Return On Investment

I tend to get testy when I hear people intone that government should “be run like a business.” (Granted–I’m testy a lot…) Government is very different from business–its purposes (which do not include a profit motive) are distinct. Not recognizing the substantial differences  between governance and enterprise marks those making that facile comment as–at best– uninformed.

That said, there is one concept fundamental to both business plans and investment decisions that should also guide governmental decisions: return on investment. Interestingly, however, many of the same folks who want more businesslike governance routinely ignore that calculation.

If I’m purchasing stock in a company, I want evidence that the shares I purchase will appreciate in value–or at least pay dividends. If I am a savvy/mature investor, rather than a gambler playing the market, I understand that such appreciation will likely not be immediate; I will invest “for the long haul.” 

That same calculation ought to determine America’s investments in social spending.  Although appropriate returns on government investment will not and should not be monetary, a number of studies confirm that a surprising number of programs actually do turn a fiscal profit for taxpayers.

Children who have been fed thanks to food stamps grow up into healthier, more productive adults than those who didn’t get enough to eat. That greater productivity means that government eventually recoups much of what it spent on those food stamps–and also saves money due to reduced spending on things like disability payments.

A recent study by Harvard economists found that many programs — especially those focused on children and young adults — made money for taxpayers, when all costs and benefits were factored in.

That’s because they improved the health and education of enrollees and their families, who eventually earned more income, paid more taxes and needed less government assistance over all.

The study, published in The Quarterly Journal of Economics, analyzed 101 government programs. In one way, it was a standard cost/benefit analysis–it looked at what  government’s costs were, and the resulting benefits to the recipients. However, the researchers took an extra step–they calculated the “fiscal externalities: the indirect ways that a program affected the government’s budget.”

In other words, in addition to the upfront costs, they calculated the monetary return on taxpayers’ investment.

Consider one program: health insurance for pregnant women. In the mid-1980s, the federal government allowed states to expand Medicaid eligibility to more low-income pregnant women. Some, but not all, states took up the offer. Increased Medicaid coverage enabled women to receive prenatal care and better obstetric care, and to save on personal medical spending.

For the federal government, the most straightforward fiscal impact of this expanded coverage was increased spending on health insurance. The indirect fiscal effects were more complex, and could easily be overlooked, but they have been enormous.

First, newly eligible women had fewer uninsured medical costs. The federal government picks up part of the tab for the uninsured because it reimburses hospitals for “uncompensated care,” or unpaid bills. Thus, this saved the government some money. On the other hand, some of the women stopped working, probably because they no longer needed employer-provided private health insurance, and this cost the government money.

But the biggest indirect effects were not apparent until children born to the Medicaid-covered women became adults. As shown in a study by Sarah Miller at the University of Michigan and Laura Wherry at the University of California, Los Angeles, those second-generation beneficiaries were healthier in adulthood, with fewer hospitalizations. The government saved money because it would have paid for part of those hospital bills. The now-adult beneficiaries had more education and earned more money than people in similar situations whose mothers did not get Medicaid benefits. That meant higher tax revenue.

Data on other social programs yields similar results. Researchers have found that Medicaid expansion, for example, more than paid for itself, even after accounting for the fact that future benefits are “discounted”–i.e., worth less today. 

Businesspeople understand that it usually takes time to realize profit. With government social programs, too, the fiscal “payoff” generally is delayed. That doesn’t mean it is less substantial or less real. In the cited study, 16 of the social policies that the researchers examined either broke even or actually made a profit. 

I’m certainly not suggesting that government programs be limited to those with a positive financial return–government is most definitely not a business. I am suggesting, however, that we consider government social programs investments–and that the returns on those investments aren’t limited to improving the safety and security of the communities in which we all live, sufficient as that return would be. In many cases, taxpayers also get a positive monetary return on investment.

Just like well-run businesses.

