Bryan Caplan  

How to Spend A Billion Dollars

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My Ph.D. students' responses to the following question on their final exam disappointed me:
In the modern U.S., what is the most efficient way for the federal government to spend an extra billion dollars?  What is the maximally utilitarian way for the federal government to spend this sum?  (In both cases, assume that tax cuts are not an option).  Use everything you've learned to craft a thoughtful answer, and be specific.
Most responses fell into one of the following undesirable categories:

1. Cop-out answers: "There's no such thing as efficiency or utility."  "It's impossible to know what's efficient."  "It's impossible to know how happy someone is."

2. Definitional answers: "Whatever maximizes the social value of resources."  "Whatever makes people as happy as possible."

3. Hasty equivalence answers: "[Six sentences on the most efficient policy.]  The maximally utilitarian policy is the same.  The end."

4. Imaginary answers: "The maximally utilitarian policy is to give all the money to a utility monster."

5. Satisficing answers: "The most efficient policy is to clean up air pollution."  Why is this the most pressing negative externality on earth to fix?  No explanation.

Note: None of the weak responses, with the possible exception of the Definitional Answers, seems inspired by GMU students' libertarian politics.  I suspect many Princeton Ph.D. students would have given similarly weak answers.

My challenge: Can you do better?  The best answers will be highlighted in a follow-up post.  Note that "efficiency" refers to Kaldor-Hicks efficiency, a.k.a cost-benefit efficiency.


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COMMENTS (122 to date)
Hadur writes:

If you were my professor, I would suggest spending it all on incentives for reproduction (open borders, the other thing I would shill for in an attempt to win your favor, costs negative money)

Andrew writes:

Spend $1 Billion advocating NGDPLP.

H/T Scott Sumner

2nd place -- Seminars for journalists explaining that demand curves slope downward.

RPLong writes:

I think what leads people astray is the fact that $1 billion dollars, if possessed by a single economic agent, has the power to deliver a truly awesome level of utility to that agent.

Divided equally among the total population, $1 billion amounts to about $3.21 per person. This number seems trivial. Why would it be better to give every man, woman, and child in the country less than $5 apiece than to spend $1 billion on a major social initiative? How could it possibly be better when there are so many pressing issues out there. $1 billion cure cancer. $1 billion to travel to Mars. $1 billion to solve the air pollution problem. $1 billion to eradicate poverty or stockpile flu vaccines. ONE BILLION DOLLARS!

The problem is that we have no way of knowing in advance which of these major initiatives will bear the most fruit. $1 billion might fund some good cancer research, for example, but if it could guarantee a cure, then we would already have many cures for cancer.

But if I give you $3.21 right now, you will be able to IMMEDIATELY think of a way to spend that money that will give you a good amount of utility. Maybe you'll be a couple of MP3 downloads. Maybe you'll buy a hamburger for lunch. Maybe you'll use it to pay for shipping & handling on an online order of something. Maybe you'll buy coffee and a doughnut.

Whatever you spend it on, you'll benefit instantly and appropriately (appropriately FOR YOU).

(MU of $3.21) * 311,591,917 American citizens = a lot more U than (U of $1 billion) * 1.

Thus, I say distribute the money equally among everyone.

geoih writes:

Destroy it, preferably by physically burning as much paper currency possible (e.g., single dollar bills) in a heat driven engine (e.g., a boiler or generator). This will reduce the supply of currency, thus potentially increasing the value of all the remaining currency already on the market. While this increase will be slight at best, at least there will be a benefit from the increased energy output of the engine where the currency was burned.

Mordatar writes:

Meta-answer: List your best candidates for most effective public policies (ngdp targeting, freedom of migration, intellectual property reform, many others). Subsidize prediction markets on the effects of adopting these policies.

RobertB writes:

[Comment removed pending confirmation of email address and for crude language. Email the webmaster@econlib.org to request restoring your comment privileges. A valid email address is required to post comments on EconLog and EconTalk.--Econlib Ed.]

Daniel Kuehn writes:

I agree with RPLong on a simple shape-of-utility curves basis that redistribution is the obvious first-cut winner (and do it progressively). Anything else needs to overcome normal consumer theory with an interesting externality or multiplier story.

I think investments in neglected R&D of any sort would be a strong contender. A billion goes a long way in a prize fund too.

Daniel Kuehn writes:

That having been said I'm happy to serve in the role of utility monster if that one is still on the table.

Thracx writes:

Create and fund a reward system which pays voters and politicians for successfully lowering the (permanent or durable) future tax rates.

It is unclear what the best duration and payout system would be, i.e. a 5 year window paying out equal sums to all who contributed, a 10 year window paying equal sums to voters but larger sums for politicians, etc.

Fabio Rojas writes:

Assumption #1: Economic growth happens when people innovate.

Assumption #2: Innovation is proportional to population size.

Policy prescription: Use the $1B to subsidize child bearing, such as lowering out of pocket costs for delivery, paying for child care, etc.

Why it's better than other policies: No other policy is simple to implement. Also, when it come to innovation, it has a better chance of working than having the state pick projects to subsidize.

Kaldor-Hicks criteria: Since the size of the economy will grow, we can use the additional tax revenue to compensate childless people without raising taxes.

Criticism: Maybe the elasticity of children and money (and the implied growth) isn't enough to offset the $1bn.

GMU litmus test: Straight out of SRTHMK.

William Bruntrager writes:

Clarifying the first part of the question, what I would emphasize is that the costs and benefits of any policy are the costs and benefits to specific individuals. Here, our task is a bit easier because we don't have to worry about the costs (they come out of general tax revenue, say), so we can focus on the benefits. What we are looking for, in principle, is a policy that will provide the most benefit to its beneficiaries, as measured by how they themselves value the good or service they are receiving. It would be great if we could give something they value at more than $1 billion, but if not, and we can't return the money in tax rebates, we'll just do the best we can.

The natural answer is to look for public goods or goods with associated positive externalities, so that the government is getting more "bang for the buck" by benefiting more than one person with each dollar spent.

The problem with this approach, is described by economists like Coase, Demsetz, and Ostrom, and the problem unfortunately turns out to be fatal. Namely, in the real world, where there are large benefits to be captured, people are pretty good at capturing them. It is mainly within the realm of economists' imaginations that people are helpless to solve a "collective action" or "externality" problem, and thus massive benefits of simple agreements are ripe for the picking. From clubs solving the “public good” problem of lighthouse provision, to fishing villages in Turkey solving the “tragedy of the commons,” empirical investigation has shown that the people who benefit can be made to pay, somehow or other. The simple fact is, although you may often hear people say of their friends' business plans, "That's a great idea, but no one would pay for it," most ideas for products or services that are actually great, entrepreneurs have figured out a way to get people to pay for them; in contrast, most of your friends' business ideas are pretty bad.

Take my refusal to answer as a cop-out if you want, but if I believed I had a genuinely great idea that I thought was worth more to people than it would cost to implement, I wouldn't be spending
my time answering this question. The criterion of Kaldor-Hicks efficiency, plus the lessons of the above-mentioned economists, sort of makes this conclusion inevitable.

The standard critique of Utilitarianism is that it counsels giving all the money in the world to a single "utility monster," but in fact, that is the answer to the second part of the question. Naturally, it is impossible to identify who the utility monster is, but I would argue that basically you can identify him for being everything that I am not. As far as I can tell, I'm about as happy as I can be spending $5,000 a year. I believe that giving me more income would basically do nothing for my happiness. So, in all utilitarian seriousness, I would propose using the $1 billion to pay for the things that more profligate people like to buy. A person who doesn't have a job, but just spends all day doing drugs and drinking alcohol, must really like doing drugs and drinking alcohol. His main problem is he has a limited budget constraint. So, I propose that we use the billion dollars to subsidize drugs and alcohol for libertines.

