Summer School 3: How government decides what to spend our money on

Summary

Planet Money Summer School 3: How Government Decides What to Spend Our Money On

Release Date: July 23, 2025
Host: Robert Smith
Guest: Aviva Arundine, Director of the Hamilton Project at the Brookings Institution

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Introduction: Understanding Government Spending

Robert Smith welcomes listeners to the third installment of Planet Money Summer School, focusing on the intricate process of government budgeting. Building on last week's discussion about taxes, this episode delves into how the government prioritizes and allocates funds amidst rising national debt, which has surpassed $36 trillion (01:03).

Guest Insight: Aviva Arundine on Fiscal Policies

Aviva Arundine joins as the guest professor, shedding light on the Hamilton Project's role in formulating quality fiscal policies. She emphasizes that while governments can raise substantial funds, strategic spending is crucial to avoid unsustainable debt growth (02:19).

Key Quote:
"The concern is when your debt is growing too rapidly relative to your economy." – Aviva Arundine (04:03)

Breaking Down the Federal Budget

Robert Smith introduces a case study from a 2017 episode hosted by Jacob Goldstein and Stacey Vanek Smith, where the entire federal budget was explained in just 10 minutes (06:47). Despite being eight years old, the budget's major components remain largely unchanged, highlighting persistent spending patterns.

1. Medicare and Medicaid (29%)

Medicare and Medicaid collectively consume nearly a third of the federal budget, covering over 120 million Americans, including the elderly, low-income families, and individuals with long-term disabilities (08:05).

Notable Discussion:

• Sarah Kliff explains that 08:39, "If you live long enough, you might end up on Medicaid," highlighting the program's extensive reach beyond just the poor.
• The expansion under Obamacare 09:40 increased federal funding to states, allowing more individuals to gain coverage.

Key Quote:
"We're talking about the future of Medicaid." – Robert Smith (09:59)

2. Social Security (24%)

Social Security remains a cornerstone of federal spending, benefiting nearly every American over 66, including wealthy individuals like billionaires.

Key Quote:
"Social Security is politically bulletproof." – Dick Durbin (12:57)

Jacob Goldstein and Dick Durbin discuss the program's sustainability, emphasizing its broad-based support due to its universal eligibility and direct linkage to workers' contributions (11:22).

3. Defense (15%)

Defense spending accounts for 15% of the budget, consistently maintained despite political debates over increases and cuts.

Notable Insight:

• Stacey Vanek Smith reveals that over the past two decades, the defense budget's share has remained relatively stable (14:07).
• Bill Valdez, a veteran from the Energy Department, credits lobbyists for maintaining this equilibrium, ensuring budget stability through special interest group negotiations (14:45).

Key Quote:
"The budget status quo is really this hard-earned equilibrium." – Bill Valdez (14:53)

4. Income Security (13%)

This segment covers programs like the Earned Income Tax Credit, housing assistance, unemployment benefits, and SNAP (food stamps).

Notable Discussion:

• Raquel Alexander clarifies that SNAP supports over 40 million people, predominantly children, the elderly, and the disabled (15:38).
• Work requirements ensure that able-bodied individuals remain employed to qualify for assistance (15:38).

5. Interest on National Debt (6%)

Interest payments on the national debt have become more burdensome due to increased debt and rising interest rates, now consuming double the budget portion seen in earlier years (10:48).

6. Veterans Affairs (5%)

Veterans Affairs provides healthcare and disability benefits, with ongoing debates about funding levels and potential cuts (17:21).

7. International Affairs (1%)

Allocations for operating U.S. embassies, military assistance to allies, and aid to developing nations have seen significant cuts, reflecting shifting priorities (17:46).

8. Other Areas (3%)

Includes justice, natural resources, science, space, technology, general government operations, and community development.

Key Quote:
"The federal government is basically a big insurance company backed by a large standing army." – Jacob Goldstein (18:25)

The Influence of Lobbying on Budget Decisions

The episode transitions to exploring the profound impact of lobbying on government spending. Fundraising is depicted as a central activity for politicians, often hindering fiscally responsible decisions.

Key Highlights:

• Dick Durbin admits that senators spend substantial time fundraising, which can compromise their legislative priorities (23:52).
• Lobbyists play a pivotal role in shaping budget allocations by organizing fundraisers and influencing policy through financial incentives (28:10).

Key Quote:
"When you hear about lobbying, it's not just money buying votes, but a pervasive influence that shapes policy outcomes." – Sarah Kliff (30:03)

Case Study:

• The American Jobs Creation Act of 2004 demonstrated an astronomical return on lobbying investment, where every dollar spent yielded $220 in tax benefits (31:43).

Economic Principles Behind Budget Allocations

Aviva Arundine elucidates two primary motivations for government spending: addressing market failures and redistributing income.

1. Addressing Market Failures

Government intervenes when the private market fails to provide essential goods or services efficiently.

Examples:

• National Defense: A non-rival and non-exclusive public good that the market cannot adequately supply.
• Education and Infrastructure: Services that benefit society broadly and require collective funding.

