25/01/08 "ICH" -- From the holy land to the promised land, presidential promises of peace (in the middle east), progress (in Iraq) and prosperity (via more tax cuts) will be met with deep skepticism when Mr. Bush delivers the annual state of the union address on Monday. After all, his Middle East trip, touted to broker peace, culminated in a twenty billion dollar arms deal to sell US “smart bomb” technology to the Saudis. In fact, people are already looking past him in search of a more hopeful state of affairs. But Bush will be far from irrelevant -- for the next leader must undo the damage done. One area that calls out for change is the very role of government itself.
Recent scandal concerning US private security contractor Blackwater sheds light on a larger dynamic – the outsourcing of government operations to the private sector. The available data reveals that government has been fundamentally altered. The question raised is whether or not this reinvention of government is a change for the better.
According to the Wall Street Journal, US private federal contractors now total more than 7.5 million, which is four times greater than the federal workforce itself. With federal contracting expenditures approaching half a trillion dollars a year, having doubled during this decade, the US national debt has now surpassed $9 trillion for the first time ever. Outsourcing is supposed to save money, but the New York Times found that less than half of the government’s private contactor actions in 2005 were even subject to open competition.
Government contracting – data, trends and controversies
“Government is not the solution to our problem; government is the problem,” Ronald Reagan proclaimed in his 1981 inaugural address, thus christening an era of populist anti-government politics. In the 1990s, the Clinton administration cut the US federal workforce to its lowest level since 1960 and streamlined outsourcing. Now, George W. Bush, the first MBA President, viewing his role as a CEO, has taken the privatization of government to unprecedented levels. Simply put, his administration holds the basic view that government can do no right, and business can do no wrong.
The Wall Street Journal reports that more than 40 cents of every dollar paid by US taxpayers now goes to private contractors, performing functions including oversight, security and tax collection. Even the most secret and politically sensitive govt. jobs, such as gathering intelligence, legal compliance, budget preparation, and counting the votes in elections are increasingly contracted out, despite a law prohibiting the outsourcing of “inherently governmental” duties. The US government spent $43.5 billion on intelligence gathering operations in 2007, of which about 70% was paid to contractors. Private contractors handle sensitive personal data, take minutes at top-level meetings on national security matters, review and oversee the performance of other contractors, and even help the govt. to determine what services it needs from contractors. The largest source of govt. contracting growth has been the burgeoning national security industry, most notably at the Department of Defense and the newly created Dept. of Homeland Security. Christopher Hellman, fellow at the Center for Arms Control and Non-Proliferation, reports that while last year the total US federal budget was roughly $2.8 trillion dollars, $1 trillion of that was spent on security.
According to an October 24th New York Times report, “The Bush administration has doubled the amount of govt. money going to all types of contractors to $400 billion [in 2006; up from $207 billion in 2000], creating a new and thriving class of post-9/11 corporations carrying out delicate work for the government. But the number of govt. employees issuing, managing and auditing contracts has barely grown.” Critics contend that a lack of accountability, and the ensuing fraud and waste engendered by present govt. operations, undermines the core principle that democratic governance is built on a social contract whereby those elected act for the common interests of the people they are supposed to represent.
Blackwater – a case of lawless disgrace
The September 16, 2007 killings of 17 Iraqi civilians in Baghdad by private security guards of the US govt. provides a useful case study of the pitfalls of outsourcing traditional military and other governmental functions.
A lawsuit filed in US federal court on November 26th on behalf of five Iraqis who were killed and two who were injured during the shootings accuses an estimated dozen Blackwater bodyguards of ignoring a direct order to stay with the official they were assigned to protect, and, under the influence of steroids, going on a crazed shooting rampage in a section of Baghdad known as Nisoor Square.
