The adequacy of state pre-K funding for quality and access

The latest edition of “The State of Preschool-2014” was released on May 10, 2015 by the National Institute for Early Education Research. This annual release of data and analysis has become essential to understanding what is going on with publicly-funded pre-K in the United States.

Using this latest edition, in this post I analyze funding for age-4 pre-K, and compare current funding to what would be needed to ensure adequate quality for pre-K for all age-4 participants, and what would be needed to ensure both adequate quality and adequate access to pre-K for all age-4 children in the United States.

Based on the NIEER data, I estimate that in aggregate, total funding for state-sponsored pre-K for 4-year-olds was about $5.2 billion in the 2013-14 school year.  (All dollar figures in this blog post are stated in year 2013 dollars.) This total includes not only state funding for state-sponsored pre-K programs, but also what is known about local and federal funding for such pre-K programs. (An additional note for data wonks: To get this estimate, I used NIEER estimates of total pre-K funding per child by state, and multiplied it by the number of 4-year-olds in pre-K in each state, and then summed this product over all states. Because the NIEER estimates of per-child funding included both 3-year-olds and 4-year-olds, the implicit assumption is that this funding per child did not differ much between 3-year-olds and 4-year-olds, or that such differences canceled out when summed over states. )

NIEER also estimates what it would take for the state to have adequate resources per child to consistently deliver a high-quality program. The estimates of the per-child funding are derived from estimates from the Institute for Women’s Policy Research, in their 2008 report, “Meaningful Investments in Pre-K: Estimating the Per-Child Costs of Quality Programs”. For each state, these estimates of per-child funding reflect the mix of half-day vs. full-day and other length of program design features of the state’s pre-K programs – that is, the required per-child funding for quality would be much greater if a state had all full-day slots vs. all half-day slots. The estimates are then adjusted to 2013 national dollars, and also adjusted for cost differences across states, as described in NIEER (2015, p. 18), using estimates from Lori Taylor.

If we add how much it would take to consistently deliver quality programs for the CURRENT number of 4-year-old children served in each state, we come up with a figure of $7.4 billion. Therefore, current funding of $5.2 billion would be needed to be increased by $2.2 billion, or over 40%, simply to consistently deliver a quality program to all 4-year-olds being served by state-sponsored pre-K, in the mix of half-day versus full-day programs that is currently being delivered.

(Another data note: This calculation simply increases all states that are below the needed quality spending level per child to the needed spending level per child. States for which funding is currently above the estimated required funding level are not reduced. If we simply adjusted all states up or down to the estimated required spending level for quality, total required funding would be somewhat lower, at $7.1 billion.)

What would it take to offer universal access to quality pre-K to all 4-year olds in the United States? This depends upon what one assumes about how many families with 4-year-olds would participate in a program that offers universal access, but obviously does not require participation, as pre-K is a voluntary program. It also depends upon what one assumes about the length of the program in terms of full-day versus half-day.

Suppose we assume that the program is a full-day (six hour) academic year program, with a class-size ratio of 15 students to 2 teachers, and with the lead teacher paid wages and benefits similar to what is paid to public school kindergarten teachers.  Suppose further that we assume that in a voluntary program that offers universal access, the percentage of 4-year olds in state-sponsored pre-K would be similar to what it is today in Oklahoma, at 76.4% of all 4-year-olds. The remainder of families would have their 4-year-olds in Head Start, in private preschool or child care, or at home. As was done with NIEER, and as I have done in previous work, I rely on the IWPR cost figures.

The resulting estimate is that full-day universal-access high-quality pre-K would cost $31.1 billion per year. This is an increase of $25.9 billion over current state-sponsored pre-K funding. Although $26 billion is a great deal of money, this amounts to less than 2% of overall state and local government tax revenue. (See p. 70 of my book, From Preschool to Prosperity.)

However, the cost of universal access to pre-K could be considerably less if we assumed the program would not be full-day for all. For example, suppose we assume that the program would have the mix of full-day versus half-day that is true of current state-sponsored pre-K programs. Then the estimated total cost of universal access to pre-K would be $19.8 billion per year. This amount would be sufficient to enroll 76.4% of all 4-year-olds in a program whose funding allowed high-quality, but with the program mix skewed mostly to programs offering half-day services.

In the real world, I think that to achieve universal access, and elicit adequate participation from all income groups, it might be necessary to expand on current full-day options. Therefore, the best estimate is that a universal program offering some mix of half-day versus full-day services would probably cost between $20 billion and $30 billion per year.