Josh Saavoss writes:

Give it to the Bill and Melinda Gates foundation.

8 writes:

This first part is east: the most efficient way is to pay out a bonus to SS recipients.

The second part: spend $1 billion on copyrighted learning materials such as textbooks. No need to offer them online, simply lift the threat of lawsuits.

I guess if you were really utilitarian and considering the average person, the money should go to entertainment companies to lift their copyrights.

Best answer if this qualifies: the U.S. Treasury should take the $1 billion and openly state it will buy $1 billion in gold to increase U.S. reserves. The value of the U.S. gold reserves will jump in value, delivering billions in profits, while the U.S. dolls would strengthen, raising the buying power of all dollar holders.

Demosthenes writes:

Easy.

I'd pay as many women as I could not to have abortions.

Demosthenes writes:

If you want a consumer theoretic justification, marginal utility approaches infinity as utility approaches zero.

Martin writes:

Pay Kim-Jong Un and his key (read: most influential) supporters to leave North Korea and never come back and send them to some undisclosed location (I am sure China would be willing to receive them).

Alternatively, pay-off any third world dictator and his key supporters to leave the country and never come back.

AMW writes:

Most efficient: pay for the travel expenses of highly skilled foreigners in low to medium income cuontries to immigrate to the U.S. (No money for their families' expenses; after a year or two here the immigrants can afford to bring them over on their own dime.) Such immigrants can make somewhere in the neighborhood of two to five times their current salaries just by moving here. For a couple thousand dollars a head we could create tens of thousands of dollars of productivity per year for the next few decades. That's efficiency.

Most utilitarian: pay for the travel expenses of low skilled foreigners from the poorest nations to immigrate to the U.S. (Again, no money to move the families; the lucky immigrant can remit money back home and eventually pay to bring the family here.) Their lifestyle will almost instantly improve dramatically, and assuming a standard-shaped utility function the gain in utility will be enormous.

Objectively speaking those answers may not be "right," but I'll bet they would get full credit in Bryan's course! :)

Thomas Sewell writes:

Most efficient way: Give a per person bonus on tax filings. Second most efficient if that's too close to a tax cut, include a bonus in checks that are already going to be mailed, as in 8's SS example above.

Maximally utilitarian way: I'm going to rule out methods that directly decrease government spending, as that seems to be against the spirit of the question. I read it as what would be a good use of additional spending on top of existing spending, so instead, I'll throw in a direct benefit to the instructor. Add an IG division with the power to repeal or modify _any_ existing government regulations if in their opinion it results in a net utilitarian benefit. Staff it with libertarian-leaning economists.

BarryV writes:

Select 10,000 people at random and give them each $100,000.

Ryan Murphy writes:

Endow a fund that spends 5% of the endowment per year on prizes for solving specific scientific problems.

Chris H writes:

@RPLong and Daniel Kuehn,

It seems to me an obvious way to improve on utilities in your redistributive scenario would actually be to not hand out the money to Americans but instead to hand it out to the world's poorest people. If you handed out $1 billion dollars to 300 million people earning less than a $1.25 per day, then you have nearly tripled the average daily wage of 300 million people for a day, which should create many more utilitons than even focusing on handing out $17 dollars to the poorest 20% of Americans ($17 dollars being a little over half the daily wage of an individual at the US poverty line). Beyond that, cost of living typically being cheaper in nominal terms in these countries, that $3 will be able to buy more and thus produce more utilitons for those individuals than even individuals similarly impoverished in the United States.

But perhaps we can even do better than that.

I propose we spend that billion dollars flying people from the poorest parts of the world to the US to live and work in the US. With an average cost of about $2000 to fly a person from Africa to the United States we could bring over 500,000 African immigrants. As of 2008, average personal income of African immigrants to the United States was $26,000 a year which demonstrates a huge increase in income from conditions in Africa. Even assuming that the Africans brought over in this programs would, because of their low income and likely low skills, earn half that average we have a huge increase in utilitons for 500,000 people. 500,000 people earning an average of $13,000 a year per person will produce $6,5000,000,000 a year. Compare this to making about $400 individually a year and thus the total group producing $200,000,000 a year. We've just turned 1 billion dollars into 6.3 billion dollars. But that's to the immigrants, if the government then declared that these immigrants would only receive non-rival government benefits (roads, defense, etc) and taxed them at 10% of their income this would mean it would receive back the billion dollars plus an extra 30% in 2 years. This could create a self-sustaining loop with the government then using the gains to bring in more immigrants increasing their utilitons, the utilitons of everyone who benefits from the immigrants increased productivity, and even potentially the government's utilitons if they skimmed off part of the extra tax revenue for whatever increases the utilitons of government officials.

So that's my answer, fly over 500,000 desperately poor Africans to the United States and watch the utilitons increase.

August writes:

What is efficient and utilitarian for my purposes is for the federal government to declare bankruptcy and some sort of receivership and court be set up to transfer the assets of the federal government back to the people. Of course, the assets of several 'too-big-to-fail' institutions ought to be seized too.
A billion dollars would go a long way to fund such a thing, especially since we'd want a really big incentive for getting the job done fast and then going home, rather than becoming yet another parasite.

Tracy W writes:

Most efficient way: Fund $1 billion worth of scientific journals, spread across all the sensible subject areas, that only publish scientific results that confirm their null hypothesis, or try to replicate other people's work.

This is an area of scientific work that is seriously neglected, given most people's interest in eye-catching results. Many policy proposals thus are based on biased research. Improving the published research base could thus leverage better quality proposals across the board.

Most maximising-utility way: quite frankly, the best value spend I've seen of government money in terms of resulting general happiness was the tax incentives the NZ government gave to the Lord of The Rings movies, meaning that they were made in NZ. Vast numbers of Kiwis were involved one way or another in the making of the movie. The London Olympics, from living in the city, seemed to have a similar effect. Assuming that the $1 billion spend is similar one-off, as opposed to ongoing, my response is "circuses". Some big, feel-good event that gets many Americans involved.

Granite26 writes:

3.75$ on 1 gallon of gas
.25$ on 1 box of matches
999,996 million on increasing the carbon dioxide in the atmosphere.

(Cop-out tax cut by inflation reduction)

Eric writes:

I don't have time to write a full essay-question answer, but here is my sketch:

Spend the $1B to overcome resistance to open borders and to open them (with keyhole policies to make the border-opening Pareto).

Opening the borders will invite young people motivated for change to come. We will not have had to spend to raise them. But they will enter our economy and innovate. This will cause economic growth. Macroeconomic growth will benefit everyone.

Further, since most immigrants will be younger (older people don't like to move) this will shift demographics so we can pay for extant entitlement commitments.

And additionally, an open border environment should require less border policing, reducing costs. And, an open border environment will reduce international resentment against the USA since anyone who wants to be a part of what we are doing can join us. In turn, this will decrease threats of terrorism.

The long-term cost of this proposal is likely negative to almost everyone involved. (People prejudiced against immigrants, people displaced by immigrant workers, and politicians who have built their careers generating such prejudices will need some sort of compensation.) The $1B will serve the purpose similar to a spark initiating an exothermic reaction of removing entrenched interests and misconceptions so that the nation-wide benefits of open borders can take hold.

I cannot think of another policy with such a potential for long-term ROI for the USA (except possibly for colonizing space - which would cost MUCH more than $1B and have benefits MUCH farther in the future). But when measured on a global scale, utility would increase even more because the immigrants themselves would find their utilities increasing.

John Hall writes:

Are we strictly focusing on spending? What about investments? If you invest $1bn in equity index funds, then it will put upward pressure on equity prices. Any person who holds equities will benefit. The investment can be made in perpetuity with dividends going to any of the other scheme mentioned or reinvested.