Key Quote:
"If the private market is not giving us the distribution of resources that we as a society want, the government steps in to redistribute income." – Aviva Arundine (19:57)

2. Redistribution of Income

Programs like SNAP aim to redistribute resources to ensure lower poverty rates and provide food security, correcting imbalances that purely market-driven outcomes would exacerbate.

Challenges in Budget Reform: Concentrated vs. Diffuse Interests

A significant barrier to budgetary reforms is the disparity between concentrated benefits and diffuse costs.

Key Insights:

• Concentrated Interests: Entities like hospitals or defense contractors that receive substantial benefits from specific budget allocations.
• Diffuse Benefits: The general public enjoys broader, but smaller, advantages such as reduced national debt or improved public services.

Aviva Arundine explains that this imbalance makes it difficult to pass reforms, as the powerful, concentrated interests oppose changes that would dilute their benefits for marginal gains to the populace (35:28).

Key Quote:
"The hospital cares a ton about this payment reform. The average citizen cares a little bit." – Aviva Arundine (35:30)

Conclusion: The Complex Dance of Politics and Economics

Robert Smith wraps up by summarizing the complexities involved in government budgeting, emphasizing the tug-of-war between special interests and the broader public good. Aviva Arundine reinforces the importance of understanding these economic principles to navigate and potentially reform the budgeting process effectively.

Key Vocabulary:

• Market Failure: Situations where the private market does not efficiently allocate goods and services.
• Redistribution: Government efforts to adjust the distribution of resources to achieve a more equitable outcome.
• Concentrated vs. Diffuse Interests: The challenge of balancing significant benefits to a few against minor benefits to many.

Key Quote:
"Special interests often get exactly what they want because their benefits are concentrated whereas the costs are spread out among many." – Aviva Arundine (35:30)

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Notable Quotes with Timestamps:

• "The concern is when your debt is growing too rapidly relative to your economy." – Aviva Arundine (04:03)
• "Social Security is politically bulletproof." – Dick Durbin (12:57)
• "The budget status quo is really this hard-earned equilibrium." – Bill Valdez (14:53)
• "The federal government is basically a big insurance company backed by a large standing army." – Jacob Goldstein (18:25)
• "When you hear about lobbying, it's not just money buying votes, but a pervasive influence that shapes policy outcomes." – Sarah Kliff (30:03)
• "Special interests often get exactly what they want because their benefits are concentrated whereas the costs are spread out among many." – Aviva Arundine (35:30)

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This episode of Planet Money Summer School offers a comprehensive exploration of government budgeting, the pervasive influence of lobbying, and the economic principles that underpin fiscal decisions. By breaking down complex topics into relatable discussions, it provides listeners with a deeper understanding of how government prioritizes spending in the face of growing debt and competing interests.

Transcript

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[Robert Smith]

Hey, everyone, just a quick message before class gets started. Planet Money Summer School is having a live graduation ceremony and party in New York City on August 18th. It's gonna be great, so get your tickets now before the show sells out. Planet Money plus supporters get a 10% discount and get early access to summer school episodes all summer long. Check out the show notes for a link to buy tickets and to subscribe to Planet Money Plus.

[Aviva Arundine]

This is Planet Money from npr.

[Robert Smith]

Welcome back, class, to Planet Money Summer School. The only economics degree you can get just by listening. No tuition, no textbooks, no frustrating group projects. Am I right? I'm Robert Smith, and this season we are tackling power and money, the profound ways that the government influences business and the economy. This is class number three. You are what you pay for. Last week we talked taxes, how the government raises money. This week, we get to decide what to spend it on. Woo. Government shopping spree. But reality check. Although it seems like the government can spend an endless amount of money, it cannot do all the things it wants to do. So the big question in this week's lesson is, how do we decide? Why does the government spend so much money on some things and not other things? And honestly, is there any limit the United States is at? Let me check here. More than $36 trillion in debt. Is that too much? Kind of feels like too much. Every week we have a couple of case studies and a guest professor to teach us the big lessons. Welcome today to Aviva Arundine, director of the Hamilton Project at the Brookings Institution. What exactly does the Hamilton Project Do? Do? It's not based on the musical, right?

[Aviva Arundine]

It's not based on the musical. Though it's funny, it gets its name from sort of the same rehabilitation of Hamilton that is embodied in the musical.

[Robert Smith]

I guess it is hard to make a rhyme based on the Hamilton Project, but of course, I'm gonna try. It makes multimodal proposals on quality fiscal policies. Yeah. Not ready for Broadway. Moving on. For our purposes, Here at summer school, we should say that Aviva has in the past been. Been inside the very government we are going to talk about at the Treasury Department and at the Office of Management and Budget. So, Aviva, you have been there for the taxing, you have been there for the spending. And the cloud hanging over all those discussions must be the national debt. Now, of course, like, as an individual, I have to pay my debts eventually. Why doesn't the government ever balance its budget?

[Aviva Arundine]

So government is different fundamentally because it has a tax base. And there are in fact, some very good reasons that a government might not balance its budget every year.

[Robert Smith]

Yeah, I mean, we might be at war. That often sends up the deficits. The country could be in recession where it makes sense to spend a ton of money to perk up the economy and help people, but there's not always an emergency reason, Right?

