Government Procurement: Pennywise, Pound Foolish

You need a new pair of jeans. You’re standing in front of two stores, both offering excellent quality jeans. One store offers them for $35; these jeans are made offshore somewhere, and the retailer is based in a distant state. The other store offers a virtually identical pair for $38; these jeans are made right here in L.A., and the retailer is also based in L.A. What do you do?

Trick question — it doesn’t matter. You’re an individual consumer, overwhelmingly concerned with your own pocketbook.

But what if you’re the government, and you’re concerned not only with getting the best price, but also with trying to create jobs and generate more money for the local economy? Then it gets a bit trickier. Which is to say, we’re going to have to do some math here, folks: Just how much is that extra $3 getting us?

Unfortunately, too often local governments don’t even ask that question. Recently, L.A. Metro awarded a nearly $1 billion contract for 235 light rail cars to a foreign company. A competing bidder had a slightly higher price, but committed to doing significantly more manufacturing work in the region. Metro wanted to get the best deal. Did it?

According to a new report from the Economic Policy Institute, probably not. EPI found that the winning bidder will create 536 jobs in the L.A. area, while the loser would have created 1,488 jobs. As has been argued in these pages previously, it seems that Metro missed a critical opportunity here.

But it can be hard to tell exactly what those extra 952 L.A. jobs would have brought to our local economy, what tax revenue this would have generated for our struggling public sector, what secondary and tertiary effects this money would have had as the dollars were recirculated throughout the local economy. Perhaps, a skeptic might argue, we’re getting blinded by the promise of jobs, and this sort of promise doesn’t pan out.

One non-profit in Arizona decided to find out. A few years ago, Local First Arizona noticed that local office supply companies were losing government contracts to big-box retailers who charged the government less, ostensibly saving tax dollars. They wanted to see whether this really was a good investment. So they compared purchases from Office Max (which, with a local distribution center, kept more money in the local economy than its national competitors) to a local company, Wist. It turned out that when you examined four key factors – wages, profits, procurement, and charity – the “more expensive” alternative – local independent firm Wist – recirculated three times as much money in the local economy as the same contract with the national firm.

As the report concludes, government entities “might benefit from giving additional consideration” to just this sort of firm, adding, “Additional dollars recirculating in the local economy generate taxable transactions, employ local citizens, and promote the economic vitality of the community.”

A case out of the Carolinas is even more stark. North Carolina firm Smith Setzer & Sons sued South Carolina over a procurement policy that gave preference to in-state firms, even if an out-of-state firm offered a better price (up to five percent). The court ruled in favor of South Carolina’s policy of local procurement, citing an econometric study done by South Carolina showing that even though the state would have saved $50,000 by purchasing from Smith Setzer, the state’s economy would have lost $2.1 million in terms of jobs and tax revenue lost.

We all have our assumptions about what constitutes value: Is it the lowest price? Is it the most jobs created, regardless of price? These sorts of assumptions are often guided by our ideologies. But until we roll up our sleeves and actually address some real, answerable, empirical questions, we’re not going to know.

From the examples above, one thing is undeniable: Looking solely at lowest cost is not guaranteed to provide the best value for government, for taxpayers, or for citizens. In fact, spending a little extra out-of-pocket today can often yield us outsized returns tomorrow. For all of us in L.A., it’s too bad that Metro wasn’t willing to do the math.

(Brenda Perez and Doug Smith contributed research to this post.)