19 Comments

  1. And MAYBE — Just MAYBE — we can drop that illusion that a business person with NO government experience is a good choice for President

  2. “Return On Investment” is the ultimate goal of President Biden’s bills, currently caught up in a political square dance doing do-si-dos between House and Senate slim majorities. “Cash-in hand”, the government’s hand, is not the goal; salvation of Americans and the many forms of infrastructure and saving lives is the trifecta payoff being sought. The Republicans are sticking with Trump’s business format of spending pennies and reaping major benefits. Some Democrats are dragging their feet in investing the best they have to offer in the way of elected officials working to salvage the current remains by using Republican tactics of puny investment in this nation’s future.

    Meanwhile it appears that the Republican campaign for donors reaping millions might result in Donald Trump reaping the return on their investment of those millions by returning to the White House to complete his “deconstruction” of our government and this country as he so successfully impoverished companies who worked for him but reaped nothing when their bills came due or 30 cents on the dollar of what they were guaranteed.

    “Businesspeople understand that it usually takes time to realize profit.” This is true of the expected profits this country and the citizens will reap, but only if we invest in the country and the citizens. To “get what you pay for” must first be paid for to get the return on those bills dancing around in Congress.

  3. That calculation is the basis for many decisions within the business and those looking to give the business capital. It’s one of capitalisms defining calculations. Will I get a return on my investment?

    The folks who confuse government and businesses also believe their taxes are capital given to the government to grow. What they really are debating or whining about is how the transfer of wealth from them to the government is being spent. Many of these people believe government taxation is stealing — a form of theft.

    They are protesting that the government is using “their money” in ways they’d prefer the government not to use money.

    I don’t think these people really care about the ROI because most of them don’t even have investments. They just don’t want their tax money going to help people they dislike or don’t approve of. They’d prefer keeping their money as opposed to helping lazy _______.

    We just saw it in Indiana with the folks receiving Unemployment Insurance when the federal government gave those folks extra money because of the pandemic. I am assuming the ones complaining were working and were bitching that “their money” was being used to keep lazy workers at home on the couch. These protestors concluded that the at-home workers are lazy, the government is stupid for giving out free money, it was the Democrats who wanted it, so, therefore, all Democrats must be voted out of office. And damn-it, I can’t get my jumbo meal because ______ is closed because they can’t hire staff.

    The nuances and intricacies of the problem escape them. They aren’t concerned with ROI because they don’t understand finance or economics. They have a limited understanding of most matters which is why they are so easily manipulated.

    If we didn’t have a conscience, we could make a ton of money off these fools.

  4. The costs to society due to air and water pollution are called social costs, because society has to pay for them, not the polluters. In the same way, the social benefits of “social” programs provide benefits to the entire society, not just to those who receive them directly. The bean counters have to learn to look at the big picture.

  5. I have the same reaction when someone says “education should be run like a business”. It too is, or should be non-profit. When people are better educated they also contribute more to society, financially and other less obvious ways such as lower crime rates. So we also are experiencing the slow death of public education led by, you guessed it the reactionaries who make up the current iteration of the Republican party. A free public education is the corner stone of a democracy and they are trying their best to destroy public education in the US. If one takes time to do the research essentially every private school started after 1954 has the purpose to undermine Brown V Board of Education. IMHO they should all be shut down as they are a clear and present danger to our democracy and our way of life.

  6. Well here we go again, expecting us to govern based on evidence! We have operated for at least the last 60 years on conservatives’ strongly worded assumptions. If you raise the minimum wage, businesses will close and people will lose jobs! If you give people an extra $300 a week for unemployment compensation, they will become too lazy to work! People on food stamps are lazy and enjoying prime rib on the taxpayers’ dollars!

  7. I love the idea that any of our elected Republicans or their base have even the faintest interest in long-term planning.

  8. A similarity between government and big business is lack of ethics or morality!

    Ethics and morals are the internal drive to attempt to do the appropriate thing by your neighbors! Whether it be business or government. Unfortunately, ethics and morals have ceased to be a driver a long time ago.

    The desire to see everyone successful is not in our vernacular anymore. It’s all about what’s in it for me, and, not what’s in it for we.