Investigations by the US military, FBI and also the Iraqi government found no evidence in support of claims by Blackwater employees that they were fired upon and were therefore acting in self-defense. The US Army investigation determined that there was “no enemy activity involved” and described the killings as a “criminal event.” There is also evidence that Blackwater employees tampered with the crime scene in a cover-up effort. Yet Blackwater continues to receive lucrative govt. contracts and the State Dept. reportedly gave bonuses for “outstanding performance” to officials with direct oversight of Blackwater. How can this be?
Blackwater was founded in 1997, but its security division was incorporated in January 2002, just before the US invasion of Afghanistan, which led to its first contract, with the CIA, in April 2002. One of the key players involved in that contract and securing Blackwater’s role as the leading mercenary company of the Bush administration was Buzzy Krongard, then executive director of the CIA. Buzzy, a friend of Blackwater CEO Erik Prince, went to Kabul in April 2002 and said the agency’s new station there was sorely lacking in security. That same month, Blackwater landed a $5.4 million six-month no-bid contract to provide 20 security guards for the Kabul CIA station, and Blackwater was off and running. Erik Prince has made six-digit contributions to Republican candidates and is well-connected with right-wing power brokers, but maintains that these contacts had nothing to do with Blackwater’s growth during the Bush years from a tiny start-up to a billion dollar federal contractor.
Buzzy Krongard’s brother, the top State Department official charged with investigating allegations of fraud, waste and abuse, has the duty to oversee Blackwater. Inspector General Howard Krongard resigned on Jan. 15th amidst charges of perjury and obstruction of justice in impeding investigations of fraud by contractors in Iraq. The chairman of the House oversight committee investigating fraud in Iraq finds that “the State Dept. is acting as Blackwater’s enabler.” Just what is being enabled?
Competency and corruption
In 2003, Blackwater was awarded a $27 million no-bid contract to provide the bodyguards for US staff in Iraq. A year later, the State Dept. expanded that contract to $100 million. Blackwater now holds a contract worth $1.2 billion. Over the past 4 years, State Dept. spending on private security firms has risen by 400%, to $4 billion a year, yet few officials act to oversee the contracts. Private contractors are paid up to 7 times what US soldiers are paid, yet, according to the Times, “The State Dept. has said that it will continue to rely on contractors because, for now at least, it has no choice… the military does not have the trained personnel to take over the job.” An official inquiry by the Special Inspector General for Iraq reconstruction found that the State Dept. was unable to say what is was receiving for much of the money given to DynCorp (whose employees were implicated in sex crimes committed in the 1990s in the Balkans), the second largest private contractor in Iraq and Afghanistan over the past 3 years.
Ultimately, Blackwater continues to prosper because the State Dept. and the armed forces have become depleted and anemic. The government has ceded so many core military responsibilities to firms like Blackwater and Halliburton that it can no longer afford to fire them. An early 2007 Wall Street Journal report found that due to its increasing tendency to outsource, the US govt. is rapidly losing its expertise and competence in vital areas such as security and defense, leading to what the author calls “the outsourcing of its brain.” FEMA’s (the Federal Emergency Management Agency) feeble response to Hurricane Katrina and the Coalition Provisional Authority’s dismal performance in Iraq are but two of many examples of incompetence and corruption.
Author and columnist Naomi Klein notes that when contractors – including Blackwater –descended on New Orleans following Hurricane Katrina, “FEMA was already so hollowed-out by then that it had to hire a contractor to help manage all the contractors… It still looks like government – with impressive buildings, presidential news briefings, policy battles. But pull back the curtain and there is nobody home.” Thus, when the Dept. of Homeland Security (DHS) solicited bids on its Secure Border Initiative it told contractors “We’re asking you to come back and tell us how to do our business.” Boeing which was awarded the projected $8 billion undertaking will assign roles to various govt. agencies and contractors, creating what officials call a “blended work force” and which critics call a government run by corporations.
