Understanding how government programs affect people in different places is crucial in helping policymakers determine how and where to target public assistance. For example, to maximize the positive impact of government policies on social welfare, policymakers could focus transfers on areas where assistance yields the greatest benefits.
One relatively new metric for measuring the impact of policies on social welfare is the Marginal Value of Public Funds (MVPF). The MVPF for any policy change is the ratio of the benefits provided to recipients per dollar to the policy’s net cost to the government per dollar.
Regarding the MVPF numerator, each dollar received is worth a dollar to the recipient for a policy that provides cash assistance. In contrast, for a policy that offers health insurance, each dollar worth of health insurance received is worth less than a dollar to the recipient, on average. Regarding the MVPF denominator, a policy that creates a work disincentive might cost the government more than a dollar for each dollar spent. This is because reduced labor supply may lead to lower tax revenue and increased reliance on other public assistance programs. Symmetrically, each dollar spent on a policy that leads to higher labor supply might cost the government less than a dollar.
Each policy will uniquely impact the MVPF’s numerator and denominator. An MVPF less than one means that each $1 spent on this program leads to an increase in overall social welfare of less than $1, and an MVPF greater than one means each $1 spent leads to a rise in social welfare of more than $1. An MVPF of infinity means that the net cost to the government is zero and that the program “pays for itself” as is the case with a number of policies aimed at increasing the health and well-being of low-income children.
Calculating MVPFs and quantifying the impacts of policies on social welfare provides a single measure to compare policies that have very different outcomes, such as reducing child poverty, increasing access to childcare or healthcare, raising test scores and educational attainment, or lowering crime. MVPFs also enable comparisons of policy impacts across different regions and over time.
New research on the EITC in rural and distressed parts of the country
In a recently published research paper, I present an original analysis of how a federal policy leads to different MVPFs in different parts of the country, examining how costs and benefits vary by geography. Specifically, I explore the impacts of the Earned Income Tax Credit (EITC) by metropolitan status (i.e., urban, suburban, or rural) and whether places are economically distressed. Following Bartik (2020), I define “distressed places” as those with a prime-age employment rate at least 5 percentage points below the national average. This category includes 14.7% of the U.S. population, or nearly 50 million people. There are numerous urban, suburban, and rural areas that both meet and do not meet this definition of distressed.
To conduct this research, I build on existing evidence showing that expansions of the EITC have consistently increased maternal employment and family resources since the 1970s. This research typically uses a quasi-experimental approach, leveraging state and federal EITC expansions—which also vary by number of children—to estimate the EITC’s impact on various outcomes. However, these studies focus on the EITC’s national-level effects, with little known about how effects differ geographically. I also explore whether this geographic pattern has changed meaningfully between the 1970s and the 2010s.
Whether the EITC would have larger or smaller effects in rural and economically distressed areas remains unclear. On one hand, if these areas have fewer available jobs or stronger norms against mothers working outside the home, the EITC’s earnings subsidy might lead to fewer new working mothers compared to economically stronger areas. On the other hand, the EITC may have a larger impact in these areas for at least three reasons:
- Higher pool of potential workers: Female employment is lower in rural areas compared to suburban or urban areas, resulting in more potential new workers.
- Greater eligibility and responsiveness: Wages and earnings are lower in rural areas, making more workers eligible for—and thus responsive to—the means-tested EITC.
- Higher relative benefits: Federal EITC benefits do not vary by geography, meaning that in rural and lower cost-of-living places, the benefits of higher purchasing power. This has been observed in other programs like SNAP.
Using various datasets, I find that the EITC’s effects on employment and income are most significant in rural and economically distressed areas. I also find that this geographic pattern has remained consistent between the 1970s and 2010s. These results corroborate previous research finding that the EITC increased the labor supply of unmarried mothers and had few negative effects on the labor supply of married mothers. My research also provides the first evidence that the average impact on rural married mothers was positive, countering previous findings of negative effects driven by suburban and urban mothers.
These effects on employment and income have important implications for the EITC’s MVPF. Nationally, Bastian and Jones (2021) find the EITC’s MVPF is between 3.18 and 4.23. This means that for every $1 the federal government spends on the EITC, it generates between $3.18 and $4.23 in benefits for EITC recipients, indicating a very high benefit-cost ratio.
Following Bastian and Jones’ approach, I estimate the EITC’s MVPF by metropolitan status and find a rural MVPF of 3.0 and an urban MVPF of 1.8. Each $1 spent on the EITC in rural areas increases social welfare by $3, whereas each $1 spent in urban areas increases social welfare by $1.80. As such, I conclude that, by most standards, the EITC is an effective program with a high benefit-cost ratio, particularly in rural areas.
The EITC’s MVPF varies by region: implications
These results suggest that policymakers could increase overall social welfare by directing relatively more public funds to people living in rural and struggling regions of the country. Such policies could help reduce regional disparities that have only grown in recent decades. This policy implication is consistent with research arguing for place-based policies aimed at struggling areas.
For example, some argue for pro-employment policies, such as an expanded EITC, aimed at economically distressed areas. Others emphasize that local investment would increase wages, productivity, job creation, and worker dynamism. Additionally, there are calls for investment in rural broadband (finally being carried out as of 2023), for providing loans and grants to enhance entrepreneurship and small business development, and for a federal jobs program to revitalize rural infrastructure and amenities.
The debate among researchers and policymakers on whether to target assistance to economically distressed places or to people in individual places is ongoing. While a combination of both may be most effective, some individuals appear to use their EITC benefits to leave rural and distressed areas to those with more economic opportunity.
Increasing the EITC in rural and distressed areas–proportional to the local unemployment rate or economic growth–would help the EITC more effectively reach areas needing assistance.