    Corporate and business Lobbyists spread the money around as bribes to affect decisions by government. So business interests directly correlate to the well-being of those who need a hand up or those who are melatonin enhanced, or those who are less fortunate than others. Lobbyists generally fight against these things and pay very well for the privilege.

    Our government is like a bright shiny new car filled with trash, so much muck and waste that the vehicle is useless! And that, is where we are in government and business! No morals! And no ethics! That equals no conscience.

    Romans 2:14,15 reads;
    For when people of the Nations who do not have the law, do by nature the things of the law, these people, although not having law, are a law unto themselves. They are the very ones who demonstrate the matter of the law to be written in their hearts, while their conscience is bearing witness with them and by their own thoughts they are being accused or even excused.

  9. The problem with measuring ROI on social investments compared to typical business investments is the degree of difficulty of measurement and the time horizon. When a business invests in a new plant, its costs are known, and its benefits are known within a range of expected values with a high degree of confidence. Then those costs are measured against revenues each year to measure cash-flow, likely negative in the early years and then positive after that. These positive cash-flows are the “returns” on the original investment.

    In the social infrastructure investment in the above example the benefits weren’t measured until years or decades after the original investment and it required a team of academics to measure it. While it might be tempting to argue that the results of those studies can be used to justify future investments, it’s not that simple. Too many other factors affect the desired benefits and often social investments of one era or white house administration can be very different in their assumptions and approach to render comparison with prior programs useless.

    In retirement from my career in I/T and financial services industries I became a board member and then president of a public utility corporation that provided sewer and water services to small rural communities. Its mission was very clear and its operations were as measurable as those of any business. Its investments had to be financed with public debt so the benefits had to be carefully estimated and measured over time. But because it was a government entity and because it operated as a non-profit, I found that the management and previous boards lacked even the most basic and common-sense business practices and discipline.

    For example, 3 years before I joined the board the utility had made an investment to build out infrastructure to provide sewer service to around 200 homes in a small community that would generate a 3% increase in total revenues for the utility but once the project was started overall utility expenses grew by 24% over the next 4 years! They saw a pot of gold and went on a spending spree – and this was during the Great Recession! When I compiled the data on a spreadsheet and presented (confronted) the Superintendent with this, his response was: “expenses don’t matter. We’re a monopoly. We can just raise rates”.

    Another way in which I have found a number of local units of government and charitable non-profits lacking in “business” acumen is their lack of awareness that much of what they do consists of discrete “processes” that have a beginning, a middle and an end, and each with costs and a desired outcome. And nowhere is this more evident than how they tackle projects, where goals (benefits) weren’t clearly defined, the work to be done wasn’t organized or tracked, and the end never came…..it just went on and on and on as its mission creeped and staff turned over.

    So, in my experience at least, non-profit institutions and their beneficiaries would be well-served to become more “business-like” and adopt certain disciplines often (but not always) embraced in the business world. Their goals may not be as fungible (profit) as that of a business, but they should still HAVE goals and processes and should pursue them using all available disciplines and tools known to be effective, many of which are employed in the business world.

    Cheers

  10. All fine and good…BUT, a material part of the lack of trust in government is not due to lack of “ROI”, it is for lack of oversight over potential/real corruption. In the report I posted yesterday – the government’s own report – the billions in corruption in our programs in Afghanistan – maybe we didn’t teach them how to fight, but we certainly honed their corruption skills.

    No need to discuss the lack of enforcement by the IRS or the pillage of the PPP program….and on and on.

  11. Say, Todd, does that mean that there are, now, fewer overweight Indianians?
    John, you touched on an issue that has been simmering in the back of my brain: that we are in an expanded version of what used to be called the “Me” generation. Of course, the conservatives have been there for what seems like forever, which is why J.K. Galbraith was so right when he said that “The modern conservative is engaged in one of man’s oldest exercises in moral philosophy; that is, the search for a superior moral justification for selfishness.”
    John, I think your phrase “… So business interests directly correlate to the well-being of those who need a hand up…,” ought to say “inversely correlate.”
    Was it Pres. Coolidge, who said that “The business of government is business?” I believe so, and he left office in March of ’29, half a year before that fateful October of ’29!
    May I be so brazen as to ask what has become of the old concept of the “Social Contract?”