Is the fox guarding the hen house? The General Counsel of the Project on Govt. Oversight, a watchdog group, says that allowing contractors to review the work of other contractors captures in microcosm a govt. that’s run by corporations[F6 note -- it doesn't get any more point-blank than that]. As noted by US Comptroller General David Walker, “There’s something civil servants have that the private sector doesn’t, and that is the duty of loyalty to the greater good – the duty of loyalty to the collective best interest of all, rather than the interest of a few. Companies have duties of loyalty to their shareholders, not to the country.”
But at least we’ve saved money, right? Wrong. Competition, essential to realizing the purported efficiencies of free market solutions, has been lacking. The Times reports that less than half of all “contract actions” – new contracts and payments against existing contracts – are subject to full and open competition. Just 48% were competitive in 2005, down from 79% in 2001. The recent trend has been to use sole-source contracts which combine the dangers of a monopoly with the waste and inefficiency of a bureaucracy. The lack of oversight in accounting for the use of public monies has been well documented. For instance, following the invasion of Iraq, the Coalition Provisional Authority (CPA) disbursed more than $23 billion, of which some $10 billion has vanished and gone unaccounted for in a frenzy of mismanagement and greed (See “Billions over Baghdad,” Vanity Fair, October 2007).
As Congress gave money to the CPA, few realized that it was neither a US, nor Iraqi, nor a UN agency. The bizarre truth, noted in an opinion of a US federal judge, is that “no formal document . . . establishes the CPA or provides for its formation.” Thus, it was legally unaccountable in giving away billions of dollars. When asked by a BBC reporter what happened to all that money airlifted to Baghdad, the CPA’s director of management and budget replied: “I have no idea – I can’t tell you whether or not that money went to the right things or didn’t – nor do I actually think it’s important . . . what difference does it make?” A private contracting company using a Bahamian PO box, experienced only in home remodeling, was given the contract to audit the billions disbursed by the CPA. Federal regulations required that the auditor have a certified public accountant, but they had something which overrode that requirement – a personal connection through campaign contributions.
As for the efficiency of such contracting, consider this: as of October 2007, the US has spent twice as much in inflation adjusted dollars to rebuild Iraq as it did to rebuild Japan – an industrialized country comparable in size to Iraq, two of whose cities had been incinerated by atomic bombs. A November 20th Center for Public Integrity report finds that US contracts in Iraq and Afghanistan more than doubled from 2004 to 2006, to over $25 billion, yet “[w]hile the billions of dollars involved and the complexity of these war-related contracts has only grown, the lack of oversight has been staggering.” A December 2007 report of the Pentagon’s Inspector General finds that more than 90% of its contracts in Iraq lack sufficient paperwork to determine how the funds were spent.
Government diminished – meaner, not leaner
Following the My Lai massacre of Vietnamese civilians by US soldiers, the court-martial of Lieutenant William Calley provided a focal point for the painful US reckoning with how badly things had gone awry with the mission in Vietnam. Unfortunately - due in part to the restructuring of government - there has been no such post-9/11 reckoning. Private contractors now carry out duties that were once fully the domain of the military – from preparing the meals for the troops (Halliburton), to interrogating prisoners (DynCorp), to providing security for diplomats (Blackwater), to running prisons, gathering intelligence and doing combat – everything has been contracted out. These contractors have basically escaped accountability and have provided public officials with cover for illegality.
Blackwater’s September 16th shooting rampage is not an isolated incident. Atrocities have also occurred at Haditha, Abu Ghraib, Bagram, “black site” secret prisons, and elsewhere. Yet there has been no reckoning, due in part to willful denial, but also because military operations have largely been outsourced to private contractors who have escaped the law since current US and international law do not adequately address contractors. Notably, the Coalition Provisional Authority installed in Baghdad following the US invasion of Iraq decreed that US forces and agents are immune from Iraqi prosecution. Blackwater has an incentive to prevent US officials from being killed. Sadly, it has had no incentive to prevent innocent Iraqis from being killed. There appears to be no basis for holding non-DoD contractors accountable under US law [and US private contractors are unlikely to face justice under any other applicable law – see Jeremy Scahill; and, Joanne Mariner at http://www.findlaw.com ].
