Joachim Andersen

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How Government Spending Mismanages Our Money: 4 Key Insights

Four Ways to Spend Money, and Why Government Usually Picks the Worst One

Most of us are careful with our own wallet. We compare prices, we notice when quality is poor, and we walk away from a bad deal. Economist Milton Friedman argued that this simple habit changes dramatically depending on two questions: whose money is being spent, and who gets the benefit (Friedman & Friedman, 1980).

Friedman (1912–2006) was one of the 20th century’s most influential economists. He won the Nobel Prize in 1976 (Nobel Prize Outreach, 1976), taught at the University of Chicago, and became widely known through his book and television series Free to Choose. He spent decades explaining how incentives shape behavior, including how governments spend other people’s money.


A chart titled 'On Whom Money is Spent' with two axes: 'Yours' and 'Someone Else's' for spending sources, and 'Yourself' and 'Someone Else' for spending approaches. It includes four boxes explaining different spending behaviors such as 'Economize and Seek Highest Value' and 'Don't Economize and Don't Seek Highest Value'.


Milton Friedman boiled spending down to four combinations.

  1. Your money on yourself (you’re careful about both cost and quality)
    You buy your own groceries or phone. You watch both the price and whether the thing is actually good. This is the most careful kind of spending.
  2. Your money on someone else (you care about cost, less about quality)
    You buy a birthday gift. You still care about the cost because it is your money, but you may care less about whether the recipient truly loves it. Cash would often be more efficient, but gifts are about the gesture too.
  3. Someone else’s money on yourself (you care about quality, not cost)
    An expense-account lunch. You want the good meal (quality matters to you) but you are less worried about the bill.
  4. Someone else’s money on someone else (you care about neither cost nor quality)
    You spend money that is not yours, on people who are not you. You have weak reasons to control the cost and weak reasons to insist on high quality or usefulness. Friedman said this is how a large share of government spending works (Friedman, 2004; Friedman & Friedman, 1980): officials and politicians allocate taxpayer money to programs and projects for other citizens.

The above matrix shows the same idea visually. The bottom-right box: “Don’t Economize and Don’t Seek Highest Value” is highlighted because that is the quadrant with the weakest built-in checks.


Why the 4th Way so often Describes Government Projects

When the spender does not feel the loss and the beneficiary is a broad or distant group, several things tend to happen:

  • Costs rise because no one has a strong personal reason to say “this is too expensive.”
  • Schedules slip because delay is someone else’s problem.
  • The original promise (speed, usefulness, value for money) gets quietly rewritten.
  • Political credit for announcing a project is immediate, while the bill and the results arrive years later.

This does not mean every public project is a failure. Roads, courts, and basic infrastructure can be worthwhile. It means the incentives are stacked against discipline unless extra rules and transparency are added.


A Current Example: California’s High-Speed Rail

In 2008, California voters approved a high-speed rail line connecting the San Francisco Bay Area to Los Angeles and Anaheim. The original price tag was about $33 billion and service was supposed to arrive in the 2020s (Cabanatuan, 2008; California High-Speed Rail Authority, 2026).

By 2026 the picture looks very different. Active construction is concentrated on a 171-mile stretch in the Central Valley, from Merced to Bakersfield (California High-Speed Rail Authority, 2026), a much shorter piece of the original vision. Cost estimates for even this initial segment have risen to the mid-$30 billion range (California High-Speed Rail Authority, 2026), already more than the 2008 figure for the entire system. Broader estimates for a full Phase 1 connection run far higher, with some reviews citing figures well above $100 billion. Billions have already been spent. Passenger service on the first segment is now aimed at 2032–2033 (with some official documents showing further slippage risk), and a complete San Francisco-to-Los Angeles line has no firm near-term date (California High-Speed Rail Authority, 2026; Office of the Inspector General, 2026).

Federal grants were reduced or terminated. State inspectors have flagged schedule slips, funding gaps that could appear as early as late 2027 without new financing, and incomplete explanations in planning documents. Train procurement has been revised downward (CBS News, 2026; Office of the Inspector General, 2026). Construction of guideways and structures continues, yet the original promise of a fast, statewide passenger railroad remains far from delivered.

This fits Friedman’s 4th box: the money belongs to taxpayers across California and the country. The hoped-for riders and cities are other people. The officials making year-to-year decisions do not personally write the checks or ride a finished train next month. Cost control and “is this still the best use of the money?” become secondary to keeping the project alive.

Similar patterns appear in other places. Large earmarks that survive even when the Pentagon does not want them (Citizens Against Government Waste, 2026), federal buildings with tens of billions in delayed repairs while new projects are announced (New York Times, 2026), or grant programs rushed out with weak follow-up. The common thread is weak feedback between the person authorizing the spending and the person who ultimately pays or uses the result.


How to Push Back Against the 4th-Quadrant Problem

No system eliminates waste completely. These steps make the incentives less one-sided:

  • Demand clear, independent cost-benefit analysis before major projects start, and publish the assumptions so outsiders can challenge them.
  • Tie money to results, not just activity. Set measurable targets (ridership, completion date, cost cap) with real reviews and the possibility of stopping or shrinking the project.
  • Use more “user pays” where possible. Tolls, fares, or dedicated fees give beneficiaries a reason to care about cost and quality.
  • Add sunset clauses and mandatory re-approval. Big programs should not run on autopilot for decades.
  • Increase transparency. Real-time public dashboards on spending, contracts, and delays make it harder to hide overruns.
  • Shift risk. Public-private partnerships only work if private partners actually lose money when things go wrong, not just collect fees.
  • Decentralize where it makes sense. Local governments and competing states often face tighter voter feedback than a distant national or state agency.
  • Strengthen independent watchdogs. Inspectors general and auditors need the authority and visibility to report problems early, not after the money is gone.
  • Limit last-minute add-ons. Earmarks and special-interest extras thrive in the 4th quadrant.

Friedman did not claim government should do nothing (Friedman & Friedman, 1980). He claimed that when government spends, it should be treated as the least naturally disciplined form of spending and therefore needs the strongest outside checks. The four-way test is a simple reminder: the further you move from “my money, my benefit,” the more deliberately you have to design accountability.

The California rail project, still unfinished after nearly two decades and many billions, is not an isolated curiosity. It is what the 4th way of spending money often looks like in practice. Understanding the incentive problem is the first step toward spending other people’s money a little more like we spend our own.





📚 Sources and References


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