Kathandu:

The other day my wife Shalini and I sent flowers and a cake to a friend of ours on his birthday. When we visited him later, he thanked us, but added that he would have preferred cash. In weddings too, close friends and relatives prefer cash.

As an economist I do understand the reasoning. Why should we spend money on what we think would make others happy rather than let them decide for himself?

When we spend our money on giving gifts, it would be rare if we can identify precisely what the receiver would want. Even if we could, few of us would spend time and effort on finding out. Let us call this — our money spent on someone else — as the second type of spending.

Contrast this with the primary or the first type of spending: the occasions when you spend your own money on yourself. You have incentive to spend money wisely, and, buy exactly what you need, thus eliminating waste.

The third type of spending is when you are spending someone else’s money on yourself. A company expense account for your travelling is an example. Have you seen the waste and padding up, which goes on when bills are submitted for reimbursement to the company? I have.

Having worked for a number of years with Oberoi Hotels, I know that employees who would, on their private visits, travel by bus or train would want business class airfares when travel was on company account. General Managers who would go to great extents to obtain complementary hotel rooms for their personal privately paid holidays would think nothing of throwing hundreds of dollars a night on expensive hotel suites and restaurants when on a reimbursable company account. The managers, of course, had a great incentive to see that they personally derived the maximum possible benefit.

That brings us to the fourth and final kind of spending: when you spend someone else’s money on someone else. Let us suppose you are now entertaining on company account. You have no reason to economise or even see that any real value is derived from the expenditure. If you are allowed to, by your company, you will go to the Soaltee and order the choicest champagne and caviar for friends who may hold no importance for your company.

I have seen rich acquaintances prefer to entertain cheaply in Thamel when it means money out of their own pocket while those earning far less but on company accounts, would not think twice before calling Hyatt for catering at their homes.

There is no impropriety here: If I could get my uncle or the government to pay, perhaps, I too would do the same. There is, however, in this class of expenditure, an inherent built-in bias towards ever larger spending. All of us would want to splurge the maximum possible for enhancing our power, prestige, and making our friends happy if it doesn’t cost us anything.

These four classifications of spending were first identified by Nobel Prize winning economist, Milton Friedman. He said that government expenditure (our money spent by politicians and bureaucrats on themselves or on third parties) comes either under the wasteful third category: spending other’s money on yourself, or in the most wasteful fourth category: spending other’s money on others. In a private company, at least, the shareholders have an incentive to curb flagrant excesses or their company will go bankrupt. There is no such check on the government: they can always increase taxes or print more notes.

That is why politicians, in search of votes, promise everything to everyone, with no effort to economise, or to spend our money wisely. No amount is ever enough. That is why the government of Nepal with its two billion dollar annual budget is consistently strapped for funds, and, so is the government of the US with its two trillion dollar one.

The answer is not to let government tax us to death. We will die under the burden, but, it will still not be enough for the government. The answer is to drastically curb the power of the government to tax and spend. That is the way, the only way, to economic progress and prosperity.

(The writer can be contacted at: everest@mos.com.np)