Return on Investment in Government

Imagine that you own a company like Proctor and Gamble, which produces a multitude of products. You have an advertising budget, and your funds are finite. What products would you pay to advertise? Do you advertise the hottest products or the slowest movers? Do you push the items with the highest profit margins? This is the same situation our government is in. With finite tax revenue, it must choose which programs to prioritize and where to allocate money.

The category of government programs with perhaps the worst return on investment is the current welfare system. A recent study by the CATO Institute found that needs based assistance programs paid more than the take home pay of a minimum wage worker in 35 States. In 13 states, welfare pays more than $15 per hour, and it pays over $10 per hour in 33 states. Since 1995 (a year before welfare reform was passed in Congress) only 18 states saw a decline in the total value of welfare benefits. The remaining 32 and the District of Columbia saw increases. In total, there are 126 distinct federal, means-tested, anti-poverty programs.

If the goal is to provide temporary assistance and help the disenfranchised find work, the programs are clearly a failure. Less than 42% of welfare recipients nationwide are actually working (in any sense including jobs training programs). Furthermore, less than 20% of recipients have unsubsidized private-sector jobs. A long term study actually found that those in persistent poverty were more likely to escape it if they did not receive welfare.

On the other hand, Stanford University economists Charles Jones and John Williams have estimated that publicly funded scientific research and development has a return on investment of between 30% and 100%. They analyze various programs ranging from the Department of Energy labs to NASA and they found that the public funding consistently turned a profit and benefited the private sector. Despite this, such research makes up 9% of discretionary public spending today (before sequester), down from 17% high in 1962. In real dollar terms, however, the funding has increased.

The government can be looked at as a company with the taxpayers as the investors. Even if you are not always getting a tangible return on your tax investment, you should be demanding value. How much military strength do you want for your money? How capable a police force do you think is a good value? What basic services do you think should be provided to all individuals, and how much are you willing to pay for them? Should you educate the person who lacks the means to obtain education, or the person who can do the most with the education? At bottom, it is a question of priorities. Blindly following programs for ideological reasons will waste money, while objectively evaluating the value provided by the programs will ensure the best utilization of our limited funds.

Additional Resources

Forbes, On Labor Day 2013, Welfare Pays More Than Minimum-Wage Work in 35 States:

CATO Institute, The Work Versus Welfare Trade-Off: 2013:

The Economist, What Washington Must Do Now:

Huffington Post U.K., Welfare Cuts Could Lead to ‘Lord of the Flies-Style Civil Unrest’:

The Fiscal Times, Obama’s Stimulus Plan: What Worked, What Didn’t:

CNN Money, Why the Fed’s Stimulus ‘Didn’t Work’:

Forbes, Risking America’s Return on Investment:

Center for American Progress, The High Return on Investment for Publicly Funded Research:

Adam Smith Institute, Return on Investment for Government Projects:

The Atlantic Wire, T.A.R.P. is Mostly Dead, and Fannie Mae is Alive:

The Washington Post, Vacant S.B.A. Post May Gather Cobwebs:

U.S. Small Business Administration:

The Huffington Post, S.B.A. Administrator Leaves Agency with Legacy of Fraud and No Successor:

The New York Times, ‘Shovel Ready’ Not So Ready:

Growth of Government, Thomas Sowell:

The Most Persistent Economic Fallacy, Milton Friedman:

Poverty and the Welfare system, Thomas Sowell:

Obama Healthcare Reform, Thomas Sowell:

The Proper Role of Government, Milton Friedman:


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