[Stacey Vanek Smith]

Yeah.

[Aviva Arundine]

Even outside a recession, it can make sense for the government to borrow to invest. The concern, and I would say we do have this concern now, particularly as we look out 10, 20 years, the concern is when your debt is growing too rapidly relative to your economy. And that's what projections would say is gonna happen in this country going forward if we don't do something that changes our fiscal trajectory.

[Robert Smith]

So to put it in terms of my own life, if the money I owe to the bank is. Is growing faster than the money I make my salary, then I'm getting deeper and deeper into this hole. And for governments, they're already in a hole and they might wanna stop digging at some point.

[Aviva Arundine]

And the reason for that is that the size of your debt and the growth rate of your debt relative to your economy is sort of telling you what would you need to do if you abruptly needed to reduce your debt. Is that a manageable proposition where you have lots of policies you could plausibly pursue to do that?

[Robert Smith]

Or.

[Aviva Arundine]

Or is it an unmanageable proposition?

[Robert Smith]

Okay, so you seem to be saying if there's some huge thing the government has to spend money on, like a crisis, or perhaps the financial system starts to worry about lending the government money, we can always theoretically increase taxes as a country to stabilize the debt. But it makes a difference. If you have to theoretically increase taxes by 3%, which may be manageable, or if you have to increase taxes by 10%, which is definitely going to get you in trouble, like a 3% tax hike is easier to sell.

[Aviva Arundine]

And, you know, we're a big country, we're a wealthy country, we absolutely have policy tools with which we could do that. But the more the debt grows as a share of the economy and the more it's rapidly it's growing, the harder it is to make that stabilization.

[Robert Smith]

So on today's show, we are going to peer inside the budget and see what we can do to slow this roll a bit. It's easy to rant about big government, but what if everything inside the budget is actually there for a good reason? Then how do you make the hard choices? Get your calculator out for after the break.

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[Robert Smith]

Planet Money Summer School Back in session and doing math on the radio, which is always fun. Pay attention everyone. We are going to go over everything our government spends money on in in exactly 10 minutes. This is from an episode we did back in 2017, Professor Aviva Arundine. What should the students listen for in this episode?

[Aviva Arundine]

I think the question is what are all these programs doing? What do these policies and programs accomplish?

[Robert Smith]

This episode was hosted by Jacob Goldstein and Stacey Vanek Smith, and even though it was made eight years ago, the percentages of the government budget are roughly the same. One thing to mention though, we when we talk in this episode about President Trump and the Republicans trying to make budget cuts in things like Medicaid, we are referring to his first term and not the current moves in his second term to make those cuts. The more things change.

[Stacey Vanek Smith]

Okay, here's how it's going to work. We're going to put 10 minutes on the clock and we're going to cover the entire federal budget.

[Jacob Goldstein]

Every second of that 10 minutes will be worth $6.4 billion.

[Stacey Vanek Smith]

So the small programs, the they're gonna go super fast.

[Jacob Goldstein]

Big programs, nothing but time.

[Stacey Vanek Smith]

And we're gonna bring in a bunch of people from Planet Money to help us out. So the first piece in our show today, Robert Smith is gonna talk about Medicare and Medicaid. That is 29% of the federal budget. So they will get 29% of our 10 minutes.

[Jacob Goldstein]

Start the clock now.

[Robert Smith]

You know how there's always this debate about whether the federal government should have a responsibility to pay for health care? Well, I got news for you. It already does. The federal government pays for the health care of 120 million Americans. People over the age of 65, families with low income, people with long term disabilities. They're all covered by Medicare and Medicaid. Medicaid and Medicare. Although I always mix them up, everyone does. I had some embarrassing errors when I was a new health policy reporter where I would mistake these in stories and.

[Sarah Kliff]

Lots of people would send me angry emails.

[Robert Smith]

This is Sarah Kliff, a writer for Vox.com, she co hosts the Weeds podcast. I heard a terrible way to remember it. Oh, I wanna hear it. Ages ago someone told me you care for the old and aid the sick or no, aid the poor. That's what it is. See, it's a, it's a terrible one. Okay, I have a better one. Silver hair. Medicare underpaid, Medicaid. If we live long enough, we all get Medicare. But even if you don't consider yourself poor, you might also find yourself on Medicaid. It actually finances a lot of long.

[Sarah Kliff]

Term nursing home stays.

[Robert Smith]

So a lot of middle upper class.

[Sarah Kliff]

Americans eventually do end up on Medicaid.

[Robert Smith]

When they need that kind of coverage and they've kind of whittled away their savings and there you have it. Hey, Stacey, how much time do I have left?

[Stacey Vanek Smith]

You've got about a minute and a half.

[Robert Smith]

Minute and a half?

[Stacey Vanek Smith]

Yeah, you got, this is the big. This is the biggest part of the budget. You got some time?

[Robert Smith]

Okay, let's go get some coffee. We got time.

[Stacey Vanek Smith]

We have some time.

