Why is Government SO Bad with Money?
Everyone complains about what poor stewards of the people's money the government tends to be, but rarely does anyone address the question why. We chalk it up to greed and stupidity, or we just take it as the natural course of things, joke about $200 hammers and move on.
But there are actual, quantifiable reasons that government is bad with money and those reasons are systemic in nature, meaning that no matter who is in charge, or what laws are passed, the root reasons for the waste and fraud will still be with us.
Milton Friedman brilliantly described the four ways that money is spent.
- The first and most common way in the private sector is people spending their own money on themselves. In this case, the buyer is interested in both quality (the best product or service that he can afford) and value (getting it at the best price) because he is both the producer of the wealth being spent and the consumer of the good or service being procured.
- The second way is when people spend their own money on others (such as gifts). Here they are still concerned about value (it's their money), but less concerned about service quality as they are not the consumer.
- The third way is spending other people's money on yourself. Think of the rich man's girlfriend who buys herself the nicest dresses in the store on his credit card without even looking at the tag. She wants quality, but value is irrelevant since she sacrifices nothing.
- The fourth way is when people spend other people's money on other people. In this case, the buyer has no rational interest in either value or quality. Government always and necessarily spends money in this fourth way. This guarantees inefficient public spending because the spenders have no vested interest in efficiently allocating those funds.
Adding to the inherently inefficient nature of public spending is what is referred to as the "theory of measurable output." This is the idea that every system needs a "yard stick" to monitor its relative health and effectiveness. For private enterprise, these outputs are called profits (or losses), dividends, share prices, etc. However, public entities have no such affirmative measures. The only measurable outputs are increases in the entity itself, bigger budgets, more employees, greater power and regulatory authority, etc. So a million dollar loss in a private firm will signal the need to save money, cut employees, make better products, or cease to exist. In a bureaucracy, that same loss will result in a million dollar increase in budget for the next year with accompanying increases in staff, salaries and political power. If that same bureaucracy fails to spend/waste all of the annual budget, then that budget is more likely to be cut. Hence, failure is rewarded and success is punished.
The third thing to consider is the nature of the legislative process. We have seen this in full color in the last week as the bailout bill grew from 3 pages to more than 400 as additional spending was added to satisfy the special interests that control the votes of the members of congress.
While hardly comprehensive, this should give some insight into why the government is, and always will be, bad with your money. Please keep this in mind whenever someone predicates their argument on the assumption that allowing government to intervene will lead to desirable results. This was a key argument for why they should pass the bailout. We were told that buying worthless paper would be a good deal when the government analyzed these "assets" and sold them back into the market. Don't hold your breath.
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Showing comments 1—24 of 24
Posted 10/07/08 09:59 AM
Bentley
Colorado Springs, CO | Obama National Anthem
Frightening realistic
http://conservativeforchange.blogspot.com/2008/10/obama-national-an them.html |
Posted 10/07/08 10:05 AM
Ginny Saville
Richmond, KY | This is the same reason that socialistic programs produce poor results. Humans just naturally have no respect for things they don't have to earn. |
Posted 10/07/08 10:07 AM
Aquinox
Syracuse, NY | ...not to mention why true Communism fails in practice.
Collective action is hard to achieve if a vested interest isn't present. |
Posted 10/07/08 10:20 AM
Viceologist
Sacramento, CA | This is a perfect example as to why people of this country need to proudly proclaim the profit-motive as a moral ideal. In a Capitalist politico-economic system, success is rewarded and failure is punished. The best prouct at the best price wins. When an entity has no interest in making a profit or being efficient, or really producing anything of value, you get what is explained as the fourth option of spending money listed above.
Several concepts have been inverted in today's society because of a lack of a moral defense from those that believe in what made this country great in the first place. We need to restore, on moral grounds, the proper reverance for the Capitalist system and individual rights in this country...
Sorry for the rant everyone... |
Posted 10/07/08 11:08 AM
sphigel
Coralville, IA | Milton Friedman mentions those four ways that money is spent in his PBS series "Free to Choose". If you haven't seen this series I would strongly suggest it. I think it aired in the mid 80's but the ideas are timeless. For anyone interested in it I'm seeding a torrent of "Free to Choose" here:
http://thepiratebay.org/torrent/4433383/PBS_-_Free_to_Choose
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Posted 10/07/08 11:36 AM
Jstme
Melbourne, FL | Thank you for this post. I've always said, Government does not earn money. It spends it. Apparently over the weekend the MSM got to many people by having their economists insist that this bailout will turn a profit. That taxpayers will end up not paying a dime towards this due to this profit. This propaganda temporarily appeased many, until yesterdays stock market plunge and Paulson's bailout staffing was announced.
