What is the MVPF?
The MVPF measures the “bang for the buck” of spending on a given policy. It serves as a unifying metric that can be calculated for any type of government (or private) spending.
The MVPF is calculated as the ratio of two numbers: the benefits that a policy provides to its recipients divided by the policy’s net cost to the government.
The numerator
of the MVPF captures the extent to which the policy improves the lives of its beneficiaries. In technical language, we measure this numerator using individuals’ “Willingness to Pay.”
The denominator
of the MVPF measures how much a policy costs the government. In technical language, this denominator is known as the “Net Government Cost.”
The MVPF is designed to measure long-run policy effectiveness. This long-run perspective is crucial because the returns on public investment can take years to materialize.
For example, the denominator of the MVPF is meant to include all the long-run effects that a policy can have on the government’s budget.
This contrasts with traditional cost-benefit analysis where long-run government savings are considered part of a program’s benefits rather than its costs.
If a policy increases worker wages, that increases tax revenue, and helps to reduce government costs in the long-run.
That increase in tax revenue is a cost savings that should be incorporated in the denominator of the MVPF.
Similarly, if a policy improves someone’s health and therefore decreases government spending on Medicaid, that reduction in government expenses should be incorporated in the denominator of the MVPF.
How do we interpret the MVPF? What does it mean if an MVPF is high (or low)?
If a policy has a high MVPF, that means it has a large bang for the buck. In other words, the cost of policy is small, relative to the benefit it provides recipients.
For example, the Carolina Abecedarian Project, an early educational program for infants and young children, had an estimated MVPF of approximately 12.
That means those children received nearly $12 in benefits for each $1 the policy cost the government in the long-run.
In some cases, government policy can actually pay for itself over time. When that occurs, we say that a policy has an “infinite” MVPF. Infinity is the highest possible value of the MVPF.
Infinite MVPFs occur when a policy provides a benefit without any long-run cost to the government. For example, several Medicaid expansions to children have saved the US government money in the long-run.
If a policy has a low MVPF, that means it has a small bang for the buck. It is costly to provide each dollar of benefits. That doesn’t mean, however, that the policy is a bad idea or a poor use of government funds.
After all, there are many programs we choose to spend on simply because the cost is worth it.
For example, spending on children in the Supplemental Security Income (SSI) program is estimated to have an MVPF of 0.76.
That means that the program costs $1 for every $0.76 that it provides in benefits. The SSI program provides support for low-income disabled children. So, while providing benefits is expensive, they can still be well worth the cost.
The importance of the MVPF is that it helps policymakers measure tradeoffs. It helps them understand the relative impacts of spending on different programs. Understanding those tradeoffs can then help to guide decision-making.