[Robert Smith]

And I can explain one more thing about Medicaid. Okay, so we've all heard about Obamacare. We've all heard about how in Congress right now the Republicans are undoing Obamacare. But what the fight is really about is the future of these programs. We're talking about the future of Medicaid.

[Stacey Vanek Smith]

Underpaid.

[Robert Smith]

Underpaid. Do you want. Should I get your cup?

[Stacey Vanek Smith]

Black coffee, please.

[Robert Smith]

One of the big ways that Barack Obama got people insured was to expand Medicaid. Medicaid costs are shared between the federal government and the states. States run the programs. And Obama essentially said, we are going to give you more federal money. A larger share of our budget if you just cover more people. And so this. This part of the budget pie I'm talking my way through, this got larger. So when the Republicans are thinking, how do we undo Obamacare? We. What they thought is, let's put some caps on the growth of Medicaid. And what that means in sort of real world terms is that if the Republican plan passes, 15 million fewer people covered by Medicaid. So if we were gonna do this show again in 10 years, there might be slightly less time for government health care, perhaps.

[Stacey Vanek Smith]

No coffee break.

[Robert Smith]

Maybe time for a short coffee break.

[Stacey Vanek Smith]

You gonna drink that, by the way?

[Jacob Goldstein]

No transportation. 2% of the budget. Kenny Malone.

[Robert Smith]

We asked former secretary Ray LaHood to write us a haiku. He declined. So I made one for him using.

[Noel King]

Words from his old speeches.

[Advertiser]

A highway crumbles neath our wheels. One big pothole it spreads across the roads. Thank you all very much.

[Robert Smith]

Thank you very much.

[Stacey Vanek Smith]

Next up, Social Security. It accounts for 24% of federal spending. Jacob, take it away.

[Jacob Goldstein]

Social Security is really big because almost everybody gets it. In particular, almost every American over the age of 66, including billionaires. You know, if Warren Buffett wants Social Security, he can get it. I called up Ted Marmor to ask about this. He's an emeritus professor at Yale, expert on Social Security. Why does Warren Buffett get Social Security checks?

[Dick Durbin]

That's a classic dumbbell under ouch formulation.

[Jacob Goldstein]

Okay? Marmer says billionaires getting Social Security is not a bug.

[Robert Smith]

It's a feature.

[Jacob Goldstein]

When Social Security was created back in the 30s, some Democrats did want to create a version of the program where the money just went to poor people. But President Roosevelt was like, no, a program like that just won't survive politically. What we need is something that almost all working people are eligible for. And he said we should fund it with a special tax that almost all working people pay. That way people will say, I paid into Social Security. I deserve Social Security when I retire, and I will vote out of office any politician who tries to take it away from me.

[Dick Durbin]

His terms in which he expressed it was, goddammit, I'm going to be sure to have a program that no damn Congress is going to mess with because people are going to feel entitled.

[Jacob Goldstein]

But I do think this leads to a lot of confusion. You know, people seem to think, oh, I contributed to Social Security. They're holding onto my money in a special box. This is not how it works. My money is paying for retired people right now. And I'm crossing my fingers that in 30 years. When I'm retired, there will be 40 year olds who are paying me.

[Dick Durbin]

Jacob?

[Robert Smith]

Yes.

[Dick Durbin]

I'll bet you any money. And I want you to pay me off by putting it in my grave.

[Jacob Goldstein]

Okay.

[Dick Durbin]

The probability that you will receive Social Security benefits for retirement is so high that you should be declared irrational for believing.

[Jacob Goldstein]

So really, why are you so confident?

[Dick Durbin]

Why am I so confident? Because I understand the political economy of the United States.

[Jacob Goldstein]

Because Roosevelt was right.

[Dick Durbin]

Correct.

[Jacob Goldstein]

Because almost everybody pays in and gets paid out, including billionaires. Marmer says Social Security is politically bulletproof.

[Stacey Vanek Smith]

Social services and education, 3%. And for this segment, we wanted to get someone who is currently a beneficiary of public education, AKA Jacob's kid.

[Aviva Arundine]

Most funding in this area comes from.

[Stacey Vanek Smith]

State and local governments.

[Jacob Goldstein]

The federal government's.

[Aviva Arundine]

The federal government's biggest education line item is grants for low income college students.

[Jacob Goldstein]

National defense is 15% of federal spending.

[Robert Smith]

Stacey.

[Stacey Vanek Smith]

We spend one and a half billion dollars every day on defense. And this is famously one of the most controversial parts of the budget. I mean, Democrats often come in and they want to cut defense spending. Then Republicans come in and they want to raise defense spending. But somehow, in spite of all of this, if you look back over the last 20 years, the share of the budget devoted to defense has not really changed that much. And actually that is pretty much true for most of the federal budget. It stays pretty steady. And I was totally shocked by this. So I talked to this guy, Bill Valdez about it. He worked for the Energy Department for more than 20 years. He wrote a lot of budgets. And he told me his theory of what's going on here.

[Robert Smith]

You know, the real thing that keeps the budget stable is that there are all these special interest groups, hundreds of.