Ken P writes:

My thoughts are along the line of RPLong and Daniel Kuehn. Progressive redistribution. I like lottery approaches, too. In BarryV's example, you might possibly put money in the hands of the next Google or Amazon like founder.

The prize approach would be my choice, though. Prizes of $500, 200, 100 million with the rest in smaller amounts to non-profits who manage to provide the highest value of free medical care per patient for 1, 000 or more patients.

Ken B writes:

Spend a few million closing down the war on drugs. Burn the rest.

Dave T writes:

I spend that billion dollars finding, eliminating, and prosecuting fraudulent payments from Medicare. If we could catch even 5 or 10% of that, we'd turn that billion into $3 to $9 billion!

Mark Bahner writes:
Pay Kim-Jong Un and his key (read: most influential) supporters to leave North Korea and never come back and send them to some undisclosed location (I am sure China would be willing to receive them).

Alternatively, pay-off any third world dictator and his key supporters to leave the country and never come back.

I don't know if this is the best way to spend $1 billion for the people of the U.S., but I sure wish economists would explore this idea much more extensively.

I call it "Rent-a-Coup" (TM pending), and conceived of it prior to the Second Gulf War. Specifically, I proposed paying the junior officer corp (say colonel or below) of the Iraqi Army to depose Saddam Hussein and his sons, and to allow the setup of a democracy.

There are currently 47 countries ranked as "not free" by Freedom House:

Freedom House Freedom Rankings

Only a portion of those countries have consistently rated sixes or sevens (sevens being the worst) for the last few years. It would be really interesting to try "Rent a Coup" on some of those countries.

Wikipedia Presentation of Freedom House Tables

Cuba would be an interesting country on which to start. Or perhaps Syria.

Jason writes:

Certainly Most Efficient and likely Most Utilitarian:

Distribute Equally to all Full-time Govt Employees in their paycheck. Let them spend it.

$1000M/2.62M Emp (2011) ~ $382/Emp


http://www2.census.gov/govs/apes/11fedfun.pdf

Use the money as a bonus pool to divide between members of Congress and the president if they cut $X hundreds of billions ($trillion?)/year from the federal budget, to counterbalance the influence of special interest groups. As long as they manage to truly save more than $1 billion, use part of that savings to fund the continuing shrinkage of government.

Or use it for "pay for performance" bonuses elsewhere in the government to inspire a culture of efficiency, and use the savings to fund future bonuses. Or give it to free market think tanks :-)

Use it to teach free market economics and/or entrepreneurship to the public :-) (I'm assuming as usual Constitutional constraints are ignore as they are now) Perhaps use part of it for X-prize like thing for free market videos or websites that teach certain topics that get the most youtube views or web page hits.

If social security isn't going to be privatized directly, at least have the government find a way to make non-politically driven investments (rather than merely government debt) via a contest to determine those with the most skill. Although performance isn't guaranteed to repeat, to make it neutral, create a signup for investors to register the investments they propose that would total up to $1 billion and track their virtual portfolio results and see at the end of the year what returns they come up with and use some mix of them (factoring in they aren't guaranteed to get the same results the next time, and tracking their performance over time).

Chipotle writes:

I didn't read through all the comments. Sorry if this has been stated before.

Most Utilitarian (greatest happiness for greatest number): getting as many people up to annual income of $50K/year as possible. Best way would be through jobs that make them feel that they're doing important work. Maybe hire them as college lecturers.

Most Efficient: Create prize(s). Maybe a prize for an important gain in energy storage (batteries).

Ben writes:

Step 1: Initiate a Lottery for the original $1 billion.
Step 2: This will generate more than $1 billion in ticket sales (look at what happens to large lotteries and their ticket sales)
Step 3: Select winner(s) and distribute the first $1 billion.
Step 4: Distribute the >$1bn from lottery sales to each American equally.

Net Result: A few REALLY happy people, MANY people who enjoyed a couple of days or weeks thinking about what it would be like to a billionaire, and those smart enough to not "invest" in the lottery (and thus capable of maximizing utility) receiving more dollars than those who don't and weren't capable of maximizing utility.

A related tactic, you could give a bonus to politicians and/or regulators per X page federal regulations are reduced.

Spend it on a project to get foreign countries to pay us for defending them to cut down on military costs, while still letting the military industrial complex get money so they are less likely to fight this than real defense cuts.

Or obviously funding privatization efforts throughout government, e.g. spinning of the FDA into a competing safety label

You could have the utilitarian benefit of seeing liberals scream bloody murder by giving it out to the public in a regressive fashion, giving the money given out to the public based on their share of total investment income as a proxy indicating some likelihood they might spur economic growth (rather than the contest I suggested).

I'm sure there are better ways, these were what popped to mind in the first few seconds.

Rob writes:

Most utilitarian: Define utility, then treat the defined phenomenon as a subject of scientific investigation - which you fund.

(E.g. if utility is "happiness", fund the neuroscience of happiness and how to maximize it systematically, as a phenomenon)

Jake writes:

After reading through the bullet points that Prof. Caplan linked, I am not sure I see a material difference between K-H efficiency and utilitarianism. I get that one measures in dollars while the other measures in utility (or happiness), but why would we expect them to diverge into different policy recommendations?

Are there any textbook examples that show how a situation can be K-H efficient but not utility-maximizing (or vice-versa)?

Michael Stack writes:

Hmmm, with respect to an efficient way to 'spend' the money, if you assume that government tends to spend money inefficiently, one could argue (as others have above) that the government should either divide the money equally among some subset of the population (maybe the deserving poor, though you have to identify them), or burn the money (everybody else's holdings increase in value).

However, since it is a thought experiment and you're asking how the government *should* spend the money, maybe we should feel entitled to assume that the government would spend it in whatever fashion we imagine - government inefficiency assumed away. In that case I'd start thinking about the biggest public good 'lever' one can find. Immigration would be great but I doubt the money would have enough of an effect. Instead I might award it as a prize to whatever drug company produced the largest decrease in morbidity for disease.

Lastly, in this case, isn't maximizing utility necessarily going to be the most efficient option?

RPLong writes:

Question for Ken P and Daniel Kuehn:

Is there an economic reason why you favor progressive redistribution? I haven't thought much about it, but my gut reaction is that we have no a priori reason to assume that $1 offers a poor man more utility than it offers a rich man - am I missing something?

Spencer writes:

This is the first answer the occurred to me; I scanned the comments and didn't see it:

Efficiency: Pay down the debt (i.e. do NOT spend it). This might be a cop-out, but if the question requires that the government actually spend the money, then deposit it in the Treasury's general fund and use it to pay bills as they come due. Then at the next debt auction, the government will need to borrow $1 billion less, and that $1 billion that Goldman et al would have sunk into Treasuries will instead go to other investments. Assuming that these other investments are in the private sector, they will necessarily be more efficient than using the $1 billion on anything that the government would spend it on.

Utilitarian: I like the lottery idea others proposed. People get very excited about the lottery, even if it is just redistribution.

Alex J. writes:

Efficiency is dollar denominated while utilitarianism is "happiness" denominated. Given diminishing marginal utility, this means that the most utilitarian method is likely to help the poorest and most miserable, who are for the most part outside of the US. The most efficient method is likely to help the (relatively) wealthy, who have more money to reveal their preference for things by buying them.

Ideally, the best solution will involve positive externalities. Goods that are under produced because the benefits are not captured.

Deregulation is not "spending" the money. I'd lump advocating deregulation in the same category.

Buying off dictators is tempting, as their subjects are the most miserable, but how are you going to guarantee their replacements are better? Also, I don't think a billion dollars is enough to get NK sold to SK - which is the most plausible way to improve a terrible regime.

