Don't Balance the Budget on the Backs of Government Contractors

Matthew Yglesias has a novel idea for handling the country's growing debt issues:

The best way to handle this, in the first instance, is to pay contractors with IOUs. The firms that supply the United States military aren't cash-constrained and they don't want to give up the Pentagon as a customer. If we ask them to keep doing the work and just promise to pay them after congress raises the debt ceiling, they'll almost certainly keep paying the troops.

There are a few poor assumptions supporting this idea. The first, and most obvious, is that contractors do not pay troops. The U.S. government pays troops, directly. The contractors pay the civilians who build the military's bases, guard said bases, serve food, haul fuel, and just about everything else essential to the war the military doesn't directly have people in uniform doing (in my case, cultural analysis).

The second poor assumption is that contractors are not cash-constrained. The biggest five or six companies -- the Boeings, Lockheed Martins, and Northrop Grummans of the industry -- certainly do have substantial reserves of cash. But they only represent part of the picture. I spent a substantial chunk of my adult life working as a contractor for the defense department, and it was only at the very end of that career that I worked directly for one of the large companies.

There are, literally, thousands of small companies employing tens of thousands of people. While some of those small companies have benefited outrageously from federally-mandated set-asides and contract fraud, most actually get by with normal profit margins and normal reserves of cash (that is, not huge amounts relative to their expenses). Those small companies simply cannot go six months on IOUs. They would go bankrupt, throwing potentially tens of thousands of people out of work (a problem that is still looming on the horizon when the war ends).

This brings up another problem with Yglesias' IOU-nomics. The big contractors are required by law to hire a certain number of smaller subcontractors to staff their contracts. Because these companies would most likely go bankrupt if told to operate at a loss for more than a few months, those contracts -- whose functions are vital to national security, as Yglesias acknowledges -- would go empty. Every contract, and the laws that govern them, would have to be rewritten to allow the bigger firms to rehire the workforce of those bankrupted subcontractors. It is, without exaggeration, an outrageous, enormous undertaking completely glossed over by just waving your hands to say "eh, let them eat IOUs."

Then there's the somewhat philosophical question of whether it is smart to ask companies to work for free on the hope that politics won't get in the way of their income. Just in the top five companies, they employ several hundred thousand people. Demanding they all go on IOUs for an interminable time is just... well, it's really bad politics. With stakes as low as an airplane engine gloves come off. What about threatening hundreds of thousands of jobs? And in the future, what company on the planet would dare risk more business with the U.S. government if, at any moment the political winds shift, their contracts are canceled and they're left without income? That is simply a ludicrous risk to take on.

Lastly there's the very real problem that if companies doing contracted work for the government suddenly lost their income streams, they'd sue the government for breach of contract. The government can order a work hold, or they can cancel the contract. But they cannot demand companies perform work for free. Did Yglesias consider the legal costs of his IOU scheme? I doubt it.

While I'm deeply sympathetic to Matthew's attempt to find some way to get a bit more leeway on the government debt issue, it's not something that can be solved quite so glibly as asking hundreds of thousands of people to feed themselves on IOUs. It requires hard choices about budgetary priorities, about taxation, and about meaningful cuts both to the DOD budget and to the overall federal budget. That is the ultimate answer to fixing the debt problem. Demanding people work without pay is not.