People think that when you argue that way, you’re arguing for selfishness, for greed. That’s utter nonsense! The people who are in positions in a political hierarchy, are also selfish and greedy. Man kind is selfish and greedy.

Friedman then concludes with some insightful thoughts about government waste:

Thank god for government waste. If government is doing bad things, then it’s only the waste that prevents the harm from being greater. And the waste in government has two very important elements. Number one: If government were now spending the amount it now spends, which is 40% of our income (governments federal state and local in the United States have total spending which equals 40% of total national income) if they were spending that efficiently, we’d be slaves now. And in the second place, the waste is so obvious that it arouses a counter movement in the population at large. People are disillusioned by government and it increases the change that they will recognize where this road is taking them and get off that train before it goes all the way.

How is wealth taken out of the economy? Let me illustrate with a silly but effective example:

Suppose we have country with a very simple one-product economy consisting of 100 loaves of bread produced and consumed daily, costing $1 each, with $100 in total circulation. One day some politicians come along and decide that the bread making industry is just too crucial to leave to the whims of the free market, and decide to nationalize it, i.e. take it over. But now, since the government is bad at running an industry efficiently, only 50 loaves of bread are getting produced each day. With $100 in total circulation it means that now each loaf costs $2 instead of just $1. So every dollar bill can now buy exactly half of what it could before.

Do you think this scenario is far fetched? Except for the one product economy, it has all transpired before in the Soviet Block. Many Soviet Block nations had full employment. Everybody worked and had a job. But nonetheless, people were literally starving. How could that be? It’s because the government-run industries lacked the efficiencies and innovation of the free market. Full employment is useless if things are so inefficient that barely the life’s necessities are being produced.

The End Result of Government Waste

This is how it plays out:

Taxes -> Money Goes to Government -> Waste -> Less Production -> Everyone Has Less

Notice that I didn’t just write “The Rich Have Less”. Ah, yes, government waste is one reason why when the rich are taxed, everyone ends up with less, as in:

Taxes (On the Rich or Anyone Else) -> Everyone Has Less

For more on the subject of government waste, read this excerpt from Milton Friedman’s book, Free to Choose.

It’s the Poor and Middle Class Who Get Hurt Most by a Slow Economy, and They Benefit the Most from a Good Economy

Here are two main reasons for why this is so:

First, a slow economy results in fewer jobs and longer periods of unemployment. But the richer you are, the more likely you are to either not need a job at all, or be able to withstand longer periods of unemployment.

And second, economic growth increases the standard of living, and because of the laws of diminishing returns benefits lower income people more.

The Middle Class and Poor Have Benefited Greatly From an Ever Increasing Stanadard of Living

What is the law of diminishing returns?

Let me illustrate with an example:

Suppose you don’t have a car, and then buy a good used car for $5000. The positive impact on your life is potentially enormous. You can now go to places that were previously out of reach or very inconvenient to reach. Suppose you strike it rich, and decide to buy a $200,000 Rolls Royce. Now you’ve paid an extra $200,000, but the only extra benefit you get is the ability to go places in style. Buying that first car had a much more drastic impact on what you could and couldn’t do in your life, yet it cost A WHOLE LOT less.

That was an effect of the law of diminishing returns, where each additional dollar is worth less in terms of the real benefits it can bestow than the previous one.

Why does a good economy benefits lower income people more than the rich?

Now I’ll illustrate with another example how the law of diminishing returns turns a growing economy into an engine that helps lower income people more than the rich.

When large-screen flat-panel TVs first came out, they were very expensive. Only affluent households could afford to pay $10,000 and up to get one, while everyone else was stuck with tubes. But now, one can buy a very nice flat-panel 50″ (quite large!) plasma TV for under $1500, making it affordable to most middle class households.

What caused this incredible price drop? Increase in productivity and technological know-how, which were spurred by investment, innovation, and the desire to make a buck, did. A slow economy, with less productivity and investment delays this process.

Why did the middle class benefit more than the rich? Middle class people can now afford quality large-screen flat-panel TVs, whereas before they couldn’t. And sure, the rich can afford yet better TVs now. However, currently, if you have the money, you can buy a 70 inch plasma TV for $10,000. But how much more benefit are you getting for that extra $8500 over a 50 inch TV, which almost any household can afford? Not much as compared to going from a small tube to a large plasma. Therefore, the effective benefit of advances in TV technologies was larger for the middle class.

Increase in productivity and technological advancements are the true equalizers of society. And a soak the rich, investment killing, productivity squashing, tax policy imposed by a socialist government, works against the very equality it claims to advance.

