Unfair Competition from Prison Labor Requires a Congressional Fix

FPI's many advantages in the private-sector marketplace would include exemption from taxes and laws establishing minimum wages for employees.

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 it out of business before it got off the ground, probably before government regulators even found out about it.

Yet such a firm does exist.  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 prisons make up the captive work force of FPI.  They make clothing, electronic and vehicle components, industrial items, and dozens of other products including one of crucial significance to the economy of West Michigan: office furniture.  That industry is reeling from a soft economy and if FPI has its way, West Michigan furniture workers are going to get hit again.

The idea of convicts working at something while serving their time is a laudable one.  States often employ them to maintain and refurbish the very facilities that house them, to produce goods and services for sale to each other, or to keep roadsides free of litter.  But FPI is controversial because there's much more to it than prisoners keeping busy and out of trouble.

FPI enjoys preferential treatment in government contracts.  Indeed, "monopoly" more aptly fits the status it enjoys.  Federal law since 1934 designates FPI as a mandatory supplier to the federal government, which means that federal agencies must purchase from FPI.  Private firms that sell the same or similar products are cut out altogether, unless FPI itself grants a waiver.

This monopoly status puts FPI in an extraordinary position.  It determines whether its products for sale 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.  Agencies are even prevented from conducting market research to find out if private industry can supply them with a better and cheaper product.

U.S. Senator Carl Levin, D-Mich., 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, which compared FPI prices for 20 representative products to prices for identical or comparable products in the catalogs of private vendors.  For almost half of 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.

Such poor policies and practices do harm even to the federal government's core responsibility of 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 or bullets.

Without congressional intervention, 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 U.S. Rep. Peter Hoekstra, R-Mich., would address the problem by requiring FPI to compete for federal contracts and prohibiting the agency from selling in the private marketplace.  His bill, HR 1577, would also enhance public oversight of (and tighten the standards for) any future FPI expansion plans. 

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.

(Lawrence W. Reed is president of the Mackinac Center for Public Policy, a Midland-based research and educational institute.  Permission to reprint in whole or in part is hereby granted, provided the author and his affiliation are cited.)