[Stacey Vanek Smith]

Lobbyists battling for government funds, hammering out deals with different states and different politicians. Bill says the budget status quo is really this hard earned equilibrium. And he thinks this is a good thing. Ultimately, it creates stability. So we actually have lobbyists to thank for our stable budget.

[Robert Smith]

Yeah, in many respects, yeah.

[Stacey Vanek Smith]

It's like a little shout out to the lobbyists. Well, I mean, they get so little love. I feel like that's okay. Right? Don't you think that maybe the budget should be their valentine? President Trump has proposed increasing defense spending by cutting other parts of the budget. Bill says he will have to get through the lobbyists first.

[Jacob Goldstein]

Next up, income security, 13% of the budget. Here is Noel King.

[Raquel Alexander]

Yes, income security. So think of this as programs for poor people. It includes a bunch of different things like the earned income tax credit, housing Assistance, unemployment, foster care is a small part of it. I'm going to talk about food stamps, which are officially known as SNAP for two reasons. Number one, food stamps are a really big program. Usage spiked during the recession. If you look at graphs, it's basically like a straight line going up and it has stayed pretty high. More than 40 million people are getting food stamps right now. And I think there is a lot of confusion over who gets them. So let's clear that up. Two out of every three people on food stamps are kids, the elderly, or they are disabled. Of the rest, it's roughly split between people who are working but making very low wages, low enough to qualify for food stamps, and people who are not working but should be working soon, because SNAP comes with work requirements. For the most part. If you are able bodied and you don't have a job, you get cut off from food stamps after a couple of months. There you go.

[Stacey Vanek Smith]

Interest on the national debt, 6% of the budget.

[Jacob Goldstein]

And you can look at this in two ways. One, interest rates are really low right now. So the government was able to borrow money, spend it on goods and services for Americans. Great.

[Stacey Vanek Smith]

But you could also say this whole chunk of the budget is just the interest on all the money we owe and what we get in return for all this money is nothing.

[Jacob Goldstein]

Four more seconds.

[Stacey Vanek Smith]

This is feeling awkward.

[Jacob Goldstein]

Veterans Affairs, 5%. Sally Helm.

[Robert Smith]

Go.

[Aviva Arundine]

Yes, they provide things like health care.

[Robert Smith]

And disability benefits for vets. President Trump wants to boost funding for.

[Stacey Vanek Smith]

The VA but is proposing some cuts.

[Robert Smith]

Including one for disabled vets once they're old enough to get Social Security. President Eisenhower tried to do something kind.

[Stacey Vanek Smith]

Of like this in the 50s.

[Robert Smith]

He was a five star general, so.

[Aviva Arundine]

Maybe he thought he could get away.

[Stacey Vanek Smith]

With it, but he got totally shut down by Congress.

[Robert Smith]

We'll see how Trump does.

[Stacey Vanek Smith]

International Affairs, 1%. Nick Fountain. Go.

[Robert Smith]

Yeah.

[Jacob Goldstein]

This goes to operating U.S. embassies and consulates throughout the world, providing military assistance to allies, aiding developing nations. Everything else makes up about 3% of the budget. Let's bring it home.

[Stacey Vanek Smith]

Justice. That's FBI, DEA, prisons, Homeland Security, Natural.

[Jacob Goldstein]

Resources and the environment.

[Stacey Vanek Smith]

Science, space and technology.

[Jacob Goldstein]

General government. That's like mowing the White House lawn and paying congressional salaries.

[Stacey Vanek Smith]

Community and regional development, Agriculture, energy.

[Robert Smith]

Done.

[Aviva Arundine]

Woo. We did it.

[Stacey Vanek Smith]

So we made it through the whole budget in 10 minutes. And I have to say the thing that strikes me about the budget is that half of it, more than half of it, is just made up by three programs. Medicare, Medicaid and Social Security.

[Jacob Goldstein]

And then in the rest, overwhelmingly, the biggest Chunk is defense. And so there is this old line that I still love, which is the federal government is basically a big insurance company backed by a large standing army.

[Robert Smith]

Jacob Goldstein and Stacey vanek Smith from 2017. And the percentages you heard there are still roughly the same, with a couple of notable exceptions. If we were doing this show again today, Nick Fountain would barely have time to speak. If the current plans hold, the budget for international aid and embassies will be cut to far less than 1%. And the interest on the national debt, the debt is now bigger. The interest rates are now higher. The interest on the national debt is now double what it was 13% of the budget. Twice as much time. Ouch. Indeed. Let's bring back in our professor Aviva Erendine from the Brookings Institution. As we listen to those 10 minutes of the budget, I kept thinking, why? Why does the government do these things and not other things? What's the big way to think about this?

[Aviva Arundine]

So I think you can put most of the things government does into one of two buckets. One is addressing a market failure, a case where there's something that prevents the private market from functioning well. And the other is redistributing income. So addressing a case where the private market is not giving us the distribution of resources that we as a society want.

[Robert Smith]

Why don't we start with market failure? What do you mean by market failure?

[Aviva Arundine]

Yeah, so this is a case where there are lots of cases where markets work pretty well. If you want to buy a pair of shoes, market economy is going to do a pretty good job of offering you a range of shoes to buy of different kinds, lots of different characteristics. They're going to be priced pretty close to what it costs to make them. It's going to work great.

