Government spending that pays for itself

Many of my posts challenge overly optimistic claims. But this one’s about a more hopeful story: how some types of government spending can actually generate financial returns through increases in future tax revenue.

The basic idea is simple. While most government programs come with a price tag, some can boost economic outcomes in ways that lead people to earn more-and when people earn more, they pay more in taxes.

Of course, government spending doesn’t need to generate a financial return to be worthwhile. National defense doesn’t pay for itself. Neither does Medicare. But when government spending leads to higher future tax revenue, in addition to any other benefits it has, that higher tax revenue helps offset its cost. And sometimes, the gains are so large that the program’s long-run fiscal benefits fully match-or even exceed-its upfront costs.

Economists have found some of the strongest examples of this in programs aimed at low-income children, which makes a lot of sense. Smart investments in children help them become healthier, more educated adults. And healthier, more educated adults generally earn more money and pay more taxes.

For instance, research shows that children in families who received larger Earned Income Tax Credit benefits earned more and did better in school as adults. Another study found that each dollar of childhood Medicaid spending generated 58 cents in tax revenue by the time those kids reached their late twenties. The long-run return is likely even higher.

Similarly, research has shown that early childhood education for low-income kids in North Carolina led to big gains in adult earnings — and higher earnings mean more taxes paid. Even simpler interventions — like reducing childhood lead exposure or improving prenatal care — have been linked to better cognitive outcomes and higher future earnings, which means more tax revenue down the road.

Of course, not every dollar spent on low-income children is automatically beneficial. Nor should government spending decisions be solely about their financial return. But when designed well and targeted effectively, policies that invest in low-income children are some of the smartest fiscal investments we can make.

Originally published at https://mytwocentsandcounting.substack.com.