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The Federal Prison Industries Empire

FPI Produces Inferior Products Despite Numerous Special Privileges

SEPTEMBER 01, 2002 by LAWRENCE W. REED

Imagine a company that pays its workers as little as 25 cents an hour and often charges more for its goods than any of its competitors, even though it pays no taxes or dividends. The marketplace would put such a firm out of business before it got off the ground, probably before government regulators even found out about it.

Yet an outfit that does all that really exists. It’s not a private one operating in a free market. It’s a half-billion-dollar government enterprise that wants to get bigger, at the expense of taxpayers and the jobs of workers in the private sector. Welcome to the world of Federal Prison Industries, Inc., or FPI–a unit of the U.S. Justice Department.

More than 22,000 inmates in over 100 of the nation’s correctional facilities make up the captive work force of FPI. They make clothing, electronic and vehicle components, furniture, industrial items, and many other things–nearly 300 different products in all.

The idea of convicts working at something while doing their time is laudable. States often employ them to maintain and refurbish the very facilities that house them, or to produce goods and services for sale to each other, or to keep roadsides free of litter. An argument can be made that as an alternative to idleness, putting inmates to work, educating and training them for skilled jobs when they leave prison, is a good public investment–and some of that happens in federal prisons right now. But FPI is controversial because there’s much more going on than just keeping prisoners busy and out of trouble.

When the proceeds of inmate work are used for restitution in behalf of victims or for covering the costs of their incarceration, some good accrues. But for practical reasons, there’s pitifully little in effective restitution in our judicial and penal systems. And FPI income is not earmarked for the costs of incarceration at all. The taxpayer-funded Bureau of Prisons (BOP) picks up the tab for food, housing, recreation, education, health care, and security. Federal rules also prohibit the use of FPI revenues for the construction or acquisition of prisons. BOP (read: taxpayers) provides all the land and buildings for FPI facilities, rent-free, and even provides free power and water. When FPI wants to expand, the funds to do so don’t come from inmate work; the BOP simply uses your tax money and mine to pay for it.

Economist David Martin explains some of FPI’s other advantages: “It pays no social security tax nor does it pay for unemployment insurance or workers compensation. It carries no insurance for property damage, product liability, or other customary business loss exposure. . . . It is exempt from all federal and state income taxes, gross receipts tax, and property tax. . . . It doesn’t have to deal with federal and state regulations of such things as occupational safety and health, pollution, employment discrimination, and the hiring of illegal aliens.” This isn’t the first instance of Congress exempting itself or the entities it creates from its own rules, but the special privileges for FPI don’t end there.

FPI enjoys preferential treatment in government contracts. Indeed, “monopoly” more aptly fits its status. Federal regulations since 1934 designate FPI as a mandatory supplier to the federal government, which means that federal agencies must purchase from FPI, and private firms that sell the same or similar products are cut out altogether, unless FPI itself grants a waiver.

This monopoly privilege puts FPI in an extraordinary position. It determines whether its products and its own delivery schedule actually meet the needs of the purchasing agency. If a federal agency wants something, and FPI makes it, FPI sets the terms. An agency can even be denied the right by FPI rules to conduct market research to find out if private industry can supply a better and cheaper product.

U.S. Senator Carl Levin points out that “many federal agencies have been forced to purchase products that cost more, and perform less well, than products that are available to the rest of us in the commercial marketplace.” He cites the General Accounting Office (GAO), which compared FPI prices for 20 representative products to prices for identical or comparable products in the catalogs of private vendors. The GAO found that for almost half the products reviewed, FPI charged a higher price than most or all of the private vendors–who unlike FPI must pay taxes to governments, dividends to shareholders, and market wages to employees. When federal agencies made those costly purchases, they did so with taxpayer dollars.

Inferior Goods

Such poor policies and practices do harm even to the federal government’s core responsibility–providing efficient and effective national defense. The U.S. Navy testified that what it buys from FPI is “inferior, costs more, and takes longer to procure” than comparable goods produced by the private sector. When the armed services have to spend more than necessary for desks or electronic components for weapons systems, they have less to spend for planes and bullets.

FPI’s heavy-handedness has hurt companies and workers who sell goods to the government. For example, an Alabama company supplying military field jackets to the armed services was forced to close a plant and fire 300 employees when FPI decided to dramatically increase its share of that market.

FPI is poised for significant expansion. It now claims, without citing any statutory authority, that it can offer its goods in the private marketplace to firms that do business with the government. It also claims it can sell services (like packaging or data entry) in the private marketplace without limitation. Legislation offered by Michigan representative Peter Hoekstra would nip FPI’s ambitious expansion plans in the bud by requiring it to compete for federal contracts (stripping away the requirement that federal agencies buy from it) and prohibiting it from selling in the private marketplace.

Unfair competition from privileged agencies of government is nothing new, but when it comes from prisoners doing time because they broke the law at the expense of taxpaying, law-abiding citizens, both fairness and economics demand that something be done about it.

ASSOCIATED ISSUE

September 2002

ABOUT

LAWRENCE W. REED

Lawrence W. (“Larry”) Reed became president of FEE in 2008 after serving as chairman of its board of trustees in the 1990s and both writing and speaking for FEE since the late 1970s. Prior to becoming FEE’s president, he served for 20 years as president of the Mackinac Center for Public Policy in Midland, Michigan. He also taught economics full-time from 1977 to 1984 at Northwood University in Michigan and chaired its department of economics from 1982 to 1984.

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