In the early 20th century, few people could afford such things as cars and airplane tickets, and up until the 1990’s few people could afford cell phones, yet today we take those for granted as things even many households that are considered poor can afford. What has caused this tremendous advances in the standard of living? Welfare programs? No! What has caused these advances that greatly benefited “the poor” is the desire of individuals and corporations to make money.

But wait, won’t the government take the money from the tax increases on the rich, reinvest it in the people and the economy, and generate economic growth that way?

No. Any growth resulting form government spending won’t come close to the growth generated by the private sector. That’s because the government is much more wasteful than the private sector and is not very good at allocating resources. The government is driven by what’s politically beneficial to elected officials and not by what’s most conducive to economic growth. Taking money from the private sector and giving it to the government can never create a sustainable long term benefit to the economy. To learn more about government waste and it’s consequences, go here.

Why is government wasteful?

The answer to this question is actually very simple! Government is wasteful because it spends other people’s money.

Anyone who’s ever had an employee’s expense account knows that when you’re spending money that isn’t yours, you have very little incentive to spend it wisely on the owner’s behalf.

Likewise, politicians and bureaucrats are in charge of spending money of the faceless, nameless taxpayer, who has no direct control over how the money is spent. And therefore, they have very little incentive to spend it wisely.

Furthermore, when you have an expense account, at least you are somewhat accountable to someone (such as the company’s owner) who feels the pinch when you misuse funds and can cut you off when you do. However, a taxpayer has no direct say in how the money is spent. The taxpayer can’t cut the government off if he/she doesn’t like how the money is spent.

Therefore, since government decision makers are not spending their own money, and are not directly accountable to anyone whose money is being spent, they have little incentive to:

1. Hire qualified workers and fire unqualified workers.
2. Make sure contractors don’t over charge.
3. Economize on purchases.
4. Initiate work on fruitful projects, and cut off wasteful ones.

One of the most famous cases of government waste was a Pentagon purchase of $600 toilet seat covers back in the early ’80s.

Another famous and more recent case is Alaska’s “Bridge to Nowhere“, a project that was allocated $320 million to build a bridge to an Island with a population of 50.

As the examples above indicate, occasionally there is public outrage over egregious cases of misuse of public funds, but almost all cases fly under the radar. It’s possible to expose a useless $320 million bridge, but who is going to bother a bureaucrat who doesn’t want to fire a lazy useless employee because… well… who likes firing people anyway?

Government decision makers have little incentive to spend taxpayer’s money wisely, but that doesn’t mean they lack motivation for other things. Like everyone else, they are motivated to further their own personal self interests, such as their political careers and size of their bank accounts. And in doing so they tend to:

1. Dole out government contracts to campaign contributors, who may not be the best for the job.
2. Hire friends and family members, who may not be best qualified, for projects that are not necessarily needed.
3. Spend money so they can tell constituents they’ve brought money to their district, a.k.a pork spending.
4. Spend money so they can tell constituents something is being done to solve their problems, regardless of if it actually helps.
5. Spend all their budgets regardless of need to avoid inducing a budget cut. If a certain department doesn’t spend its entire budget then it’s a clear signal that it can do with less, and no bureaucrats wants to be in charge of a smaller budget next year.

And then there’s criminal corruption. If you think that private corporations are corrupt, then government bureaucracies are much more so because of the potential to steal from those whose money is taken away anyway, i.e. the taxpayers.

Therefore, the government will always be much, much more wasteful than the private sector, where someone owns the bottom line.

Next, discover why government waste is bad.

The Fallacy of the Welfare Sate

Why have all these programs been so disappointing? Their objectives were surely humanitarian and noble. Why have they not been achieved? At the dawn of the new era all seemed well. The people to be benefited were few; the taxpayers available to finance them, many – so each was paying a small sum that provided significant benefits to a few in need. As welfare programs expanded, the numbers changed. Today all of us are paying out of one pocket to put money – or something money could buy – in the other.

A simple classification of spending shows why that process leads to undesirable results. When you spend, you may spend your won money or someone else’s; and you may spend for the benefit of yourself or someone else. Combining these two pairs of alternatives give four possibilities summarized in the following simple table:

Category I in the table refers to your spending your own money on yourself. You shop in a supermarket, for example. You clearly have a strong incentive both to economize and to get as much value as you can for each dollar you do spend.

