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The Real Deep State

The Real Deep State

The excessive drain on American taxpayers isn’t the federal workforce, as many imagine. It’s the unchecked contractor state.

John DiIulio, Jr.

The three frontrunners for the GOP presidential nomination have declared war on “the deep state,” also styled as “the administrative state.” Former President Donald Trump has vowed that if returned to office he will strip federal employees of their civil service protections and “shatter the deep state.” Meanwhile, Florida Governor Ron DeSantis has warned the “bureaucracy” and its “deep state people” that on day one of a DeSantis presidency he’d “start slitting throats and be ready to go.” And businessman Vivek Ramaswamy has declared that “shutting down the administrative state” by slashing the federal employee headcount by over 75 percent tops his domestic policy agenda.

There is a deep state, but it doesn’t emanate from within the federal bureaucracy. The real deep state is the contractor state. It consists of three intersecting networks: financially well-heeled and politically well-protected mega-corporations led by big defense contractors; government grant-gorged, taxpayer-subsidized nonprofit organizations with multimillion-dollar annual budgets; and career politicians in both political parties.

The self-dealing denizens of the real deep state stoke nonstop federal deficit spending on everything from Medicare to missiles. They surreptitiously steer grants and contracts to themselves through administratively maze-like federal programs. They use federal tax dollars to privately employ millions of people. They are behind the “waste, fraud, and abuse” that everyone typically blames on “bureaucrats” who are mostly mere grant and contract managers in a workforce that has not grown since the 1960s.

Five sets of facts, all hiding in plain view, pave the path to recognizing and reforming the real deep state.

A Vast Federal Proxy Bureaucracy

1. The number of people who get paid from the U.S. Treasury but work for private businesses and nonprofits is now more than three times the entire on-payroll federal civilian workforce.

In 1960, when John F. Kennedy was elected president, there were about 1.8 million full-time federal civilian workers or bureaucrats. By the time of Ronald Reagan’s presidency, this number had increased to 2.2 million, roughly the same level that it currently remains. Yet while federal employee levels have kept stable, the number of people paid by federal grants and contracts but not counted on the federal payroll rose to around 7 million, a number that reflects 4.8 million contractors and 2.3 million grantees.

During the 2010s, due in part to several government shutdowns, the contractor bureaucracy first contracted and then expanded by about 2 million people—roughly the size that the entire federal civilian workforce had been for six decades.

2. Eliminating the entire on-payroll federal workforce would reduce total federal spending by less than 5 percent.

In 2020, if not a single penny had been spent on any federal worker—if what Ramaswamy called “the federal employee headcount” was beheaded by 100 percent—then total federal spending would have been about $6.2 trillion, for a savings of about 4.5 percent.

In its September 2021 report, Mapping the Swamp: A Study of the Administrative State, Open the Books, a nonprofit organization that has built a unique database for tracking spending at all levels of government, put the number of “disclosed” federal bureaucrats, including civilian defense workers and postal service workers, at 2.8 million. The same report pegged estimated total compensation costs for these “disclosed” feds at $225 billion plus an estimated 30 percent in benefits, or $292 billion in all.

So, eliminating the entire federal civilian workforce would leave in place about 95 percent of all federal spending and the whole $33 trillion and rising national debt. And projected annual federal spending will top more than $7 trillion when whomever is elected president in 2024 takes office in 2025.

In inflation-adjusted 1960 dollars, between 1960 and 2020, federal spending grew by about 800 percent, and per capita federal spending grew by about 460 percent. Superficial anti-big-government rhetoric about the deep or administrative state obscures the hard fact that it is impossible to slow or stop Leviathan-sized federal deficit spending and debt accumulation without significantly reducing spending on popular but budget-busting entitlement programs like Medicare while also radically reducing funding for military-industrial complex contractors.

Bashing the ostensibly big, bad, and bloated federal bureaucracy is easier than slashing the real deep state and its private proxy bureaucracy starting in one’s own state or city. For example, Florida, home to Trump and DeSantis, is also home to about 5 million Medicare beneficiaries and 100,000 full-time federal bureaucrats.

Would either candidate truly be willing to discuss in depth how Medicare balloons federal spending and the national debt, given that the program cost $838 billion in 2021 and has a looming insolvency crisis? Would either candidate seriously consider putting the Sunshine State’s 100,000 feds on the unemployment line? And might either candidate ever act to reduce federal funding for the nearly 16,000 Florida-based businesses that since 2000 have received about $250 billion in federal defense contracts?