So:

Utilitarian: Buy out a billion dollars worth of patents for medicines that treat diseases of the poorest people of the world e.g. AIDS and malaria. Put them into the public domain. The ill poor are the most miserable of the miserable. We can buy the patents of proven drugs, rather than speculate on what might wind up the most helpful.

Efficient: Give the money away to members of the highest tax bracket, as they have the greatest revealed demand for money, expressed in money terms. Obviously, I'm punting on positive externalities here, but at least the recipients would be able to apply their own tacit knowledge as to how to spend the money. An obvious alternative would be to buy out patents for medications which treat diseases of the (relatively) rich.

Rob writes:
E.g. if utility is "happiness", fund the neuroscience of happiness and how to maximize it systematically, as a phenomenon

The optimal utilitarian way might be research on how to create hedonium, i.e. technology optimized to produce maximum pleasure per unit of energy.

Eli writes:

Efficient? Whatever has the largest positive externalities; probably basic research funding granted to universities.

Utilitarian? Use it on a subsidized low income worker program. Us it to transport third world workers into The States. The money could be spent advocating for open boarders, but no amount of money could overcome the strong opinion of the public against the idea. It isn't open boarders, but it's the closest thing to it for $1 billion.

Bostonian writes:

If some software costs $1000, people who value the software at $800 don't buy it and suffer a deadweight loss of almost $800. With $1 billion, I would buy the rights to an expensive piece of software (Mathematica or Matlab, for example) and then distribute it for free and/or make it open source.

Along similar lines, I would buy and then give to the public domain the patents for some medicines so that their prices would fall.


Thomas May writes:

Sending medicine and vaccinations to the third world is probably the way to provide the greatest happiness to the greatest number for the lowest cost. The domestic welfare state by and large isn't because people in the US tend to have a lot of money by world standards anyway, and development aid (as opposed to relief of extreme hardship) isn't either because it doesn't seem to do much of anything.

I'm not sure refusal to give this answer is entirely unconnected to libertarian beliefs (speaking as a libertarian), although some of the "bad" answers seem to be people trying to prove they're smarter than the question and apparently failing.

(As an aside, I doubt AIDS is actually worth treating with a sum as small as $1 billion. Yes it causes a lot of harm but it's also extremely expensive to treat and treatment only delays progression. There are enough really easily preventable diseases about like measles.)

Adam_Smith writes:

I am taking "efficiency" to be a matter of minimal overhead costs; i.e., ideally all the funds spent are applied directly to the intended beneficial end. For this I say raise the pay of federal employees. It's very simple, the benefit, (to the employees), is undeniable and implementation costs are pretty much limited to changing the input instructions to payroll computers.

Identifying maximal utility is much harder. I'm going go with infrastructure spending on such things as roads, bridges, locks and dams, canals and harbors and airports -- transportation infrastructure. Doing the improvements creates jobs and income for many working households and then the improvements themselves generate productivity gains for additional economic benefit. I left out electric, water and electronic communication utility spending, (even though most of these these are literally "utilities"), because these improvements are better managed by the private sector than the federal government. A close runner-up to infrastructure in my mind would be spending on basic scientific research because of the large potential for long term benefits, but those are more speculative, less immediate and initially less dispersed.

brendan writes:

Alright, there's this guy named Peter Thiel. He's sorta like Brian. Libertarian. Bigtime education skeptic and democracy skeptic, etc. So he's operating under OUR assumptions.

And he's a great capital allocator! A lot of the commenters ideas require someone to distribute the cash. Innovation=positive externalities, right? Someones gotta hand out the cash to the innovators. Sounds like a job for Thiel. Give him the billion.

One word of caution. He might use the money to build a border fence! (google numbersusa thiel)

Bob Murphy writes:

Hire handicapped 3rd worlders to come in with work visas and take rich Manhattan families to the front of the line at Disneyworld.

Jacob Lyles writes:

Use the money to create a public repository for all government funded research results, papers, code, and data.

Hana writes:

From the comments it seems that libertarians are every bit the rent seekers as all other groups. I agree with Spencer, use the money to reduce the debt.

At the end of every fiscal year Federal Government Departments have excess funds. While some amounts are carried over in to the next year, most departments make an effort to spend down the excess, thus securing their baseline funding. The notion that there is an extra billion dollars laying around to be spent willy nilly is how the US has arrived at its current fiscal situation.

On that basis the most utilitarian and efficient is to pay down the debt.

Hazel Meade writes:

Use it to pay down the federal debt.

Paul Ralley writes:

Most Efficient: expand existing entitlement programmes, these are already in place, and so the cash can then be spent by (mostly) poor people on things they actually desire

Max utility: have a lottery to give a $10,000 grant plus green card to 100,000 individuals aged 16 - 24 from the bottom billion

Hazel Meade writes:

Followup:

Paying down the debt has no (or as close to 0 as you can get) administrative costs. (Efficient!)
Paying down the deby will also deliver returns by reducing future interest payments on the debt. Which will in turn be utilitarian by providing benefits over the long term to our children and grandchildren (i.e a much larger number of people than are living today, spread over a longer timespan).

Doug writes:

Develop new anti-biotics, put them into the public domain.

Since it's the government they can suspend the requirement for FDA efficacy testing and develop the drugs at a much cheaper price.

Bostonian writes:

If you think an inability to borrow, as in Greece or Spain, is one of the few things that can constrain government spending, you would not use your windfall to pay off government debt if you are a libertarian.

dave smith writes:

I don't have an answer, but this made me think about how crappy the government spends money.

Floccina writes:

Hire more police for crime ridden areas. This makes those areas safer and therefore more valuable. It should also reduce the number of people going to prison a big gain. And it is the core function of Government and so least like to cause crowding out.

More Police, Fewer Prisons, Less Crime
by Alex Tabarrok on January 26, 2013

Philo writes:

The question is odd, in that it focuses on the government’s spending a billion dollars *without changing any of its other behavior* (presumably). Yet many of its activities obviously fail both the test of efficiency and that of utility-maximization. So we are to imagine that the government is aiming at efficiency or maximum utility *in its spending of the billion dollars*, but not in its other activities; it must have inconsistent objectives--as it were, a split personality. It would have been better to word the question thus: “In the modern U.S., what is the most efficient way for a non-governmental agency to spend a billion dollars? What is the maximally utilitarian way for it to spend this sum? Assume that the government will not interfere with the agency’s actions, so long as they are legal.”

anonymoose writes:

Paul Ralley,

You suggest the US hands out 100,000 grants of $10,000 plus a green card by lottery. I could make a pareto improvement to your suggestion by handing them out instead by IQ test.

Jacob Lyles writes:

Paul Ralley,


I could make a pareto improvement to your suggestion by handing out 100,000 green cards by merit/skill instead of by lottery, unless you think that all people have an equal chance of flourishing in a US economy which has been brutal to unskilled workers in the last half decade.

Marc F Cheney writes:
I don't know if this [paying off dictators] is the best way to spend $1 billion for the people of the U.S., but I sure wish economists would explore this idea much more extensively.

Economists would hopefully note that when you reward a particular behavior, you get more of it.

Thomas Boyle writes:

You want to give it to those with the highest marginal value for money. How do you know who they are? They are likely to be the people with the highest earned incomes. Why them?

a) Revealed preferences: they put more of their resources into earning than others do.
b) Higher tax rates: at the margin, to buy something they must earn more than others do - and they are already putting more effort into earning than others are, so they have less capacity to do more.

So, it's pretty easy. Give it to people in proportion to their earned incomes. Use tax returns to identify them. If we want to make sure we don't just reward luck, use an average over 5 or 10 years.

This is not a tax cut. It is a bonus to those who are doing most to support our society. An earned-income bonus, if you like.

BZ writes:

Pay all TSA employees to stay home for the next 4 years.

