Among the favorite lessons taught by the great economist Milton Friedman were the four ways in which money can be spent. There are only four ways and each of them put into motion very different, but easily understood, incentives and dynamics.
The first way is to spend our own money on ourselves. Since money is a limited resource, not easily replaced, we all want to maximize our buying power. We are more likely to comparison shop, discover ways to obtain discounts and explore more economical alternatives. When we spend our own money on ourselves, we are not only incentivized to get the most out of our money, we obtain exactly what was desired. After all, only the individual user of a product or service is in a position to accurately weigh whether the value merits the cost. It’s an excellent expenditure when both value and satisfaction result.
The second way to spend money is to spend our own money on someone else, as when buying a gift. As in the first way, we seek to get the most for our money but this becomes difficult since we cannot know how much the recipient will value the expenditure. Perhaps we choose something we like, hoping they like it as well. Or, maybe we take a guess at what we think they will want, based on an observation or a comment. In the end, we cannot know if the purchase was wise or not until after the fact, making this expenditure a bit of a crapshoot.
The third way money can be spent is to spend someone else’s money on ourselves. This is everyone’s favorite way to spend money. It is the dynamic involved when having lunch on the company’s expense account. Let’s say the company allows $30 per meal. The incentive is no longer to be concerned with value but to be solely focused on obtaining the desired result. With no additional acquisition cost to consider, you might opt for the $25 crab sandwich whereas a $7 tuna sandwich would have otherwise sufficed. While the odds of satisfaction for this type of expenditure are extremely high, incentives to produce dollar-stretching value is extremely low.
The fourth way to spend money is to spend someone else’s money on someone else. As in the third way, spending someone else’s money does not incentivize frugality. And, as in the second way, there is no means of knowing if whether the expenditure targets the recipient’s need or desire. There is no downside to wasteful or excessive spending and no accountability for failure to produce satisfaction, making this the most ineffective of all spending methods. It is also how all government monies are spent.
According to the U. S. Bureau of Economic Analysis, our 635 federal representatives spent 37 percent of total the U. S. production in 2022 on large spending bills, often never read, opening the door even wider to staggering levels of waste, fraud, abuse and corruption.
The lofty intentions of big spending programs — such as, the Inflation Reduction Act or the American Rescue Plan — were highly touted by government pitchmen and their media allies, while a stunning record of recent multi-billion dollar fiascos go largely ignored, such as:
$163 billion in fraudulent or mistaken COVID-related unemployment payments, including checks to incarcerated felons.
$20B sent to Ukraine is unaccounted for.
$3 billion to re-sand beaches -- even as this new sand washes back into the ocean.
$13 billion in Iraq aid has been classified as wasted or stolen with another $7.8 billion that cannot be accounted for.
$25 billion spent annually maintaining unused or vacant federal properties.
$100 billion in welfare fraud, abuse, and improper payments
More than $60 billion annually in Medicare fraud.
$125 billion worth of military waste.
Moreover, government’s serial lack of fiscal prudence has trapped us into an enormous debt with crushing interest payments. How costly is borrowing $31 trillion? This past December, the government virtually torched $103 billion of confiscated tax dollars, just to pay interest on the debt for the first two months of the 2023 fiscal year.
When self-serving politicians and disinterested bureaucrats are unleashed to spend other people’s money, we see Sam Bankman-Fried style accountability. There is little incentive for efficiency, prudence, accountability or satisfaction. That is why the money spent by bureaucrats should be strictly limited to the essential functions of government. To the greatest possible degree, spending should be done by those who produced the wealth.
Milton Friedman understood the predicament of the American taxpayer. He would attempt to provide some consolation, saying that, in some regard, we should all be grateful for government incompetence and wasteful spending. He pointed out that if government used their resources efficiently, we would all be slaves by now
.