As Michael Ratner, president of the Center for Constitutional Rights stated, “These legal loopholes amount, in practice, to a license to kill with impunity. There is no genuine deterrence to acting unlawfully.” Blackwater was involved in 195 instances of gunfire from 2005 until early September, a rate of 1.4 shootings per week. In 163 of those cases, Blackwater gunmen fired first. Yet nothing has been done about this, and the investigation of the September killings was tainted from the start: The initial State Dept. report was drafted by a Blackwater employee on US government stationary. For two weeks, the only people looking at this crime were State Dept. employees -- non-law-enforcement actors with an obvious conflict of interest. In a highly unusual move, the govt. granted those involved in the killing immunity from prosecution in return for cooperating with investigators. The immunity-for-statements deal suggests that the motivation of the investigation was more to immunize Blackwater employees than to gather facts in pursuit of justice.
Blackwater has reportedly used chemical weapons in ways prohibited under international law (see James Risen, “Blackwater use of CS gas raises a cloud of anger,” Intl. Herald Tribune, Jan. 10, 2008). A Blackwater convoy stuck in traffic sprayed CS gas, a substance banned by an international convention on chemical weapons signed by the US, into a crowd of US soldiers and Iraqi civilians in order to clear a path. Blackwater claims its contract with the Sate Dept. permits it to use CS gas, which the State Dept. denies. International law professor Michael Schmitt says “it [use of CS gas] is not allowed as a method or means of warfare” adding “I have never seen anything that would make it permissible to use tear gas to get traffic out of the way.” Scott Silliman, director of the center on law, ethics and national security at Duke Univ. School of Law, observes, “You run into this issue time and time again with Blackwater, where the rules that apply to the US military don’t seem to apply to them.”
While the notion of so-called “compassionate conservatism” is “leaner, not meaner,” the past 7 years suggest the reverse is true. The Iraqi taxi driver shot dead Nov. 12th by DynCorp Security and those tortured at the hands of US agents in outsourced prisons know full-well the meaning of cruel, inhuman and degrading treatment, prohibited by the Geneva Conventions, yet sanctioned by present US policy. Residents of New Orleans’ Ninth Ward and Armed forces amputees seeking medical care at Walter Reed know all-too-well the lack of compassion shown them by their govt. In January 2006, the premiere public medical center for veterans, Walter Reed Army Medical, awarded a 5-year $120 million private contract. Officials ignored warnings of the dangers of privatization and the result was the shameful breakdown of the system of medical care for veterans of the war in Iraq as disclosed by the reporting of the Washington Post. .
The lead story in the November 11th New York Times describes an Iraqi arms bazaar paid for by US taxpayers. In July 2004, the company American Logistics Systems, which later became Lee Dynamic International, won $11 million in contracts to manage five arms warehouses in Iraq. This contractor, alleged to have paid hundreds of thousands of dollars in bribes to military contracting officers, reportedly allowed these depots to become arms bazaars which routinely sold weapons to militias and other insurgents. Some 200,000 weapons supplied by the US military to Iraqi security forces went missing. Master Sergeant John Tisdale, whose repeated complaints to American Logistics executives apparently fell upon deaf ears, says “There were truckloads of stuff moving out of that armory without any authorization.”
Safety has also been eroded at home, as industry insiders and lobbyists have been appointed to run numerous govt. agencies, from the EPA, FDA and OSHA to the FCC, MSHA and SEC. For example, the chair of the Consumer Product Safety Commission, who according to the Times “is supposed to be the consumers’ advocate, [yet] has more often echoed the views of the manufacturers’ lobbyists,” recently joined lobbyists of toy manufacturers in opposing an increase in her own agency’s budget (!), banning lead from toys for kids, and stiffening penalties for violators. It was subsequently revealed that she and her predecessor took free trips from the toy industry to China, Spain and a golf resort at Hilton Head Island. The Times opined, “President Bush came into office promising relief for industry, which he claimed was overburdened by government regulations. Too often, however, that policy allows unscrupulous businesses to put workers and consumers in danger. . . .In recent months, millions of toys have been recalled because of their brightly colored – and very toxic – lead paint.”
