Philosophical objections to early childhood programs, part 3: what’s the market failure?

The natural question that any trained economist asks about government support for early childhood programs is: what’s the “market failure”? Economics holds that as a general rule, competitive private markets on their own will promote economic efficiency.  Unless “markets fail” for some reason, economic efficiency will be promoted by private markets without a need for government intervention.

In the case of early childhood programs, parents are free on their own to make decisions about paying for early childhood programs for their child. Why would the government need to intervene in the market for early childhood programs? What is the rationale for the government seeking to increase the quality and quantity of early childhood program services that are purchased?

Several important market failures may provide strong rationales for government interventions in the market for early childhood programs. First, there are some market failures that may lead parents on their own to undervalue their child’s benefits from early childhood education. Parents may lack information on the value of quality early childhood programs. Parents may also lack information on the quality of early childhood programs. In some cases, parents may undervalue early childhood programs compared to the value that would be placed on these programs by the adult the child will become.

Second, parents may be unable to afford high-quality early childhood programs. In theory, if private financial markets were perfect, low-income and working-class parents could borrow to pay for early childhood program costs, and postpone the payback until the child is an adult and is realizing the earnings gains from these programs.  But private financial markets do not exist for such long-term borrowing for lower income and working class groups.

Third, a child’s involvement in high-quality early childhood programs has strong spillover benefits for the community. One spillover benefit of early childhood programs is the resulting reduction in crime. The costs of crime go well beyond the monetary costs of crime for crime victims and the criminal justice system. The most important costs of crime are the psychological damages of trauma and fear that crime causes for crime victims or potential crime victims.

In addition, early childhood programs have spillover benefits by providing fiscal benefits for taxpayers. I have already mentioned the financial savings of reducing crime. Reducing the number of required prison beds, and the need for police and courts and probation officers, can lead to large cost savings. Other fiscal benefits include reduced welfare system costs and Medicaid costs. In addition, the increased earnings from former participants in early childhood programs will be taxed. These extra tax revenues, along with reduced costs for crime and the welfare system, allow governments to provide some combination of better public services and lower tax rates.

The final spillover benefit – and the one I think is the most important spillover benefit – is the effect of early childhood programs on the overall productivity of the local and national economy.  We know that the productivity of any individual worker does not only depend on his or her own skills, but also the skills of his or her co-workers. A business’s production is a team activity. More broadly, the productivity of a particular business in a local economy may not only depend upon that business’s workers and capital, but also on the productivity of nearby businesses. Businesses borrow ideas and workers from one another. Businesses share suppliers. Competition among nearby businesses serves as a spur to innovation and improvement.  For all these reasons, an individual’s actions to become more skilled, through early childhood programs and other means, boosts the economic productivity of the overall local and national economy, not just the individual’s own productivity.

I think this economic productivity spillover argument is the most powerful economic argument for early childhood programs, and indeed for other educational investments. Information problems can be dealt with by better informing parents. Borrowing problems can be dealt with by setting up better loan programs. If governments are fiscally pressed by welfare system costs, some would simply argue for eliminating the welfare programs. Not everyone will perceive the generation of tax revenues for government as a benefit. And although crime prevention has an appeal, getting tough on crime often has a more visceral appeal.

But the economic productivity of the local and national economy is something that everyone has a stake in. My economic fortunes do not depend solely on my own choices and life events. My fortunes also depend on the skills and ideas of others. An investment in early childhood programs recognizes that we’re all in this economy together.

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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