Raj Chetty on return on investment for social programs

Raj Chetty: This was an impressive study conducted by my colleagues Nathan Hendren and Ben Sprung-Keyser at Harvard… and the main punchline that they arrived at… is, programs that invest in kids – that is, programs targeted at developing human capital, at education, at improving development – tend to have very high rates of return, in fact sometimes infinite rates of return in the sense that they pay for themselves.

So if we invest a dollar in certain types of programs like helping families move to better neighbourhoods or certain types of early education programs, we actually find that those programs do not cost the government anything on net. In fact they pay the government back because the higher earnings that kids end up achieving later in their lives, they end up contributing more tax revenue such that they more than offset the costs of the program.

Ezra Klein: That implies to me, if the mechanism by which these programs pay for themselves is a spillover tax revenue, that the actual benefit to the lives of the people being affected is much much much larger, because tax revenue is going to be only a fraction of actual income generation, to say nothing of [other benefits of higher levels of education].

Raj Chetty: … Yes, some of these early programs – like, we were taking about moving to a higher opportunity neighbourhood … can have quite substantial impacts, hundreds of thousands of dollars of higher income over your lifetime.

Coming back to their paper, you see – not for every early childhood program but for lots of programs that target kids, and I should emphasise it’s not just programs that target the youngest kids but also programs that target older kids, kids in their teenage years or certain kinds of college access programs – a lot of these things have these incredibly high rates of return, or pay for themselves.

I think of the adage that “You teach a person to fish,” and that has a bigger pay off than giving a person a fish. So these programs that invest in human capital development end up paying for themselves, but then programs target purely at redistribution at adults, they don’t have that property, so if I cut tax rates for low income families… that doesn’t have this feature that it ends up paying for itself. To emphasise, that doesn’t mean that those are bad policies. … [The goal of those policies] is to provide support for people who really need help.

And so the lesson of this analysis is, these programs that particularly invest in kids, we should look at them differently. We shouldn’t look at them as costing society. Many of them, if designed well, could actually be in all of our interests. They could save tax payers money while increasing mobility and reducing inequality.

Raj Chetty on The Eza Klein Show: Can Raj Chetty save the American dream?

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