How do these figures compare with where states were before the aftermath of the Great Recession, and the expiration of the federal stimulus, led to state budget cutbacks? In NIEER’s data, it appears that state pre-K funding was significantly cut after the 2009-10 school year. So, let’s look at funding in the 2009-10 school year, using estimates from the 2010 NIEER Yearbook.

In 2013 dollars, total funding in 2009-10 for state pre-K programs for 4-year olds was $5.6 billion. So funding in real terms in 2013-14 had dropped by $0.4 billion, from $5.6 billion to $5.2 billion.

In 2009-10, the total funding estimated that was needed to consistently deliver quality services was $6.1 billion. This is only $0.5 billion above the actual funding. In contrast, the “quality funding” gap for 2013-14 was $2.2 billion ($7.4 billion versus $5.2 billion). The increased quality funding gap, going from 2009-10 to 2013-14, is largely because the mix of pre-K services has shifted to either more hours or days of service, which increases the needed funding level per child.  A more minor factor is the number of 4-year-olds served in state pre-K funding increased slightly, from 1.11 million in 2009-10 to 1.16 million in 2013-14.   States have not increased real funding to match the expanded hours of service per child and the increased number of children served.

What would have been needed in 2009-10 to finance universal pre-K? Using assumptions similar to what was used for 2013-14, the estimated cost, in 2013 dollars, of universal full-day pre-K would have been $32.5 billion. This is slightly higher than the estimated cost of $31.1 billion in 2013-14, largely because the number of 4-year-olds declined slightly from 2009-10 to 2013-14.  However, the costs of universal high-quality pre-K, if we assumed the mix of part-day versus full-day services actually provided in 2009-10, would have been $18.1 billion, again in 2013 dollars. Overall, it seems likely that a real world high-quality universal pre-K program in 2009-10 would have cost somewhere in the range from $20 billion to $30 billion, similar to the estimated cost in 2013-14.

What do these figures indicate? First, we are still well-short of the resources needed to have full access in all states to high-quality universal pre-K. We would need somewhere between $15 billion and $25 billion in additional resources to achieve universal access to high-quality programs.

Second, there is a growing gap between current funding levels and what is needed to fund the current numbers of children and the current mix of services in a high-quality manner. The main concern is that under-funding of pre-K will reduce the effectiveness of pre-K programs in changing a child’s future life course. A secondary concern is that under-funding of pre-K may undermine public support for expanded pre-K.

Both access and quality matter greatly to the aggregate economic impact of pre-K. As we continue to recover from the recession, all levels of government need to devote additional resources to address both access and quality issues in current pre-K funding.

Posted in Early childhood program design issues | Leave a comment

Forum discusses universal versus targeted preschool, age 4 versus earlier age programs, and public school versus private provision of preschool

On May 5, I spoke at in a forum in Minnesota on issues in designing preschool programs. The forum had six speakers with diverse perspectives on how to design early childhood programs.

The context for the discussion was a debate about the future course of Minnesota preschool policy. The policy choices facing Minnesota are similar to the choices facing other states, and therefore the Minnesota debate is relevant to all state and local areas considering expansions of their early childhood education efforts.

Minnesota currently has quite modest funding for preschool. The state’s current approach to preschool is somewhat unusual. The state funds scholarships for low-income children to go to both private and public preschools at ages 3 and 4.  At current funding levels, these scholarships only go to perhaps 10% of the eligible low-income children, and have a maximum size of $5,000, which limits what proportion of costs are covered. The state also has a “Parent Aware” rating system to help inform parents of the importance of preschool quality, and the quality features of different preschools.  The current Minnesota model is to create an informed market for quality preschool among low-income parents, with some funding to help low-income parents to pay for at least part of the costs of quality preschool.

Minnesota Governor Mark Dayton has proposed a significant expansion of Minnesota’s early childhood education efforts. The main increase in funding would go to help support universal pre-K for 4-year-olds. This funding would go directly to local public schools, although the public schools in some cases might choose to contract out to private preschools to provide preschool services.  The state would also double funding for early learning scholarships for low-income children, but extend the age eligibility for such scholarships to birth to age 5.

The coalition that has backed Minnesota’s early learning scholarships would prefer different uses of any expanded early childhood funding.  These groups, which include some business interests, some private charities, and some private preschools, is advocating for much larger increases in funding for the existing system of early learning scholarships for low-income students. In addition, this coalition would want larger funding increases for earlier age programs for low-income students, such as home visiting programs to improve parenting.

At the forum, some of the perspectives of the “Minnesota model” coalition were expressed by members of the speakers’ panel, including Art Rolnick, former director of research for the Minneapolis Federal Reserve Bank, and currently co-director of the Human Capital Research Collaborative at the Humphrey School of Public Affairs of the University of Minnesota. Some perspectives of the coalition were also expressed in audience members’ questions and comments.

