A Unified Welfare Analysis of Government Policies

88 Pages Posted: 12 Aug 2019 Last revised: 9 Jun 2023

See all articles by Nathaniel Hendren

Nathaniel Hendren

Harvard University - Department of Economics

Benjamin Sprung-Keyser

Harvard University

Date Written: August 2019

Abstract

We conduct a comparative welfare analysis of 133 historical policy changes over the past half-century in the United States, focusing on policies in social insurance, education and job training, taxes and cash transfers, and in-kind transfers. For each policy, we use existing causal estimates to calculate both the benefit that each policy provides its recipients (measured as their willingness to pay) and the policy’s net cost, inclusive of long-term impacts on the government’s budget. We divide the willingness to pay by the net cost to the government to form each policy’s Marginal Value of Public Funds, or its “MVPF”. Comparing MVPFs across policies provides a unified method of assessing their impact on social welfare. Our results suggest that direct investments in low-income children’s health and education have historically had the highest MVPFs, on average exceeding 5. Many such policies have paid for themselves as governments recouped the cost of their initial expenditures through additional taxes collected and reduced transfers. We find large MVPFs for education and health policies amongst children of all ages, rather than observing diminishing marginal returns throughout childhood. We find smaller MVPFs for policies targeting adults, generally between 0.5 and 2. Expenditures on adults have exceeded this MVPF range in particular if they induced large spillovers on children. We relate our estimates to existing theories of optimal government policy and we discuss how the MVPF provides lessons for the design of future research.

Suggested Citation

Hendren, Nathaniel and Sprung-Keyser, Benjamin, A Unified Welfare Analysis of Government Policies (August 2019). NBER Working Paper No. w26144, Available at SSRN: https://ssrn.com/abstract=3435965

Nathaniel Hendren (Contact Author)

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States

Benjamin Sprung-Keyser

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

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