets worse. Because procurement officers are evaluated on whether they followed the rules — not on whether they got a good deal. There's no incentive to negotiate. If you buy the cheapest option and something goes wrong, you get blamed. If you buy the expensive option and follow every procedure, you're fine. Luna: That creates a culture of risk aversion where the safest move is to overpay. Lucas: Right. And it's not just the military. The Department of Veterans Affairs, the Department of Energy, they all have similar stories. The entire federal procurement system spends about five hundred billion dollars a year. A GAO estimate from last year suggested that even a five percent efficiency gain would save twenty-five billion annually. Luna: Twenty-five billion is real money. That's more than the budget of the EPA. Lucas: So why hasn't it happened? There's been a push for something called 'category management' — basically, treating procurement like a business, where you centralize buying for common items. The Office of Management and Budget started a program a few years ago to identify categories like office supplies, IT hardware, and consolidate purchases across agencies. Luna: And did it work? Lucas: Partially. They saved about eight billion over five years, which is good but far short of the potential. The problem is that agencies don't want to give up control. They say their needs are unique. But a coffee cup is a coffee cup. Luna: I'd love to hear a procurement officer explain why their specific coffee cup needs are unique. Lucas: Some have tried. They'll say the cups need to fit specific holders, or withstand certain temperatures. But the GAO tested that — they found that commercial cups meet nearly all the same specs for a fraction of the cost. The real barrier is inertia and the structure of incentives. Luna: This reminds me of something — and I know this is a little off the main topic, but it's connected. Walking through this kind of waste, it makes you wonder how the system could ever change. One thing that keeps our show going, and allows us to dig into stories like this without ads, is listener support. If you find these breakdowns useful, you can support the show at buy me a coffee dot com slash fexingo. Even a small contribution helps us keep the lights on and the research deep. Lucas: Yeah, that's a good point. It's listeners like that who let us spend the time on GAO reports and procurement data. So, back to the incentives — there's also a problem with the way contracts are structured. Many are 'cost-plus' meaning the contractor gets paid their costs plus a guaranteed profit margin. That gives them zero reason to be efficient. If they cut costs, their profit shrinks. Luna: So the system rewards contractors for being wasteful. Lucas: Exactly. And it's not just the big defense contractors. Small, sole-source contracts — where only one vendor can supply something — are common. The GAO found that about forty percent of all federal contract dollars are awarded without full and open competition. That's nearly two hundred billion a year going to a single bidder. Luna: That seems like an obvious place to start. Increase competition, lower prices. Lucas: You'd think. But there's a counterargument: that competition introduces delays and complexity. Some argue that for urgent national security needs, sole-source is faster. But the data doesn't fully support that. A 2023 RAND study found that competitive contracts actually had fewer delays and cost overruns than sole-source ones, on average. Luna: So the conventional wisdom might be wrong. Lucas: In many cases, yes. But changing it requires Congress to rewrite parts of the Federal Acquisition Regulation, which is a massive, decades-old document. Plus, there are powerful lobbies that benefit from the current system. Luna: Who benefits? Lucas: Large defense contractors, obviously. But also small businesses that rely on set-aside contracts. There's a tension between supporting small business and achieving cost efficiency. Some of the most expensive contracts are small set-asides where the government intentionally pays more to support small firms. Luna: That's a policy choice with a trade-off. But if the goal is to cut waste, maybe we should be more targeted about which small businesses get premium pricing. Lucas: Right. The GAO has recommended better data tracking and benchmarking. They want agencies to compare their prices against commercial catalogs before buying. Some agencies have started doing that. The Department of Homeland Security, for instance, saved twelve percent on office supplies just by switching to a consolidated contract. Luna: So the solutions exist. It's just a matter of political will and bureaucratic follow-through. Lucas: Exactly. And that's the bigger story here. The federal procurement system isn't broken because no one knows how to fix it. It's broken because the people who could fix it — agency leaders, procurement officers, members of Congress — don't have strong enough incentives to change. The waste is diffuse, so no single voter sees it, but the lobbyists who like the status quo see it very clearly. Luna: It's a classic collective action problem. The savings are spread across millions of taxpayers, while the costs of reform are concentrated on a few powerful players. Lucas: Which brings us back to the coffee cup. Nine million cups at seven dollars each is sixty-three million dollars. If they paid three dollars, they'd save thirty-six million. That's a single item. Multiply that across thousands of products, and you start to see how the billions add up. Luna: And those billions could fund something else — infrastructure, research, tax cuts, deficit reduction. So the question is: will anyone in Washington make it a priority? Lucas: That's the question. There've been reform bills introduced in nearly every Congress for the last twenty years. Some pass, some don't. The most recent one, the Procurement Integrity and Efficiency Act, cleared the House last session but died in the Senate. So we'll see if the next Congress takes another run at it. Luna: If they do, we'll be watching. In the meantime, maybe the Pentagon could at least switch to a cheaper coffee cup. Lucas: Maybe. But I wouldn't hold my breath.