Some of the concerns expressed at the forum about Governor Dayton’s program included the following:

  • There are concerns about prioritizing universal access to preschool over more income-targeted approaches. The argument made by Art Rolnick at the forum is that the highest return to early childhood investments comes from investments in low-income children, not middle-class children. The focus should be on closing the achievement gap between low-income children and other children.
  • There are concerns that putting most of the funding into age 4 preschool doesn’t put a sufficient priority on earlier-age (birth to age 3) early childhood programs. Art Rolnick argued that age 4 preschool was too late for many low-income children, and that based on the brain science, the child’s brain is more malleable at earlier ages, and therefore we would get the greatest effects on closing the achievement gap by investing earlier in low-income children.
  • There are concerns that utilizing public schools to deliver preschool will leave out private preschools. Although public schools can contract out, they may choose not to do so. Leaving out private preschools was argued by Rolnick to decrease parent choice. Some private preschools at the forum were concerned that greater reliance on public schools for age 4 preschool would cause financial problems for private preschools, which were argued to use age 4 preschool revenue to cross-subsidize more expensive care at earlier ages.

I was asked by the forum organizers to focus on why I favor universal over income-targeted preschool.  A previous blog post presented my detailed prepared remarks on this topic.  The essence of my argument was two points:

  • The research evidence suggests that preschool for middle-class kids has similar benefits to preschool for low-income children. Preschool for both income groups has very high benefit-cost ratios. Therefore, any state wanting to maximize its future should invest more in preschool for both low-income and middle-class children.
  • Universal access to preschool has some practical advantages. Most notably, universal pre-K is likely to have sustained broad political support for maintaining an adequate number of preschool slots and adequate preschool quality.

Art Rolnick brought up a counter-argument at the forum. He argued that the empirical evidence I presented only showed that the direct earnings benefits of preschool for middle class children and low-income children was similar. But he argued that it was reasonable to believe that some social benefits, such as lower crime and reduced special education costs, might be greater for preschool for low-income children.

My response to this counter-argument is as follows. There is actually no empirical evidence on whether preschool’s benefits in reducing crime and special education costs are greater for low-income children. It is a reasonably plausible assumption, but it has not been shown to be the case in empirical studies.

In addition, there are other possible social benefits of preschool that might imply greater social benefits from preschool for middle-income children. For example, there is empirical evidence that there are substantial economic spillover benefits for the entire economy from increasing the percentage of workers with college degrees, benefiting all workers, not just those who get a college degree. But the empirical evidence does not support such economic spillovers from more high school degrees. If preschool for the middle class has more of its earnings effects through helping children who would have been high school grads to become college grads, while preschool for low-income children has more of its earnings effects through helping children who otherwise would become high school dropouts to become high school graduates, but not necessarily college graduates, then preschool for the middle-class might have greater “skill spillover” benefits for the entire economy. There is no direct empirical evidence for these greater skill spillover benefits for middle-class preschool, but it seems as reasonable an assumption as the assumption that the anti-crime benefits of preschool are greater for low-income preschool.

On the issue of age 4 preschool vs. programs at earlier ages, I argued in discussion at the forum that although earlier-age programs can achieve higher effects in increasing a child’s future earnings than age 4 preschool, possibly because the child’s brain is more malleable at earlier ages, the benefit-cost ratio is higher for age 4 preschool than for earlier-age programs. I have argued this position before, and similar findings have been reported by Reynolds et al.  Why is this the case? Moving to earlier-age programs, we do get higher effects on earnings, but costs per child go up even faster. Child care programs at ages 1 and 2 must have lower child to staff ratios to be high-quality than is true of age 4 or age 3 preschool. Parenting programs such as the Nurse Family Partnership must use a lot of 1 on 1 staff time with parents to be effective. Preschool at age 4 or age 3 may be a “sweet spot”, where the child’s brain is still malleable enough to have significant effects, while children are old enough to have larger class sizes, which lowers costs per child.

On the private versus public preschool issue, I argued in discussion at the forum that either a public school approach or a private preschool approach can work. For example, both Oklahoma and Georgia run preschool programs with some evidence of success, yet Oklahoma runs preschool primarily through the public school system, with some contracting out, while Georgia uses a charter school approach. Furthermore, in the broader K-12 area, the evidence suggests that market competition via charter schools has not resulted in clear dramatic improvement in average school quality. Some charter schools are better than the average public school, and some are worse.

