Sometimes the explanation for vexing problems is clear as can be
after you see it. A perfect example is an observation made by the
late Milton Friedman in a 2004 interview with Fox News:
There are four ways to spend money. You can spend your own
money on yourself. When you do that, why you really watch out for
what you’re doing, and you try to get the most for your money. Then
you can spend your own money on somebody else. For example, I buy a
birthday present for someone. Well then, I’m not so careful about
the content of the present, but I’m very careful about the cost.
Then, I can spend somebody else’s money on myself. And if I spend
somebody else’s money on myself, then I’m going to have a good
lunch! Finally, I can spend somebody else’s money on somebody else.
And if I spend somebody else’s money on somebody else, I’m not
concerned about how much it costs, and I’m not concerned about what
I get. And that’s government. And that’s close to 40 percent of our
national income.
It would be nearly impossible to exaggerate how many of
our current economic problems are explained by Friedman’s four ways
of spending money. Think of the four ways in the order they’re
presented as S1, S2, S3, and S4. As Friedman explains, the
effectiveness of how money is spent declines inexorably as you move
from S1 to S4.
The important demarcation line in ways money can be spent
is between S2 and S3. In other words, the issue that matters most
is your money versus someone else’s money. If you’re spending your
own money on someone else, your spouse or children, for example,
you still take the expenditure seriously. You still pay a price if
you don’t look for bargains.
A new Gallup survey finds that “Americans believe, on
average, that the federal government wastes 51 cents of every tax
dollar, similar to a year ago, but up significantly from 46 cents a
decade ago and from an average 43 cents three decades ago.” This is
a good example of “the wisdom of crowds.” The trend shows that the
crowd is wising up regarding the implications of gargantuan
government.
The survey respondents are correct in their assessment of
how government spends money, and you need go no further than
Friedman’s distinctions of how to spend money in understanding the
source of the problem.
My guess would be that many of the respondents would think
the government doesn’t necessarily need to waste half the public’s
money. The problem, however, is it’s the nature of the beast.
Because of the realities Friedman refers to, the government will
never be able to spend money as effectively as the private
sector.
The problems associated with how the government spends
money are not the result of who’s running the government. The
problems are systemic. Unless government is seriously downsized,
waste and inefficiency will remain problems no matter which party
is in power.
The source of the problem can be further clarified by
keeping in mind the observations of another economist, Steven
Landsburg: “Most of economics can be summarized in four words:
People respond to incentives.” (That’s the first sentence in his
excellent book,
The Armchair Economist.)
The incentives for spending money wisely and efficiently
are simply too weak when it’s not your own money. It’s no skin off
your nose if the benefits of the expenditure are a small fraction
of the costs. When it’s your own funds being used, you will not
only restrict your expenditures to things having more benefits than
costs, you will choose the ones you think will have the highest
ratio of benefits to costs.
When it’s your own money you’re spending, it costs you
something when you spend it foolishly. That’s not to say that we
never spend our own money foolishly, but it comes out of our own
hides when we do. When we spend our own money foolishly, we’re left
with less money to spend well. It’s a self-policing structure. Of
course, your incentives are even stronger when you worked hard for
the money in question.
When a politician or bureaucrat spends taxpayer money it’s
treated essentially a freebie. It’s only natural that taxpayer
money gets treated like monopoly money. Politicians and bureaucrats
have virtually no incentive to care about the value of an
expenditure or its cost. This is a profound disadvantage of public
spending that will never, ever go away.
Contrary to the straw-man accusations of some liberals,
conservatives do not advocate zero government expenditures.
Conservatives definitely are not anarchists. Nevertheless, the
inherent and inescapable inferiority of spending someone else’s
money on someone else is a strong argument for minimizing the size
of government. The public’s opinion that the amount of government
waste has been increasing parallels the exponential growth of
government.
The Solyndra fiasco is another recent confirmation of
Friedman’s observations. Despite alarm bells going off, the Obama
administration pushed the doomed endeavor forward. Why not? It
wasn’t their money, after all. Because it has now becoming so
notorious, it appears the administration may pay a political price.
Nevertheless, half a billion dollars of taxpayer money has gone
down a rat hole. Unfortunately, Solyndra is the rule, not the
exception. Absurdly generous public employee pension plans are
another predictable result of spending someone else’s
money.
Friedman said that the fourth spending alternative is how
we spend forty percent of GDP. He was, I think, referring only to
budgetary expenditures. Forty percent is a lot. Unfortunately, it
understates the full extent of the problem.
The vast regulatory apparatus of the government is
basically a system of spending someone else’s money on someone
else. It is estimated that government regulations currently cost
the economy $1.7 trillion a year. For example, requiring a private
business owner to spend hundreds of thousands of dollars to comply
with the American with Disabilities Act is a clear case of spending
someone else’s money on someone else. Requiring a private business
to spend a million dollars doing an “environmental impact report”
is a clear example of spending someone else’s money on someone
else. Spending a million dollars or more on an EIR, in fact, is an
example of spending someone else’s money for no one and for
nothing. Minimum wage laws likewise are a case of spending someone
else’s money on someone else.
The billions of hours Americans spend each year preparing
their tax returns is a case of spending someone else’s
time on someone else. Time is money, as they say, and most
people I know complain a lot more about a scarcity of time than
they do of money.
When you spend your own money (or time) on yourself, or
for your loved ones, the process is essentially self-regulating.
The incentives are automatically aligned with waste minimization.
When such incentives are not present, elaborate and complex systems
of rules and artificial punishments must be put in their place.
There can never be enough rules and regulations to match the
effectiveness and elegance of the self-regulating
market.
