Measuring Cost-Benefit of Social Spending Programs

Welfare, food stamp and other social spending is controversial. Conservatives generally want to reduce or completely eliminate it, while liberals generally want to increase or maintain it. The to sides tend to disagree about the cost-benefit of such spending. To try to at least partly rationalize the debate, In July of 2019, Harvard University economists, Nathaniel Hendren and Ben Sprung-Keyser devised a way to analyze the costs and benefits of social spending. They wanted to both try to find a reliable a way to do a cost-benefit analysis and then apply the analytic protocol to see how 133 different federal, state and local spending programs performed over the last 50 years.

The analytic protocol is explained in detail at this link. Click on the “How is the MVPF calculated?” button at the top of the page and then scroll down the pop-up box that explains how each cost and benefit is measured from the time benefits are paid until the recipient is 33 years old. MVPF stands for the marginal value of public funding. Each element of cost and benefit is then laid out for the spending program under scrutiny, admissions expansions at Florida International University (FIU) for the example spending program. The published paper is at this link.

The basic measure MVPF is recipient willingness to pay divided by net government cost. WTP, willingness to pay, is a measure of how much the recipient would be willing to pay for the benefits.

Cost-benefit at age 33 for FIU admissions expansion

Cost-benefit projected to age 65 for FIU admissions expansion

In their executive summary, Hendren and Sprung-Keyser comment:
1. Direct investments in the health and education of low-income children yield the highest returns, but not every policy targeting children has a high MVPF. We find that expansions of health insurance to children, investments in preschool and K-12 education, and policies increasing college attainment all yield high returns.

2. Many direct investments in low-income children’s health and education pay for themselves. MVPFs are lower for policies targeting adults. We find lower MVPFs for policies that target adults. Indeed, MVPFs for these policies are often close to 1, indicating that their benefits are approximately equal to their costs.

3. MVPFs are lower for policies targeting adults. We find lower MVPFs for policies that target adults. Indeed, MVPFs for these policies are often close to 1, indicating that their benefits are approximately equal to their costs.

4. Some policies targeting adults have high MVPFs, particularly if they have spillovers onto children We find that spending on adults can result in high MVPFs if those policies have positive spillover effects on children.

5. We find high MVPFs for policies that target children throughout the full duration of childhood. This is true for a range of policies spanning from preschool and health programs for young children to college policies for older youth. This finding directly challenges the notion that opportunities for high-return investments in children decline rapidly with age.

Medicare analysis: MVPF = 1.63

Medicaid analysis: MVPF = 10.24

If this method to analyze cost-benefit is reasonably accurate, it should help inform governments and policy makers to make better funding decisions. For people who want to increase or decrease welfare spending, they will either take this kind of analysis into account, or ignore or even reject it as flawed or lies. Presumably, most libertarians and anti-government conservatives will continue to argue that all welfare spending is illegal or unconstitutional. They will continue to make those arguments, but at least they do that in the face of data strongly suggesting there can be significant social benefit from at least some government spending programs.

1983 Medicaid expansion to children analysis: MVPF = infinite