Therefore, Minnesota (or other states) can use any mix of public versus private approaches to delivering preschool, and still get results. Public preschool might have some advantages in tying preschools more directly to the K-12 system, which will make transitions to K-12 somewhat easier. Preschool in the public schools might also strengthen the public schools as an institution. Public schools might tend to be more universal and less selective, while some private preschools might be more selective in which students they try to serve, although this selection can of course be regulated. On the other hand, private preschools might tend to be more innovative, and might tend to offer more diversity of curriculum.  But public preschools can be encouraged to be more innovative and diverse in curriculum choices with appropriate state policies.

One point I made at the forum, and more extensively in private conversations in Minnesota, is that the choices facing Minnesota are broader than the contrast between Governor Dayton’s original proposal, and the expansions favored by advocates for the scholarship model. For example, there are preschool expansions that would be more “universal” than Minnesota’s current scholarship system, yet not fully universal. We could imagine funding preschool fully for students up to 300% or 400% of the poverty line, and charging fees above that family income level. Or we could imagine funding universal preschool for school districts exceeding some minimum percent of students eligible for free or reduced price lunch, but providing more limited funding for school districts with more affluent student bodies, and allowing those more affluent school districts to decide whether they wanted to provide the local funding needed to make preschool universal, or instead wanted to charge fees.

As another example, we could imagine the state providing some funding for public school provision of preschool, but also significantly expanding funding for private preschools at age 4. The state could directly allocate some share of the funds to private preschools, or require local school districts to allocate some share of funding to private preschools.

A final comment is on Art Rolnick’s argument that the main focus should be on closing the achievement gap between disadvantaged students and other students. In general, I think it is more appropriate for public policy to be based on multiple goals rather than exclusive focus on one goal. Lowering the achievement gap to help the poor is one worthy goal. Increasing the skills and earnings of all workers, including the middle-class, as part of an effort to improve the overall economy, is another worthy goal. Public policy towards early childhood programs, and other public services, is more likely to be effective and gain greater sustained political support if it tries to balance a variety of worthy goals rather than allowing one worthy goal to trump all other worthy goals.

It is tempting for advocates for the poor to adhere to the doctrine that all that matters for public policy is what public policy does for the poor. But a democratic government that seeks to raise taxes from a broad range of people , and promises to provide useful public services to a broad range of people, must have a broader vision. The interests of the poor should perhaps receive a greater weight in public policy, but that weight should not be 100%. Furthermore, if the interests of the poor are prioritized within a universal system that provides some benefits to all, public support will be greater. I suspect that Social Security, with its broad public support due to its near-universal benefits, but with a formula that favors low-wage workers, has done more to reduce poverty in the U.S. than income-targeted welfare programs, which are highly unpopular.

Putting all the weight on the poor might appeal to some conservatives and some business leaders as a way to hold down taxes, because enhanced spending is only required for a relatively small percentage of the population. But if broad public services such as universal preschool provide economic benefits greater than costs, then this is too narrow a view. Universal preschool that includes the middle-class will expand the U.S. economy more than income-targeted preschool. The initial costs of universal preschool will be higher, but in the long-run, the economic pie will be larger, which will increase business sales and profits, and provide a broader tax base that will allow improved public services combined with lower tax rates. The long-run interests of the business community, and of those favoring low taxes, are better served by the universal preschool approach, because it has larger effects on long-run economic growth.

States face a wide variety of choices in designing their early childhood education efforts. A pragmatic political strategy will forge appropriate compromises in these design choices between different policy goals. There is not one “ideal system” for early childhood policy.

Posted in Distribution of benefits, Early childhood program design issues

Why preschool should be universal

On Tuesday, May 5, I was asked to speak at a forum in Minnesota, on why I think that preschool should be universal rather than income-targeted. Below are my prepared remarks:

My main reason for arguing that publicly supported preschool should be universal is that the research evidence suggests that preschool’s benefits are universal. Preschool benefits for middle-class children are almost as large as benefits for lower-income children.

For example, the research evidence in a study I co-authored of Tulsa’s universal preschool program suggests that test score effects of pre-K for middle-income children are 90% as large as those for low-income children. Based on available studies of the relationship between early test scores and later earnings, we would also expect the dollar effects of Tulsa pre-K on future earnings for middle-class kids to be 90% as great.

These estimated earnings effects, for both middle class and low-income kids, are that for each dollar invested in pre-K, the present value of future earnings for those kids increases by about $5. This is a very favorable benefit-cost ratio for investing in both low-income and middle-class kids.

Even though the benefit-cost ratio is about the same for preschool for both middle-class and low-income kids, a universal preschool program would still significantly redistribute income. Because low-income children on average have lower baseline levels of future career earnings, the same dollar boost to earnings will cause a larger percentage boost to future earnings.

