Wage and price controls are the last refuge of scoundrels and government officials. They are an attempt to avoid the consequences of bad economic decisions. The last time they were tried in the United States was in the early 1970s by the Nixon Administration. They failed miserably and resulted in a decade of high inflation and economic stagnation.
Now Congress and the Department of Defense (DoD) have resurrected this discredited policy tool. Buried in the 566 pages of the Fiscal Year 2012 National Defense Authorization Act (NDAA) is a section that imposes a temporary limit on the aggregate amount of funds available to DoD for contract services. Section 808 of the NDAA limits the total amount that DoD can expend on contract services for both 2012 and 2013 to the level spent in 2010. This is a challenge. But section 808 does not limit itself only to reducing the total amount available to DoD. It goes on to require the Pentagon to issue guidance to officials seeking contract services to establish as a negotiating objective labor and overhead rates for contracts in both 2012 and 2013 not to exceed those paid in 2010. In other words, Congress has directed DoD to impose retroactive wage and price controls. On July 31, the Office of the Secretary of Defense dutifully published implementing guidance calling on negotiating officials to pursue the 2010 price levels as an objective in future service contracts.
The DoD guidance is not requiring negotiators to pursue lower total contract prices or demand reduced fees. The government negotiators are now directed to demand that the companies lower the prices they charge for the factor inputs that go into the performance of contract service work. How exactly are the companies that provide contract services supposed to respond to the demand to roll back prices to the 2010 level? Labor and overhead rates for defense companies are based on actual costs that are audited by defense agencies. It may not even be legal for these companies to offer undocumented or incorrect prices. If a company has labor rates established by agreement with a labor union it may not be possible to reduce those rates. Moreover, the easiest way to reduce labor rates is by firing more qualified and experienced workers because they tend to cost more. Costs may go down, but so too will performance.
Section 808 is essentially establishing wage and price controls under another name. It was a bad idea in the 1970s and it is an equally bad idea now.
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