    I prefer Rousseau’s version to Locke or Hobbes’: “Rousseau’s conception of citizenship was much more organic and much less individualistic than Locke’s. The surrender of independence, or natural liberty, for political liberty meant that all individual rights, including property rights, are subordinate to the general will. For Rousseau the state is a moral person whose life is the union of its members, whose laws are acts of the general will, and whose end is the liberty and EQUALITY of its citizens. It follows that when any government usurps the power of the people, the social contract is broken; and not only are the citizens no longer compelled to obey, but they also have an obligation to rebel.”
    In our situation, those who are the ones rebelling, are those of us who are resisting the Trump/GQP usurping of power.

    In my perspective, the return on the public’s investment in government is the “liberty and equality” of which Rousseau wrote, along with the right to a “pursuit of happiness” for the equalized masses, rather than the presumed happiness of those with private yachts and rockets.
    John, notice the use of “moral” ??to describe the state.

  12. Patrick@9:09

    Excellent example!

    During the time of the robber barons in this country, government realized that something had to be done because the corporations were taking over! Roosevelt came in to try and change things and broke up monopolies and went after these folks to reel them in. But in the long run, they just figured out a way around more rules and regulations.

    Really, just like a computer program that ends up being corrupted by a hacker implanting a virus! (Lobbyists and business interest doling out money)

    The corrupted program was initially designed to make that particular function or the computer run smoothly and efficiently by its designer. The corruptor designed a program to alter its function and become either useless or a trojan horse for a nefarious reason.

    The sad thing is, we usually have technicians to install antivirus programs and correct the problem, but in government, the legislative branch feels no responsibility to act, because the lobbyist virus keeps adapting!

    It’s always about the money! Follow it long enough and those without a conscience will indict themselves!

  13. Mitch D@ 9:49

    Absolutely my brother!

    The sad thing is, when religion was allowed to worm its way deeper into government, this blurred the line between righteous and unrighteous, moral and immoral, civility and uncivility also conscience and a lack thereof!

    Truthfully Mitch, I don’t know if all of these things can be corrected or not. Looking back at history, it always ends up to be the demise of that particular civilization or power.

    Corruption and the decline of morals in civil society are usually the death nail that ends the long agonizing writhing of a civilization being destructed.

    History is available to everybody at any time, too bad it seems that we never learn from it!

  14. Mitch,

    If the trend continues, yes, unless there are sufficient substitutes for value meals. After a quick trip to a local Walmart, you can find plenty. I’m sure we’ll be treated to new recipes on social media for raw weiners, bologna, and meat nuggets….all sprinkled with artificial bacon bits. 😉

    And Patrick, the time horizon for ROI is a quarter on Wall Street or 3 months. Only in the 21st Century has academics begun realizing that incessant expectations of infinite growth on a finite planet may cause a problem with sustainability.

    And speaking of ROI, I listened to a great interview with the famed journalist Pepe Escobar, and he said his deep VA sources say the CIA is wildly upset with Biden for leaving Afghanistan because the Taliban has already announced the end of the opium trade which was a huge funding source for CIA global black ops – talk about an ROI.

    If you look at the global production of opium/heroin, it was almost non-existent at the turn of the 21st century when the Taliban ruled Afghanistan. Once the USA went into Afghanistan, the global production of opium/heroin grew exponentially. Even the USA suffered from a heroin problem.

    What’s going to happen now that the production is cut besides ticking off the Northern War Lords who grew the poppies? Where will the capital flow? Treatment centers?

  15. Shelia, mentioned the expansion of Medicaid. It was a baby step a real return on investment would be Single Payer – Universal Heath Care. Our “Health Care” system now ifs a Frankenstein Monster of complex grafted parts. The system is profit driven with some exceptions, like Medicare, Medicaid or the V.A.

