When you don’t have a lot of disposable income, the decisions you make about how to spend money take on added importance. Whether it’s balancing a family budget, or trying to erase a billion dollar state deficit, the principals are much the same. You need to take care of your basic needs, and invest the money you have wisely.
The concept of Return on Investment (ROI) is a common sense filter for budget decisions. It allows you to differentiate between “expenses” and “investments.” With this perspective, things like energy efficient windows for your home, medication that you need to stay healthy, or classes that could further your career can all be intuitively classified as “good investments.”
As our state attempts to deal with huge budget deficits, common sense ROI seems to sometimes get lost in the discussion. Maybe it’s time for that to change.
What would happen if we used an ROI filter to make all of our budgeting decisions? If each dollar spent could return two or four or more dollars down the road, how soon could we move our state back onto a road of growth and prosperity?
There are numerous examples of programs where ROI is easy to see. Some that come to mind immediately are:
- Children’s Health: When we cure a serious illness or a medical issue for a child, we end up with healthy, productive, tax-paying adults. Leaving aside any moral and emotional appeals about helping kids, a simple look at the cost-benefit equation clearly shows we should be investing in children’s health.
- Early Childhood Education: Kids who are put on a positive path for learning early in life are not only more likely to become productively employed adults, they are also less likely to become financial drains to society. School drop out rates, crime rates, and incarceration rates will all decline if we invest in education.
- Affordable Housing: It is virtually impossible for families to pull themselves out of poverty and to become productive citizens if they don’t have a healthy, safe, affordable place to live. Programs that help people get off the streets and onto a plan for self sufficiency can turn a relatively minimal investment into a lifetime return.
- Parent Education: One of the cheapest and most effective ways to break the cycle of poverty and abuse is to help new parents learn how to be good parents. New parents often don’t have role models or support mechanisms to learn even the basics of how to care for a baby. Programs such as ECFE that provide support and education are relatively inexpensive when compared to the very real costs of neglect or abuse.
These are just a handful of examples that demonstrate the power of ROI as a guide for spending decisions. These are also areas that have to some extent been threatened as our budget deficit has skyrocketed.
Obviously determining ROI both in the short and long term is an inexact science. Many programs that I think are vital to Minnesota’s quality of life (parks, the arts, and, yes, stadiums) may not easily lend themselves to an ROI analysis. But if you believe quality of life is important for attracting business, talent, and jobs to a state, I believe these kinds of programs pass the test.
ROI analysis is not a silver bullet to make balancing the budget easy. In fact, MOST of the state’s major spending categories can make a reasonable ROI claim. Transportation, higher education, public safety, the environment and our natural resources… each of these areas contribute to the health and growth of Minnesota.
I think ROI does lend itself to smarter fiscal policy in two ways. First, ROI can help us analyze results and direct money to programs that are making a clear impact around these important societal issues. Second, it can help us change the way we look at the other side of the budgeting puzzle, taxes.
Tax policy is an area that is ripe for ROI analysis. Yes, there is a return when you cut certain taxes to encourage spending, investment, and job growth. But sometimes tax increases are necessary when we need to balance the budget without gutting the programs that provide vital return to our communities.
What are some programs or investments that you think provide the best ROI for Minnesota? What kinds of spending fail the ROI test? And how important SHOULD ROI be in making budget and taxing decisions?
Join the discussion!
Agree with this, Brian — especially early childhood education and early childhood FAMILY education. Much research has been done on the importance of investing in these types of programs and the the positive impact it has on our state down the road. Much smarter — and less expensive — to invest in kids now (which reduces crime rates, drug use, etc.) than to pay for rehabilitation and incarceration later.
One more ROI I’d add to your list is investing in care management for people with chronic health conditions. The GAMC and people with disabilities. By investing in simple things like accessible fitness programs, and basic health care, you can avoid the more serious and costly health concerns that drive up health care costs.