The best way to cut government waste is to cut government spending

Last week, the Office of the Legislative Auditor (OLA) released its fourth report on the $2.7 billion Southwest Light Rail Line (SWLRT). It found, according to the Star Tribune, that;

The Metropolitan Council failed to effectively enforce the main contract overseeing construction…making decisions that contributed to many of the project’s delays and cost overruns…

The OLA:

…recommended at a hearing Wednesday that the Met Council improve its construction management practices for big transportation projects like Southwest.

Phew, that’ll fix it!

Whenever one of these multi-million dollar disasters blows up, the inquiries always find the same thing: we need better oversight. It has become a mantra among policy aficionados driven more by reflex than reflection.

In a woolly minded recent editorial praising the ludicrous Northern Lights Express (NLX), the Star Tribune‘s Editorial Board wrote:

Republicans have expressed skepticism about the project based on its price tag, potential cost overruns and delays, and the somewhat hazy ridership projections. Those are all valid points to raise, and every effort should be made to ensure proper planning, transparency about any overruns or delays, and more up-to-date ridership projections so that the state has as few surprises as possible.

All that is needed to stop the NLX turning into the next SWLRT is – you guessed it – more oversight.

In another woolly minded opinion piece in the Star Tribune (which my colleague, Bill Glahn covered), Tom Horner, the 2010 Independence Party candidate for governor, wrote:

Good governance, though, includes tasks that Democrats often have ignored, starting with the need to impose accountability on all state spending. Taxpayers deserve specific measures to track what can be expected from the enormous investments and to provide absolute assurances that every dollar is being spent wisely.

One more for more oversight!

The truth is that we have all the oversight we need. As noted, the OLA is turning out reports on the SWLRT debacle at the rate Louis L’Amour cranked out novels and it is still a complete disaster. All this oversight isn’t working.

It doesn’t work for the very simple reason that, on average, with all the oversight in the world, nobody spends money as well as the person who earned it. As I’ve written before, the economist Milton Friedman explained back in 1980, in his classic book Free to Choose:

When you spend, you may spend your own money or someone else’s; and you may spend for the benefit of yourself or someone else. Combining these two pairs of alternatives gives four possibilities summarized in the following simple table:

Category I in the table refers to your spending your own money on yourself. You shop in a supermarket, for example. You clearly have a strong incentive both to economize and to get as much value as you can for each dollar you do spend.

Category II refers to your spending your own money on someone else. You shop for Christmas or birthday presents. You have the same incentive to economize as in Category I but not the same incentive to get full value for your money, at least as judged by the tastes of the recipient. You will, of course, want to get something the recipient will like—provided that it also makes the right impression and does not take too much time and effort. (If, indeed, your main objective were to enable the recipient to get as much value as possible per dollar, you would give him cash, converting your Category II spending to Category I spending by him.)

Category III refers to your spending someone else’s money on yourself—lunching on an expense account, for instance. You have no strong incentive to keep down the cost of the lunch, but you do have a strong incentive to get your money’s worth.

Category IV refers to your spending someone else’s money on still another person. You are paying for someone else’s lunch out of an expense account. You have little incentive either to economize or to try to get your guest the lunch that he will value most highly. However, if you are having lunch with him, so that the lunch is a mixture of Category III and Category IV, you do have a strong incentive to satisfy your own tastes at the sacrifice of his, if necessary.

Legislators vote to spend someone else’s money. The voters who elect the legislators are in one sense voting to spend their own money on themselves, but not in the direct sense of Category I spending. The connection between the taxes any individual pays and the spending he votes for is exceedingly loose. In practice, voters, like legislators, are inclined to regard someone else as paying for the programs the legislator votes for directly and the voter votes for indirectly. Bureaucrats who administer the programs are also spending someone else’s money. Little wonder that the amount spent explodes.

The bureaucrats spend someone else’s money on someone else. Only human kindness, not the much stronger and more dependable spur of self-interest, assures that they will spend the money in the way most beneficial to the recipients. Hence the wastefulness and ineffectiveness of the spending.

But that is not all. The lure of getting someone else’s money is strong. Many, including the bureaucrats administering the programs, will try to get it for themselves rather than have it go to someone else. The temptation to engage in corruption, to cheat, is strong and will not always be resisted or frustrated.

Government wastes money because it isn’t in anyone’s interests, strongly enough, at least, for government not to waste it. If you want less money wasted, funnel less of it through the hands of the government. The only really effective way to reduce government waste is to reduce government spending.