Milton Friedman used to elegantly distinguish between four ways of spending money. First, when you spend your own money on yourself, you are very careful to get the most benefit for your buck. After all, it is your money and you know what you want for yourself. Second, when you spend your own money on someone else. Here too you carefully economize to meet your objective but since you don’t know the other person’s needs as well as you do your own needs, your spending may not be as optimal for the other person. Third, you spend other people’s money on yourself. In this case, your incentive to economize is certainly blunted. You are much more concerned with getting the best and less with what it will cost.
Finally, when you spend other people’s money on someone else. That is, you transfer resources from one group to another group. In such cases, economizing goes out the window, and what is worse, you promote your own ends rather than the ends of those whose money you are spending or those who are the ostensible beneficiaries of the transfer. The most ubiquitous example of this is what he calls the “distributor of welfare funds” — taxpayers money being spent by government officials for welfare. Here’s Friedman in his own words:
The economic efficiency of spending is worth paying attention to. It means using the least cost method to achieve the desired objective. When it isn’t your own money, how much you spend does not matter. Economic efficiency suffers when other people’s money is spent on some other people. As C. Northcote Parkinson noted, when money is no object the only economizing done is in thinking.
But there is one really pernicious effect of spending other people’s money on others. It leads to what economists call “moral hazard” and “opportunistic behavior.” The spender of other people’s money often uses it the manipulate the beneficiaries of the spending. Government officials use taxpayers’ money to buy votes by distributing goodies to preferred groups. The power to tax and spend is dangerous as power usually is: it tends to corrupt.
Senator Crockett and Mr Bunce
A few months ago I came across a piece titled “Not Yours to Give.” It is attributed to a speech by Tennessee Congressman Colonel David Crockett in 1828. The story about Crokett’s speech is probably not historically accurate but the lesson is highly important and relevant.
Briefly this is the story. Congressman Crockett on his re-election campaign meets a voter, one Mr. Horatio Bunce, a farmer. Bunce tells Crockett that while he voted for him at the last election, he will not do so this time. Why? Bunce explains, because —
Horatio Bunce: “… you gave a vote last winter which shows that either you have not capacity to understand the Constitution, or that you are wanting in the honesty and firmness to be guided by it. In either case you are not the man to represent me. … I believe you to be honest. But an understanding of the Constitution different from mine I cannot overlook, because the Constitution, to be worth anything, must be held sacred, and rigidly observed in all its provisions. The man who wields power and misinterprets it is the more dangerous the more honest he is.”
Davy Crockett: “I admit the truth of all you say, but there must be some mistake about it, for I do not remember that I gave any vote last winter upon any constitutional question.”
HB: “No, Colonel, there’s no mistake. . . . My papers say that last winter you voted for a bill to appropriate $20,000 to some sufferers by a fire in Georgetown. Is that true?”
DC: “Certainly it is, and I thought that was the last vote which anybody in the world would have found fault with.”
HB: “Well, Colonel, where do you find in the Constitution any authority to give away the public money in charity?”
DC: “Well, my friend; I may as well own up. You have got me there. But certainly nobody will complain that a great and rich country like ours should give the insignificant sum of $20,000 to relieve its suffering women and children, particularly with a full and overflowing Treasury, and I am sure, if you had been there, you would have done just as I did.”
HB: “It is not the amount, Colonel, that I complain of; it is the principle. In the first place, the government ought to have in the Treasury no more than enough for its legitimate purposes. But that has nothing to do with the question. The power of collecting and disbursing money at pleasure is the most dangerous power that can be entrusted to man, particularly under our system of collecting revenue by a tariff, which reaches every man in the country, no matter how poor he may be, and the poorer he is the more he pays in proportion to his means. …
“So you see, that while you are contributing to relieve one, you are drawing it from thousands who are even worse off than he. If you had the right to give anything, the amount was simply a matter of discretion with you, and you had as much right to give $20,000,000 as $20,000. If you have the right to give to one, you have the right to give to all; and, as the Constitution neither defines charity nor stipulates the amount, you are at liberty to give to any and everything which you may believe, or profess to believe, is a charity, and to any amount you may think proper. You will very easily perceive what a wide door this would open for fraud and corruption and favoritism, on the one hand, and for robbing the people on the other.