For example, in my work for Tulsa, I’ve calculated that a full-day preschool program costing $10,000 per year would boost the present value of future career earnings by about the same $50,000 for both low-income and middle-income children. But because expected future income is lower for low-income kids, this same $50,000 boost is about 10% of baseline career earnings for low=income kids, twice the 5% effect on career earnings for middle-class kids.

This evidence from Tulsa is backed up by similar evidence from Boston’s universal pre-K programs, and from random assignment experiments in both Utah and Rhode Island. The Boston and Rhode Island results for universal preschool programs suggest that preschool’s benefits for middle class children are 70% as great as for low-income children.

In contrast, the available evidence for earlier age interventions, such as parenting programs and child care programs for ages 0 to 2, suggests that they only pay off for low-income groups. For example, a study of one early child care program for ages 0-2, co-authored by Aaron Sojourner at the business school here, suggests that this program only helps children from families below 180% of the poverty line.

Why is there this pattern of benefits, in which preschool benefits all income classes, but earlier interventions in child care and parenting only benefit the poor? I think the most plausible explanation is the middle-class families are generally able on their own to provide adequate parenting or child care services. But high-quality preschool is hard for both middle-class parents and low-income parents to provide on their own. Preschool provides various skills, in particular social skills, that are best provided in a group setting. And quality preschool costs a lot: one school year of full-day high-quality preschool costs around $10,000, which is hard for many middle class families to afford on their own.

This interpretation of the research evidence is not my own unique view. A November 2014 “Consensus Letter” signed by over 500 early childhood researchers attempted to define the research consensus on early childhood education. Among other things, the letter stated that for programs such as preschool, and I quote, “benefits outweigh costs for children from middle-income… families.”

The economic research argument for universal preschool is backed up by some practical considerations. Universal programs are easier and cheaper to administer, without dealing with the complexities of income determination and recertification. Universal programs are less stigmatizing to the poor. Universal programs find it easier to encourage income mixing of children in preschool, which provides positive peer effects for low-income children. As argued in a recent report for The Century Foundation, economic diversity in a preschool program should be considered an important element of preschool quality – no-one thinks that running preschool in an income-segregated manner, as we do with Head Start, is ideal.  Finally, universal programs tend to have more persistent strong political support for maintaining access and program quality over time.

So in sum, I think that the research supports providing universal preschool at age 4, and income-targeted parenting and child care services for low-income children from the prenatal period to age 2. This combination of universal preschool services and targeted early age services will provide valuable benefits to all income classes, and boost the entire economy, while also providing an extra percentage boost to the poor and reducing income inequality.

Posted in Distribution of benefits, Early childhood program design issues | 1 Comment

The importance of neighborhoods for child development

On Monday, May 4, the New York Times gave prominent coverage to two recent papers that provide strong evidence that better neighborhoods or local areas for young children make a large difference in increasing future adult earnings and income for these children. This research was conducted by Harvard economists Raj Chetty, Nathaniel Hendren, and (on 1 of the 2 papers) Larry Katz.

One paper (by Chetty, Hendren, and Katz) concludes that providing housing assistance to low-income families, combined with a requirement that the family move to a low-poverty neighborhood, increases future earnings of a young child in these families by around 30%. This result only holds for children who are between the ages of 4 and 12, with an average age of 8.  In contrast, for children 13 and over, forcing a move to a better neighborhood appears to be counter-productive, possibly because the disruptive effects of the move outweigh any benefits of the better neighborhood.  For children under the age of 4 at the time of the move to a better neighborhood, the authors do not have data.

The other paper (by Chetty and Hendren) suggests that children from low-income families do much better in adult income and earnings due to growing up in some local areas (counties or local labor markets) compared to other local areas, and that this is a true causal effect of the local area. Because of data limitations, the study can only look at where the child grew up back to age 9. But the study finds that the more years during childhood the child spends in a “good” local area, compared to a “bad” local area, the higher are the child’s future adult earnings. At least from age 9 on, each extra year in a “good” local area yields the same predicted improvement in the child’s future percentile rank in the adult income distribution.

My initial reactions to these two papers include several points:

First, these estimated effects of either the child’s “neighborhood” or “local area” are quite large. For example, the 30% boost to the child’s future earnings from housing subsidies tied to neighborhood quality exceeds the 26% boost found in studies of the effects of the Abecedarian program, which provided full-time child care and preschool to low-income children from birth to age 5. As another example, a quality full-day preschool program for one-year might reasonably be predicted, based on current research, to increase future earnings for children from low-income families by 10%.