Richard writes:

Since you didn't say maximize human utility, I'd say that the federal government should start a propaganda campaign against factory farming. They might be able to buy factory farms directly, but as long as there is a demand new ones will pop up. Therefore, I would look for a long term solution to end factory farming. Hopefully, the results of the campaign would be public pressure for government to ban the practice (assuming that the US government can't just ban it under this scenario, and is looking to somehow spend money).

Part of the money should also go towards scientific research into how to grow meat in test tubes, as William Saletan recommends. That's another way to get a long-term solution to the end of factory farming. But there will be a need for at least some propaganda to make the public accept test tube meat as a morally superior option.

Jacob Lyles writes:

We can use the same arguments for open border propaganda and for pro-life propaganda. The 55 million or so young people that we have lost to abortion after Roe v. Wade would have certainly contributed to economic growth. And they would have far fewer costs of cultural assimilation than immigrants. As a bonus, with a younger demographic structure, our government might be more focused on ambitious projects with high return and less on entitlements - more moon shots, less medicare.

Steve Jobs was given up for adoption by his impoverished mother. Had he been born in the 70s or later he would have ended up a lump of cells in a medical waste bin.

Damian Park writes:

This is a really difficult question to answer because my eyes are blinded by the deadweight losses that envelop the federal bureaucracy, and thus when I think of improving welfare, I think of rescinding laws and spending less rather than spending more.

Therefore, if we cannot do this, we can use the money to bribe people to accept tradeoffs.
1) Agricultural subsidies create deadweight loss - therefore, bribe farmers with a one-time payment so that they voluntarily relinquish their opposition to subsidy cancellation. Not sure if a billion is enough though but it might be.

Other ideas along this line may make sense too.

My initial thought was to buy parkland inside cities, but in dense cities, like SF, where it would be valuable, a billion doesn't go very far at all, and it's not clear how valuable these are to people although they get a lot of use.

If I actually had to spend money on something, then I think about transportation and investing in traffic management? Almost everyone benefits from lessened congestion. Time stoplights for signal coordination, or add congestion pricing to highways, or convert downtowns to one-way streets. Some cities actually do spend their money this way, indicating that it is valuable. It lessens pollution as well. Is it the most efficient use of money? Could be, but really, there is no way to know ex-ante.

Jacob writes:

A billion spent strategically could conceivably win you a majority in both chambers of the legislature without breaking the law (~$1.7b was spent on campaigns in total for both chambers in the most previous election, so this is so not unrealistic).

Use your newfound political clout to push through fundamental tax, immigration, and trade reform, and other legislation to get rid of big deadweight losses due to poorly designed/implemented government policies. Stopping here maximizes efficiency.

Redistribute some of the welfare gains from this policy to the most destitute. This maximizes utility.

Koen writes:

Award prizes to people who solve (or contribute significantly to solving) specific scientific, technological or other (e.g. politico-strategic) problems whose solution would make a great difference to the well-being of a lot of people in the world.

For example, the billion dollars can be divided as follows: 5 prizes of 100 million dollars each, 5 of 50 million, 5 of 25 million, 5 of 10 million, 5 of 5 million, and 50 for 1 million.

Some problems will require significant investments to solve, others less so, which is in part what explains the difference in prize money per problem. Of course urgency and gravity of the problem also play a role in deciding how much money to reward. There can be various ways in which decisions can be made about which problems should be included and how much to award to their solution.

Some examples of problems: design cheap and safe ovens for people in developing countries to use so that their indoor air pollution goes way down; find cure for types of cancers; find effective strategies for reducing or resolving conflicts between governments; etc.

---

The rationale behind this way of spending one billion dollars is that while science and technology can greatly improve the lives of so many, currently due to its institutional structure the markets for science and even technology right now are quite distorted, benefiting the status quo and being not generous enough toward out of the box thinking / thinking by relative outsiders to a field.

By rewarding prize money to whoever solves some problem, one in a certain sense bypasses the institutional structure and changes the incentive structure so that new and better ideas to solving some serious problems may emerge.

Andrew writes:

Most efficient: Write $100,000 checks to the 10,000 random small businesses. The check wont be enough for them to close up shop and retire and will most likely be invested. We could have some sort of application process, but that would eat into the efficiency of the process and would get political. Random it is.

Most utilitarian: Buy a few of the patents of some the commonly used and more expensive cancer drugs and make them public domain. Generic manufacturers will rush in and drive down the prices to market levels. Utilitarian in that every one is personally or has close relative affected by cancer.

Only question: I have no idea how much these patents are worth ($1B could be laughably low).

peter thom writes:

Mark Zandi, chief economist at Moody's Economy.com, studied the efficacy of various forms of stimulus. He concluded that GDP grows by $1.59 for every dollar spent on infrastructure, while the increase from a corporate tax cut is only $0.30.
Zandi's study measured some of the most efficient ways to spend government money: temporarily increasing food stamps ($1.73 GDP increase per dollar), extending unemployment benefits ($1.63), increasing infrastructure spending ($1.59) and upping direct aid to financially strapped states ($1.38). The most efficient tax break was a direct refund check, but even this had a lower multiple effect than any of the stimulus forms studied.
Of course there are studies that claim tax rebates are more productive than spending (Alesina & Ardagna), though their findings have been quite effectively countered since they were published.
It would seem logical that wealthier people, who receive the bulk of tax cuts and tend to save a significant portion of incoming funds, would not match the spending of people who tend to live from paycheck to paycheck.
The major confounding variable is whether we are in a balance sheet crisis or not; when lots of people are paying down debt rather than spending incoming funds regardless of what the source may be.

One possibility is to to employ the market to solve this problem via an X-prize like approach, assuming the distributed mass of minds out there might invent ideas we as central planners might not come up with. Use part of the money, $X million to reward those that come up with the best answers to say make government more efficient, with the reward amounts based on the savings actually realized (rather than predicted). Ideally more than one idea would be chosen to be funded, since none are guaranteed to succeed, just like with venture capital. Use part of the savings to fund the next round, etc. Meant to post that earlier but had to run, variation on earlier themes.

I'm assuming you are somehow oddly in control of how this is spent, and might use it in a way Congress and the president might not approve of. Since we are engaged in fantasy, this is a speculative idea that needs data I don't have to assess its viability. If so, an issue I've never looked into is what % of what the federal government does has never been challenged in court as being unConstitutional, yet stands a decent chance of being declared so if it were challenged. If the budget is in the $billions then since the current leadership wouldn't end the programs, hand the funds to outside law firms to challenge them. Venture capital investments don't count on all investments succeeding, just some, so the potential return on this investment.

Aaron Zierman writes:

Spend the money on basic economic education for the masses.

Theoretically, people will make more informed, well-thought decisions with their lives resulting in increased wealth (both in a monetary sense and overall happiness).

Additionally, such a populace will elect economically-informed politicians. They will also hold them more accountable to true economic reform.

The policy result will be far greater savings than just the original $1 billion.

So in the end:
1. People are happier
2. The overall economy grows faster (and more naturally)
3. The government is run more efficiently.
4. Repeat 1-3.

Martin writes:

@Mark

"I don't know if this is the best way to spend $1 billion for the people of the U.S., but I sure wish economists would explore this idea much more extensively."

Military material is expensive. I am sure freer world will also be a safer world. It would probably alone already be earned back through the peace dividend over time.

Not to mention that in 50-60 or so years you might have another South Korea. How valuable would that be trade-wise to the USA?

The danger with this idea, and Rent-Coup, is that you have to figure out what the alternative would be then. Syria seems dangerous, but who knows.

MingoV writes:

The answer is simple: give everyone in the USA approximately $3.

