The four ways to spend money

Milton Friedman stated years ago there are four ways to spend money. So what are they?

This will actually be a short article, because the matrix Friedman described is a simple 2 by 2 matrix. Simply put, you are spending either your own money or money you are charged with spending on one axis, with whom you're spending the money on is the other axis.

So, here they are, from the best to worst ways to spend money.

1. YOU SPEND MONEY ON YOURSELF. You, expending your own pool of financial resources on yourself. This means that (unless you're an idiot) you want maximum value for what you're paying. You don't fritter your financial resources away.

2. YOU SPEND YOUR MONEY ON SOMEONE ELSE. Again, you are drawing from your financial resources, but someone else is the beneficiary of your purchase. Inherently, you will want to spend the least amount possible (this amount will vary, acquaintances on the lower end, then friends, then family, then your spouse/children). The quality, however doesn't matter as much. If you're getting a toaster for your 2nd Cousin's wedding, you will probably will get them a $20 Hamilton Beach toaster. If it's for your spouse, you might get them a $180 Breville toaster (since you might end up getting to use it as well, see #1 above).

3. YOU SPEND OTHER PEOPLE'S MONEY ON YOURSELF. You are handed a pool of money to spend on something that will directly affect you. Within the limitations given to you (the size of the budget, where you can spend it, etc.) you will go for maximum quality without regard to the price. If your boss says to get a plane ticket because you have to be in another city tomorrow, chances are you will end up in a First Class seat because that's the first flight to get you there and the Coach and Business seats are full. It gets the job done, but not the best value for the money.

4. YOU SPEND OTHER PEOPLE'S MONEY ON SOMEONE ELSE. This is the worst way to spend money. You are given a pile of money and told to make it stretch to as many people as possible. Say you have a budget to build a public housing complex. You will not put anything but the cheapest fixtures and appliances into these apartments because 1) You have a limited budget to get several hundred of any given item (so you go for the low bidder) and 2) you don't care about the quality of the items. If the maintenance crew has to replace a fixture every 18-24 months because it's that bad of a quality, you don't care because you won't be living in that housing and having to put up with those fixtures constantly malfunctioning. So, the cost doesn't matter and the quality doesn't matter (to the person spending the money, anyway).

Government is always spending your tax money in item #4 above. If you just went through a hurricane and most of the local housing is destroyed, if you are forced to find housing on your own, you will find a way to get you and your family into a safe hotel room that night, one way or the other. If you depend on the government to provide housing, you will sleep on a cot in a school gym for 4-6 weeks until they deliver a mold-infested mini-camper that's so small you have to step outside to change your mind. Now, if you're a FEMA department head who has to stay in the area until things are back under control, that falls under #3 and you will justify one of those $70,000 motor coach buses delivered next day via military C-17. Because you need something like that.

Always remember, government expenditures is always people, spending money that's not theirs, on people they don't significantly care about. It doesn't matter if it's health care, housing, shelter, anything.


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