Second, the gross fiscal costs of realizing these gains from better neighborhoods might be quite high for some families. As Chetty, Hendren, and Katz point out, for families who would have received low-income housing subsidies anyway, the fiscal costs of tying housing subsidies to moving to better neighborhoods are not great, perhaps about a one-time cost of $4,000 in extra counseling costs of facilitating the move to a better neighborhood.  Therefore, there is a very strong argument for trying to use existing housing subsidies for low-income families to facilitate family moves to better neighborhoods.

But most low-income households do not currently receive large housing subsidies.  If we wanted to help all low-income families move to better neighborhoods, this would be quite expensive. Typical low-income housing vouchers in the U.S. cost around $8,000 per year per recipient family. The exact cost per child depends on how many children are in each family, and the relative ages of the children. But paying for better neighborhoods for all low-income children from birth to age 18 could be quite expensive. For a one-child family, this would be a per child cost of over $140,000 over these 18 years, although the average cost per low-income child would be lower, sometimes considerably lower, in families with more children.

These large costs might well be worth it, solely in terms of benefits for children. For example, Chetty, Hendren, and Katz estimate that the 30% increase in future earnings would amount to an increase in the present value of earnings for the typical child in their sample of $99,000, discounted back to age 8. As the typical child in their study moves to a better neighborhood at age 8, maintaining that better neighborhood would require spending $8,000 per year for 10 years, from age 8 to 17. The present value of this would be around $70,000. Even if the family only has one child, the earnings benefits exceed the costs.

However, the point is that facilitating better neighborhoods for the poor through housing subsidies for better neighborhoods would not be a cheap program if pursued as a comprehensive program.  For example, if we provided $8,000 per year in housing subsidies to all families below twice the poverty line, which is around 23 million families, the annual costs would be over $160 billion. In contrast, interventions such as universal pre-K education for all 4-year olds would cost around $30 billion annually. Benefits for low-income children from a comprehensive housing subsidy program might well exceed costs, but it is unclear whether the benefit-cost ratio for such a comprehensive program would be greater than the 5 to 1 or greater ratio that is sometimes achieved for preschool programs.

(Note to policy wonks: this ignores entirely the value to parents of the housing subsidies, which could be considered an offset to the costs of housing subsidies.  The value to parents of early childhood programs is also sometimes ignored in benefit-cost analyses. Furthermore, determining this value is not straightforward. Finally, it often seems that the political system in the U.S. places little value on what income transfers can do for low-income adults, but does place some value on what income transfer programs can do for low-income children.)

Third, if better neighborhood quality is pursued solely through moving low-income households to more income-integrated neighborhoods, this requires an enormous social rearrangement. This necessarily implies as well that middle-income and upper-income households would usually be living in neighborhoods with more lower-income households. These middle-income and upper-income households would likely fear that this would lead to a loss of neighborhood quality that might damage their prospects and their children’s prospects.  In the paper by Chetty and Hendren, they argue that current evidence suggests that upper-income households are less sensitive than low-income households to features of the local area that are related to the income segregation  of the area. The argument is then that the children of the poor benefit from greater neighborhood income integration, but the children of the middle-class and the upper-class do not suffer from greater neighborhood income integration. But whether this finding is robust to more detailed analysis of the effects of specific neighborhoods, rather than overall area traits, is unclear.

Fourth, the limitations of a housing subsidy approach to improving neighborhood quality increases the importance of improving neighborhood quality through a variety of mechanisms, and not limiting the neighborhood improvement mechanisms to housing subsidies. In both these papers, what exactly constitutes the “quality” of a neighborhood or larger “local area”, from the perspective of improving a child’s future prospects, is still to a large extent a black box. Some correlations are presented that relate different local area characteristics to the child development effects of the local area, but the relative importance of these different neighborhood or local area characteristics is unclear. We are a long way from defining with any great assurance what aspects of the neighborhood and area child environment are most crucial in shaping child development and the child’s adult outcomes.

Fifth, it is reasonable to infer from these results that some early childhood interventions will help directly improve local neighborhood quality. Income transfers to families with very young children will raise average income in low-income neighborhoods, which we would predict would lead to higher overall neighborhood quality. Preschool and other early childhood education programs will raise school test scores, which is suggested in Chetty and Hendren’s paper to be one of the area characteristics associated with better adult prospects.

These spillover benefits from better neighborhood and area quality due to early childhood interventions may add to the overall benefits of early childhood interventions. One implication of this work by Chetty and Hendren is that many social interventions may have important neighborhood spillover benefits. If educational and social interventions are pursued on a large scale, they may improve neighborhood quality enough to add considerable economic and social benefits.

