McKinsey is overpriced and corrupt. It is also gunning for government cash.
By Matt Stoller and cross-posted from his blog, BIG.
If there’s one striking feature of the Biden administration so far, it’s the rejection of Barack Obama’s policy framework by his own party. It is now the consensus that Obama’s lack of ambition led to Trump’s election. For instance, party leader Senator Chuck Schumer recently called the Obama stimulus a “mistake” and “a small measly proposal” on CNN, as a way of selling 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.” Biden wants to spend a lot, to go big, instead of the go small vision of Obama.
Last week, the Biden administration laid out a $2 trillion vision on infrastructure called the American Jobs Plan. The theory behind the American Jobs Plan is that the U.S. has a few key challenges, all related to the physical design of the country. We have to wean ourselves off of Chinese imports, deal with climate change, and create a more equal economy. The American Jobs Plan is the proposed solution. It will do everything from expand broadband to repair roads and bridges using “cleaner cement and steel,” upgrade ports and electric grids, subsidize semiconductor factory investment, and on and on, all with inputs “made in America and shipped on U.S.-flagged, U.S.-crewed vessels.”
It’s a bold vision. 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. The difference between FDR and Obama, after all, was not just spending amounts. 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. (A particularly mean joke was that FDR won WWII in less time than it took Obama to build Obamacare web sites that didn’t work.)
Biden isn’t inheriting a well-functioning government, so pushing $2 trillion through a battered public sector is going to lead to problems. 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.
McKinsey: The Government’s Brain
When I was a Senate staffer, one of the worst pieces of legislation I worked on was called PROMESA. It was June of 2016, and Puerto Rico was having trouble paying back $70B+ of its state debt. There are no bankruptcy provisions for U.S. territories, so Congress stepped in and appointed a control board of bankers and technocrats to govern the island, the idea being that the democratically elected government had been fiscally reckless, and the Federal government should step in.
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. Puerto Rico’s water, health and electric systems were weak, which the hurricane exposed by ripping through the island’s physical plant.
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. The unelected control board has allowed the awarding of electric grid contracts to corrupt insiders, so power outages are still common. Mass protests forced the governor’s resignation in 2019. And schools are closing even as the government continues to pay government salaries to people who don’t work for the government.
So what has McKinsey been doing, if it hasn’t been running Puerto Rico? The answer is, McKinsey has been looking out for McKinsey. 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. I don’t know how much the firm will make, but according to the GSA schedule, just one recent college graduate working at McKinsey costs around $3 million a year. Beyond the straight fee extraction, the conflicts of interest are comical; McKinsey’s internal hedge fund actually owns Puerto Rican bonds.