And while the unqualified head of FEMA and other crony appointees let the US emergency response agency fall into utter malfunction, the poor of New Orleans were left to feel the pain and agony of being treated as discarded surplus peoples. The world watched in disbelief as its wealthiest country abandoned the victims of Hurricane Katrina, leaving them to fend for themselves in a Lord of the Lies-like nightmare scenario at the Superdome and elsewhere, while the President who was once again vacationing at his ranch in Texas had the gall to say that the head of FEMA was “doing a heckuva a job.” That the National Guard had been deployed to fight a war of choice in Iraq, and was thus unavailable to assist in the rescue operations, offered no comfort to the poor and dispossessed Americans of Louisiana who still to this day have not seen sufficient federal assistance to help them to rebuild their shattered lives. And the tax cuts given to the wealthiest Americans have not yet trickled down their way. No crumbs.
With the price of essential food staples rising, people have begun asking questions about a govt. policy which favors feeding automobiles rather than people. The US govt. response to climate-change is inappropriate at many levels, including the misguided incentives to promote corn-based ethanol as the primary substitute for foreign oil. This massive agribusiness subsidy does not result in reduced carbon emissions, but it has led to reduced nutrition for the poor and middle class, who have seen a dramatic rise in food prices in recent months as farmers have been given the incentive to gear their crop production towards the automobile. Ethanol plants are projected to use half of America’s 2008 corn harvest, and the diversion of corn usage from food to fuel is resulting in higher food prices and widespread food shortages as soaring prices have led farmers to replace crops such as wheat with corn. The resulting shortage of wheat and many other related foods has exacerbated poverty, hunger and starvation not just in America, but globally (see “The Fight between Fuel and Food,” Risk Management Magazine, April 2007).
Citizenship and the social fabric
JFK famously implored Americans, “Ask not what your country can do for you - ask what you can do for your country.” Yet at a time of war in Afghanistan and Iraq Americans have been asked to do little more than go shopping and watch Fox News.
As reported in the International Herald Tribune, “Without public debate or formal policy decision, contractors have become a virtual fourth branch of government.” And such contracting almost always leads to less public scrutiny. Companies, unlike govt. agencies, are not subject to disclosure laws. Congress has spent two years trying in vain to get the Army to explain the contracts for Blackwater’s work in Iraq, which involves several layers of costly subcontractors. An early 2007 study by govt.-appointed experts concluded that the surge of contracting “poses a threat to the government’s long-term ability to perform its mission [and could] undermine the integrity of the government’s decision-making.”
So why use contractors? The hidden contractor workforce is politically convenient for officials, enabling them to claim that they are reducing the size and cost of govt. It also enables officials to reward friends and patrons, and to establish ties to contractors who may hire them in lucrative positions someday – the so-called public/private sector revolving door (e.g., former CIA counter-terrorism chief Coffer Black is now vice-chairman of Blackwater and an advisor to presidential candidate Milt Romney, while running his own security consulting firm). And in war-time, private armies allow politicians to avoid a draft, and the public scrutiny of the politics of war which accompanies a draft, and to reduce the political damage caused by troop casualties as the deaths of contractors are not counted (There are now 180,000 individual private contractors in Iraq while the total number of US troops in both Iraq and Afghanistan is 156,247). An October UN human rights report, noting reports of “killings carried out by privately hired contractors with security-related functions in support of US govt. authorities,” warns that an increasing reliance on heavily armed private contractors risks eroding the distinction between civilians and combatants.