Posted in Distribution of benefits, Early childhood program design issues, Economic development

Economic diversity in pre-K, peer effects, and universal versus targeted programs

A recent report by Jeanne Reid and Sharon Lynn Kagan of Columbia University, written for The Century Foundation, argues for greater consideration of economic diversity as a feature that helps determine quality in pre-K programs.

The report documents that low-income children not only have lower rates of attendance in preschool, but also are disproportionately enrolled in lower-quality preschool programs. Moreover, preschool classrooms are overwhelmingly likely to be highly segregated by income. As they point out, Head Start programs, by their very design, are largely restricted to children from families below the poverty line.

This economic segregation is troubling for many reasons. In a diverse, democratic society, it is important that families and children learn to live together, which depends upon common experiences.

In addition, as Reid and Kagan point out, research suggests that low-income children experience significantly greater learning gains if the preschool classroom is income-integrated. This greater learning is thought to occur due to peer effects from being exposed to middle-class children who, on average, tend to enter preschool with higher literacy and math skills.

At the same time, Reid and Kagan argue that the research evidence suggests that these peer effects are asymmetric: middle-class children’s learning seems not to be as subject to such peer effects. This means that integrating preschool classrooms by income contributes to greater learning for low-income children, without sacrificing the learning of middle-income children.

The report goes on to discuss policy implications. The authors argue for policies that include:

  • Encouraging programs to enroll both publicly-funded and tuition paying students;
  • Encouraging Head Start programs to make greater use of their flexibility to enroll 10% of their students from above the poverty line;
  • Locating more preschools where they are accessible to a variety of income groups;
  • Providing greater financial support for transportation to preschool programs;
  • Adding more professional development for preschool teachers in how to deal with diversity in preschools.

I was surprised that the authors omitted discussion of the hot political issue of universal versus income-targeted preschool programs. (Witness the recent debate in Minnesota.) In principle, government programs that only subsidize preschool for low-income children can include middle-income children who pay tuition. But in practice, income integration with private tuition charged to the middle-class is more difficult to arrange. Among other factors, some middle-class parents have some reluctance to enroll their child in a more diverse setting, despite the research.

In contrast, if a preschool program is universal in that it is free to all students, then middle-income families have more incentive to participate. Of course, full income integration in individual preschool classrooms will not happen automatically with universal preschool, any more than it does in public K-12 education. Procedures for allocating preschool slots, recruitment efforts, transportation availability, and preschool locations may all need to be arranged in a manner that encourages diversity of children in preschool classrooms. But universality is helpful in encouraging greater income integration.

Reid and Kagan have made a valuable contribution by arguing that greater economic and racial diversity in preschool classrooms is a goal worth pursuing, as it contributes to preschool quality. In my opinion, that goal will be more easily pursued if we begin with government support for universal preschool, rather than income-targeted preschool.

Posted in Distribution of benefits, Early childhood program design issues | 1 Comment

The challenges posed by “short-termism” in corporate decision-making, and what it implies for policies to promote broader prosperity

Professor William Lazonick of the University of Massachusetts Lowell has a provocative recent paper, written for the Institute for New Economic Thinking, outlining his views on how some of the adverse trends in income inequality in the U.S. are due to changes in corporate decision-making incentives. The paper is entitled “Labor in the Twenty-First Century: The Top 0.1% and the Disappearing Middle-Class”, thus implicitly referring to Thomas Piketty’s recent celebrated book, “Capital in the Twenty-First Century”.

(Lazonick previously wrote an award-winning book for the Upjohn Institute on the same themes, “Sustainable Prosperity in the New Economy”. His new paper further develops his thinking and is shorter, but the previous book presents more in-depth research evidence.)

The brief summary of Lazonick’s argument is as follows. In recent years, U.S. corporations have become overly focused on boosting their short-term stock prices. This is in part due to the structure of the compensation of corporate executives, which is increasingly weighted towards stock options. Corporations boost their stock options by such measures as using their profits to buy back their own company’s stock. As a result, corporations under-invest in R&D, physical capital, and their own workers, and have incentives to excessively lay off workers. The consequence of this process is a redistribution of income to the top 0.1% of the income distribution, which is dominated by corporate executives, and a reduction of good jobs for the American middle-class. Furthermore, this process weakens the long-run competitiveness of the U.S. economy and long-run growth.

