Milton Friedman’s Wisdom and the Impending London Olympics

Lynne Kiesling

Jonathan Pearce at Samizdata has a dandy little post on the London Olympics and some words of wisdom from Milton Friedman. I was also struck (but not surprised) earlier this week by the estimates that cost overruns for the 2012 Olympics would be substantial, to the tune of around 50 percent at £5 billion:

The £5bn figure is £2bn more than the initial £2.4bn cost of construction and security in the run-up to the games and £1bn for regeneration presented to the International Olympic Committee by bid organisers two years ago. But the £5bn figure does not include money the government must allow for value added tax costs and contingencies.

Tessa Jowell, sports minister, earlier this week blamed higher steel prices and transport costs for a £900m rise to £3.3bn in the predicted cost of building the Olympic Park in east London.

The City of London is putting funds toward this event even though it requires the construction of a new stadium, for whom there are no post-Olympic tenants. As someone who was working in London during the construction of the Millennium Dome and its cost overruns and post-event underuse (my office window even allowed me to supervise the construction!), I’m sure having some déja vu all over again.

This not-too-surprising budget creep raises the question of why government should be involved in subsidizing entertainment spectacles. Leave aside for a minute the economic theory arguments for and against, and the moral arguments for and against, and simply focus on the practical, realistic political economy of such a venture. Why should we expect governments to spend other people’s money in a frugal manner?

The rest of Jonathan’s post takes inspiration from Milton Friedman in cautioning us against such expenditures. He quotes from this 2004 Fox News interview with Friedman. In discussing health care and the negative incentive effects of third-party payments, he makes the following relevant observations:

DA: People defending the system would say that it’s become a more complex world. Now we have all this complex equipment and tests and medical specialists and with all that complication, you need somebody extra to sort things out.

MF: But the government has introduced the major complication. The major complication is caused by third party payments. The fact that you have more complexity in medicine is a good thing. During the whole of the past 100 years, life expectancy has been going up. It was going up before there were these government programs, it’s been going up since. But life expectancy actually went up faster before these programs were introduced than since.

In 1946, just after World War 2, total medical expenditures was about 5 percent of national income. Today, it’s 17 percent. And life expectancy increased far more rapidly in the 50 years before World War 2 than it is increasing today. I believe that the progress and the quality of medical care has increased independent of the amount we spend on it through government. The relationship between your father and the doctor he paid at the door could work well in our time. It doesn’t work well when your father doesn’t pay the doctor directly but calls in a third party, and some third party has to judge whether that medical procedure is necessary. That’s what causes the complication.

There are four ways in which you can spend money. You can spend your own money on yourself. When you do that, why then you really watch out what you’re doing, and you try to get the most for your money.

Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I’m not so careful about the content of the present, but I’m very careful about the cost.

Then, I can spend somebody else’s money on myself. And if I spend somebody else’s money on myself, then I’m sure going to have a good lunch!

Finally, I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get. And that’s government. And that’s close to 40 percent of our national income.

Well said.

As a side note, Chicago is in the running for the Olympics, and I desperately hope that we fail. I’m sure my local representatives would find some way to raise my taxes or impose a bond issue to pay for infrastructure, making the argument that the city will benefit from the long-lived nature of the infrastructure. I am not convinced, deeply so, and the London experience is not changing my mind.