I'll be copying this post and sending it out to those that fell for the MSM's economists over the weekend. I hate to pop their balloon, but living in dream land will be far more detrimental to them. |
Posted 10/07/08 11:44 AM
Brian
Maple Grove, MN | This is kind of interesting, http://evilspeculator.com/wp-content/uploads/2008/10/100608_nwleverageflochrt.gi f shows how Credit Defaults come about / work.. and how much is really out there. |
Posted 10/07/08 11:46 AM
JimMN
Eden Prairie, MN | That's where "good enough for government work" and "use it or lose it" (in terms of wasting your budget so it's not reduced) come from. |
Posted 10/07/08 12:04 PM
Jarmar
Houston, TX | this is DEAD ON!!!
Jarmar................ |
Posted 10/07/08 12:25 PM
WillB852
Winter Garden, FL | Just why government should be small, and not dealing with more money than what they "need" to operate the way they were intended, and leave everything else up to the free-market, i.e. education, health care. We do need to spend for the military, but they should be defending us here, not closing our bases to build them over-seas. |
Posted 10/07/08 2:59 PM
Philip
State College, PA | Free to Choose is also a book by Friedman. It's probably my favorite liberty-minded book. It's an easy read and a must-read in my opinion. |
Posted 10/07/08 3:24 PM
rae 37066
Westmoreland, TN | This is a great post, It is off the http://www.dailypaul.com/node/67575 opengee if you are on here, this awesome!!!
Well put!!
TRAITOR CONGRESSMAN COMES HOME TO FIND AN AWAKENED CONSTITUENT
Posted October 7th, 2008 by opengee
The following is a very interesting (true) story of what happened to me tonight, when one of our fearless congressional turn-coats arrived back home. Enjoy!
One of the traitor Congressmen came back to his home district and I was fortunate enough to be on hand for the local county Repub. Party meeting.
I am a citizen of Oconee, Co., SC and I heard on the local newsradio station that the Oconee Repub. HQ was having an open house meeting for their returning Congressman, Gresham Barrett. Barrett, one of the most traiterous in that he voted Nay on Monday and Aye on Friday! I got a short notice, but I was determined to confront the man as soon as Friday's vote was over. THIS WAS MY CHANCE!
Let me preface with; I, personally, only became involved politically because of the Ron Paul Revolution, exclusively. Dr. Paul could have been a member of the Kangaroo Party and I would have jumped on board so I could support him, or more importantly "THE MESSAGE." He is a Republican, so I have dealt with that as best I can, AND THE PARTY PEOPLE. However, as many of you know, the Republican base membership is basically made up of white, elitist, pseudo-hardworking "christian" (lower-case intentionally) conservatives (and in the South, a lot of racists, too). I must say, first of all, that the head-count of this Republican stronghold in the upstate of SC (less than a month from the ELECTION!) was a pitiful turnout at best! I can recall more people at our Ron Paul meetup groups a year ago! And he was a "fringe candidate" THEN! This is indicative that the party of the Elephant is dying! Maybe 30 people, excluding speakers and party leaders on hand.
But, I digress..
Anywho, I arrive and ask to speak to Mr. Barrett. I was shown where he was and shook his hand and said "Why did you change your vote on Friday?" He replies "I'll be addressing that in just a few minutes at the podium." Very well, then. I help myself to the lush Subway-catered table and sit back as the suit-and-ties and soccer moms stare at me in my casual attire. The meeting commences with local and state government rep's getting applause and general GOP butt-kissing and good ol' boy pandering. Of course there's a PRAYER that is as "exclusively American" as always. They always ask God to bless US and THIS country and OUR troops and anything AMERICAN! I guess they think God is all for isolating or self-proclaiming your particular group as the ones He wants protected and we MUST be sacred over ALL of His children and Creation? God created all of us, everywhere!.......Anyway,... Then, finally, Mr. Barrett begins to talk. Obviously the economy of the nation was the issue, and his "harrowing experience on Capitol Hill last week" unfolds. After being praised by the handful of local GOP flunkies, he explains (para-phrased) "Folks, this was one of the hardest weeks of my entire political career." "The Sec. of the Treasury comes up and says 'Guys, I need you to give me a check for $700 billion dollars!' " "Well, we worked on it. and, uh, on Monday, they all had something they thought would work. But, uh, I opposed it, I voted No. And, then after all the votes were cast, the Speaker said 'Anyone wanna change their vote?' And it was dead silent. And, then, a NY rep said 'The Stock Market just dropped 700 points!' And, folks, my heart sank! I was in shock! So, the gavel fell and I looked at Mr. Frank and said 'Sir, we gotta roll up our sleeves, we got more work to do!"
As if that weren't abhorant enough, he proceeds with how the rest of the week provides even more "information to make him wonder what to do." "I'm hearing from this guy over here, and this expert over there, and I just don't know what to do! Then I get calls from people all over South Carolina. I had one lady in Spartanburg telling me she had 5 Verizon stores and wanting to open a 6th one and she said 'Gresh, the bank tells me 'No!' And, then, the thing that tore me up was a fella' I knew in McCormick, SC that was cryin' on the phone and said 'Gresh, I could lose $400,000 in my savings!' And, folks, that's when I knew I had to change my vote!" "And, so, we got a higher security of the FDIC figure, up to $250,000 from 100k. And, I tell ya, it wasn't perfect....it wasn't perfect.....but it was necessary, folks" (please use your best southern accent when reading the preceding).
