By Gary M. Galles
Professor of Economics
Pepperdine University
Malibu, CA

Two years ago, the Los Angeles city council raised monthly trash fees from $11 to $28 a month, promising that every penny would go to hire more police officers. Now, they will rise to $36 under the same rationale. But that claim is bogus, as shown by a city audit which determined that two thirds of the money went for other purposes.

This diversion demonstrates how untrustworthy Los Angeles city government promises are. But why should others care? Because many government programs everywhere exhibit the same failing -- dollars provided for one purpose that end up financing far different expenditures. The reason is that money is fungible — it can be diverted to any use one chooses.

These diversions occur in many other areas, including bond issues, lottery funds for education, humanitarian foreign aid, food stamps and other in-kind transfer programs. In each case, earmarked expenditures replace money that would have otherwise been spent in those areas, freeing dollars up to spend however recipients decide.

Consider bond measures to fund particular government expenditures. Diversions of such funds to uses different than those advertised are so common that oversight boards are now often included. They have been ineffective in reducing abuses, but they are promoted as “proving” public trustworthiness now, to get bond issues approved.

State lotteries were promoted to supplement education funds. But what actually happens is that politicians, taking into account those additional funds, reduce their budgetary support (or, its growth rate) for education. The dollars released are then available to be spent however the state government decides, just as if lottery proceeds went directly into its general fund. As professors Patrick Pierce and Don Miller concluded in a study of all fifty states, "Regardless of the state, the educational spending rate declined once a state lottery went into operation."

The same sort of diversions have often converted humanitarian foreign aid--for food, medical supplies, and development projects--into both wasteful spending and weapons in many poor nations. The aid frees up money that would otherwise have been required to buy those goods, allowing it to fund whatever receiving governments choose. Beyond even rampant corruption and waste, it has been frequently used for military spending, allowing recipient governments to better tyrannize their citizens and threaten neighboring countries, leading them to spend more on arms as well.

The food stamp program suffers from the same problem. The subsidy is equivalent to a cash transfer for almost all recipients, because the vast majority of recipients would have purchased more food than their food stamp allotments, even if they were given cash. The food stamps simply replace money that recipients would have spent on food anyway, freeing up that cash to use however they choose.

The same mechanism also undermines other in-kind government aid, such as housing and energy subsidies. Money's ability to be redirected in any way decision makers wish results in earmarked funds being diverted to whatever uses their recipients choose.

Even when one accepts that such spending proposals further legitimate government interests, the ability of recipients to redirect funds undermines the purpose in earmarking the funds, not to mention the only rationale to have multiple bureaucracies to administer the multitude of programs.

Their trash fee diversion has angered Angelinos who were misled. But citizens everywhere need to recognize that they confront similar concerns. For instance, diversions proposed to break budget stalemates and the billions in bonds on November ballot face the same issue.

Whether funds are generated by trash fees, bonds, government aid or any other source, politicians ignore fund diversions to over-sell their proposals.

And Americans must think more carefully to avoid being bilked for more of the same, because as Frederic Bastiat noted over 150 years ago, "Our own ignorance is the primary, the raw material of every act of extortion to which we are subjected."