    The result is Americans pay more per person than any other country in the world for health care. For several years bills have been introduced to convert our “system” to Single Payer – Expanded Medicare, that would include, doctors, hospitals, dental, mental health and pharmacy, no co-pays, no deductibles.

    Unfortunately, we have blue dog Democrats and the GOP who bitterly resist replacing the profit based system we have today.

    We will spend trillions of dollars on a war in Afghanistan and fail miserably. However, along the way the MIC made billions in profits. Health Care for all Americans via Single Payer or Universal Health Care – No we cannot have that.

  16. Once upon a time corporations believed in social welfare. They were just as concerned about their employees as they were their share holders. I believe they took the longer view and were not so focused on short term quarterly gains. They also understood that their employees were their greatest and most expensive asset. They had the attitude of the protagonist on “Its’ a Wonderful Life.”

    Children take a long time to become productive adults. Many children are, in fact, inspiring others to donate to worthy causes and to help others. And some children are bright enough to innovate at a very young age especially with the help of computers and the internet. I wonder what the girls’ robotic team from Afghanistan will create for us. Children are our future and investing in them not only secures our future but helps create a healthy economy. Can we measure in dollars and cents the value of that?

    It has been people who innovate and improve a company’s products. AI may, in fact, become the source of innovation and solving the world’s problems. That’s what the technocrats want. I have not heard the AI is capable yet of intuition which, for some of us, is an essential part of the creative process.

    The more we invest in people and their health, the more we will create solutions to our challenges because healthy, educated people are more productive and innovative.

    I just heard on the news that Indiana is going to test a road created in Europe that can charge a car’s battery while someone is driving on that road. I hope it works! And another company is creating steel without using coal! This is what happens when we invest in people and yes, children.

  17. I have written elsewhere rather extensively that the role of private enterprise, unlike that of government, is to make a profit, whereas the role of government is to provide services. As it happens, government does reap social and even pecuniary profits from its investments Sheila has outlined today. Thus, for instance, better educated people command more income and pay higher taxes down the road, thus enhancing revenues to government. All prosper – in time.

    I also write on the definitions assigned by politicians and their averse-taxpaying campaign contributors. Thus the Trump-Ryan reckless and unnecessary tax giveaway of 83% of a 1.9 trillion tax trove in December, 2017, to the rich and corporate class by a lame duck Republican Congress one month before being replaced by Democrats made no provision for repayment and was added to our long term deficit which our grandchildren will have to pay, in contradistinction to that currently proposed by Biden, where provision is made for repayment. I call such giveaways sans current repayment offsets “spending” and Biden’s plan “investment.”

    Spending (unless you are a trickle down aficionado) gives us no return on investment but uses our tax money to further enrich the few in terms of stock buybacks, enhanced capital gains potential, executive compensation etc., all while making no provision for repayment to the public till, whereas investment by government as now proven by Sheila’s reference today shows that we the people actually not only reap social profit down the road but monetary “profit” as well.

    So how shall we either “spend” or “invest” our tax money for the greatest good for the greatest number? Shall we invest it in three hundred thirty two million current and prospective taxpayers and reap its rewards or give it away to perhaps a mere one hundred thousand taxpayers for no discernible benefit to the rest of us who, to add insult to injury, are handed the bill?

    You be the judge. I have made my judgment.

  18. Two small points – First – businesses are equally guilty of short-sighted bean-counting. At one of my IT jobs, they decided to cut staff and their first two cuts were people with years of experience in an obscure part of the job. They didn’t “sell”, so they were worthless — except that they routinely saved dozens of hours of other people’s time through their expertise, savings never quantified.

    Second point, brought up by Lester – Two “moral” people can disagree thusly
    One would rather spend the money, accepting that there will be some “waste and fraud”
    One would only spend the money when there is no “waste and fraud”, allowing more money to truly help

    They will disagree on policy, even if they both calculated the same ROI.

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