Govt. contractors have become powerful special interest groups which, through their campaign contributions and lobbying activities, exert an inordinate influence on policy. The billions spent on missile defense programs which do not work, for instance, is driven by the aerospace industry. The top 20 contractors have spent more than $300 million since 2000 on lobbying and have donated $23 million to political campaigns. Contractors have formed their own lobbying association, the Professional Services Council, which pushes for the further corporatization of govt. Lockheed Martin, the biggest contractor, receives more federal money each year than either the Energy or Justice Departments. Congressional earmarks also serve to directly benefit select private businesses at public expense. This non-transparent legislative “pork” which allows lawmakers to fund projects to benefit their large campaign contributors has tripled over the past decade, totaling $31 billion last year. For instance, House lawmakers tacked on 1,337 earmarks adding some $3 billion to go to 580 private companies in its most recent military appropriations bill – all for projects which the Pentagon did not even request.
The Department of Homeland Security (DHS), established as a new govt. agency in 2003, offers prime pickings for contractors. What’s that smell? Nominated in 2004 to head DHS, Bernard Kerik has pled guilty to ethics violations and was recently indicted on 16 counts of federal criminal fraud, conspiracy and obstruction of justice. DHS maintains an “Open for Business” website section and a private-sector office headed by a former JP Morgan Chase banker. This office held a corporate seminar in 2007 on “The Business of Homeland Security” offering “tips, hints and directions” on how to win contracts. In 2003, the US govt. issued 3,512 security contracts to companies. In the 22-month period ending in August 2006, DHS issued more than 115,000 security related contracts.
Using private contractors to collect past-due tax obligations has been well-documented as fiscally inefficient, invasive of privacy, and harmful to civic duty (See, e.g., TomPaine.com). Taxpayers owing back taxes might hesitate if they knew the contractor collection agency gets to pocket as much as 24 cents of every dollar collected. The govt. clearly loses money by using private debt collectors rather than public revenue agents. Why then does it continue? Well, it does allow for politically expedient claims of reducing the federal workforce and for awarding chosen businesses with lucrative contracts.
All the wrong incentives
US govt. contracts for work in Afghanistan and Iraq have grown from $11 billion in 2004 to more than $25 billion in 2006. Comptroller General Walker notes the acute problem of lack of oversight for military contracting. The Center for Public Integrity cites the lack of competitive bidding, missing contracts and unidentified companies as some of the key problems. In its list of the top 100 private contractors in Iraq and Afghanistan from 2004 through 2006, the largest benefactor falls into the category of “Unidentified Foreign Entities” – those not identified in US govt. contracts - which have received some 20.5 billion dollars for services.
According to Alan Grayson, the amount spent on contractors in the four-plus years of war in Iraq is now over $100 billion, and through a combination of inflated bids, waste, kickbacks and inflated subcontracts, some half of the value of every contract he has seen “ends up being fraudulent in one way or another.” An attorney crusader against govt. contractor fraud, litigating on behalf of whistleblowers, he is an authority on the topic. Using the Federal Acquisition Regulation, governing commercial relationships between the US govt. and private business, Grayson tries to hold the govt. and its contractors to account (See David Rose “The People vs. The Profiteers,” Vanity Fair, November 2007).
Patrick Leahy, Chairman of the Senate Judiciary Committee, has introduced a War Profiteering Prevention Act to hold corrupt contractors accountable. But it is the very deals the govt. awards contractors that foster waste and corruption. Halliburton spin-off KBR operates under a LOGCAP 3 contract which is a sole-source (giving KBR sole responsibility for the maintenance of US troops in Iraq) “cost-plus” agreement, meaning that the govt. commits to reimburse whatever KBR spends, plus a fee of some 3%. So the more money KBR spends, the more money it makes; thereby giving it the incentive to jack-up its expenditures by any means. KBR is thus encouraged to be inefficient, and to falsify cost-related records. (See November 2007 Vanity Fair; and Gary Shteyngart, Absurdistan, for a sardonic fictionalized depiction of cost-plus war culture).