“No, Colonel, Congress has no right to give charity. Individual members may give as much of their own money as they please, but they have no right to touch a dollar of the public money for that purpose. … There are about two hundred and forty members of Congress. If they had shown their sympathy for the sufferers by contributing each one week’s pay, it would have made over $13,000. There are plenty of wealthy men in and around Washington who could have given $20,000 without depriving themselves of even a luxury of life. The congressmen chose to keep their own money, which, if reports be true, some of them spend not very creditably; and the people about Washington, no doubt, applauded you for relieving them from the necessity of giving by giving what was not yours to give.
“The people have delegated to Congress, by the Constitution, the power to do certain things. To do these, it is authorized to collect and pay moneys, and for nothing else. Everything beyond this is usurpation, and a violation of the Constitution.
“So you see, Colonel, you have violated the Constitution in what I consider a vital point. It is a precedent fraught with danger to the country, for when Congress once begins to stretch its power beyond the limits of the Constitution, there is no limit to it, and no security for the people. I have no doubt you acted honestly, but that does not make it any better, except as far as you are personally concerned, and you see that I cannot vote for you.” {Emphasis added.}
This story resonated very powerfully with me. Last year in March before I came across the Crockett speech, I had pondered the matter of government compensation of victims of tragedies in a piece that I had written for Quartz magazine, which I re-published here, “The Case Against Government Compensation of Crime Victims.”
Constitutionality
One of the reasons that Crockett’s speech appeals to me has to do with the emphasis that Mr Bunce places on the constitutionality of the government as the distributor of welfare funds. The US constitution, as Bunce notes, does not give the US Congress the power to give away public money in charity. The Congress was not authorized by the people (through the constitution) and therefore it is unconstitutional.
We should stress one matter here: merely because something is constitutional does not mean that it is good, and conversely, just because something is unconstitutional does not make it bad. What makes something good or bad depends on whether it accords with reason, regardless of what the constitution says. All said and done, constitutions are human artifacts and like everything else, not perfect. However, if much thought has gone in framing the constitution based on sound fundamental principles, then it makes sense to refer to it to settle matters easily. It should act as an authenticating mechanism: if something is unconstitutional, it is probably unsound.
And now to the main point of this piece: Why the government must not be in the business of distributing public money for charity. Simply put, it leads to a reduction of freedom and is un-democratic in principle. Let’s explore why it implies a reduction of freedom.
Collective Goods
One of the main purposes of a government is the provision of “collective goods” — goods that usually cannot be efficiently provided by the private sector — such as national defense, internal law and order, funding of public health, public sanitation, etc. These goods and services are such that they cannot be individually purchased and provided. You cannot go to the market and buy a unit of national defense like you can go and buy a pair of jeans. These have to be collectively financed and the benefits accrue to the collective without discrimination. Collective or public financing is done through taxation.
One of the components of freedom is to spend your earnings in whatever way you wish. To the extent that some of your earnings are taxed away by the government to finance collective goods, your financial freedom is curtailed. However, when the taxes you pay buys you something that you value — security, for instance — it takes on the characteristics of a trade. You are “buying” collective goods with your tax money. Therefore, this transaction can be seen as a trade, much like the trade when you buy a pair of jeans. Both can be viewed as a transaction entered into voluntarily.
Without going into the question of precisely what can be characterized as essential collective goods, we can label the taxing and spending on them as “non-discretionary” — the government has to do it and that is that. Any government spending beyond that is discretionary and therefore subject to the closest scrutiny. Why? Because the financing of discretionary items, taxes have to be imposed and that, as noted before, reduces your financial freedom.