[Robert Smith]

This is why we don't have government shoes.

[Aviva Arundine]

Right. And anyone who suggests we should have government shoes. Right. You'd have to some questions. There are other things that the market is definitely not going to provide. So classic example, national defense. It's what economists call a true, a sort of pretty pure public good. We usually define this in technical terms as non rival risks. Which means that the fact that you and I both get protection from the U.S. national defense apparatus doesn't really increase the cost of providing national defense and non exclusive. Which means you can't really say to anyone living here, we're going to carve you out of our national defense protection because you didn't pay for it. Right. So the market is just never going to provide something like that. And then there are lots of things that aren't pure public goods, but they have some characteristics and qualities of public goods. So this is a lot of things that the federal government does, like education, scientific research, infrastructure, national parks, in theory. Could you imagine those being privately provided? Sure. But I think most people have a pretty strong instinct that there are reasons that those are treated as public goods, that we want to provide those on a common basis.

[Robert Smith]

So that is one reason why government would spend money for a market failure. The other one you said was redistribution. Which parts of the budget are redistribution and why are we doing it?

[Aviva Arundine]

Sure. So a good example of a part of the budget that is principally redistribution is the Supplemental Nutrition Assistance Program, or snap, or what used to be called food stamps, that provides food assistance to people who have low incomes, whether elderly people who have low incomes, kids who have low incomes, people of working age who just lost their jobs and have low income. And that's a pretty pure case of in a market economy, if you just left the market outcome alone, many of those people would really struggle to put food on the table. And in fact, we have evidence that when you cut snap, people have more trouble affording food. When you increase SNAP people, fewer people struggle to get food. And we've decided that that's a valuable thing to do. It's not addressing a market failure per se, but it's addressing a failure of the market to achieve the distributional outcome. In this case, lower poverty, lower rates of people who can't feed themselves than we want.

[Robert Smith]

So that is the theory of how government budgets should be decided. Coming up after the break, we look at the messy reality. I don't want to spoil it, but let's just say that maybe, maybe the politicians who decide how to spend our money have some personal interests of their own.

[Indeed Advertiser]

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[Robert Smith]

Okay, class. In our next case study, we peer behind the curtain of the US Congress and find out that there are forces at work that might keep them from doing the most fiscally responsible thing. One reality is that senators and representatives want to keep their jobs and get reelected, and that takes donations. Listen now to Illinois Senator Dick Durbin.

[Dick Durbin]

I think most Americans would be shocked, not surprised, but Shocked if they knew how much time a United States Senator spent spends raising money and how much time we spend talking about raising money and thinking about raising money and planning to raise money.

[Robert Smith]

In 2012, Planet Money and this American Life collaborated on a series of stories about how money and lobbyists influence politics. Alex Bloomberg and Andrea Seabrook began by tracking down a list of dozens of fundraisers that happen in Washington, D.C. every single week.

[Sarah Kliff]

The money changes hands in very specific places all over D.C. there are townhouses whose sole function is to be rented out as venues for this. Dozens of restaurants do a booming business catering small parties in private rooms.

[Noel King]

And there's one thing driving all this activity, a gnawing, relentless, voracious need for cash. To understand that need, consider Walt Minick.

[Sarah Kliff]

Minick is a conservative Democrat who represented a Republican leaning district in Idaho. He was first elected in 2008, and after he won, he took just five days off from fundraising. Then, two months before he was sworn in as a congressman, he was back raising money for the next election, two years away.

[Robert Smith]

I needed to raise 10 to $15,000 a day, and you only do it by elbow grease.

[Noel King]

Let's stop and dwell on that statement for a second, shall we, Andrea? 10 to $15,000 a day. The typical cost of a congressional race is about a million dollars, although if you're challenging an incumbent, you need more. Minick's goal was even more than that, 2.5 million. Because he was in such a competitive district.

[Robert Smith]

I would spend two or three hours a day as a congressman trying to raise money.

[Sarah Kliff]

That's typical for a member of Congress. And most of those hours are spent across the street from the Capitol in special offices set up by the parties specifically for this purpose.

[Noel King]

Special offices. Because federal law prohibits lawmakers from making fundraising calls from their own congressional offices, neither party is eager to let reporters into these call centers. But we got a couple Democrats to describe what it's like in there. This is Oregon Congressman Peter DeFazio.

[Aviva Arundine]

If you walked in there, you would.

[Robert Smith]

Say, boy, this is about the worst looking, most abusive call center situation I've seen in my life. These people don't have any workspace. The other person is, you know, virtually touching them. Just like counters on the wall with telephones and people 8 inches away from you talking on the telephone.

[Dick Durbin]

We sit at these desks with stacks of names in front of us and short bios and histories of giving.

[Noel King]

This is Senator Dick Durbin who says that on the Senate side they'll have these things called power hours several times a week, where A bunch of senators will go into the call center and.

[Dick Durbin]

Make these calls to people who are our faithful friends and ask them to give money or have a fundraiser. And then if we're fortunate enough, we end up attending those fundraisers that we beg people to do for us. I mean, that is part of the conversation. And this goes on and on and on.

