An explanation, an experiment, and a parable about Milton Friedman's Four Ways To Spend Money

Here's a chart showing Milton Friedman's famous Four Ways To Spend Money. 

Here's a 2004 interview with Friedman, in which he explains the famous Four Ways To Spend Money.  (All government spending is in that nasty bottom right quadrant, BTW.  Any project that is advertised in terms of number of "jobs created" is a waste.  I'm just sayin'....)

There are four ways to spend money. You can spend your own money on yourself. When you do that, why you really watch out for what you're 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, I'm not so careful about the content of the present, but I'm very careful about the cost. Then, I can spend somebody else's money on myself. And if I spend somebody else's money on myself, then I'm going to have a good lunch! Finally, I can spend somebody else's money on somebody else. And if I spend somebody else's money on somebody else, I'm not concerned about how much it costs, and I'm not concerned about what I get. And that's government. And that's close to 40 percent of our national income.

Here's something from MSN Money, posted about a month ago.  It's an experiment that confirms Friedman's hypothesis about the top right and bottom left quadrants of the chart.  If you're helping someone else spend their money, or they're helping you spend yours, more money will be spent, often on silliness....

You and your friends are eating out and you plan to divide the tab evenly. Now you're faced with a dilemma. Do you splurge at the expense of your friend's pocketbook, or do you eat light, knowing you're going to end up paying for your friend's lavish meal? 

This seemingly innocuous event has caused enough consternation that a group of three scientists actually performed field experiments to see how unscrupulous people really are. 

According to io9.com, the experiment went a little like this: A group of strangers gather to eat at a restaurant. The participants are each told how they will pay for their meal. Some will pay individually, some are told they will split the check, and the remaining people are told that the meal will be free. 

The diners then ordered their meals without anyone else seeing what they had chosen.

The results of the dining experience are described by io9.com:

To no one's surprise, the people who paid individually were the most frugal, the people getting the free lunch were most extravagant, and the people who split the bill were in the middle, and therefore slightly unscrupulous.

Some diners were then told that they would have to pay just one-sixth of the cost of their individual meal. There was no difference between what those diners ate compared to those who were told they had to split the bill evenly, according to io9.com.

But what happens when you're in a large group of anonymous people?  Here's something from the immortal Russ Roberts, writing waaaaay back in 1995.  This essay, called "If you're paying, I'll have Top Sirloin", has already made it into the Libertarian Literary Canon.  The entire parable is scraped and reposted here, just to make my point....

As Congress prepares to try to cut spending, I am reminded of an evening last fall at the St. Louis Repertory Theater, our local company. Before the curtain rose, the company's director appeared and encouraged us to vote against a ballot proposition to limit state taxes. He feared it would lead to reduced funding for the company.

I turned to the woman sitting next to me and asked her if she felt guilty knowing that her ticket was subsidized by some farmer in the "boot-heel" of Missouri. No, she answered, he's probably getting something, too. She seemed to be implying that somehow, it all evened out.

I left her alone, but I wanted to say, no it doesn't even out. If it "evened out" for everybody, then government spending would really be depressing: all that money shuffled around, all those people working at the IRS, all those marginal tax rates discouraging work effort just to get everybody to get the same deal.

Here in St. Louis we recently completed Metrolink, a light rail system. It cost $380 million to build. We locals contributed zero out of pocket. It was paid for by the rest of the country. Shouldn't we feel guilty making people in Kentucky, Mississippi and Maine pay for our trips to the hockey arena downtown? No, say the beneficiaries. After all, we paid for BART in San Francisco and MARTA in Atlanta and all the other extraordinarily expensive, underutilized public transportation systems whose benefits fall far short of their costs. It's only fair we get our turn at the trough.

This destructive justification reminds me of a very strange restaurant.

When you eat there, you usually spend about $6—you have a sandwich, some fries and a drink. Of course you'd also enjoy dessert and a second drink, but that costs an additional $4. The extra food isn't worth $4 to you, so you stick with the $6 meal.

Sometimes, you go to the same restaurant with three friends. The four of you are in the habit of splitting the check evenly. You realize after a while that the $4 drink and dessert will end up costing you only $1, because the total tab is split four ways. Should you order the drink and dessert? If you're a nice person, you might want to spare your friends from having to subsidize your extravagance.

Then it dawns on you that they may be ordering extras financed out of your pocket. But they're your friends. They wouldn't do that to you and you wouldn't do that to them. And if anyone tries it among the group, social pressure will keep things under control.

