Skip to comments.(Vanity) Perverse Incentives, or, P.J. O'Rourke Meets Milton Friedman
Posted on 04/06/2009 8:55:29 PM PDT by grey_whiskers
The Nobel prize winning economist Milton Friedman had a brief description of how money is spent.
In an interview with Fox News in 2004, he said the following:
"There are four ways in which you can spend money. You can spend your own money on yourself. When you do that, why then you really watch out what youre doing, and you try to get the most for your money. Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then Im not so careful about the content of the present, but Im very careful about the cost. Then, I can spend somebody elses money on myself. And if I spend somebody elses money on myself, then Im sure going to have a good lunch! Finally, I can spend somebody elses money on somebody else. And if I spend somebody elses money on somebody else, Im not concerned about how much it is, and Im not concerned about what I get. And thats government. And thats close to 40% of our national income."
It would be like shooting fish in a barrel -- and a waste of time and effort -- to make the observation that things are even worse now, under Obama, and "Oh my God, what are we gonna DO?"TM So I won't do that. Instead, it will be instructive to parse his statement, and see how each one of the four cases have helped to land us in our present predicament.
1) You can spend your own money on yourself.
OK, if you do this, it is like taking money out of your bank account, going to the store, and buying groceries. Everyone has heard of comparison shopping. However, this observation is not always accurate. Typically, one has a threshold below which "it doesn't matter". In fact, there are two of them. One is a high threshold at which you consider the purchase carefully before deciding to buy at all, if you do end up buying, you comparison shop very carefully. The other one is a low threshold, and it comes into play once you've decided to buy an expensive item, or when it's a really cheap item in the first place. This one governs which brand or features you're going to pay for -- the absolute dollar amount is not the issue, but the percentage increase or decrease in the price of what you're going to buy, is the issue. To use the example of buying a car: once you decide to buy a car, you might then go ahead and price the Prius against the Corolla. Once you've committed to spending $15,000 - $20,000, you then haggle within your own mind over the deluxe stereo for $1000 more or less (is it worth the amortization?) or the remote keyless entry (or deluxe wheel package, whatever). $1000 is a lot of money, but it's a small item when you're already dropping $20,000.
2) You spend your money on somebody else
In this case, a birthday present is a good example. You want to be generous, but you don't want to break the bank. How many people go seriously into debt on a gift for someone else? But you want to get nice gifts in return -- except maybe for the in-laws -- so you can't be too much of a piker. Social and monetary costs reach a balance.
3) You spend somebody else's money on yourself.
Back before the recession, how many people have had an expense account at work? Say you get sent on a business trip to California. I'll bet you buy a better lunch than if you were paying for it yourself. This kind of spending is limited by your cleverness at hiding the costs, and the gullibility (or influence) you have over the person paying.
4) You spend somebody else's money on a third party.
He's right, that is goverment. At first blush. But in actuality, it goes a little deeper than that, which brings me to P.J. O'Rourke.
P.J. acutally paraphrased Friedman's statement as follows (warning, vulgar language) in his book All the Trouble in the World:
"1. You spend your money on yourself. You're motivated to get the thing you want most at the best price. This is the way middle-aged men haggle with Porsche dealers.
2. You spend your money on other people. You still want a bargain, but you're less interested in pleasing the recipient of your largesse. This is why children get underwear at Christmas.
3. You spend other people's money on yourself. You get what you want but price no longer matters. The second wives who ride around with the middle-aged men in the Porsches do this kind of spending at Neiman Marcus.
4. You spend other people's money on other people. And in this case, who gives a sh*t?"
The reason I bring up Mr. O'Rourke, aside from the humor, is that he has made another observation *very* relevant to our current economic crisis. To wit:
"When the legislature controls what is bought and sold the first thing that is bought and sold is legislators."
Keep in mind our new situation. The Teleprompter in Chief, in a rare unguarded moment during the campaign, admitted that he was driven by a vision of the Constitution which required the government to do things *for* you. And part and parcel of this, evidently, is the requirement that the government keep us safe from large executive bonuses. And tell us what kinds of cars we should drive (Four wheels bad, two wheels good, government wheels best!) And determine (remember Al Gore?) the amount of sewage we can flush through our septic tanks with "smart toilets"...otherwise known as the Incumbent Politician Protection Act. Which would be bad enough as it is. But of course, it is the government officials, and the members of Congress, who are to be in charge of determining what is bought, and sold, and how much. Which means...
it's the legislators who are being bought and sold!
So instead of applying O'Rourke's maxims to individuals, we need to apply it to both the bureaucrats, and to those who pay for them. And that means the lines get a little...blurred.
