(2021-04-05) Stoller Keep Mckinsey Away From Bidens Infrastructure Push

Matt Stoller: Keep McKinsey Away from Biden's Infrastructure Push. Senator Chuck Schumer recently called the Barack Obama stimulus a “mistake” and “a small measly proposal” on CNN, as a way of selling Joe Biden’s much larger proposals.

Biden’s goal, and that of the Democratic Party that controls both houses, is to break from recent politics, and be “more like Franklin Delano Roosevelt (FDR) and the Congress of 1933, and less like Barack Obama and the Congress of 2009.” (credit crisis 2008)

Last week, the Biden administration laid out a $2 trillion vision on infrastructure called the American Jobs Plan.

We have to wean ourselves off of Chinese imports, deal with climate change, and create a more equal economy

One important question is whether it’s actually possible to spend that amount of money on so many things without immense amounts of corruption or waste.

Obama didn’t spend enough, but he did spend a lot. FDR, however, actually built things, whereas Obama’s stimulus money for, say, California’s high-speed rail, evaporated into a cloud of consultants

To understand Biden’s challenge, we should go to the last time America had to build a bunch of infrastructure. In 2017, in Puerto Rico, hurricane Maria wiped out the island’s electric grid. If you want to know the nightmare scenario for Biden’s infrastructure plan, start there.

2016, and Puerto Rico was having trouble paying back $70B+ of its state debt.

Congress stepped in and appointed a control board

The control board hired McKinsey, the management consulting firm, as the island’s ‘strategic consultant,’ with the goal of getting Puerto Rico back to fiscal solvency. A little over a year after Congress passed PROMESA, hurricane Maria hit

For the last five years, McKinsey has detailed highly paid consultants to help the control board both renegotiate debt and oversee infrastructure spending. Has the rebuild gone well? In short, no.

It has ensured that Puerto Rico will spend the mind-bogglingly large sum of $1.5 billion on professional services, meaning lawyers, bankers, and consultants (including McKinsey), which is five times what Detroit paid in services for its bankruptcy

Beyond the straight fee extraction, the conflicts of interest are comical; McKinsey’s internal hedge fund actually owns Puerto Rican bonds.

McKinsey helped ruin the U.S. spying apparatus with a bloated, failed contract. They helped run Trump’s U.S. Immigration and Customs Enforcement; ICE even hired McKinsey to write its own contract. McKinsey structured France’s terrible coronavirus response, and that of New York state.

every overpriced government contractor out there is gearing up to steal as much of the $2 trillion as they can

If Biden wants to make his plan functional, he should follow FDR’s model.

Roosevelt’s first major infrastructure battle was over Muscle Shoals in Alabama, the great hydroelectric resource.

had the government directly build the Tennessee Valley Authority, a publicly owned and operated electric utility for much of Appalachia. TVA was part of a package of reforms to constrain and control Wall Street, to end what FDR called the ‘informal economic government of the United States.’

Public institutions got bigger and more competent, and the financiers and monopolists lost power.

During World War II, military procurement officers had immense capacity and power, imposing tight control over contractors, and ensuring that there were at least a dozen competitors for each major weapon system. They could peer into the books of contractors, and even claw back excessive profits.

America used this governing capacity for decades

In the 1990s, however, Bill Clinton’s “Reinventing Government” initiative killed the public capacity Roosevelt had constructed. Clinton encouraged the big prime defense contractors to merge, shrinking them from over 100 to just 5 firms. (M and A)

Clinton’s procurement initiative, led by Steve Kelman, invented a whole new vocabulary for ways to let contractors steal. The details get complex, but the gist was a ‘light touch’ approach

today, agencies can just order stuff from pre-approved contractors without doing much negotiating

This kind of buying system - no prices, no transparency, no competition - is precisely the opposite of what firms like Amazon, Walmart, and other ‘power buyers’ do to wring efficiency from their suppliers.

The problem isn’t just that Uncle Sam gets ripped off. The net effect of encouraging laziness and monopoly throughout the government procurement process is poorly thought out initial requirements, which of course results in bloated costs and failed projects later on. (anti-trust)

There is hope. Operation Warp Speed, which super-charged vaccine development and roll-out, was probably the most effective government project since the moon landings

Stopping mergers is good for business. Take a very simple consumer product - razors and razor blades for shaving, or disposable wet shave safety razors.

The razor business is, like most consumer packaged products, all about distribution. Prior to the internet, that meant getting into stores.

Gillette, now a part of P and G, had so much power that it still controlled 70% of the market in 2010

yearly annual price increases and nice margins for a commodity product.

In 2013, Harry’s launched, challenging the duopoly of P&G and Schick by going direct to consumer online. A similar firm, Dollar Shave Club... did so only online, which meant that the incumbents maintained much of their power by controlling retail shelf space.

However, in 2016, Harry’s got shelf placement in Walmart, Target, and other big box stores. The result is Schick and P&G had to cut prices

Enter the buyouts. In 2016, Unilever bought Dollar Shave Club.

Schick tried to take out the remaining challenger by buying Harry’s. The FTC, however, filed a case against the merger, and Schick walked away from the deal.

Opponents of stronger antitrust laws say that blocking mergers will harm the economy. Is that true? Dan Primack in Axios Pro Rata published a story on what happened next.... Today Harry’s product line “includes men's and women's shaving products, shampoos, deodorants, lotions and even fresh cat food.”