But now suppose the tab is split not at each table but across the 100 diners that evening across all the tables. Now adding the $4 drink and dessert costs only 4¢. Splurging is easy to justify now. In fact you won't just add a drink and dessert; you'll upgrade to the steak and add a bottle of wine. Suppose you and everyone else each orders $40 worth of food. The tab for the entire restaurant will be $4000. Divided by the 100 diners, your bill comes to $40. Here is the irony. Like my neighbor at the theater, you'll get your "fair share." The stranger at the restaurant a few tables over pays for your meal, but you also help subsidize his. It all "evens out."

But this outcome is a disaster. When you dine alone, you spend $6. The extra $34 of steak and other treats are not worth it. But in competition with the others, you've chosen a meal far out of your price range whose enjoyment falls far short of its cost.

Self-restraint goes unrewarded. If you go back to ordering your $6 meal in hopes of saving money, your tab will be close to $40 anyway unless the other 99 diners cut back also. The good citizen feels like a chump.

And so we read of the freshman Congressman who comes to Congress eager to cut pork out of the budget but in trouble back home because local projects will also come under the knife. Instead of being proud to lead the way, he is forced to fight for those projects to make sure his district gets its "fair share."

Matters get much worse when there are gluttons and drunkards at the restaurant mixing with dieters and teetotalers. The average tab might be $40, but some are eating $80 worth of food while others are stuck with a salad and an iced tea.

Those with modest appetites would like to flee the smorgasbord, but suppose it's the only restaurant in town and you are forced to eat there every night. Resentment and anger come naturally. And being the only restaurant in town, you can imagine the quality of the service.

Such a restaurant can be a happy place if the light eaters enjoy watching the gluttony of those who eat and drink with gusto. Many government programs generate a comparable wide range of support. But many do not. How many Americans other than farmers benefit from the farm subsidy programs? How many Americans other than train riders derive benefit from the Amtrak subsidy?

People who are overeating at the expense of others should be ashamed. That shame will return when others are forced to cut back too. This requires deep cuts and an end to the government smorgasbord where the few benefit at the expense of the many.

There you have it.  The original Milton Friedman theory, a real-life experiment, and a Russ Roberts parable, all illustrating why government spending is generally a disaster. 
If you want someone to do a better job of pulling all this together, go elsewhere.  This is the best I can do. 
Here are some more charts, extravagantly posted on my site for your benefit, because I downloaded them from elsewhere at no expense to myself (ahem). 

Happy Father's Day

Here's a picture of my father, the late Donald Gene Patterson, and my daughter, The Aggie. 
My father was the greatest man I've ever known.  The End.  Full Stop. 

There was a time during the "Men's Movement" scare of the late 1980's early 1990's, where men would go out into the woods and sit in drum circles and take turns slamming their fathers. 

I have no idea, no background, or no experiences to help me fathom what those guys were talking about.  Lucky me. 

If you visit this site regularly, what you're reading is merely an expansion of what I learned riding around our farm in his pickup truck.  While he would've never supported, say, the right to use marijuana or gay marriage, I believe he was doing the best he could with the light that he had to see by. 

I miss him so very much. 

BTW, for Father's Day, The Aggie gave me an original drawing of Peyton Manning, our football hero.  Pretty dang cool. 

People who didn't get what they wanted for Christmas

To see the complete list, go here.

An Apology To My Online Friends In The British Commonwealth

Hello all,

As you know, we don't think much of royalty in the U.S. As you know, in the United States, we worship the idea of royalty. We re-elect Kennedys and Bushes, and we used to go ga-ga over Princess Diana.

Giving a boxed set of DVD's to Prime Minister Gordon Brown was perhaps excusable as a rookie mistake.
Giving the Queen an iPod was not.
Especially an iPod that contains Barbra Streisand singing "People". (See the song list in the previous link.)

I hope this will do nothing to harm what Churchill called "The Special Relationship" between our countries.

Once again, my apologies. We're still working on things like which fork to use.

-TWS

Whoopi Goldberg on taxes

Here's Whoopi Goldberg on her taxes:


She goes off on a rant about being overtaxed, nickeled and dimed on her phone bill. Some of her co-hosts then praise the 50% tax rates in Denmark. You can read the entire transcript here.