3. The contractor state uses federal bureaucrats the way sophisticated criminal syndicates use low-level bagmen.

In 2021, federal bureaucrats doled out more than $630 billion for both defense and civilian products and services, more than double the roughly $300 billion that went to federal workers’ wages and benefits.

Aided by about 15,000 congressional staff members, Congress controls the federal bureaucracy’s day-to-day operations and funding decisions via virtually nonstop (and often off-the-record) negotiations with hundreds of White House aides and thousands of presidential political appointees.

The real deep state’s heaviest money bags consistently go to mega-corporations via the U.S. Department of Defense. But big nonprofit organizations, including hospitals and universities that pay their executives millions of dollars a year in salaries, benefits, and deferred compensation, also get to drench their beaks.

For instance, in addition to billions of dollars a year in tax-free property and tax-deductible donations, nonprofits registered with the I.R.S. receive about 30 percent of their more than $2 trillion a year in revenues from government grants plus fees for goods and services from government.

Meanwhile, small community-serving nonprofits, most notably street-level urban faith-based organizations, typically get either nothing or get federal grant or contract crumbs as subcontractors or secondary vendors for both religious and secular nonprofits with multimillion dollar annual budgets.

4. Federal contractors have spent recent decades weakening federal oversight.

For decades now, federal contractors have been the largest disclosed corporate contributors to federal campaigns and elections. Even controlling for many variables, businesses that contribute to career politicians today get more government grants and contracts tomorrow.

Until the mid-1990s, it was illegal for the feds who manage and monitor many different types of contractors to take past vendor performance fully into account when deciding whether to renew contracts. By congressional design, federal agencies have neither the manpower nor the authority to challenge competitive bidding rules that camouflage contractor oligopolies; police bid-rigging schemes and outright grantee fraud (like multimillion-dollar payouts for goods or services never provided); or correct persistent performance failures.

Many federal programs have made the Government Accountability Office (GAO) “high-risk” list every year for decades. Invariably, the very worst cost overruns, financial management meltdowns, and other acute or chronic performance failures have belonged to the very federal programs that rely most on for-profit and non-profit contractors and grantees.

5. The national government is deeply debt-financed for the same reasons that its programs are privately proxy-administered.

As political scientist Martha Derthick observed, “Congress loves action, but it hates bureaucracy and taxes—which are the instruments of action. Overwhelmingly, it has resolved this dilemma by turning over the bulk of administration to … any organizational instrumentality it can lay its hands on whose employees are not counted on the federal payroll.”

Left, right, or center, Democrat or Republican, the contractor state’s political confederates in Congress and other bodies bash federal bureaucrats, hide the true size of Washington’s workforce, and stick future generations with the bill for today’s profligate overspending because, sadly, they get rewarded by the voters they have so artfully deceived and seduced for doing precisely that.

For all the ideological sound and partisan fury supposedly signifying that we live in hyper-polarized times and are divided by culture war issues, America’s two political parties remain at core the red party of “tax little” and the blue party of “spend lots.” Together, the two parties tax little, spend lots, and never lose. In the twenty-one national elections held from 1982 to 2022, more than 90 percent of House members and 85 percent of senators who sought re-election won it.

An Elegy for the IRS

It is generally agreed that small businesses create good jobs out of proportion to their size and receipts. The federal government’s Small Business Administration (SBA) champions their cause. Between 2007­–22, the SBA allocatedbetween $500 billion to $1 trillion each year to small businesses in grants, subsidies, and loans.

But in August 2023, Ohio Senator J.D. Vance, author of Hillbilly Elegy, correctly noted that despite $80 billion in new funding and 87,000 new agents, the IRS was way behind in processing tax-relief claims by small businesses. The IRS, observed Vance, “is a microcosm of what’s wrong with Washington:”

In too many cases, the federal government suffers not from a lack of capacity, but from a lack of focus. Even with all the necessary resources, an agency with multiple priorities and competing incentives will struggle to accomplish anything good.

Senator Vance got it almost right. Courtesy of their political masters and the contractor state interests for which they shill, the IRS and most other federal agencies suffer from both a lack of capacity and a lack of focus.

Over the last several decades, as Congress expanded and consolidated the contractor state writ large, it foisted upon the IRS new rafts of contractor-state-friendly tax code changes, conflicting rules, and contradictory regulations. The Internal Revenue Code (IRC) grew from about 3,000 printed pages in the late 1990s to about 4,000 printed pages just thirty years later—but this was accompanied by something on the order of a three-fold increase in complexity. The IRS now explicitly cautions that “the IRC is complex, and its sections must be read in the context of the entire Code, the Treasury Regulations, and the court decisions that interpret it.”