[Noel King]

Where do the names come from? How do you decide who to call?

[Dick Durbin]

The names come from a history of giving, and many of them, it's hard for most listeners to believe, really aren't looking for much. They want their team to win, in this case, the Democratic team. They don't ask for special favors, but there are exceptions. There are some who won't waste any time to tell you what they think is the most important issue in Washington as they talk about their donation. I mean, it is part of the reality of the life that I live now.

[Noel King]

There is an easier way to relieve some of that pressure and raise money faster, a way that doesn't involve tapping out your friends. Just go to the people who already have big stacks of money set aside to give to politicians, lobbyists.

[Sarah Kliff]

A lobbyist can throw you a fundraiser, a lunch at Johnny's Half Shell, or a cocktail reception at Bullfeathers. And so every week, lawmakers and their staffs work the phones trying to find lobbyists to organize these events. Jimmy Williams used to get those calls. He was a lobbyist for the real estate industry for many years.

[Advertiser]

A lot of them would call and say, hey, you know, can you host an event for me? And you never want to say no. Actually, no, you always want to say no. In fact, you always want to say no. But you can look on your phone with these caller IDs, and you would be like, really? I'm not taking that call.

[Noel King]

Oh, so you would dodge calls for phone calls?

[Advertiser]

Oh, yeah. Every lobbyist does it. Are you kidding? You spend most of your time dodging phone calls. Oh, yeah.

[Noel King]

This was one of the most surprising things I learned about this whole process. The way most of us generally think about it is absolutely backwards. We imagine the lobbyists stalking the halls of Congress trying to influence members with cash. But more often than not, it's the reverse. The member is stalking the lobbyist, saying, hey, can I have some of that money?

[Sarah Kliff]

And it's hard to say no, Jimmy says, especially to a congressman whose work and votes he cared about. So he'd say yes, and then he'd have to round up a bunch of guests.

[Advertiser]

So I call up my buddies down on K Street from my buddy over at the credit unions or my buddy over at the insurance company or my buddy over wherever the home builder. And I say, hey dude, I'm going to do this event for this guy. And he sits on the House Financial Services Committee. And do you guys have any money for this person? Is he in your budget? And the answer was usually, yeah, yeah, I got money for that guy. All right, so cool. So we'll come up with a date and then we have this fundraiser and it's a breakfast or it's a lunch or it's a dinner or a cocktail reception and everyone comes and they bring their checks or they mail their checks in and then you have it.

[Sarah Kliff]

We're talking thousands of dollars that the Congressman will make in just an hour.

[Noel King]

And this brings us to the big what does the money buy? What are corporations and special interests getting in return for the billions of dollars they spend lobbying each year?

[Sarah Kliff]

There tend to be two views on this. If you're cynical, you think money buys votes. Pure and simple, Washington is owned. Money drives everything.

[Noel King]

But lobbyists and politicians will sometimes tell you the opposite. Money has no effect. After all, they say there's always two sides and both are giving exporters versus importers, bankers versus realtors, businesses versus unions. The money cancels itself out.

[Sarah Kliff]

When we asked Congressman Barney Frank about this, he said both of those positions are caricatures.

[Robert Smith]

People say, oh, it doesn't have any effect on me. Look, if that were the case, we would be the only human beings in the history of the world who on a regular basis took significant amounts of money from perfect strangers and made sure that it had no effect on our behavior. That is not human nature.

[Sarah Kliff]

On the other hand, he says there are things that influence a politician besides money.

[Robert Smith]

If the voters have a position, the votes will kick money's rear end anytime.

[Sarah Kliff]

But the fact is, most legislation your district doesn't care about, the stuff that makes the news is a tiny fraction of what Congress actually does. They're deep in the weeds of tax law and business code and replacing the and in subsection B of title I with an or things most voters have no no opinions on. The only people who do care or who even understand what that small print means are the lobbyists and the industries and interests they represent.

[Noel King]

Consider the American Jobs Creation act of 2004. This was a piece of legislation that lots of multinational corporations spent a lot of time lobbying for because it got them a huge one time tax break. Some of the profits, the profits they made overseas would be taxed at just 5% instead of the normal rate of 35%. A massive windfall.

[Sarah Kliff]

This law caught the attention of a tax professor at the University of Kansas, Raquel Alexander. She thought it might help her understand a pretty difficult question she and her colleagues had been considering.

[Aviva Arundine]

We know that people lobby for a reason, but we haven't really been able to quantify what's the return on their lobbying investment.

[Sarah Kliff]

With the American Jobs Creation Act, Alexander and her colleagues finally got something that could help them add up the lobbying costs and benefits.

[Noel King]

They simply compared the amount that companies spent lobbying with the amount they saved on their taxes, came up with a figure, a figure they called the return on investment for lobbying. Now, for some perspective money in a regular old savings account, you'd be lucky to get a 1% return on your investment. On the other end of the spectrum, Bernie Madoff advertised annual returns of just over 10%. If you want to come up with a big, impressive sounding lie, a 10% return on investment is what you say. The return on investment to lobbying. In the case of Alexander's study, 22,000%.

