On the face of it, labeling early childhood programs as “economic development” seems crazy. We see “economic development” in newspaper headlines about a manufacturing plant or corporate headquarters or major research facility that received large tax credits from a state or local government. What does a preschool program have in common with such tax incentives?
As I argue in my book Investing in Kids (January, 2011), what early childhood programs and tax incentives have in common is the nature of the benefits they potentially provide for local economies. Early childhood programs and tax incentives differ in the means they use, but the ultimate local benefits are similar: higher local per capita earnings.
I’ve pointed out in research over the years that the main benefit of successful “local economic development” is the increase in per capita earnings of local residents (e.g., my book Who Benefits from State and Local Economic Development Policies? 1991). Suppose tax credits attract jobs. This local job increase will lead to increases in employment rates and wage rates of local residents. This better job experience will raise long-run earnings.
What about other possible benefits of tax incentives for business? Fiscal benefits of more jobs will be slight unless the jobs raise employment rates and wage rates, which raises tax revenues while lowering social program costs. If job growth does not raise employment rates and wage rates – we just have more jobs and more population, but the same standard of living — it is unclear whether there will be any fiscal benefits, as this increased population will need infrastructure and services of similar or even greater size than the generated tax revenues. Property value increases will occur due to growth, but the empirical evidence indicates these property value increases are slight – typically additional land can be developed without huge increases in prices. Local businesses may gain increased profits from more population, even in the absence of improvements in the standard of living, but competition will limit the extent of these benefits. In-migrants may benefit, but even if this local area had not grown, they could have found similar opportunities elsewhere.
Empirically, increased earnings per capita are 70% of the benefits from the job growth that might be generated by business tax incentives. And almost half of the remaining benefits are fiscal benefits that mostly depend on higher per capita earnings.
If the main benefit from business tax incentives for local economic development is higher earnings per capita, a natural question is whether there are alternative means to attain those benefits. Early childhood programs can achieve higher local earnings per capita. The main way they do so is by helping their child participants get on a path that leads to higher adult skills. Many of these former child participants will stay in the same area, increasing the quality of local labor supply. This higher quality local labor supply will attract new and better business.
Some years back, Art Rolnick and Rob Grunewald of the Minneapolis Fed argued that high-quality early childhood programs were good “economic development” programs because these programs had high rates of return. I agree. But I go further in arguing not only that early childhood programs have high rates of return, but also that much of this return is exactly the same types of benefits provided by well-designed business tax incentives: higher local per capita earnings.