In his writing regarding the ratio of federal employees to federal contractors (1.5 million : 15 million), economic historian and professor Brian Domitrovic argued that the contractor bubble is rooted in a desire to undermine the private sector. His argument is that federal contractors are in reality federal employees under a different name. The root of Domitrovic’s thesis lies in American attitudes toward government employees, perspectives that might be relevant today.
One American cultural trait that is at odds with much of the rest of the developed world, a manifestation of the much-vaunted American exceptionalism if one wills, is that working for the government is not a respectable career. Unlike Europe and East Asia, Americans do not have the concept of the “servant of the State.” Even more importantly, the refusal to consider government work as acceptable is deeply tied to a vision of avoiding big government or federal overreach. Domitrovic’s argument that contractors are a bloated bureaucracy’s way of concealing the true number of its employees while also shielding an entire swath of society from social disgrace stems from this particular cultural attitude.
As Domitrovic elaborated, the US government at all levels, municipal, county, state, and federal, has difficulty hiring “good people,” i.e. high-skilled, ambitious recent graduates. While this is largely due to historical cultural prejudice – as Domitrovic eloquently summarized the situation, before the 1930s, “postman” was equivalent to “loser” – there is also the fact that there continue to be certain career penalties for those who work in government.
For example, in 1933, as a response to the banking crash, the US Congress passed a bill, the Banking Act of 1932, commonly called the Glass-Steagall Act, which separated the financial ecosystem into investment and commercial divisions, and in doing so created a broader societal divide. While the primary focus of the legislation was to divide financial risk and protect the consumer, one other effect was to limit who could, or could not, work in investment banking. Specifically banned were, and still are, people who have, or who have close family members (defined by law as parents, siblings, siblings-in-law, and grandparents) who work or have worked in commercial banking. And, with the same conditions, those who work, or have worked, for the government in any form or at any level are also barred.
The purpose of the first instance was to avoid conflict of interest and possible insider trading. While the legislation targeted the second, government employment, for the same reason, there was an additional concern. In the US, municipalities and counties raise additional funds for purposes ranging from public improvements to paying salaries through issuing bonds which are exempt from state and federal taxation upon maturity. The task of determining the credit-worthiness of the city or region and consequent interest rate assigned to the bonds falls to investment banks. Barring individuals with government connections was as much intended to preempt a situation in which an assessor identified emotionally with a particular place or purpose of a bond and consequently suffered from compromised judgement.
To illustrate the reason Congress of 1933 saw fit to erect such barriers, here is a hypothetical scenario: A representative of a bank discovers that the municipality he is charged with assessing needs to issue bonds in order to pay law enforcement. The assessor’s own father is a policeman, so he identifies emotionally with purpose of the bond. Consequently, he does not return a completely accurate report to his institution in an attempt to assist the city with securing credit. As farfetched as this scenario might seem today, the crash of 1929 revealed a sufficient level of this type of dishonesty among those who worked in finance as to lead legislators to believe it was necessary to provide safeguards.
It would be inaccurate to say that the state-private employment legal divide, represented by Glass-Steagall, is a cause of economic inequality, and while it might cause social inequality, there is insufficient data to claim that it does so. However, a few sociologists, such as Richard Reeves, author of Dream hoarders : How the American upper middle class is leaving everyone else in the dust, why that is a problem, and what to do about it, have observed the tendency for certain elite professions to not include the children of state-workers, but these sociologists tend to describe the situation in terms of social class, rather than as a result of federal legislation dating back eighty years.
To return to contractors and their role in this system, their existence has, to a great extent shielded broader society from potential consequences of legislation, such as Glass-Steagall. Contractors are not classified as federal employees, so they and their relatives are not subject to the professional restrictions placed on government workers. This is not to argue that such laws should be dismantled. The historic circumstances which led to the creation of Glass-Steagall are such that there seems to be a need for clearly defined boundaries and consequences, even if there are career penalties, not only for oneself, but also for future generations involved.
Domitrovic is correct in maintaining that not only are the 1.5 million official federal employees superfluous, but the necessity of 15 million contractors, for whom the former group spends most of its time writing paychecks, should also be reconsidered. The real solution, as socially unacceptable as it would be, is to return to the mentality of thinking of government employees of all types as pariahs, much the way they were seen in the 1930s, when they were the people who had given up on the American dream of entrepreneurship, private industry, or intellectual pursuits. According to the mores of that time, these people had chosen mere dumb existence, rather than life. Aside from any practical concerns of insider training or abuse of knowledge, the personnel restrictions of Glass-Steagall came from a time when constituents fully supported banning such “losers” from aspiring to the pinnacles of industry and finance. Returning to such an attitude and extending it to include government-only contractors would not only assist in dismantling the bureaucratic state but would also incentivize private endeavor of all types, reestablishing it as greater in the social hierarchy.
 Some readers may recall Anthony Scaramucci, the Press Secretary whose tenure only lasted ten days, was an investment banker first. He is an exception in that his mother was a school teacher. The restrictions have been relaxed over the years, allowing for employment in the elite parts of the private sector if 1) more than five years have passed since employment by the government, 2) the candidate has accomplished a career objective sufficient to indicate severance with his previous associates, e.g. obtained an academic degree, 3) and in the case of exceptionally promising individuals, the private employer may examine the situation on a case-by-case basis and petition the regulatory authorities for an exemption.