The "Earmarked Money" Illusion

149 The "Earmarked Money" Illusion by William B. Irvine T wo stories that made recent headlines were President Bush's declaration of war on drugs, and securities firm Drexel Burn ham Lambert's payment of over $300 million in fines and penalties for having engaged in insider trading. One would naturally think that these two events were in no way connected, but according to the government they were: Acting U.S. Attorney Benito Romano announced that most of the mon ey paid by Drexel could be used to fund the na tion's war on drugs. This announcement no doubt created an agree able image in the minds of many people. By fining Drexel, the government was not only taking steps to discourage insider trading, but was simultane ously generating funds with which to fight drug abuse. It is not difficult to come up with other cases in which politicians and government officials have claimed that certain government revenues were "earmarked" for particular purposes. The federal government, for example, sometimes gives money to other nations with the stipulation that the mon ey be used to buy food and medicine rather than arms. Similarly,in some states the law requires that the money raised in state lotteries be spent on ed ucation. And sometimes when a municipal gov ernment raises the sales tax, it stipulates that the additional tax revenues will be used only for some worthwhile purpose-say, to improve transit sys tems.

The image created by claims that revenues have been earmarked for worthwhile purposes is Professor Irvine teaches philosophy at Wright State Uni versity in Dayton, Ohio. largely an illusion.It is rarely possible for a govern ment to earmark revenue for a particular purpose. Consider, for example, the claim that the Drexel fine could be used to fund the war on drugs. Sup pose, as is most likely the case, that the $300 mil lion check from Drexel is deposited into an ac count which already contains funds from many other sources and from which a wide variety of programs are funded. What sense does it make to say, when money is drawn from this account to spend on the drug war, that it came only from the Drexel fine and not from any of the other sources of account funds? And what sense does it make to say that the Drexel fine was spent only on the war on drugs and not on any of the other programs funded from the account? It makes no sense at all.

In general, once you commingle funds in an ac count, it is impossible ever to separate them again. This is because money is, as economists like to re mind us, a fungible commodity. Suppose that the government, rather than com mingling the Drexel fine with other revenues, is careful to start a new account in which the Drexel check is the only deposit. Suppose, too, that the only checks the government ever writes from this account are checks to fund the war on drugs. In this case, it might make some sense to say that the gov ernment has earmarked the Drexel fine to fund the war on drugs, but there is an element of illusion in even this claim. Many would assume that because the govern ment is earmarking the Drexel fine to fund the war on drugs, the war will receive $300million more in funding than would otherwise be the case. This, of course, isn't necessarily true. For if the govern ment, after declaring that the $300 million in "the 150 THE FREEMAN • APRIL 1990 Drexel account" will be used only to fund the war on drugs, proceeds to cut by $300 million its gen eralrevenues fundingof the war on drugs,the war will be no better funded than it would have been without any earmarking of funds. In this case, all that earmarking the Drexel fine accomplishesis to allow the government to spend $300 millionfrom generalrevenues accountson thingsother than the war on drugs. It might, for example, buy part of a Stealth Bomber.

Along these same lines, consider a state lottery whose profits are earmarked for education. Sup pose that before starting the lottery,a state spends $200millionout of general revenues on education. Suppose that the lottery brings in $50 million in new revenue, which must be spent on education. If, in the face of this windfall,the state kept itsgen eralrevenues fundingof education at $200million (sothat education receiveda total of $250million), it might make sense to say that the lottery profits had "gone for education." Suppose, however,that in reaction to the $50 millionin lottery profits, the state cuts its generalrevenues funding of educa tion to $150 million.In this case, the total amount of money that the state spends on education will remain at $200million;and in thiscase,allthe state accomplishesby earmarking lottery profits for ed ucation is to free up $50 million of general rev enues to spend on something else. In short, although the lottery revenue is earmarked for ed ucation, education might be no better off because of it.

As another example of this phenomenon, con sider what happens when our federal government gives another country money with instructions to spend it on food and not on guns. In such cases, who's to say that the money was spent on food? Suppose,for example,that before getting a $5 mil liongiftfrom the United States,the recipientcoun try had planned (without telling us) to spend $5 millionon food and $10 millionon guns; and sup pose that once it obtains our gift,it spends $5 mil lion on food and $15 millionon guns.It willlook as ifour $5 milliongiftwasindeed spent on food. (The country did, after all,buy $5 millionof food shortly after receivingour gift.)The real effect of our gift, however,is to enable the countryto buy more guns than it otherwisecould have afforded. Of course, the earmarked-money illusion can take place outside the political realm. Parents might, for example, give their adult son a gift of money with the stipulation that he spend it on, say, neckties and not beer. If the son allowed the gift money to commingle with other funds, or if he would have bought neckties even if he hadn't re ceived the gift money,it makes little sense to say that the money he spent on neckties was "really"

his parents' gift. The businessworld has also discovered the ear marked-money illusion.When, for example, a ho tel provides a "free" continental breakfast to peo ple who pay $100 for a room, the breakfast isn't really free. After all, the hotel wouldn't let you have the breakfast ifyou didn't rent a room. When a hotel charges $100 for a package of services, it makes little sense to say that the money "really" went for some of the services but not for others. Indeed, a hotel that says that $100 will get you a room and a free continental breakfast couldjust as wellsay that $100willget you a continental break fast and a free room; either way, the claimborders on nonsense. Returning to claims that government revenues are being earmarked for certain purposes, we are faced with a new question: If such claimsare gen erallyillusory,then why do politiciansand govern- . ment officialspersist in making them? In part be cause they don't realize that they are talking nonsense and in part because it often serves their purposes to talk nonsense.

When, for example, government officialswish to raise revenues by means of a new tax, they may, if they are clever, try to "sugarcoat" the tax by claimingthat the money raised won't be wasted on frivolous things, but will be earmarked for some worthwhilecause. Nine people out of ten not only will accept this claim, but will applaud those who make it. Of course, we citizens should realize that you can't judge a pill by its coating. And whenever a politician or government official tells us that the money the government is taking from us is being earmarked for a worthwhile cause, we should think twicebefore swallowingthe pill.Chancesare that beneath its sugar coating,it willtum out to be a bitter pill indeed. 0 151 Animal Rights Are an Individual Responsibility by CherryHill A nimal rights are makingthe news with increasing frequency, and few topics evoke stronger emotions. "Animal rightsare the thirdmostpopularissuein thiscoun trytoday,rankingjustafterthe nationaldeficitand Medicare-Medicaidin numbersoflettersreceived by legislatorsin the nation'scapitol,"states Mari lyn King, Region 5 chairman for the American NationalCattlewomenanimalcarecommittee.As she speaks nationally, she encourages animal industrypeopleto counterthe radicalpositionsof animalrightsgroupswho often propose inappro priate governmentintervention.