In the decade leading up to the September 11, 2001 terrorist attacks, the IRS lost 16 percent of its federal workforce, and in the decade afterward, the IRS became ever more short-staffed, not only in absolute terms, but relative to the size and complexity of its congressionally mandated duties.

As a result, trillions of dollars owed in federal taxes have gone uncollected. Yes, trillions, or enough to make more than a sizable dent in reducing the national debt. As the contractor state deepened, the “tax gap” soared and annual federal budget deficits widened. For instance, in 2006 alone, the IRS failed to collect about $450 billion in federal taxes—more than triple (in constant 2006 dollars) the amount left uncollected in 1973.

In 2012, a GAO report found that for every dollar the IRS invested in recouping unpaid taxes, it yielded $25 for the U.S. Treasury. But Congress did nothing to institutionalize and expand those programs. In fact, it quietly but effectively gutted them, and in the early 2010s, the IRS lost about 10,000 more full-time employees.

By the early 2020s, the agency had hemorrhaged its most professional and experienced leaders and managers. Meanwhile, the IT systems on which the IRS relies to collect taxes and distribute refunds went from sorely outdated to terribly outmoded. By 2023, the agency had nine ongoing IT “modernization” initiatives underway.

Who has benefitted over the past decades, and who benefits the most now, from the contractor state’s chief tax collection agency being short-staffed, technologically challenged, governed by multiple, vague, and contradictory congressional directives, and persistently unable to collect trillions of dollars in taxes?

Cui bono? It’s not the vast majority of Americans whose incomes are either too low for them to owe federal taxes or who pay federal taxes but are nowhere near the loophole-laden top tax brackets. And it’s certainly not the yet-to-be-born Americans, what the Constitution calls “our Posterity,” who will pay for more than a half-century of debt-financed, proxy-administered big government.

Draining the Contractor Swamp

The real deep state has been on the rise since the mid-1960s. But if I had to fix a single date for its arrival, it would be June 24, 1981.

On that day, the General Accounting Office issued a report entitled The Government’s Use of Civil Servants and Contractors. In what now seems like quaint and innocent language, the report fretted that federal agencies had started using “contractor personnel to do work that involves basic management functions,” and warned that “contractors are influencing the agencies’ control of Federal programs and policies” and limiting agencies’ “ability to develop options other than those proposed by the contractor.”

Still, even now, rolling back the real deep state is possible.

For starters, we should require federal contractors and their most highly paid executives to disclose all donations and contributions, including funds given to unions, trade associations, and other organizations that can receive unlimited donations from individuals and corporations and spend money on elections without disclosing their donor list.

In tandem, place a lifetime employment ban on all former federal employees, political or career, of the White House or Congress, from earning more than $100,000 a year (in 2023 dollars) in total from any for-profit organization that receives more than half its annual revenues via federal contracts.

We also need laws, rules, and regulations that empower all federal agencies, not just watchdog units like the General Accounting Office’s successor, the U.S. Government Accountability Office, to keep and routinely publicize detailed, up-to-date data on contractors and grantees—laws that make it much harder to hide big government’s proxy bureaucracy and the federal money that flows through and to it.

Over time, we need to foster a culture of evidence-based outsourcing in which the costs and benefits of outsourcing versus insourcing are assessed through empirical analyses that are conducted openly, honestly, and without undue political or other pressures being brought to bear on anyone involved.

Model studies that do just that remain scarce but are not hard to find. And, led by the dean of U.S. public administration scholars, Donald F. Kettl, there is robust, well-researched, nonpartisan, and smartly prescriptive academic literature to guide a new generation of efforts to reform the federal civil service.

What seems impossible to find, however, are political leaders in either party who are ready, willing, and able to speak the whole truth about big government, face up to the contractor state, and face it down.

John J. DiIulio, Jr. taught American government at several universities and is the author of Bring Back the Bureaucrats: Why More Federal Workers Will Lead to Better (and Smaller!) Government (Templeton Press, 2014). This essay is adapted and updated in part from his chapter in James L. Perry, ed., Public Service and Good Governance for the Twenty-First Century (Penn Press, 2020).

Image: Aerial view of industrial environment. (Unsplash: Chuttersnap)

EconomicsUnited States