Philo writes:

The big difference between perfect efficiency and maximum utility is that in utilitarianism there is no discounting of the future, as there is in economics. The efficiency maven is overweighting short-run payoffs; the utility maximizer is taking a *very* long view.

Joe Smith writes:

Give the money to DARPA and tell them to use it to find a "cure" for drug addiction/drug dependence/alchohol addiction. A cheap substitute, with no adverse side effect, which allowed addicts to function and that addicts preferred to harmful drugs would qualify as a cure.

DARPA has a history of effectively managing research. Private sector research into a cure is likely to be minimal. The benefits to addicts, alcoholics and society from a cure would be huge. Net present value of a "cure" could potentially equal as much as one years GDP (approx. 16 trillion dollars).

Even if DARPA did not find a cure, we can expect spin off benefits from the research. The payoff from a cure is so huge and the investment so small in the scheme of things that the investment is justified.

Koen writes:

Award prizes to people who solve (or contribute significantly to solving) specific scientific, technological or other (e.g. politico-strategic) problems whose solution would make a great difference to the well-being of a lot of people in the world.

For example, the billion dollars can be divided as follows: 5 prizes of 100 million dollars each, 5 of 50 million, 5 of 25 million, 5 of 10 million, 5 of 5 million, and 50 for 1 million.

Some problems will require significant investments to solve, others less so, which is in part what explains the difference in prize money per problem. Of course urgency and gravity of the problem also play a role in deciding how much money to reward. There can be various ways in which decisions can be made about which problems should be included and how much to award to their solution.

Some examples of problems: design cheap and safe ovens for people in developing countries to use so that their indoor air pollution goes way down; find cure for types of cancers; find effective strategies for reducing or resolving conflicts between governments; etc.

---

The rationale behind this way of spending one billion dollars is that while science and technology can greatly improve the lives of so many, currently due to its institutional structure the markets for science and even technology right now are quite distorted, benefiting the status quo and being not generous enough toward out of the box thinking / thinking by relative outsiders to a field.

By rewarding prize money to whoever solves some problem, one in a certain sense bypasses the institutional structure and changes the incentive structure so that new and better ideas to solving some serious problems may emerge.

Geoffrey writes:

Kaldor-Hicks efficiency

Although not perfect - I would try something that includes revealed preference on the willingness to pay.

How about $1 for $1 matching funds for individual purchases. Giving the money first to our poorest citizens who spend the highest portion of their income.

Spending $500 of your very limited funds to get a $1000 car - might not show you value the car at the full $1000 - but it shows you value it an awful lot.

Things might have to be simplified somewhat to reduce the transaction costs.

Cheers

Ken from Ohio writes:

My answer

Burn the Money. Just pile it up and set it on fire.

By destroying $1B in currency, the total money supply will decrease
therefore increasing the purchasing power of the remaining currency.

This is the most efficient mechanism of providing a benefit (although small) to everyone.

Jacob Lyles writes:

Joe Smith,

Instead of asking DARPA to find a cure for addiction, can we ask them to make better and less harmful drugs?

Pleasurable drugs without harmful side-effects are an obvious win from a utilitarian perspective. And the art they inspire - such as all of 60s/70s rock and roll - is an additional benefit.

I’m going to answer the question “What is the maximally utilitarian way for the federal government to spend this sum?” first, since I forgot about the other part of the question when I was thinking about it.

If I want to give the money to those for whom it has the most utility, I should give it those who would get the most utility from it – or, in other words: those who would pay the most for it. What does it mean, though to pay for money? The obvious answer is a loan.

I would auction off the right to borrow the money for some fixed period – say, amortized over 10 years. To lower the overhead, it would be auctioned in fixed chunks (say, $10,000 per person) and the money could only be used to pay off all or part of an existing loan in good standing to a federally insured institution and only be given to a taxpayer who appears from the last few returns to be capable of paying it. The payments would be automatically deducted from the taxpayer’s income through payroll deduction and would not be dismissible by bankruptcy.

This makes the assumption that willingness to pay interest is a good proxy for actual utility of having the money. This seems to me a reasonable assumption, but I could understand challenges to it – however, I would expect such a challenge to propose a better way of evaluating said utility.
This, of course, kicks the problem down the road, as the money will be paid back eventually and must be returned. But the incentive seems OK to me – in fact, this kind of program could have ameliorated the housing crisis, IMO – issue loans at very low rates to those who *don’t* have bad loans, rewarding them and freeing up existing capital at well-manage banks that can then be re-loaned. So the second-order effects of this policy are also good -- capital is freed up to go where it will be most productive.

In any case, I hope the key issue – find out who has the most utility for the money and give it to them – is clearly addressed. Only markets have the power to easily distribute a good (even money) in a way that respects utility.

Eric Shierman writes:

Paying down debt by paying off the treasuries with the highest coupon, either by calling them or buying them on the open market, (depending on the call premium relative to current market prices).

zc writes:

Most efficient: Allow the Federal Reserve to use those billion dollars to serve as replacement for the billions of dollars they replace as 'worn out' having deemed them 'unfit for commerce' annually. For example, in 2010, the Federal Reserve removed from circulation and destroyed almost 5 BILLION notes. ()

This would be the most efficient because I'm assuming the $1-billion to be real, cash money. As such, this achieves the same result as burning the money (effectively taking $1-billion out of circulation), with the added benefit of saving the cost of printing $1-billion that would otherwise have to be printed to replace old, worn currency with new currency.

No deadweight costs, no crowding out, no negative externalities.

Maximally utilitarian: Place $20-million bounties on the heads of 40 of the world's most wanted (say the Top 10 worst dictators, the FBI's 10 most wanted, and Interpol's 20 most wanted). But, you say, that's only $800 million. The additional $200 million would be placed in a trust fund charged with providing for the costs of asylum in perpetuity for the immediate family members (parents, significant other, children) of anyone cashing in on a bounty.

This would be maximally utilitarian in that only people who deemed it worth the risk would pursue the bounty, yet virtually everyone else would receive the benefit of happiness/pleasure that would go along with the technical success of the program. Even before the first bounty was cashed, each of the targeted individuals would immediately become more distrustful of their inner circle, their cost of doing business would go up, and their criminal/despotic regimes would become less effective.

[broken link fixed--Econlib Ed.]

James A. Donald writes:

The question demands that we think like a state, assumes that there is such a thing as a benevolent state.

The best of states is a stationary bandit, rule by secure king. Typical states are closer to being mobile bandits, dissipating wealth in the struggle for power.

The best solution is that the money not be spent, for if spent, would surely be spent destructively to the favor of overly powerful special interest groups. Given the civil service is fireproof, andy government spending, no matter how good the intentions, winds up generating negative utility. If the money was burnt, would increase the value of money held by people who actually produce wealth, thus increasing the production of wealth.

blsdaniel writes:

Pile up the money in the middle of a mine field. Anyone who goes in to get it must want it BAD!!!

PrometheeFeu writes:

Buy land and bribe a foreign third-world government to grant that area sovereignty and form a charter city there.

Matt Bramanti writes:

hire outside consultants to identify, appraise, market and sell underutilized government assets - land, buildings, aircraft,
typewriters, executive departments, whatever.

take the proceeds and repeat.

another Bob writes:

Prizes.

Spend $1M on an insurance policy against an important achievement or innovation. For example, cold fusion. That's at least a 1000-to-1 against long shot over the next 10 years. If it is achieved the winner gets $1B from the insurer.

Do this for the next 999 most advantageous possible achievements or innovations.

In this way you could turn $1B in cash into $1T in prizes! Now that's some incentive for innovation and achievement.

Charlie writes:

In a Kaldor-Hicks Utilitarian sense, the most costly policy is that poor non-US workers are not allowed to work/live in the US (or comparable Western country).