As you can imagine, it was hard for me to keep down the Roast Beef and Swiss sub I had eaten! Not only was he admitting he was basically unconcerned with "hard-workin' people" after the Stock Market update on the first go-round. But, if the special interest and banking cartel's didn't sway his 2nd vote, the handful of WELL-above-average constituents from OTHER districts sure did! I was appalled. He asked for questions. The first one was from a gentleman that quickly voiced he was enraged with Barrett's switch vote, and nicely explained why. I can't understand why the man was upset! I mean, come on!! Some poor soul was about to lose $400 grand! Apparently, if you have $400k sitting around you're suddenly poverty-striken! And, then, that sad story of the woman who NEEDS a 5th or 6th Verizon store and THE BANK WON'T LEND HER MONEY! OH, NO!!! The only time I ever even SAW $400,000 was in typed print! |
Posted 10/07/08 6:46 PM
Two-if-by-Sea
, MA | A very wise analysis! It's deep thinking like 'why does the gov't waste money?' instead of just acknowledging that it wastes money that will be one of our greatest tools in proving the statists wrong |
Posted 10/07/08 7:03 PM
Bentley
Colorado Springs, CO | Check out this post in response to Obama's claim that he would actually cut spending
http://conservativeforchange.blogspot.com/2008/10/we-need-drastic-cu ts-not-earmark-reform.html |
Posted 10/07/08 7:39 PM
Matt Wolf
Bloomington, IN | This is why we should all call for "A separation of economy and state" |
Posted 10/07/08 9:07 PM
SonOfLiberty4
Devastated, CO | I don't agree that voting 3rd party is wasting a vote - I'm voting for the one I think will uphold his duty of protecting the constitution as his oath proclaims - "I do solemnly swear (or affirm) that I will faithfully execute the Office of President of the United States, and will to the best of my Ability, preserve, protect and defend the Constitution of the United States. "
This is the primary duty of the president that we seem to forget about. Looking at this - many presidents have violated this oath.
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Posted 10/08/08 07:59 AM
CurtisM
Kokomo, IN | To answer your question, Don, it would be lack of economic education.
I am not educated in economics, but what I do know about the subject is 90% more then most members of Congress. What I do know could be wrote in two to three pages. It makes you scratch your head and wander what kind of person it takes to not want to get advised in matters of economics when, basically, that is the majority of what is voted on in Washington. |
Posted 10/08/08 08:14 AM
illuminatidvds
lake park, FL | Great Post... I've read a lot of posts on here and it only backs up the information I found on this web site...
http://www.illuminatidvds.com
Keep up the good work!!! |
Posted 10/08/08 1:59 PM
BillNM
Carlsbad, NM | I wonder what the bureaucrats will do with the bad mortgages they pick up? When the FSLIC took over many of the failed S&L's back in the 1980's you would have thought that they would have dealed in such a manner as to dispose quickly of those assets in the interest of the taxpayer. However, that would have meant that the bureaucrat in charge would have been out of a job. So they refused to settle and just rode the wave as long as they could. I am pretty sure the next round will be about the same. In a closed system it is ridiculous to think the government can make money! |
Posted 10/08/08 10:33 PM
SolarisTristam2
avon, CT | now i will admit that when it comes to the economy and more importantly economic theory i am a novice, however to glorify and praise a man like milton friedman is reckless. consider that this same man is personally responsible for the advice given to chile, argentina and many other latin american countries in the 70's and 80's. his insistence on deregulation, privitization and cuts to social programs led those countries spirialing into debt, joblessness and a ever widening chasm between the very rich and the hopelessly poor. at the time these were largely nationalized, social democracies that supported fare wages, workers unions and strong reliance of domestic product. in EVERY |
Posted 03/07/09 6:19 PM
Don Rasmussen
Baltimore, MD | Solaris - It appears you are a novice when it comes to economic history as well. The period prior to right-wing authoritarianism in Latin America is referred to as ISI or Import Substitution Industrialization and it wasn't the worker's paradise you describe. That system was so corrupt and destructive of the wealth and resources of the region that when it collapsed it left a hole so big that only the military could maintain order amid 2500% inflation and food riots. Friedman did inspire some of those governments by offering the opposite of what they just had (under ISI) which was the obvious thing to do. The fact that they deviated from Friedman where domestic pressure dictated is not an indictment of Friedman, but of them. As for Friedman himself, he sent one letter to Pinochet in response to a technical economic question he posed in their only meeting, a meeting requested by Pinochet when Friedman was in country for an economic conference. That brief meeting and subsequent letter is the peg that leftists have hung their hat on as far as blaming Friedman for all of the excesses of the truly horrible governments of the period. To hear these pinko talking points repeated on C4L is discouraging to say the least. |
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