What implications does this paper have for how public policy might boost broadly-shared prosperity for all Americans? This particular Lazonick paper does not outline specific solutions, but the obvious implication is to consider policies that would seek to reform corporate governance, corporate pay, and the stock market to encourage long-run thinking. As Lazonick argues in another paper, written for the Brookings Institution, public policy might discourage excessive reliance on stock options in corporate executive pay, and discourage companies from trying to buy back their own stock. We might consider changes in corporate governance, for example encouraging more corporations to include workers on their boards, and to have goals other than maximizing short-term stock prices, as has for example been discussed in Thomas Geoghegan’s recent book.  For example, we might give more favorable tax treatment to corporations that were reorganized under such broader corporate charters. As Bob Lerman has argued, we might consider measures that would encourage the stock market to place a greater value on a corporation’s human capital, by encouraging better measurement of the “human capital” of a corporation’s workers. As Larry Summers has argued, we might make it more difficult for activists to threaten a takeover or restructuring of companies that are in their view failing to maximize short-run shareholder value.

How does this issue relate to other policies that promote broadly-shared prosperity? For example, how does this issue relate to early childhood education programs that seek to promote broadly-shared prosperity by better development of skills for all children? I don’t think that any of these arguments mean that “labor supply” policies – policies that attempt to improve the labor market by boosting the quantity or quality of labor supply – are ineffective or unneeded. There is research that shows not only that more education helps individuals, but also showing that improving educational attainment will help overall wages, employment rates, and per capita income, for example research by Enrico Moretti on how more skills has spillover benefits for everyone in a metro area’s economy.  Existing research on how businesses respond to increased skills can be used to estimate how more skills will help those getting skills and improve income equality, for example see this recent report by Hershbein, Kearney, and Summers.

In other words, even if corporations are more reluctant than they should be to make long-term investments in their workforce and their competitiveness, corporations will still show some response to an increased skill level of the workforce. Labor supply policies still will make a difference.

However, it is the case that labor supply policies will be more effective if we also work on the labor demand side, that is we also work directly to affect the behavior of businesses.  For example, preschool programs would have even greater aggregate effects on the U.S. economy if U.S. corporations could be encouraged to be more willing to complement these preschool investments with their own investments in workers’ skills.

The converse is also the case: labor demand policies that affect business decision-making will be more effective in advancing broad prosperity if accompanied by well-designed labor supply policies such as preschool. Even if we restructure corporate incentives so that corporations are significantly more interested in investing in their workers, these investments are likely to go mainly to workers who start out with good hard skills and soft skills. Preschool and other educational reforms will help corporate governance reforms to be more successful in broadening opportunities.

Labor demand and labor supply policies go together. (I have argued this before, including at book length.) Both types of policies are needed to improve broadly-shared prosperity.

Posted in Business incentives, Economic development

Review of Robert Putnam’s new book, “Our Kids”: strong on vivid individual stories illustrating the problems; weaker on showing solutions

Robert Putnam’s new book, “Our Kids”, does an excellent job of telling individual stories of the American poor, and in particular recounting how their lives are affected by their experiences in childhood and adolescence.  (Robert Putnam is a political science professor at Harvard, perhaps best known for his work on the importance of social capital in societies, most famously in his book “Bowling Alone“.) These stories encourage insight and empathy with the constraints that inhibit equal opportunities for all Americans. Among the constraints are family and parenting problems, troubled neighborhoods, bad schools, and lack of sufficient quality job opportunities. But these constraints are illustrated through individual stories more than through the usual social science data presentation.

The book is weaker on providing solutions. The book does outline some policy solutions to enhance opportunities for persons growing up in low-income families, including: income transfers for low-income families, parenting improvement programs, preschool, and school improvements. However, these solutions are only relatively briefly outlined in one chapter. The book does not present detailed enough program proposals that allow the specific costs and benefits of the various proposals to be discussed.

As a result, I think many readers will not believe that these solutions will come close to solving the overwhelming problems that are made so vivid in the individual stories presented in the bulk of the book. I think it is important for policy wonks to make clear what specifically their proposed policies will do to solve the problems identified in their policy analysis , as I have tried to do in my own work, for example in my recent book on preschool, outlining both benefits and costs.

In addition, the book spends relatively little time on outlining how policy solutions might address the overall structure of opportunities in the American economy. In other words, the book is more concerned with improving the quality of the poor’s labor supply, rather than addressing labor demand: the number of good jobs available to all Americans including the poor. A more comprehensive anti-poverty strategy for helping all our kids should include both labor supply and labor demand approaches, as I have argued before.

However, in a society that seems to become more divided over time, “Our Kids” will help many readers empathize with the children of the underclass, and better understand the challenges they face in growing up and succeeding. This increased empathy may help motivate some readers to support finding better solutions to improve opportunities for all of “Our Kids”.

Posted in Distribution of benefits