Government Spending: A Cause of Inefficiency

We often hear that government is inefficient:  They spend too much, they take too much time to provide services, they do not provide quality services, they have too many checkpoints, and so on. But who or what is government? Are employees not the heart of any organization?

Contrary to popular belief, employee performance is not the problem when it comes to efficiency. There are many very industrious and efficient employees in any industry, including government.

The root of inefficiency in government relates to money. More specifically, because governments do not spend their own money, inefficiency can be a serious problem.

To put this into perspective, think about these four possible scenarios relating to spending money (source: Milton Friedman, Free to Choose) (a matrix is also provided):

  1. You spend your own money on yourself. When you spend your own money on yourself, you take care with your money, trying to get the best deal (best quality for least cost).
  2. You spend your own money on somebody else. When you spend your money on somebody else, you still take care to spend the least amount of money, but you are not as concerned about the quality of the product or service. For example: buying gifts for someone else.
  3. You spend somebody else’s money on yourself. When you spend somebody else’s money on yourself, your primary concern is to get the best quality. Money really is no object. For example: buying yourself a gift or enjoying dinner on “somebody else’s dime.”
  4. You spend somebody else’s money on somebody else. When you have somebody else’s money to spend on others, concern for quantity of spending and quality of product and service is not a high consideration. This is the situation with government spending.

Now put yourself in government’s shoes. If you have an almost unlimited supply of someone else’s (i.e., taxpayer) money each year, how will you spend it? Will you really give your systems and processes the due care that you would if you were spending your own money?

Unlike private organizations that spend money on goods and services that the market values, government spending has no information value. That is, organizations that spend to meet market demand will create a profit – this is the value that the organization generates. If it stops generating value for its customers, it stops making money.

In government, no matter how much money is spent and no matter how much output is produced, government does not know the value of its output. This contributes to a cycle of inefficiency in spending and outputs.

When was the last time your government told you how well they spent your money?

While pockets of government departments do forge ahead with implementing efficiency measures, there is generally no check on government efficiency. Governments are inefficient because they can be.