The ostensible solution is to give opponents what they require. That is, pay states and even low-skilled US workers, to compensate for adding non-US workers to the US. That is, fund SS, small increase in the minimum wage or better EITC where supported immigrants can work, and use the money to support local government like hospitals.

Brad D writes:

$1 Billion is 0.0067% of GDP. Spending it in any fashion on normal or even public goods is zilch.

Relocate 1600 Pennsylvania Ave (the White House) to Plainview, TX. If enough $$ if left over, relocate as many cabinet-level offices there as well.

Himanshu Sanguri writes:

If I would be a part of decision making body to spend the extra one billion dollars, I will plan and invest the money in a scheme that will provide loans to low income but enthusuastic people with a sound business plan. I will advocate for giving loans to such people who have brilliant ideas to generate more income, employment and social utility goods. Therefore, I will ensure that, that extra one billion dollar should be a germinating seed for new budding talents.

Steve Z writes:

_Step One._

The most efficient current way for the government to spend a billion dollars is unknown. Here are some assumptions.

(1) Let the cost of figuring out how to most efficiently spend $1bn be Z (Z includes the costs of figuring out how to calculate Z);
(2) Z is less than $1bn;
(3) Z is large enough that it is also a good approximation of the best way to spend $1bn - Z.

Conclusion one: the first investment should be in figuring out how to most efficiently spend $1bn - Z.

_Step Two_ In order to complete the task of Step One, post a post like this on all sorts of econblogs, and hang it on the door at various econ departments. There is something bizarre about seemingly rational economists -- they will generate a bunch of answers for free! Alternatively (or as an adjunct), set up a prediction market soliciting the best responses. One could also conduct studies of how $1bn has been spent in the past and what the results have been.

_Step Three_ Implement the results of Step Two, or a mixture of the best results, if there are local maxima at less than $1bn - Z.

christopher fisher writes:

Agree to a onetime bonus to the president if he agrees to repeal all previous Executive Orders, without re-enacting them later. We might also ask for a blanket pardon of all drug offenders.

PG writes:

1) Hand to Fed for regular currency emission purposes. Alternatively repay debt. Possibly fund basic research prizes or something.
2) Distribute via food stamp programme, but in cash. Uses existing programme infrastructure and does a decent job targeting the "high marginal value of money" people I guess.

PG writes:

Addendum to 2): this is under assumption you can't spend it on non-US poor of course!

Tim Worstall writes:

The efficient and maximally utilitarian method of Uncle Sam spending $1 billion is to increase the efficiency with which Uncle Sam spends the other $3 trillion a year he does spend. This will clearly also be maximally utilitarian.

The greatest single possible efficiency improvement would be to get Maxine Waters* to leave politics.

Thus $1 billion should be spent on persuading her to retire.

If it does not cost that much so to persuade her then rinse and repeat with as many politicians as you can afford.

* Please do substitute your own idea of who is the worst current politician here. I'm not all that up with US politics and there may well be those who, when substituted here, would increase both efficiency and the utilitarian outcome.

Ralph writes:

Shouldn't you just stick it in an index fund or something like that? Or could you give it to the hottest venture capitalist or stock broker at the moment? Someone's already figured out the most efficient use of capital, so just give it to them.

Steve Z writes:

Max utility: Nozick's essay "The Experience Machine" discusses a virtual reality machine that gives pleasure. Under a plausible set of assumptions, rational agents who have a choice will spend as much time as they can in such machines as soon as they exist. Such machines are possible to build. The best way to maximize utility with one billion dollars is to hasten the development of such machines.

Pat writes:

$1 billion dollar prize for carbon sequestration.

I don't think global warming is nearly the problem that others do but $1 billion is much cheaper than anything else we'd do.

EclectEcon writes:

Spend a small portion to research how to use the rest to pay off the vested interests to reduce bureaucracy and red tape in gubmnt. I.e., look for Pareto efficient reductions in regulatory capture and the like.

Handle writes:

1. Forget about new functions of government or radical shifts in existing policy; there would be too much resistance, and it already does too much.
2. Does the government already spend it's existing budget in K-H efficient manner?
3. If not, spend as much as the US$1B figuring out how to reallocate and then do it. Huge gains in efficiency! The most utility-per-dollar productive programs are expanded, the most wasteful programs are shrunk or even eliminated.
4. Once equal marginal rates of transformation are established, spend whatever is left proportionally amongst all existing government programs.

Coda:

If you had achieved equal MRT's across the entire government and had to cut the budget then you would do so ... proportionally across all programs. Except Air Traffic Control, obviously. See: "Sequestration". If think Sequestration is "dumb" then you've got a model of the relative ranking of very unequal MRT's across government programs, and your real beef is that Congress didn't do the above process.

Hugh writes:

The problem here is to choose the project with the highest IRR (Internal Rate of Return), where the (R)eturn will have to capture both economic and non-economic benefits.

I would propose a nation-wide competition where anyone can submit a proposal for spending the $1BN cash; each submission to be accompanied by a cheque for US$1,000.

The US$1,000 would defray the costs of having GMU Ph.D students review the projects and choosing that with the highest IRR.


Maximum Liberty writes:

Pay off $1b of government debt, allowing future taxes to be $1b plus interest lower. Any government spending on actual programs will most likely reduce both efficiency and utility in the future in way that I cannot possibly predict now. See public choice theory for why.

Max

Sarah writes:

*Major* efficiency or utility gains involve abilities not currently plausible in government.

*Ability to coordinate Manhattan-like research projects. [Creating molecular nanotechnology or strong, safe AI.]

*Ability to identify promising business opportunities. [A hedge fund/VC firm at a grand scale.]

The current US government is not capable of mobilizing the country's most competent people and coordinating them to work on a task. In fact, I don't think most private organizations are, either. You'd really have to figure out *governance*, that is, *human coordination* before you could spend your billion dollars. It probably makes more sense to try to figure this out in the safer sandbox of a private business than to jump into government right away. If we are allowed *time* in this thought experiment, I'd want to first figure out how to build a private organization (a business or foundation) for practical basic research (i.e. goal-oriented, not with the dysfunctional incentives involved in universities and grant funding.) Then have the government "buy" that organization and give it a bigger budget.

Seth writes:

Why aren't tax cuts an option?

Abe Froman writes:

I'm treating this in a completely theoretical way. My answer is probably not the best for reasons of precedent and envy and corruption... but I think its useful. Here goes:

Mutual Fund Managers pick the stocks they think will create the most value for shareholders. Likewise, government officials are supposed to spend this money to maximize the social return for taxpayers. I'd argue there's really very little difference - as long as you're ignoring Ricardian Equivalence/tax effects. Both investors and the government are really just interested in creating consumer surplus.

Perhaps the most-robust statistical finding in all of economics is the evidence that Mutual Fund Managers cannot beat the market. Similarly, Govt Bureaucrats are also unlikely to pick the investments with the most gain to taxpayers.

Index funds get better returns because they have much lower costs. The govt equivalent of the index fund is either 1) give the money away to everyone; or 2) get rid of it in the cheapest way possible. Government decision making has costs. You need to pay a govt official to make the decisions, pay bank charges to send the money back to people, and the govt official's decisions could be wasteful. Individuals are more likely to spend the money on goods that generate some consumer surplus/producer surplus.

Therefore, I think leaving the cash in a giant pile on the White House lawn for people to just pick-up might just be the best way for the government to spend the money - since it's transaction costs are low. The full $1B will flow back into the markets as many self-interested parties that are prone to make much more efficient decisions than a single govt official.

Rob writes:

@Steve Z:

Nozick's essay "The Experience Machine" discusses a virtual reality machine that gives pleasure... The best way to maximize utility with one billion dollars is to hasten the development of such machines.

The Experience Machine is not optimally funded by government, it will be a natural outcome of entertainment consumer market evolution.

