Government Outsourcing Study Shows Higher Costs Of Doing the Work

This link is to a study by a government oversight agency that did some research on the potential cost savings by government outsourcing to private contractors. The study found that while labor costs were less than government labor costs, the cost to government was 84% higher than the cost of doing the work in-house.

More research needs to be done on this topic, but there has been a trend in which outside contractors have become lobbyists in areas where it might benefit them, and they are a source of campaign contributions to parties that support their interests. For example, some states have outsourced prisons to private contractors. Contractor's have lobbied for changes in laws that would create greater demand for inmates to imprison. Of course, they also fund the campaigns for sympathetic politicians.

In other words, outsourcing of government functions has implicit moral hazards which may be a more important reason for outsourcing than cost reduction. Politicians can also argue that they have cut the number of public employees which appeals to many voters.