According to former employee Linda Warren, KBR regularly falsified records. For instance, its official 2006 statement of “73.5 million patrons served in Recreational Facilities” was more than 565 times the number of troops stationed in Iraq and thrice the country’s total population. Former employees have also recounted how KBR over-orders equipment on a huge scale, much of which is then left to rot in the desert. The LOGCAP contracts are written and administered in such way that there is no way to track how the money has been spent. Yet LOGCAP 4, to be awarded to DynCorp, Fluor and KBR, is another cost-plus, indefinite-delivery, indefinite-quantity contract. This time a private contractor has been hired to assist the govt. agencies responsible for oversight. But outsourcing govt. oversight merely abdicates duty to an unqualified business rife with conflicts of interest.
The Department of Defense [DOD] is the largest govt. agency with a $460 billion budget this year [not including almost $200 billion in supplemental funding for war fighting], a 90% increase since 2000. The Economist reports that the US now spends more on defense than does the rest of the world combined. On November 13th, Congress estimated the actual cost of the wars in Iraq and Afghanistan to total a staggering $1.6 trillion – roughly $20,900 per US family of four. DOD private contracting expenditures have risen from $106 billion in 2000 to $297 billion in 2006. Attorney Alan Grayson says, “In my mind, one of the basic reasons, maybe even the basic reason, why the war has gone badly is war profiteering. You could say that the only people who have benefited from the war in Iraq are al-Qaeda, Iran and Halliburton. America has spent so much money that we literally could have hired every single adult Iraqi and it would have cost less than what it has cost to conduct this war through US military forces and contractors.”
Halliburton’s govt. contracts have risen by 600%, including more than $10 billion in DOD contracts, while its spin-off, KBR, has been the top contractor in Iraq and Afghanistan from 2004 through 2006, with contracts exceeding $16 billion. With 2006 profits of almost $2.5 billion, Halliburton’s overall profits have increased by more than 368% since 2001. Like Halliburton, DynCorp, Blackwater, L-3, Titan, Custer Battles, Triple Canopy, etc. are also reaping billions of dollars of public monies doing work outsourced by the Bush-Cheney (The latter, the former CEO of Halliburton) Pentagon. Of course, nearly all of these companies are major donors to and/or are run by executives with close ties to the Republican Party.
The social contract ruptured? Whither the liberal welfare state?
Following the industrial revolution there was consensus on the need to regulate business activity in order to protect consumers and workers. And following the Great Depression, there was consensus on the need for govt. to regulate financial institutions and markets, and to provide a safety net for its most vulnerable citizens. FDR’s New Deal reflected deeply-held values that govt. owes a duty to its aged, infirm and downtrodden – that a great society takes care of those who can’t take care of themselves because the true measure of a society is how it treats its most vulnerable.
Of late, we have seen efforts to privatize social security, Medicaid and Medicare -- the pillars of the New Deal and the Great Society. The philosophy of the Bush administration was expressed by its former budget director Mitch Daniels: “The general idea – that the business of govt. is not to provide services but to make sure that they are provided – seems self-evident to me.” When govt. sought to privatize the Social Security program, critics said it represented govt. breaking its pledge to US workers that it would provide their pension payments. They contend that the push to privatize social security was driven by the hundreds of billions of dollars in fees that Wall Street investment bankers stood to make from managing accounts in a privatized system, as with the current College Loan Programs which should serve as a cautionary tale given the myriad scandals involving corruption which have come to light at Sallie Mae, the largest US student loan company.
Sallie Mae was created in 1972 as a quasi-govt. agency to help students who were a credit risk to get loans from private banks so they could pursue higher education. Ten years ago it severed its ties to govt. and became a private lender. Since 1995 the company’s stock price has gone up 2,000%. Critics such as Harvard Law professor Elizabeth Warren contend that Sallie Mae’s profitability has come at too high a cost to students and taxpayers. Equal educational opportunity, vital to democratic ideals, has suffered as students have confronted undue burdens in borrowing. And yet again government is providing the wrong incentives in its contracting.
