Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / How Government Procurement Creates a Two-Tier Economy
Transcript
- Lucas: So there's this thing called the 'government premium' — and it's not a crypto token. It's the extra cost taxpayers pay when the government buys something identical to what you or I would buy, but for more money. Luna: Wait, identical? Like the same brand, same model, same everything? Lucas: Exactly. In 2024, the RAND Corporation published a study looking at exactly this. They compared prices paid by federal agencies against commercial prices for the same items — office furniture, IT equipment, medical supplies. The premium averaged somewhere between 30 and 50 percent. Luna: That's massive. Why does that happen? Is it bureaucracy? Lucas: Partially. But the interesting finding is that it's not just incompetence. It's structural. The procurement rules — the Federal Acquisition Regulation, or FAR — are designed to ensure fairness, transparency, and accountability. But those rules also add steps. Every purchase above a certain threshold requires multiple bids, documentation, justification. Luna: So suppliers know they're dealing with a slower, more paperwork-heavy process, and they price that in. Lucas: Right. And the risk profile is different. A contracting officer's job is to avoid a scandal or an audit finding. If they buy the cheapest option and it breaks, they're blamed. If they buy a slightly more expensive option with a longer warranty and it works fine, nobody questions it. So there's a bias toward over-specifying. Luna: That's a really underappreciated point — the personal incentives of the person writing the check. Lucas: Let me give you a concrete example. In 2022, the General Services Administration — the GSA — ran a pilot where they bought a standard office desk that retails for about $400 in the private sector. The government price? Over $620. Same desk, same manufacturer. The difference came from things like a mandatory three-year warranty extension, compliance with environmental certifications, and shipping to a federal warehouse instead of directly to the office. Luna: So the desk itself wasn't different, but the wrapper around it — the contract terms — added 55 percent. Lucas: Exactly. And when you multiply that across millions of desks, computers, chairs, you're talking billions of dollars a year. The RAND study estimated that if the government could narrow the premium to, say, 10 percent, it would save tens of billions annually. Luna: But part of me wonders — isn't some of that premium justified? The government has different requirements. Maybe the extra warranty actually saves money in the long run. Lucas: That's a fair question. And the study did account for that. They compared total cost of ownership, including maintenance and replacement. Even then, the government paid more for equivalent or sometimes worse outcomes. Luna: So what's the fix? Can the government just buy off Amazon? Lucas: Not exactly — the FAR doesn't allow that. But there have been reforms. The Department of Defense has a program called 'Commercial Item' designation, where they certify that a product is essentially the same as what's sold commercially, and then they can buy it under streamlined rules. That has helped in some areas. Luna: But I imagine the incentives push back hard. Contracting officers who use the streamlined process might still worry about audits. Lucas: Exactly. And that's the heart of the problem. The system is designed to prevent fraud and abuse, but the side effect is that it systematically overpays. It's a two-tier economy: one price for private buyers, another for the government. Luna: You know, this is one of those topics where I feel like listeners might want to dig deeper themselves. And that's actually a good moment to mention — if walking through the economy with us has made something click, a few listeners have started supporting the show through buy me a coffee dot com slash fexingo. Lucas: Yeah, and it's genuinely how we keep this ad-free and focused on the numbers. No sponsors reading copy — just the two of us and the research. So if you find value in that, it's a small way to keep it going. Luna: Exactly. And now back to that government premium — because there's another angle I want to explore. The concentration of suppliers. Lucas: Oh, that's a big one. A 2023 Government Accountability Office report found that for many categories of goods, the top three suppliers account for over 70 percent of federal contracts. That lack of competition naturally drives prices up. Luna: And because the procurement process is so cumbersome, smaller businesses often don't even bother bidding. The entry cost is too high. Lucas: Right. The administrative burden of bidding on a federal contract can run tens of thousands of dollars in legal and compliance costs. For a small firm, that's prohibitive. So you end up with a handful of large, well-established contractors who face very little price pressure. Luna: So the premium is partly a tax on complexity. And the people paying that tax are taxpayers. Lucas: Precisely. Now, there have been some pilot programs trying to change this. The GSA's 'Commercial Platforms' initiative, for example, tested allowing agencies to buy off-the-shelf items through a few approved e-commerce marketplaces. Luna: What did they find? Lucas: Early results showed price reductions of 15 to 25 percent on common items. But the program faced pushback from existing suppliers and concerns about oversight. It's still in limited use. Luna: So there's evidence that change is possible, but the political and bureaucratic obstacles are real. Lucas: Right. And that gets to a broader point about fiscal policy. We often talk about spending levels — how much the government spends — but the efficiency of that spending matters just as much. If you can deliver the same service for 30 percent less, you've effectively cut spending without cutting programs. Luna: That's a compelling argument for reform. It's not about austerity — it's about getting what you pay for. Lucas: Exactly. And the RAND study, the GAO reports, they all point to the same conclusion: the procurement system is structurally inefficient. Fixing it is hard, but the potential savings are enormous. Luna: So what would you tell a policymaker who wants to start? What's the first step? Lucas: I'd say: start with data. The government doesn't always know what it's paying for common items across agencies. If you could centralize that data and benchmark against commercial prices, you'd instantly identify the biggest outliers. Then target those categories for streamlined purchasing. Luna: It sounds almost too straightforward. But I suppose the devil is in the implementation. Lucas: It always is. But there are models. The UK's Government Commercial Function has done something similar, creating a central capability that negotiates prices for common goods across all departments. They've reported savings of about 12 percent on average. Luna: So there's a path. It just requires the political will to disrupt existing relationships. Lucas: Exactly. And that's a choice. Every dollar saved in procurement is a dollar that can be spent on something else — or returned to taxpayers. The premium isn't inevitable. Luna: Alright, so to wrap up: the government pays more for the same stuff because of rules designed for a different era, a risk-averse workforce, and a concentrated supplier base. But there are proven ways to reduce that gap. Lucas: And that's the takeaway. The next time you hear about a $600 hammer or a $1,000 toilet seat — yes, those are real, though from decades ago — remember it's not just a joke. It's a symptom of a system that systematically overpays. And fixing it is one of the highest-return investments in fiscal policy.