Thursday, March 24, 2011

Spending Other People's Money

Walter Bagehot noted that 'the most melancholy of human reflections, perhaps, is that on the whole, it is a question whether the benevolence of mankind does more good or harm.' One reason I'm against the increase in government spending is because I find government to be a really bad manager, which is what you should expect when there's no bottom line that disciplines the process. Within a profit-making company hard decisions to fire someone or discontinue some activity are made all the time because of necessity. Without this necessity, these hard decisions aren't made at every level.

Case in point, Madonna put up $11MM to start a school for girls in Malawi. It has been abandoned after they spent $3.8MM on nothing:
"Despite $3.8 million having been spent by the previous management team, the project has not broken ground, there was no title to the land and there was, over all, a startling lack of accountability on the part of the management team in Malawi and the management team in the United States,” he said. “We have yet to determine exactly what happened to all of that $3.8 million. We have not accounted for all the funds that were used."

At least here, with a direct line between the financier and the project, it was stopped. If it were US federal money it would be considered 'stimulus', and thus a success.


Anonymous said...

First of all, I would like to congratulate you on your great blog and book, Finding Alpha. I read your blog regularly and consider it to be a great source of ideas and original thinking.

Eric, have you read about ideas in MMT (Modern Monetary Theory)?

Here's a good primer:

Some basic tenets:
1. "Government deficit spending credits the private sector and payment of taxes debits the private sector"

2.Governent taxes in order to create demand for its currency.

3. "It (the govt.) does not finance spending via revenues or debt issuance. The US government, as a monopoly supplier of currency in a floating exchange rate system simply spends."

Would be nice to hear your comments on the subject.


Eric Falkenstein said...

I'm not that cynical...there is some independence between the Federal Reserve and the US Treasury, they are not synonymous. Seigniorage is an important source of revenue for the US government, but it is still relatively small (3%?), and taxes are 'real'--they could be in coconuts or gold. Fiat money is a fascinating thing, and having it be legal tender for taxes is important in establishing it's value.

AHWest said...

From Atlas Shrugged:

“I’m entitled to an explanation! You owe your stockholders an account of the whole disgraceful affair! Why did you pick a worthless mine? Why did you waste all those millions? What sort of rotten swindle was it?”

Francisco stood looking at him in polite astonishment. “Why, James,” he said, “I thought you would approve of it.”


“I thought you would consider the San Sebastián Mines as the practical realization of an ideal of the highest moral order. Remembering that you and I have disagreed so often in the past, I thought you would be gratified to see me acting in accordance with your principles.”

“What are you talking about?”

Fransisco shook his head regretfully. “I don’t know why you should call my behavior rotten. I thought you would recognize it as an honest effort to practice what the whole world is preaching. Doesn’t everyone believe that it is evil to be selfish? I was totally selfless in regard to the San Sebastián project. Isn’t it evil to pursue a personal interest? I had no personal interest in it whatever. Isn’t it evil to work for profit? I did not work for profit–I took a loss. Doesn’t everyone agree that the purpose and justification of an industrial enterprise are not production, but the livelihood of its employees? The San Sebastián Mines were the most eminently successful venture in industrial history: they produced no copper, but they provided a livelihood for thousands of men who could not have achieved in a lifetime, the equivalent of what they got for one day’s work, which they could not do. Isn’t it generally agreed that an owner is a parasite and an exploiter, that it is the employees who do all the work and make the product possible? I did not exploit anyone. I did not burden the San Sebastián Mines with my useless presence; I left them in the hands of the men who count. I did not pass judgment on the value of that property. I turned it over to a mining specialist. He was not a very good specialist, but he needed the job very badly. Isn’t it generally conceded that when you hire a man for a job, it is his need that counts, not his ability? Doesn’t everyone believe that in order to get the goods, all you have to do is need them? I have carried out every moral precept of our age. I expected gratitude and a citation of honor. I do not understand why I am being damned.”

Matthew Gunn said...

If it were aid it would be considered a success as aid is often measured in dollars spent rather than results delivered.

Anonymous said...

Yes, charity isn't easy, but I'd rather have people try to do charity than sit on their money while the parasitic wealth management sector of the economy feasts on it.

Dave said...

Is the problem government spending per se or the quality of government in places such as the U.S. and Malawi? Aren't there examples of countries where government spending is a large share of GDP that have enviable infrastructure and quality of life to show for it (e.g., France? The Netherlands? Sweden?)?

Anonymous said...


It is true that some European countries (I would include Sweden, but certainly not France) have large amounts of government spending that isn't so bad. There are problems with this, however: almost all of the Swedish government's revenues come from income taxes. Taxation and regulation of the economy is much freer than it is in the U.S., and is generally not captured by special interests to the same degree.

Is it possible to replicate this? There are underlying governmental institutions and voting preferences that are essentially unmovable. What works in Sweden may not work in other places.

And let's not forget that Sweden's GDP per capita is still far below that of the U.S.

Anonymous said...

Yawn... Here you go again, Eric, government bad, private sector good. Don't you ever get fed up with your manicheistic views and your narrow binary vision?

Case in point, the FAA and the safety record of civil aviation. But I guess you'll argue that flying would be even safer if we had just left the airlines self organize...

Anonymous said...

"Case in point, the FAA and the safety record of civil aviation. But I guess you'll argue that flying would be even safer if we had just left the airlines self organize..."

Are we supposed to take it on faith? Eric's incentive-based argument is certainly not airtight, but assuming conclusions is not even an argument.

Try again.

Dross said...

The FAA provides a product with measureable results, ie death.

Unlike most government ventures, there is a yardstick to measure and everybody understands that yardstick.

But have said, FAA is way more the exception rather than the rule. And how clever of you to pick such an unusual example of government success.

Why don't you take something more exciting to prove government effectivess? How about HUD?

Mat Stroller said...

The FAA provides a product with measureable results, ie death.

Yes, but to make a comparison one needs at least two values.

I'm not saying that the FAA is ineffective, only that knowing the results of one option is not enough to compare multiple options. It applies in the other direction too: the government doing a terrible job with something is not evidence that the private sector would be able to provide a better solution.

miracle2u said...

Spending other peoples money is really an interesting article! I like this kind of article, thanks for writing!