Government Efficiency

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Why do I read the Ohio State University paper, The Lantern? I am constantly met with misinformation such as this article titled Taxes needed. This anonymous editorial suggests that without the additional 1% in state sales tax that is scheduled to expire next year, Ohioans will not get college education. I am going to quickly try to examine this situation, but this is another of my pet peeve issues that I would love to have time to study in detail.

This is absurd. I know that I don't need to explain the economics of tax to you, preaching to the choir and such. In this state where people continue to plead for lower unemployment, they need to realize that taxes create unemployment! Period. A sales tax specifically taxes consumer purchases from companies typically hiring lower wage employees.

However, think about money loosely in terms of Einstein's relativity, it can be neither created nor destroyed (I realize this is a loose concept.) So the supposed $1.25 billion can either be spent by the Government or saved and spent by the citizens. Approximately $200 per citizen per year. The question is not can one do without $200, the question is who can better decide how to use the $200. This is an issue of efficiency.

Many charities are rated for their efficiency. Usually it terms of how much money ends up spent on the purpose at hand and how much is spent on bureaucracy, salaries and other extraneous expenses. The Government, like any charity, should be measured in terms of efficiency.

Does anyone have a good reference for government efficiency?

A dollar spent for a dollar worth of goods is 100% efficiency. As an individual my efficiency is 100% minus the taxes I pay. Federal income tax reduces this by 30%, state income tax extracts 8%, city income tax takes 2% and sales tax brings it down another 7%. This brings an individual's efficiency to 53%. Charity donations might bring this down another 10%, now I am less than 43% efficient.

So what happens to the 57% consumed by the government and charities? A good charity will spend 75% on the actual charitable cause, so 25% of my lost 10% is a total of 2.5% of an individual's total efficiency lost to a charity, but an individual regains 7.5%. Now the total of an individual's efficiency is about 50.5%. The only remaining question is how much of the government budget is spent efficiently and how much is wasted on salaries and other bureaucracy. I doubt the government can beat 75% efficiency. Let's give them the benefit of the doubt and assume the Government is 50% efficient. Therefore 50% of the Government's 47% is a total of 23.5% loss. Individual (100%) - Charity (2.5%) - Taxes (23.5%) = 74% total efficiency. This is probably the most generous measure I could make since it fails to account for capital gains and lots of other factors. However it is easy to see the difference between losing 2.5% of my income by allowing a charity to spend my money and losing 23.5% of my income by allowing the Government to spend my money.

The fundamental economic assumption is that the best way to make economic decisions is in a market. As a market for charity & taxes, the Government extracts HUGE portions of this market through their monopoly. In the market for charity the Government has excessive market power.

Take control of your money and donate to your favorite charity.
Reduce taxes at every opportunity.

Who knows how to best spend YOUR money? You or the Government?

3 Comments

I recall that in Larry Elder's book, "The Ten Things You Can't Say In America", he says that government welfare programs spend 70% on administrative overhead while only 30% goes to actual charities. I don't have the book handy, so I can't tell you page numbers or where he's citing the statistics from, but maybe I can take a look later.

If we carry this definition of efficiency to its logical conclusion, everything is 100% inefficient.

Suppose, for example, that I currently run a soup kitchen, and that I buy all food ready-made from a caterer. Suppose further that I find that I can save $1000 per day in food expenses by buying the raw ingredients and cooking the food in-house, but that I'll incur an additional $500 per day in labor expenses. Spending on goods goes down while spending on salaries goes up, so efficiency has gone down, right? Not really. I'm doing the same thing for $500/day less.

You might argue that we can resolve this by factoring in the efficiency of the caterer. But we can apply the same logic to the caterer. The goods he buys could, in theory, be produced in-house as well. So we have to factor in the efficiency of his suppliers, and so forth. As we trace the factors of production all the way up to the farmers, miners, and others who extract raw materials from the land, we find that at some level, every penny has gone to salaries rather than to the purchase of goods. My soup kitchen is 0% efficient!

But there is a distinction, is there not, between administrative salaries and the salaries of those doing productive work? Well...no. Suppose that I hire a new manager for $300/day, and that he finds ways to save us $500/day. My expenditures on administration have gone up while my expenditures on the purpose at hand have gone down. But in reality I've improved the efficiency of my operation.

I can only think of one meaningful way to measure the efficiency of a charitable operation, and that's to compare the inputs to the outputs. In other words, what exactly can you do with my $100 or four hours of volunteer work, and how does this compare to what other organizations could do?

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This page contains a single entry by Bryan published on November 29, 2004 1:44 PM.

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