Home > Economics > Giving away other people’s money

Giving away other people’s money

March 31, 2010

Politics is strange. If I were to come to your house and take $100 of your money, then spend that money on a bicycle, and then give you the bicycle, you probably wouldn’t thank me. Indeed, you would probably be annoyed. But if a sitting politician does the exact same thing, then they are held up as heroes and thanked for their generosity. Weird.

Yesterday the ABC reported that people in Griffith (the electorate where I will battle Kevin Rudd) were publicly thanking Kevin Rudd for giving them a bicycle. Of course, the truth is that Kevin did not pay for the bicycle himself, but instead took the money from Australian workers and consumers. The thank you note should be written to the Australian taxpayer.

Giving away other people’s money makes for good politics. Everybody likes Santa… so when politicians run around handing out “free” gifts, they are sometimes able to buy support. But unfortunately, it can lead to bad outcomes. Milton Friedman identified four ways of spending money. Either you spent your money on yourself; your money on other people; other people’s money on yourself; or other people’s money on other people.

Friedman goes on to explain that when you use your own money you have a relatively higher concern for value, and when you spend on yourself you are relatively better at picking the right thing. But if you spend other people’s money on other people, then there is a higher risk that you will be wasteful and end up buying the wrong thing. That has been the story of the schooling building projects.

Another example of this was reported today, where parents at a school in the electorate of Griffith have complained of waste, and have been involved in a draw-out battle to swap their unneeded duplicate library for eight new classrooms.

There has been quite a bit of coverage lately about the various waste and mistakes in the school building scheme. The important thing to note here is that these aren’t just bugs in the system, but that waste and mistakes are a fundamental part of these types of rushed government projects.  Either the government knew this was bad policy and went ahead with it anyway, or (more worryingly) the government didn’t properly understand the inevitable consequences of their policies.

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