Category II refers to your spending your own money on someone else. You shop for Christmas or birthday presents. You have the same incentive to economize as in Category I but not the same incentive to get full value for your money, at least as judged by the tastes of the recipient. You will, of course, want to get something the recipient will like – provided that it also makes the right impression and does not take too much time and effort. (If, indeed, your main objective were to enable the recipient to get as much value as possible per dollar, you would give him cash, converting your Category II spending to Category I spending by him.)

Category III refers to your spending someone else’s money on yourself – lunching on an expense account, for instance. You have no strong incentive to keep down the cost of the lunch, but you do have a strong incentive to get your money’s worth.

Category IV refers to your spending someone else’s money on still another person. You are paying for someone else’s lunch out of an expense account. You have little incentive either to economize or to try to get your guest the lunch that he will value most highly. However, if you are having lunch with him, so that the lunch is a mixture of Category III and Category IV, you do have a strong incentive to satisfy your own tastes at the sacrifice of his, if necessary.

All welfare programs fall into either Category III – for example, Social Security which involves cash payments that the recipient is free to spend as he may wish; or Category IV – for example, public housing; except that even Category IV programs share on feature of Category III, namely, that the bureaucrats administering the program partake of the lunch; and all Category III programs have bureaucrats among their recipients.

In our opinion these characteristics of welfare spending are the main source of their defects.

Legislators vote to spend someone else’s money. The voters who elect the legislators are in one sense voting to spend their own money on themselves, but not in the direct sense of Category I spending. The connection between the taxes and individual pays and the spending he votes for is exceedingly loose. In practice, voters, like legislators, are inclined to regard someone else as paying for the programs the legislator votes for directly and the voter votes for indirectly. Bureaucrats who administer the programs are also spending someone else’s money. Little wonder that the amount spent explodes. The bureaucrats spend someone else’s money on someone else. Only human kindness, not the much stronger and more dependable spur of self-interest, assures that they will spend the money in the way most beneficial to the recipients. Hence the wastefulness and ineffectiveness of the spending.

But that is not all. The lure of getting someone else’s money is strong. Many, including the bureaucrats administering the programs, will try to get if for themselves rather than have it go to someone else. The temptation to engage in corruption, to cheat is strong and will not always be resisted or frustrated. People who resist the temptation to cheat will use legitimate means to direct the money to themselves. The will lobby for legislation favorable to themselves, for rules from which they can benefit. The bureaucrats administering the programs will press for better pay and prerequisites for themselves – an outcome that larger programs will facilitate.

The attempt by people to divert government expenditures to themselves has two consequences that may not be obvious. First, it explains why so many programs tend to benefit middle-and upper-income groups rather than the poor for whom they are supposedly intended. The poor tend to lack not only the skills valued in the market, but also the skills required to be successful in the political scramble for funds. Indeed, their disadvantage in the political market is likely to be greater than in the economic. Once well-meaning reformers who may have helped to get a welfare measure enacted have gone on to their next reform, the poor are left to fend for themselves and they will almost always be overpowered by the groups that have already demonstrated a greater capacity to take advantage of available opportunities.

The second consequence is that the net gain to the recipients of the transfer will be less than the total amount transferred. If $100 of somebody else’s money is up for grabs, it pays to spend up to $100 of your won money to get it. The costs incurred to lobby legislators and regulatory authorities, for contributions to political campaigns, and for myriad other items are a pure waste – harming the taxpayer who pays and benefiting no one. They must be subtracted from the gross transfer to get the net gain – and may, of course, at times exceed the gross transfer, leaving a net loss, not gain.

These consequences of subsidy seeking also help to explain the pressure for more and more spending, more and more programs. The initial measures fail to achieve the objectives of the well-meaning reformers who sponsored them. They conclude that not enough has been done and seek additional programs. They gain as allies both people who envision careers as bureaucrats administering the programs and people who believe that they can tap the money to be spent.

Category IV spending tends also to corrupt the people involved. All such programs put some people in a position to decide what is good for other people. The effect is to instill in the one group a feeling of almost God-like power; in the other, a feeling of childlike dependence. The capacity of the beneficiaries for independence, for making their own decisions, atrophies through disuse. In addition to the waste of money, in addition to the failure to achieve the intended objectives, the end result is to rot the moral fabric that holds a decent society together.

Another by-product of Category III or IV spending has the same effect. Voluntary gifts aside, you can spend someone else’s money only by taking it away as government does. The use of force is therefore at the very heart of the welfare state – a bad means that tends to corrupt the good ends. That is also the reason why the welfare state threatens our freedom so seriously.