Rule 1, spending your own money on yourself. For the businsessmen, they think that this means spending *company* money on themselves -- golden parachutes, bonuses, lavish Caribbean vacations. (Or a worthwhile investment in a Congressman.) For the Congressmen, this means...fact finding missions, DC call girls, the bare necessities. (From *our* point of view, all of this is *our* money -- at least it was until it was taken from us under false pretences.)
Rule 2, spending your money on other people. For the businessman, this is simply paying benefits, insurance, retirement. All the things which should "obviously" be left to government, eh? And government agrees, to the extent that they can do it by bloated entitlement programs which create patronage jobs, or large buildings in the Congressman's home district with the Congressman's name emblazoned in 20-foot neon letters; a kind of architectural franking privilege. Again, for us poor
saps taxpayers, we'd fit under this too; except we're not the ones DOING this spending, as we see now.
Case 3 is spending OTHER PEOPLE's money on yourself. And here is where the wires get crossed. In reality, most of the money the Congressman spends, most of the money spent on the corporate headquarters, the executive retention bonuses, and the like, are not properly the actual property of those doing the spending. In fact they belong to the shareholders as a whole, or to the employees, or to the long-suffering taxpayers. But those in power belive it is theirs. THEIRS, do you understand?!!
And just a further twist. What happens when a Congressman is bought or sold by a commercial interest, by a pressure group, by a left-wing lobbyist?
Well, in that case, the lobbying (or bribe) money spent by the business or pressure group is other people's money spent on themselves (to get the policy or law or "consideration" they SO richly want and deseerve), so cost is no object, as long as their goals are attained. And here is where the perverse incentive comes in. Our constitution decreed that the legislators would be answerable to the people and would pass laws reflecting the peoples' will, tempered by the judgement of sober statesmanship. But with the prevalence of money in re-election campaigns, and the advent of expensive lobbyists, the legislators' loyalties are divided. They must pay lip service to the people, and must do things which look like (or can be made to look like, on TV and campaign stops) that they represent the people. But in actuality, it is the needs and wants of the lobbyists, the funding powers-that-be, which win out.
In other words, look at it like this. To the lobbyist his goal is to make money by using the politician to make laws which help his company to get rich. To the politician, the goals are not this policy or that regulation: his goal is to stay in office! So a politician takes money from a lobbyist, keeps it himself, and spends *taxpayer* money in return. Not to make himself happy, certainly not to make the taxpayer (actually) happy, but to make the lobbyist happy! Money spent to please a lobbyist thus falls all the way from Case 1 ("I want electric cars!" to Case 3 ("I'm buying my re-election!"). So in the actual legislation which is passed, the bureacracies and laws which are made, the expenditures authorized by the bought-and-paid-for legislator fall squarely under Case 4: You spend other people's (lobbyist and tax dollars) money on other people (the constituents).
"...and in this case, who gives a sh*t?"
#1 presumes you have any money left.
We need Milton Friedman back!
Would anyone like a bowl of fault-ridden chocolate pudding skin?
And all of this explains why health care is so expensive. Since insurance is going to pay for our doctor bills and prescription medicine none of us ever ask a doctor what something is going to cost. The doctor, knowing we don’t care what it costs is just as likely to prescribe procedures that will satisfy us he is doing SOMETHING to help us get better, even though pain medication and time may offer the obvious cure. No one shops around for the balance of quality and cost when finding a family doctor, nor do we ever ask the pharmacy what the generic versus name brand price difference is unless we are going to be stuck with the additional cost. If we want to make health care more affordable and available to more people we need to fix our insane insurance system.
The Obama-voter majority has contributed to the screwing of both themselves and the rest of us. Sucks.
The best analogy I’ve heard is if you got a food card when you went to work for a company. It could be used to buy food whenever you wanted, with the company’s food insurance company picking up the bill. Some restrictions on where and how you spent the money, but it could be used at both restaurants and grocery stores.
Anybody want to place a bet on how wisely people would spend “their” food insurance money?
“Anybody want to place a bet on how wisely people would spend their food insurance money?”
There are probably a million analogies to compare how skewed health insurance works against other forms of insurance. If you could insure your house for any and all repairs, you’d never ask what the repairs were going to cost, you’d opt for the most expensive materials, and have things repaired that were not necessary. The cost of home repairs would skyrocket to the point where people without the insurance could not afford to even have a new roof put on their house. Insurance should be about catastrophic incidents that people can’t control, like home fires, car crashes, and major hospital bills. Insurance should not cover things that happen routinely to people as part of normal life events.
You left out the radio ads near the end of the year imploring people to come in and get new glasses or “lose” the vision benefit for that year.
I think you've just discovered a general principle.
on the Wealth of Nations
by P J O'Rourke
read by Michael Prichard