Whoopi Goldberg has been criticized in a few places for making lots of money and then griping about paying higher taxes.
I support her 100%, and hope that her tribe increases.
But I do have a problem with a few of Whoopi's opening statements, mostly the preliminary sugar coating she tried to put on her anti-tax rant:

Well, I’ll tell you, I don’t mind paying taxes because I know I make a lot of dough and you want to give some.

I give some. I wish I could give more. But what Whoopi is talking about is NOT giving. It's called taxation. It's taking money from Whoopi, by force, so other people can spend it on their pet projects.
"Giving" is the relationship you have to your favorite charity, a neighbor in trouble, your church or synagogue, or the Chinese Democracy Fund.
I'll bet dollars to donuts that Whoopi Goldberg has a tax accountant. So do her high-tax advocating, Denmark-loving hosts on "The View". The accoutant's job is to ensure that Whoopi gets to hang onto as many of her hard-earned dollars as possible. "Giving" be damned.

Okay? That’s the way it’s supposed to be. That’s the way it’s supposed to be because if you have you want to give.

But when someone dies and leaves a will giving all his money to the Federal Government, it makes the news.
Why?
Because we know that the deceased was probably out of his freakin' mind. People don't voluntarily give their money to the government.

One of Tarrant Liberty Guy's favorite arguments goes like this..... Say you won a lottery, and wanted to help humanity. To which charities would you donate? How far down the list would you have to go before considering The Department Of Health And Human Services ?

Because Wal-Mart Gift Certificates Would've Seemed Tacky

I haven't been keeping up with She Whose Name Is Not Spoken. Turns out that she's been in Russia.
Here's David Cloud, writing for Politico.

After promising to “push the reset button” on relations with Moscow, Secretary of State Hillary Clinton planned to present Russian Foreign Minister Sergei Lavrov with a light-hearted gift at their talks here Friday night to symbolize the Obama administration’s desire for a new beginning in the relationship.

It didn’t quite work out as she planned.

She handed him a palm-sized box wrapped with a bow. Lavrov opened it and pulled out the gift—a red plastic button on a black base with a Russian word “peregruzka” printed on top.


“We worked hard to get the right Russian word. Do you think we got it?” Clinton said as reporters, allowed in to observe the first few minutes of the meeting, watched.

“You got it wrong,” Lavrov said, to Clinton’s clear surprise.

Instead of "reset," he said the word on the box meant “overcharge.”



Oh well, it's only the freakin' State Department. They shouldn't be expected to have any staff members who speak Russian.

There was another exchange of gifts going down....This gift swap was between President Obama and British Prime Minister Gordon Brown.

Brown.... gave the president and his children several uniquely historical gifts.
The first of which is a pen holder fashioned from the oak timber of HMS Gannet, a Navy vessel that served on anti-slavery missions off Africa.
Another treasure given to Obama is a framed commissioning paper for the HMS Resolute, a Royal Navy ship that came to symbolize British-American goodwill when it was rescued by the U.S. from icebergs and given to Queen Victoria. It is the sister ship of the HMS Gannet.
Finally, Brown gave Obama a first edition of Martin Gilbert's seven-volume biography of Winston Churchill, whose World War II partnership with President Franklin Roosevelt symbolized the U.S.-Anglo alliance.
For Sasha and Malia, Sarah Brown, the Prime Minister's wife, gave each an outfit from Topshop, a British chain of clothing stores, and selected six children's books by British authors which have yet to be published in the U.S.

Lordy, that's impressive. The Martin Gilbert 1st editions are to kill for, BTW. And what did we give the British Prime Minister?

President Obama on Thursday gave British Prime Minister Gordon Brown a set of 25 classic American movies to mark his historic visit to the White House.
Brown, the first European leader to visit Obama since his Jan. 20 inauguration, was presented with a "special collector's box" of DVDs during his two-day visit to Washington.
Downing Street, which reportedly tried to keep the present a secret, declined to say what movies were included in the set.
One reason for the secrecy might be that the gift seems markedly less generous and thoughtful than the presents taken to Washington by the Prime Minister," London's Evening Standard newspaper reported.

Well, yeah. Imagine giving someone a desk set whittled out of a legendary ship, and getting a copy of E.T. in return.

The Daily Mail, however, reported the movie set included ET, Star Wars and The Wizard of Oz and was produced by the American Film Institute on "special request" from the White House.

Produced by "special request" ? Horsecrap. I bet they sent an intern to pick them up at a Sam's Club.

Anyway, these are the people who want to take over medicine, the banks, more of education, Wall Street, GM, and the weather.

I'm sure they'll get it right.