By W.T. Stanbury, The Hill Times, 1 March 2004
Governments are famously wasteful. Huge cost over-runs are routine. One of the most spectacular is the federal gun registry program which was to have a net cost over the first four years of some $2-million. Over the first six years, the officially-stated net cost will be over $1-billion. And now we find that the $250-million sponsorship program officially aimed at fighting separatists in Quebec involved waste of some $100-million according to the Auditor General's Feb. 10 report.
This is a good time to provide a brief overview of the various types of waste related to government activities. Broadly speaking, there are two types of waste: transfers waste and net loss-to-society (NLS) waste. The classic case of the former is theft. The thief who steals $100 from government is $100 better off, while taxpayers are $100 worse off. But society as a whole is no worse off -- if we ignore the immorality of the theft itself. The second kind of waste occurs when scarce resources are used up, and no benefit to anyone in society is created. For example, suppose that, due to poor design by government, too much concrete, steel and labour are used to build a road, dam or office building. Those resources can't be used elsewhere. They are lost to society -- a form of NLS waste.
I now briefly describe several types of government waste. Type A: Waste related to fraud and other forms of illegal behaviour, whether by citizens preying upon government or by government, officials. There are several kinds of Type A waste -- (i) Pure transfer theft, e.g., a citizen receives a welfare or pension payment to which they are not entitled, and this is the result of fraud by the recipient. (ii) Fraudulent purchases by government are arranged, and part of the money flows from taxpayers to the initial beneficiary and then on to a political party (or to individual candidates) -- this undermines the open, fair competition for office, i.e., the legitimacy of government itself. This appears to have happened in the Quebec sponsorship scandal. (iii) A supplier provides goods/services below the standard specified in the contract with the government. Shoddy pencils or inferior paper are one thing, but sub-standard avionics and missiles for a fighter jet could have far-reaching adverse complications in combat.
Type B waste consists of the deadweight loss due to government regulations which result in allocative inefficiency. For example, the federal/provincial supply management schemes for milk, eggs, broiler chickens and turkey inflict heavy net losses on Canadians, i.e., NLS waste.
Type C waste is attributed to excess expenditures for goods and services due to the inability of a supplier to operate at the lowest attainable costs. (It is a well-worn axiom that "the government always pays too much.") For example: the federal government could have had the hulls of the last frigates it purchased for the Navy made in South Korea at a fraction of the cost it paid the Saint John yard to build them. This too is NLS waste.
Type D: This waste occurs due to the result of mis-targeting transfer payments, i.e., a government department makes payments to persons who do not meet the eligibility criteria (and who fail to return the money -- possibly because they may be unaware that they are not eligible). This is a transfer waste.
Type E waste can take the form of risk management programs that impose excessively costly regulations to reduce the number of premature deaths from various causes such as accidents or disease. The waste occurs where the imputed cost of each life "saved" exceeds $10-million and where there is clear evidence of (i) alternative government programs to save lives at far lower cost, and (ii) in their private actions to reduce the risk of death, very few citizens put an economic value their life over $10-million.
Type F waste is likely to be more controversial. I define it as expenditures which are not desired/supported by the vast majority of citizens/taxpayers, e.g., egregious pork barrel-
type outlays which are targeted on selected groups of marginal voters. These voters may enjoy the benefits of such expenditures, but to a large majority of taxpayers, these are
Finally, consider the fact that rent-seeking activities by the large number of interest groups (from environmentalists, to gay rights, to corporations to advocates for the poor) generate deadweight losses. Why? Because they use up scarce resources trying to get benefits (pecuniary or otherwise) from government. Lobbying itself is a negative-sum game from society's perspective! Then there is the waste induced by successful efforts to influence public policy, e.g., to create another supply management marketing board which misallocates resources and so generates a dead weight loss for society as a whole. I emphasize, however, that lobbying is an integral part of democratic government/politics. It is a vital tool for signalling political preferences between elections. So the waste it creates is ancillary to that created by government actions.
Waste is a serious, endemic problem for governments for two main reasons. First, very few goods/services supplied by government are subject to the pressures of market competition with its tendency to reduce costs and improve quality. Second, political markets are not very good ways of signalling the varied preferences for the wide range of goods and services that may be provided by/through government. Voting for representatives is infrequent and a crude device to indicate what programs people wants government to provide.
Columnist Lawrence Martin (The Globe and Mail, February 12, 2004) described the multiple political scandals -- most involving Quebecers -- under Jean Chrétien, as "small stuff." Wrong! They are knife thrusts to the heart of clean government. The significance of some types of government waste is vastly greater than the amount of money involved, contrary to the views of pollster Allan Gregg (see The Globe and Mail, Feb. 13). He argues that the apparent $100-million wasted over four years in the sponsorship program in Quebec "represented .015 per cent of the tax dollars entrusted to [the federal] government." Mr. Gregg misses the point -- by a large margin.
This waste -- apparently based on fraud by advertising agencies -- appears to have had two purposes: a) enriching friends of the federal Liberal Party in Quebec, and b) moving money from taxpayers through Quebec-based ad agencies to the Liberal Party itself. Both of these actions undermine democratic politics. Such actions undermine the public's (already low) trust in government. Citizens are not dupes and fools -- even if they bear the burden of wasteful activities by government.
Article published in full with the permission of W.T. Stanbury