Early childhood programs and local economic development: supply-side economics or Keynesian economics?

I recently encountered the statement that my book was in some way based on Keynesian economics, which is thought by some to be politically controversial.

I have nothing against Keynesian economics as a way of analyzing business cycles and macroeconomic policy. However, my book mostly has no connection to the debate over how to deal with business cycles.

Instead, the main concern in my book is how we as a society can address long-run economic development in our regional economies. By this I simply mean how we can best increase long-run earnings per capita and wealth in a particular state or local economy.

I’m not sure that the general public fully understands that almost all economists are “supply-siders” when it comes to thinking about long-run economic development issues. In the long-run, the wealth and prosperity of a state, a local economy, a nation, or the world depend upon the quality and quantity of the “supplies” of “factors of production”, in particular labor and capital. In the long-run, demand for goods and services will take care of itself if the supply is there. This may not be true in the short-run.

Where economists differ on long-run economic development policy is on HOW we can best increase the quality and quantity of capital and labor that is supplied to a state, local, or national economy. Is this best done through low taxes? Or is this best done through expanding productive public services?

Even these questions oversimplify the issue. If it were possible, we would like both very low taxes and very high levels of public services to promote long-run economic development. But this doesn’t add up to a balanced budget. So, we need to be selective. What public services are most productive in increasing the quality and quantities of supply of productive factors? What taxes to finance these productive public services are the least damaging to the productivity of the economy?

The essence of the case for early childhood programs is that these public services are among the most productive in raising the future quality of labor supply available to a local, state, or national economy. Even after we account for all the negative effects of the required tax financing, the net economic effects on earnings per capita far exceed the costs.

As for taxes, as a rule, the more targeted any lower taxes are on new job creation and investment, the more productive will such lower taxes be in helping long-run economic development.  Furthermore, business costs can also be lowered in a productive way for many small and medium sized businesses through public services, such as customized job training and manufacturing extension services.

As an economic development strategy, simply lowering taxes across the board makes no more sense than simply increasing public services across the board. Economic development strategies make more sense if they target the most productive services and the most productive tax breaks.

In sum, the estimates in my book have little relationship to the merits of Keynesian models. Rather, my conclusion, that enhancing early childhood programs raises the long-run quality of labor supply, and hence long-run economic development, is consistent with a general consensus among almost all economists. Economists do not always disagree. Almost all economists would agree with the proposition that labor quality is one of the most important determinants of long-run economic development.  Policies that can cost-effectively boost long-run labor quality are approved of by almost all economic theories.

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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