If Mr Obama truly seeks to rein in institutions that systematically reward bad behavior, he should scale back government and forget about intruding into the private sector. In private markets, Smith spends only Smith’s money. Smith profits or loses depending on the prudence of his choices. This tight connection between each person’s actions and the consequences that he or she bears provides remarkably effective carrots and sticks encouraging private persons to behave responsibly. In the so-called “public sector,” in contrast, Smith spends Jones’s money. Smith profits or loses depending on how effectively he uses Jones’s money to buy votes from Jackson, Johnson, Williams and other persons who are assured by Smith of their moral right to free-ride on Jones’s resources. Surely, there is no surer recipe than this for rewarding bad behavior.
This reminds of what Milton Friedman once said:
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.