You'd need to format the thumb drive in order to run programs off of it. Last time I looked into this, doing so would occupy all the space on the flash drive. So, unless there's a new program out that gets around this, you would have a USB drive either be for storage or a single program. You'll also run into problems with programs that need installed on the same physical drive as windows. Some programs though have portable options so you can run them straight off a drive, no install required. Firefox is an example of this. Features are limited but it's really handy for keeping space down on your local drives.

Stuff like games are little different. If I'm not mistaken, games store some data on the separate drive but critical files are stored locally. Textures, mods, and other large files can be elsewhere for the exact purpose of keeping large amount off local drives and in a more convenient location. But, there's concerns from the developer. For instance, piracy. If a USB can store all of a game stats what's stopping someone from cloning a USB and then handing it out to all their friends? For this reason there's local installs rooting itself to your OS so it can't be easily redistributed.