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Other People's Money

January 11, 2008

Milton Friedman famously said that government’s goal of “doing good with other people’s money” is fundamentally flawed. Typical instances of this principle can be witnessed in everything from national governments attempts at privatizations to local governments struggles with “urban development”.

Urban development usually means expropriating land (using eminent domain) and then reselling the bigger parcel to some private developer. Let’s sidestep the original sin of taking other people’s money, let’s even assume that the land was public land to begin with. It is still “other people’s money”, and as such it is hard to do anything good with it.

To wit, let’s focus on the reselling part. Are governments officials good at selling public assets? Nope. Why? Because what they’re selling is not their own stuff. But how could this be? you might say: “honest politicians have the best interest of the citizenry at heart!”

Right. What happens, time and time again, is that public officials will sell public goods with many strings attached. A local municipality will sell the land, but only to the developer who will agree to stick to very rigid pre-drawn plans. A national government (check out the recent attempts of Prodi’s italian government to sell Alitalia) will sell a company, but only to buyers who accept not to fire any of the employees of that company, etc…What happens of course is that demand drops precipitously and with it the price tag. But who notices anyway? Since it’s nobody’s money!

A private citizen would never try to sell his house, for instance, and insist that potential buyers are not going to be allowed to take the wall-paper down. So why do government administrations act in such crazy ways? Simple. Two reasons. First, they are not selling their own properties, and second (this is the worst part) they have the voters’ interests at heart!

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