How Governments Destroy Wealth
In a recent EconTalk podcast (mp3 link), Mike Munger, an economist at George Mason University, cites an example of how governments destroy wealth.
One program cited is run by HUD, the office of Housing & Urban Development. HUD provides grants to local governments to help improve their cities through building new housing, parks, and other improvements. In essence, they give away free money (we'll ignore for the moment the fact that it comes from the taxpayers in the first place).
HUD accepts proposals from cities and then decides on which ones to finance. We will assume that the decision process is fair and rational.
Since demand for free money is greater than supply, more and more localities line up for these funds. Costs begin to rise as cities hire more employees to write proposals. Eventually, costs rise far above the amount of funds received from HUD for most cities. The winning cities do, in fact, win more money than they pay out. But there are many more losing cities than winning cities.
In effect, the system becomes a lottery with the costs to all cities combined exceeding the benefits to all cities combined. The net effect to the country is a destruction of wealth.
When governments attempt to give away free money, it destroys wealth.
© 2006 Michael Cale
Excellent economic analysis. Too bad no one in government has ever received training in game theory or "real econ."
Posted by: B Phan | June 28, 2006 at 06:12 PM