[Aviva Arundine]

So for every dollar, on average, that these firms spend on tax lobbying, they receive $220 in tax benefits from this repatriation provision.

[Noel King]

Were you expecting it to be that big?

[Aviva Arundine]

I was not. I was not expecting it to be that big at all. I thought I needed to go back and check my math again.

[Noel King]

So after the fifth or sixth time checking, you were like, oh, this is.

[Aviva Arundine]

The number after the 20th time of checking.

[Sarah Kliff]

In 2010, there was a total of $3.5 billion spent on lobbying. 3.5 billion. It's hard to imagine that every one of those dollars got a 22,000% return. There's certainly companies out there that spend a lot of money and don't get what they want. They've just lost money.

[Noel King]

And it's not to say that the things they're lobbying for are bad public policy. There are lots of people, President Obama included, who think a lower corporate tax rate would benefit the country.

[Sarah Kliff]

Barney Frank and lots of others told us straight up, a lot of times the lobbyist knows much more about your subject than you do as a congressman. You depend on their expertise, and so you listen to their arguments.

[Noel King]

The problem is, those arguments are accompanied by a large check. The other side of the issue. You don't always hear from them.

[Robert Smith]

Alex Bloomberg and Andrea Seabrook from Planet Money and this American life in 2012, just last year, the amount of money spent on lobbying hit a new record $4.4 billion. Big thanks to this American Life for letting us rerun that piece. If somehow you are just hearing about this American life for the first time, check it out. It's available wherever you listen to podcasts. After the break, we'll invite our professor back to talk about an economic principle that explains why special interests often get exactly what they want.

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[Robert Smith]

We are back with our professor, Aviva Arundine.

[Aviva Arundine]

You're back.

[Robert Smith]

So in a democracy, we are essentially hiring these politicians to run our country in a responsible way. But there are all these pressures on them, right, to bring back more money to their districts and the national interest, of course. And as we hear in the story, to listen to what lobbyists want. And so politicians really have to weigh competing interests over taxation and spending.

[Aviva Arundine]

Yeah. I mean, I think another economics concept that comes into play here is the problem of concentrated versus diffuse benefits. And so let's take an example. If I were looking for a place to save money in the federal budget, to save a significant amount of money, one of the things I would look at is reforming the way we pay hospitals versus doctors in Medicare. We sometimes pay more for the exact same health service if you get it at a hospital than if you get it at a doctor's office. Costs us a lot of money, causes all kinds of problems, probably makes care worse.

[Robert Smith]

Who would want that?

[Aviva Arundine]

Right. The challenge is whenever anybody suggests changing it, and many people have, you get a lot of pushback from hospitals and they push back quite publicly. And they say, congressman so and so is proposing to cause your local hospital to close. And a lot of people find that credible. Some voters may find that more credible than what their congressperson is telling them. And even more than that, the balance of interests is just very different. The hospital cares a ton about this payment reform. At best, the average citizen is going to save a little bit of money on their health bill and they're going to see the national debt go down by a very little bit. And, and so they're just never going to care as much as the local hospital does. And I do think there are a bunch of problems in federal budgeting that have this quality that you have concentrated interests on one side and diffuse benefits on the other.

[Robert Smith]

Yikes. The school bell is about to ring. Professor, perhaps we could go over some vocabulary words and concepts so that students can think about it when they hear about Congress debating the budget. Does a government program solve a market failure? What's a market failure?

[Aviva Arundine]

A case where the private market doesn't function effectively. For example, a case where the private market just won't provide a certain kind.

[Robert Smith]

Of service or good and the government could step in.

[Aviva Arundine]

That's right.

[Robert Smith]

Redistribution.

[Aviva Arundine]

When we as a society say that we're not happy with the distribution of resources that results from just letting the market operate, and so we step in to achieve a different distribution of resources.

[Robert Smith]

When we talked about the problems of trying to balance the budget, we talked about concentrated versus diffuse costs and benefits.

[Aviva Arundine]

Yeah, there are a lot of problems in public policy where there are some stakeholders that benefit a lot from a particular policy and there's a much larger number of stakeholders who would benefit a little bit from changing it. And those are circumstances where it's often hard to make changes.

[Robert Smith]

Aviva Erendine from the Hamilton Project, which is part of the Brookings Institution, thank you so much for coming to class today.

[Aviva Arundine]

Thank you.

[Robert Smith]

Man, the time flies when we are in class. But if you're eager to hear more episodes now before everyone else get a head start on studying, well, you can if you are signed up for Planet Money plus, we're giving our plus supporters early access to every episode of Summer School this season. You can brag, you can show it off. You'll also get sponsor free versions of regular Planet Money episodes and the indicator. Joining Planet Money plus is one of the best things you can do right now. To show your support for our journalism and the work of NPR, go to plus.NPR.org planet money to join Summer School is produced by Eric Mennel and edited by Alex Goldmark. It was fact checked by Emily Crawford and Ciara Wardez. Devin Miller is our project manager and the show was engineered by Robert Rodriguez. I'm Robert Smith. This is npr. Thank you for listening.