Early childhood programs and state budget cuts: now is a good time to invest

As detailed in a previous post, states are facing significant additional budget problems this year. These budget problems may lead to pressure to cut early childhood programs.

I don’t think there’s any need for states to cut high-quality early childhood programs. Now is as good a time as any to consider how to make room for needed investments in early childhood programs.

Sensible federal policy would provide additional counter-cyclical assistance to states and local governments. During a recession, the resulting cutbacks in state/local spending, or increases in state/local taxes, exacerbate the problem of low demand for goods and services. Federal assistance to state and local governments that is explicitly temporary, ideally tied by formula to the unemployment rate or other macroeconomic variables, can help reduce short-run unemployment without creating long-run budget deficit problems.

President Obama has proposed some modest assistance to states. This takes the form of some provisions to help states deal with their debts for their unemployment insurance systems.  However, this assistance is modest, and its prospects are politically uncertain.

So, states are probably on their own. Why, in a time of budget shortfall, should states avoid cutting early childhood programs? Why should they consider maintaining or even increasing their investments in early childhood education?

In the short-run, states will do less damage to their state economies by increasing taxes rather than cutting spending.  This is a well-known result in economics, sometimes explained in intro economics courses under the label of the “balanced budget multiplier”.

The intuitive idea is that only a portion of increased state taxes would have been spent on goods and services produced in the state. In contrast, reducing state spending has direct effects on reducing demand for public sector goods and services in the state. To put it another way, if state X increases taxes, a large percentage of the resulting reduction in demand will lead to layoffs of private employees outside of state X, in other states.  In contrast, if state X reduces public spending on early childhood programs, this will directly reduce jobs in state X of the early childhood workers who are funded by that program.

For example, consider some analysis from 2003 that I did with my colleague George Erickcek. We considered the economic impact on Michigan’s economy of closing a budget gap by tax increases vs. spending cuts. Both alternatives had negative effects on Michigan’s economy.  The negative effects of spending cuts were much greater. Compared to tax increases, spending cuts had a 42% greater effect in reducing Gross State Product. Compared to tax increases, spending cuts has a 47% greater increase in reducing total employment of all workers in the state.

This is of course a short-run analysis. Whether tax increases or spending cuts are preferable long-term depends on the specific tax increases and spending cuts. The devil is in the details.

In the long-run, states need to undertake significant budget reforms. These reforms need to address significant problems that are escalating spending faster than state personal income, and causing tax revenues to rise slower than the long-run growth of state personal income. These problems on the spending side include rising health care costs for Medicaid and for public workers and retirees, increased pension costs, and rising correction costs. These problems on the tax side include sales taxes that exempt too many services, escalating tax deductions and credits, and in some states, problems in property tax systems or in income tax systems that are insufficiently graduated in rates.

In the process of making these large and painful budget changes, states should also act to reallocate state funds to more efficient uses. This includes but is not limited to increasing investments in early childhood programs.

Such investments can be affordable because their dollar magnitude is modest compared to the needed long-run structural budget reforms. Strategic investments are in areas that do have a high “bang for a buck”, and that therefore do not have huge drains of resources relative to the state economy.

Consider early childhood programs. According to chapter 4 of Investing in Kids, moving to universal preschool would have an annual cost of less than $50 per capita. Expanding the Nurse Family Partnership to all eligible households costs a little more than $10 per capita. In contrast, the short-run budget problems facing the states for FY 2012 is around $400 per capita. The long-run budget problems facing states are much greater than that in per capita terms.

In other words, if we are going to have to make large-scale and difficult budget reforms, why not tweak these reforms so they are a bit more ambitious, and free up some resources for long-term investments?

Of course, every program claims that it provides long-term benefits. But early childhood programs have more rigorous evidence for long-term benefits than most, as outlined in my book and in numerous blog entries.

Part of these benefits includes long-run benefits for state and local budgets. I have already outlined that many early childhood programs will provide significant savings in special education costs.  For example, for universal pre-k, the eventual special education cost savings are about half of the budgetary costs.  In addition, there are numerous analyses showing that after we add in other budget savings, such as reduced costs of crime, that early childhood programs in the long-run pay for themselves.

In sum, cutting early childhood programs is the wrong choice if the goal is to minimize short-run economic pain and move to long-run budget reforms. Investing in early childhood programs is helpful economically in the short-run and in the long-run.

About timbartik

Tim Bartik is a senior economist at the Upjohn Institute for Employment Research, a non-profit and non-partisan research organization in Kalamazoo, Michigan. His research specializes in state and local economic development policies and local labor markets.
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1 Response to Early childhood programs and state budget cuts: now is a good time to invest

  1. Pingback: Can states afford now to invest in early childhood programs? | investinginkids

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