When Public Investments Actually Pay Off

Conservatives have for years mocked the use of the term “investment” for public expenditures, arguing that it’s just a cosmetic code word for “spending,” and an effort to borrow on the respectability of entirely non-germane business practices. But to the extent that public spending is explicitly aimed at producing non-immediate payoffs, it is ridiculous not to view–and then to measure–the future return on “investment.”

So even as Republicans perpetually seek to deride, devolve, or demolish Medicaid as ineffective welfare for those people, along comes a new study from the National Bureau of Economic Research evaluating the long-term impact of covering children under Medicaid. And as reported by The Upshot‘s Margot Sanger-Katz, the results are impressive even if you limit the “payback” to measurable contributions to the beneficiaries’ earning power and subsequent tax payments:

The study used newly available tax records measured over decades to examine the effects of providing Medicaid insurance to children. Instead of looking at the program’s immediate impact on those children and their families, it followed them once they became adults and began paying federal taxes.

People who had been eligible for Medicaid as children, as a group, earned higher wages and paid higher federal taxes than their peers who were not eligible for the federal-state health insurance program. And the more years they were eligible for the program, the larger the difference in earnings.

“If we examine kids that were eligible for different amounts of Medicaid over the course of their childhood, we see that the ones that were eligible for more Medicaid ended up paying more taxes through income and payroll taxes later in life,” said Amanda Kowalski, an assistant professor of economics at Yale and one of the study’s authors.

The results mean that the government’s investment in the children’s health care may not have cost as much as budget analysts expected. The study, by a team that included economists from the Treasury Department, was able to calculate a return on investment in the form of tax revenue.

The return wasn’t high enough to pay the government back for its investment in health insurance by the time the children reached age 28, when the researchers stopped tracking the subjects. By that age, the Treasury had earned back about 14 cents for every dollar that the federal and state governments had spent on insurance. But it did suggest that, if the subjects’ wages continued to follow typical trajectories as they aged, the federal government would earn back about what it spent on its half of the program by the time the children reached 60 — about 56 cents on the dollar, calculated using a formula that took into account the time value of money.

These calculations do not, of course, include the ROI of healthier, happier lives.

Paul Krugman looks at this study and relates it to the Republican drive for “dynamic scoring” of tax measures in Congress–which means including estimates of the economic activity they believe tax cuts will produce along with their positive affect on revenues.

[O]ne thing is fairly certain: CBO won’t be applying dynamic scoring to the positive effects of government spending, even though there’s a lot of evidence for such effects.

A good piece in yesterday’s Upshot reports on a recent study of the effects of Medicaid for children; it shows that children who received the aid were not just healthier but more productive as adults, and as a result paid more taxes. So Medicaid for kids may largely if not completely pay for itself. It’s a good guess that the Affordable Care Act, by expanding Medicaid and in general by ensuring that more families have adequate health care, will similarly generate significant extra growth and revenue in the long run. Do you think the GOP will be interested in revising down estimates of the cost of Obamacare to reflect these effects?

Whether the “dynamic” effects of public investments are reflected in formal budget documents or not, it is time for progressives to remember and conservatives to accept that they exist, and that government programs can have a long-term beneficial impact on the long-term challenge of economic inequality and sustainable, broadly shared growth, entirely separate from any immediate redistribution of income.

Ed Kilgore

Ed Kilgore, a Monthly contributing editor, is a columnist for the Daily Intelligencer, New York magazine’s politics blog, and the managing editor for the Democratic Strategist.