However, what the Experience Machine lacks is incentive for the individual to reproduce, as well as optimal energy-efficiency of the overall system. This is why the invention and funding of hedonium/utilitronium is optimal, i.e. technology optimized to create as many pleasurable/desirable mental states per joule as possible.

Alex J. writes:

I've realized that part of my justification for the "efficient" case is incorrect, as everybody values a dollar at one dollar in dollar terms. Rather than changing my answer, I will instead point out that people who go through a lot of trouble (i.e. high tax rates) to get money are probably going to be better at spending it effectively. Unlike, say, the story of the homeless guy that was given $100,000 told here by Bryan.

Michael_M writes:

Aaron Zierman already took my answer a mere 18 hours ago, but I will flesh out the details:

  • -
buy each literate person in the US an econ 101 textbook, or perhaps the Art of Thinking Clearly
  • -
with the remaining money, offer a substantial payment to anyone who can demonstrate that they have read the book (and provide for payment to the examiners)

One can substitute an Econ 101 course for the book itself, but that may be less efficient.

This has a number of virtues:

  • -
we all assume that increased economic literacy will result in better choices, which means increased happiness and increased efficiency in all activities
  • -
the scheme is unlikely to appeal to the wealthy or to the economically literate, leaving more of the remaining pot to the marginally economically literate and those of lesser means (where poorer economic decisions tend to be made) - you won't have the $3/person problem
  • -
illiterate people will be incentivized to gain literacy to participate in the program, a massive gain
  • -
almost all of the schemes noted in other comments would actually become either policy or unnecessary the more successful this scheme is

In other words, the poor personal, social and political choices that many of the suggestions above are meant to address could be avoided or seriously reduced in this plan. You can have it all!

Aaron Zierman writes:

@Michael_M

I appreciate the support to my idea and I am liking your ideas for implementation.

Steve Z writes:

Rob:

Quite right. Cheerfully modified.

Richard writes:

For those saying stuff like "Put a billion dollars on the head of Kim Jung Un", how come the $25 million on the head of Bin Laden didn't work (or if it did, it took more than a decade)? Obviously the circumstances are different, but it seems that paying bad guys to go away or offering rewards to assassinate them isn't as easy as one would think.

Mark Bahner writes:
Buying off dictators is tempting, as their subjects are the most miserable, but how are you going to guarantee their replacements are better? Also, I don't think a billion dollars is enough to get NK sold to SK - which is the most plausible way to improve a terrible regime.

Suppose this: You offer $50,000 to up to 20,000 North Korean soldiers under the rank of general. The amount is payable when Kim Jong Un is removed, and democratic elections are held.

South Koreans (on the own dime) are encouraged to move in with non-profit aid and for-profit companies that take advantage of the lower wages paid to North Koreans.

I realize this is off-topic a bit, but this is something I really think economists should be thinking about. Imagine how much better place the world would be if the countries that are ranked lowest in freedom by Freedom House had the chance to have an internally generated regime change followed by democratic elections.

After all, what has the average person born in North Korea or Cuba done to deserve their respective lots?

P.S. Other things economists could think about are things like: maybe the reward should be reduced by some amount for significant numbers of people killed in the transition process?

Mark Bahner writes:
For those saying stuff like "Put a billion dollars on the head of Kim Jung Un", how come the $25 million on the head of Bin Laden didn't work (or if it did, it took more than a decade)?

That's a good question (about Bin Laden). Perhaps the offer should have included asylum in the country of their choice for the informant and up to 50 of their closest relatives.

Obviously the circumstances are different, but it seems that paying bad guys to go away...

Paying the bad guys to go away seems like a mistake to me because: 1) the bad guys (like Kim Jong Un) have access to their whole country's wealth (such as it is) and also have power, so it takes an awful lot to buy them off, and 2) it doesn't do anything to try to direct the replacements to be any better.

...or offering rewards to assassinate them isn't as easy as one would think.

Rewards for assassination also seem like a bad idea to me. You're effectively paying people to commit what is a crime in every country in the world.

Given North Korea's possession of nuclear weapons, and it's proximity to Seoul, South Korea, it seems like it would be better to "practice" with a country like Cuba. It seems to me that's it's unlikely that Cuba would disintegrate into civil war if Castro and his generals were removed from power.

Joery Donuts writes:

Have each agency that prepares a budget prepare two budgets for next year. One if no extra funds were received this year and one if some (specified funds) were received this year. Find the combination of agencies with the largest net present value of savings. This value may be negative, but it will still indeicate the best use of the $1 billion today.

Sunil writes:

Use it to bribe politicians to scrap as many laws as possible!

Bernard Yu writes:

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Greg Jaxon writes:
1. Cop-out answers: "There's no such thing as efficiency or utility." "It's impossible to know what's efficient." "It's impossible to know how happy someone is."

Shame on you for confusing "opt-out" and "cop-out"!

Since your question involves a Federal Government doing the "spending", these are apt answers. Are you claiming that a Federation of governments has some way to observe or calculate how happy any one or any collection of people are? Efficiency presumes some scarcity, but you're not asking what the government should do with the last $1B it will ever have! You've only asked where an effectively omnipotent bidder in the market should next interfere - so you need to define what "efficiency" might mean for that incremental application of raw force.

I think the theories you've cited might have some validity for individual rational actors, but your students are only pointing out how the very terms you use are inapplicable to the force monopolist.

Implicit in your question is the idea that another $1B increment in government spending can effect some Good. Opting out of that assumption is possibly the first sign of economic sanity.

Greg Jaxon writes:
1. Cop-out answers: "There's no such thing as efficiency or utility." "It's impossible to know what's efficient." "It's impossible to know how happy someone is."

Shame on you for confusing "opt-out" and "cop-out"!

Since your question involves a Federal Government doing the "spending", these are apt answers. Are you claiming that a Federation of governments has some way to observe or calculate how happy any one or any collection of people are? Efficiency presumes some scarcity, but you're not asking what the government should do with the last $1B it will ever have! You've only asked where an effectively omnipotent bidder in the market should next interfere - so you need to define what "efficiency" might mean for that incremental application of raw force.

I think the theories you've cited might have some validity for individual rational actors, but your students are only pointing out how the very terms you use are inapplicable to the force monopolist.

Implicit in your question is the idea that another $1B increment in government spending can effect some Good. Opting out of that assumption is possibly the first sign of economic sanity.

Daublin writes:

I'll pick better homeless shelters in major cities.

The utility improvement is immense. It doesn't cost much to provide a bed, or to upgrade from a giant room of beds to a smaller room with four beds in it. The people affected are the most desperate in society and thus will benefit more than most anyone else from the money.

I don't know what is meant by efficiency here, so I'll decline to speculate. It must mean a high *something* per dollar, but that something must not be utils.

Other candidates seem worse to me. Free medical clinics are a close runner up, but I suspect basic human needs will do more good than basic medical needs. Trains seem totally pointless to me; a billion is just too little to make a difference. Research seems to already be well funded, perhaps overly funded.

In general the question is tough for the case of the U.S. It has a larger budget than any prior government, ever. There's not much left to spend it on.

Mike writes:

I found Joe Smith's answer a bit ironic, because a universal anti-addiction treatment may already exist. It's called n-acetylcysteine. See the "addiction" section of this meta-analysis. I've successfully managed to cure an addiction of mine with the stuff, so there's anecdotal evidence that it works.

As far as I can tell, at this point only small studies have been done, and larger studies only haven't been done because NAC is impossible to patent and there's no money in it. But someone in the drug industry should tell me if this explanation is plausible or not.

AlexS writes:

Burn it. And thus decrease the money supply and increase the value of every one else's money. However the individual members of the population use their new-found value will surely be more efficient than what the government decides. This is just another iteration of the central planning fallacy.

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