Just to be clear, “freedom” means the absence of coercion and dictation by others. You are not free if someone is dictating to you on what you may or may not do, or if someone forcibly takes away your property. Thus when someone — perhaps your neighbor or your government — takes away part of your income to finance something that is not a collective good, your freedom gets eroded.
Statues of Dead Politicians
Let’s concoct an unrealistic example of discretionary spending. The politicians decide that they will build a gigantic statue of a well-known dead politician. It will cost $1.2 billion. Consequently the citizens lose $1.2 billion worth of “financial freedom” — they could have used that money as they would have deemed fit but instead they are forced to pay for a statue whether they approve of it or not. True, given a population of 1.2 billion, per capita the waste comes out to be only $1. But remember that for a poor person, every dollar counts. And whether a person is poor or not, it is the violation of a principle — that a person should not be coerced to pay for non-essentials — that is unethical and wrong.
Now it is conceivable that people may say that a country needs to recognize the greatness of great dead politicians by erecting massively impressive tall statues. Well in that case, let the people decide. Let it be a democratic decision, especially if it happens to be a so-called democracy. Let the people vote with their wallets and do so directly, and not indirectly through their elected representatives.
I am not against the government’s involvement in discretionary public projects such as statues of dead politicians. I am sure that the government has a role but only indirectly. What I am arguing for is that the discretion should be exercised by the people and not by government officials and bureaucrats. If the government has to be involved at all, that role has to be limited to providing a coordinating signal. Let the government announce that “there is a need to finance a massive statue of this dead politician, and so we have put a huge big donation collection box into which you can put your hard-earned money.”
That’s an example of direct democracy. People choose to put their money where their mouths are. There is no force or coercion involved. People vote with their wallets and if enough votes are collected, the massive statue gets erected without fuss.
Limited Government
Lately we have heard a lot about “minimum government and maximum governance.” To move beyond the rhetoric and into action, one way to achieve minimum government is for the government to vacate the space that legitimately belongs to the people. Let the people decide, not the politicians or the bureaucrats, what they want to spend their money on. Let the people decide unless of course the claim is that the people are too immature or incapable of deciding for themselves on such matters. But then that leads to an inconsistency: on the one hand people are held to be mature and capable enough of self-governance and hence a democracy; and on the other hand they are regarded to be so immature that they cannot be trusted to decide for themselves how they should spend their money.
That sort of inconsistency should be evident to all — expect that it somehow eludes those who are in government. However, that is understandable. Politicians and bureaucrats have an incentive to increase taxes and increase spending because not only does it increase their power but they also get to handle all the money with very sticky fingers.
Politicians and bureaucrats award contracts to their favored firms, get kickbacks and then during elections get funding from the owners of the beneficiary firms.
Charity
Of all the pernicious things that a government does, arguably the worst is when the government gets into the business of charity. That’s the kind that Mr Bunce took exception to. If politicians and bureaucrats want to support charity, they should do that with their own money, not the public’s money. They are free to contribute as much as they wish of their own money, and they should extend that freedom to everybody else. Let people decide how much they want to spend and on which charity.
I can honestly claim that I contribute to charity regularly. Why? Because I am moved by empathy and compassion towards my fellow beings. I not only receive the joy of giving without expectations of return, I also derive psychic satisfaction by exercising the freedom of deciding on whom or what I spend my money. I wish I had more money so that I could give more of it away. A favorite quote from Khalil Gibran’s The Prophet goes, “All you have shall some day be given; Therefore give now, that the season of giving may be yours and not your inheritors.”
When the government takes my tax money to spend on what it considers charity, it deprives me of my freedom to give freely, it deprives me of the joy of giving, and takes away a responsibility from me that I treasure. What is worse, when I forced to do something, I resent it even if that something is something that I would have otherwise voluntarily done.
When the government taxes me to do charity, it is to me morally and functionally equivalent to someone putting a gun to my head and robbing me to help a poor person. Regardless of what the money is going to be used for, robbery is immoral and unethical.
{To be continued.}
Investing is difficult.
