One thing though, the explanation for some of these extra inefficiencies you put down to "transaction costs" may not be quite so innocent. Some of the waste is simply, as you no doubt already know but are too polite to say, legal corruption. Government ensuring that their business friends are permitted to "wet their beak" as its put on the Sopranos. But another factor is the simple imperative within the capitalist system to ensure that the other objective of any welfare system, that is the imperative to police the poor. That costs a lot of money and of course this cost is at the expense of providing benefits.
[WS:] Absolutely. TCE does not have the last word in this debate. There is plenty of transaction costs and inefficiency in hierarchies, government run or private -as neo-institutionalists were eager to point out. And then of course, is the politically motivated inefficiency or "mellow weakness" as one writer dubbed it. The idea here is that there are problems that must be solved, yet effective solutions are not feasible due to opposition from powerful interest groups. "Mellow weakness" in that context is an action that makes a gesture toward a solution, but does not upset the opposition, and as a result does not change much, just spins wheels and wastes money.
The bottom line is that the key problem in all social programs is the multitude of different often mutually contradicting interests. Reaching compromise is therefore a necessary condition for social programs and the shape of the latter heavily depends on the former. Therefore, the political system of reconciling difference is essential for social programs. The so-called "majoritarian" or 'Westminster" system of democracy is more confrontational and awards greater power to even narrow majorities, while significantly excluding even large minorities. The "consensus democracy" or a parliamentary system otoh rests on compromise and cooperation , giving minorities considerable power. As a result, "consensus democracy" is more conducive to corporatist policies of including various organized interest in the political process, and in return rewarding them with social programs (for details see Arendt Lijphart, _Pattern of Democracy: Government Forms and Performance in Thirty Six Countries_ ,1999).
This can explain why the Commonwealth countries - all of which have the "Westminster system" in one form or another have much lower level of social spending than parliamentary democracies. I would also like to add that the US is a mixture of Westminster system and corporatism, providing the worst parts of those two worlds - relatively high level of exclusion of minorities, and the 'pork and barrel" implicit in the corporatist system.
Wojtek