New Yorker economics columnist James Surowiecki writes, “When Americans think of college these days, the first word that often comes to mind is ‘debt’ . . . the huge profits that lenders make from student loans are being earned on the government’s dime. . . if a student defaults [on a loan] the government will pay off almost the entire loan. On top of that, the government hands out billions of dollars in subsidies to lenders every year, all but insuring them a steady profit. In effect, lenders get a guaranteed return with very little risk. This convoluted process is good at making student loan companies rich – Sallie Mae, the biggest issuer of student loans earned $1.3 billion last year, with a return on equity that dwarfs most other companies’. But it’s not very good at getting government money to students cheaply and efficiently. President Bush’s 2007 budget shows, for instance, that it’s four times as expensive for the government to subsidize and guarantee private loans as for it to issue those loans itself. In other words, the current system is not just corrupt. It’s also inefficient.” Similar scandal and criticism has followed the govt.-sponsored privately run home ownership programs Fannie Mae and Freddie Mac.
From Plato to Aristotle, Locke to Hobbes, Karl Marx to J.S. Mill, David Hume to Adam Smith, and J.J. Rousseau to John Rawls, political philosophers have shared an understanding that government has an obligation to act in the interests of its people, and that absent that it loses its legitimacy and authority, and an appreciation that private-sector actors have different motivation and duties than public officials.
The emergence of Libertarianism over the past 45 years has been based on convenient premises which are at odds with the understandings of the previous 4,500 years – that govt. is not a marketplace, but rather a bargain made between people and government – of the people, by the people and for the people. Markets, after all, are not naturally self-regulating or sustaining. Government must treat its people first and foremost as citizens, not consumers. That the free market provides the optimal solution to all societal needs is a tough sell given the lessons of history, most recently with the subprime mortgage lending crisis exposing once again the fallacy of laissez-faire free marketeers’ magic.
Blackwater revisited (a Blackwater whitewash?)
The populist govt.-bashing of recent decades is ripe for a rethink, as is the recent trend to privatize ever-more public sector functions. When the Blackwater story reached the mainstream press following the September 16th killings, the questions were: What happened? And what is Blackwater? What initially was reported as a tragic mistake is now understood to involve much more – politically expedient short-term measures damaging long-term interests; flagrant violations of domestic and international law; conflicts of interest; lack of accountability; and, the ensuing waste of resources and lives. Lies and cover-ups have been exposed involving public officials embroiled in dependent relationships with private contractors.
Comparing the magnitude of the alleged misconduct here and in the Whitewater affair (a massacre of innocent civilians followed by a concerted cover-up vs. the propriety of a real estate transaction in which a loss was incurred) it is hard to find sanity in the appointment of a special prosecutor in the latter and the granting of immunity in the former. Under public pressure, in December new rules and guidelines were agreed to giving the military in Iraq greater control over Blackwater and other private security contractors. At best this reform may improve oversight, yet it does little to fix the larger problem of a system of bad incentives. At worst it is purely cosmetic, and likely to be overseen by the very contractors it is purported to control.
The International Herald Tribune opined on November 17-18, “the FBI is reaching the same horrifying conclusions as the Iraqi authorities did: that the deadly September shooting spree by Blackwater security guards in Baghdad was unjustified [and] has fed Iraqi’s fury at the American occupation. . . Contractors have been involved in some of the most shameful incidents in this war, including the torture of prisoners at Abu Ghraib. But not one contractor [among the 100,000 American contractors working in Iraq] has been prosecuted for crimes against an Iraqi. That shameful record cannot be allowed to stand.”
Bush officials have consistently employed the “few bad apples” defense to discount the corrupt practices and atrocities of US contractors, such as the Sept. 16th killings at Nisoor Square. As the disgrace and waste continue, that explanation is clearly inadequate. The Blackwater scandal provides an opportunity to delve deeper into the institutions and incentives at work and to question the wisdom of turning state functions into for-profit enterprises. If we fail to do so there will surely be more Blackwaters in our future.
William A. Cohn is a writer, lawyer and lecturer at the University of New York in Prague
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