Helping the well-connected by helping the disadvantaged

A family friend used to be an executive at a Fortune 500 corporation, where she ran a department that provided a certain kind of service to other businesses. She had started the department with just a handful of people and quickly grown it to occupy a whole floor of a downtown skyscraper. Then, about a decade ago, she left to start her own business, providing the same kinds of services.

She soon brought in two of her top former employees. They were also women with many years of experience doing that kind of work, making the new company the very epitome of a woman-owned-and-operated business. Nevertheless, when she tried to get certified as a woman-owned business in Chicago (or maybe Cook County, I can’t remember), she was repeatedly turned down.

One time, they turned her down because a businessman had helped her out with a little money and let her use some office space. They accused her of being a front for him.

Later, after she got the business running under its own power in a new location, she re-applied, only to be told that because her husband spent a lot of time around the office, they suspected she was just a front for him — never mind that he had no experience in that line of work and was just helping out because he had lost his previous job in the recession. After being turned down a few times, she eventually gave up.

Her problem — obvious at this point to anyone familiar with how business is done in Chicago — was that she didn’t have the right connections. If she really wanted to get certified, she was going to have to get some clout. That wouldn’t necessarily involve giving manila envelopes full of cash to city council members, but she would certainly have had to pay people who knew how to work the system for her.

A similar situation is developing with the system of set-aside programs for disabled veterans. According to Andrew J. Tobias and Tom Beyerlein of the Dayton Daily News, these programs are riddled with scams:

Federal agencies have awarded tens of millions of dollars in taxpayer-funded contracts to businesses operating in Ohio that claimed to be owned and controlled by military veterans with service-related disabilities, only to conclude the companies lied to the government when they said a disabled veteran was in charge, a Dayton Daily News examination has found.

I’m not surprised. Congress passes laws that distort the efficient operation of the free market, and they get different distortions than they were expecting. It’s the law of unintended consequences.

In some cases, business owners pretended to be decorated war heroes to obtain set-aside contracts, or served as front men for large corporations. More often, disabled veterans improperly partnered with other small businesses, having little say in the running of the companies and bringing almost nothing to the table except their disabled-vet status.

I have to admit, I don’t entirely see why the latter development is such a big problem. So what if the veterans aren’t in charge? The point of veteran set-aside programs is to help disabled veterans. How is this not helping the disabled veteran who gets the job? (Although, of course, it’s vastly inefficient.)

The victims, experts say, are companies that are legitimately owned and operated by disabled veterans who may lose contracts to bogus firms.

Actually, companies that are not operated by disabled veterans are also victims, because they could also lose contracts to bogus firms. I suppose they’re not as important because they would only have lost those contracts anyway, to firms that are legitimately operated by disabled veterans. That’s the price we pay to help disabled veterans this way, which is probably cold comfort for workers at those other companies who lost their jobs.

The program limits bidding for certain contracts to small businesses that are majority-owned and whose day-to-day operations and long-term strategies are controlled by disabled vets, thereby easing the competition. The program is dominated by construction and information technology companies.“You have companies run by service-disabled veterans that are the only ones able to compete for contracts that are quite large,” said Edward DeLisle, a Philadelphia attorney who specializes in government contracting. “It’s a huge benefit.”

And that huge benefit is precisely why there’s so much cheating, which would have been obvious to anyone who gave it a little thought.

Naturally, the government is now cracking down:

In the wake of the GAO’s 2009 findings, Congress required the VA’s Center for Veterans Enterprise to verify the eligibility of all 10,000-plus businesses on the VA’s program rolls. The center issued a letter in December 2010 to the businesses, telling them they must prove ownership and control within 90 days or be cut from the eligibility list.The verification process has caused a bottleneck for entrepreneurs seeking to access the program. And the sudden shift from “self-certification” to government verification has caused small businesses months of delays, mountains of red tape and significant costs in some cases before they can do business with the feds, veteran advocates say. Some legitimate businesses, they say, are being eliminated by the process.

Notice how far things have drifted off course. The original purpose of these contracts was to purchase goods and services needed to carry out the functions of government. Then it was decided that these contracts should be used to help veterans through the set-aside programs, which raised the cost to taxpayers. Now, because of all the fraud, the government has added a massive amount of paperwork to the process. This will raise taxpayer costs further while simultaneously soaking up some of the benefits that would have gone to disabled veterans.

Whenever you take part in a government program, you don’t just have to do what the government wants you to do, you have prove it and document it and defend it. This is all part of the cost of regulatory compliance. Well, it’s a cost to businesses, but it’s a profit center for the lawyers and consultants who help businesses comply.

And it sounds like it’s a pretty big profit center. We know it’s got to be huge because women and disabled veterans are dropping out of the programs rather than paying the cost of qualifying. In other words, they discovered that the cost of qualifying for the program soaked up all of the program’s benefits. This means that even for people who remain in the program, a large portion of the benefit is probably being spent just to keep them in the program. Or to put it another way, programs that were supposed to help women and disabled veterans have become fronts for diverting money to people with good government connections.

Regardless of whether you think the government should help out specific disadvantaged groups such as women, or whether you think we owe more to disabled veterans, this doesn’t seem like a very good way to go accomplish either goal.

About Mark:
Mark is a computer programmer, website builder, photographer, and sometimes journalist in Chicago, where he also writes the long-running Windypundit blog.
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