Expanded pre-K is fiscally sustainable

The popular Washington Post blog “Wonkblog” had a post on April 11 2013 from Brad Plumer that got my attention with this headline:  “Funding preschool with a cigarette tax is unsustainable”.

The gist of the article is as follows: Although the proposed cigarette tax increase of $1.95 per pack would fully pay for the Obama Administration’s proposal for expanded preschool programs and expanded home visiting programs over a ten-year budget horizon, the annual funding per year at the end of the 10 year period is insufficient to pay for the program on an ongoing basis. Over the 10 year time horizon, total revenue is $78 billion and spending is $77 billion. But in the last year of the time horizon, 2023, total revenue is $6.1 billion and spending is $11.6 billion. 

The reason for this is two-fold: First, the preschool program is gradually expanded over time, which is eventually offset, but only partly, through a reduced federal share of the funding. Second, real revenue from the cigarette tax declines over time because the tax will reduce smoking more and more over time.

However, these figures do not take into account plausible positive fiscal feedbacks from pre-K. It is conventional practice of the Office of Management and Budget (OMB) and the Congressional Budget Office (CBO) to not consider most of the feedback effects of revenue and spending proposals from their effects on the economy and other fiscal categories. Thus, we would consider how a cigarette tax would affect smoking and hence cigarette tax revenues, but not how this would affect health care spending. For pre-K funding, we would consider likely take-up rates by states of the program, but would not consider any effects of the program in reducing special education spending, reducing prison costs, or increasing tax revenues from effects on parental earnings or the earnings as adults of former child participants.

The rationale for not doing “dynamic scoring” is that this might lead to temptations for budget gamesmanship, where politicians encourage budget agencies to make unrealistic assumptions about dynamic responses to reduce or eliminate the costs of political proposals. For example, if one makes extreme enough assumptions about how labor supply and capital investment respond to taxes, one can reduce or even eliminate negative effects of tax rate reductions on government revenues. 

However, although perhaps we don’t want OMB or CBO to be tempted by dynamic scoring, this is no reason for journalists or policy wonks to ignore plausible, research-proven economic effects of budget proposals in evaluating the proposals. In the case of pre-K, for example, we have very good evidence, for example from the Chicago Child-Parent Center program, that high-quality preschool reduces special education assignment rates by over 40%.  Pre-K also reduces crime rates by over 25%, which will reduce prison costs and other criminal justice system costs. Finally, pre-K will increase the adult earnings of former participants by over 7%, which will increase government tax revenues.

In their analysis of the benefits and costs of the Chicago Child Parent Center program, Art Reynolds and his colleagues find that the present value of the fiscal benefits of the CPC program outweigh the costs. The calculated present value of fiscal benefits is almost three times the costs, at 288%. (This includes their estimates of tax revenue increases, savings on special ed, savings on grade retention, reduced criminal justice system expenditures, savings in the child welfare system, and increased college tuition subsidies, but excludes estimates for possible savings on treatment of depression and substance abuse.)  The three biggest categories of savings are:  criminal justice system cost savings (present value of 106% of program costs); increased tax contributions as adults of former child participants (75% of program costs); reduced special education costs (63% of program costs).

Many of these fiscal offsets occur outside the 10-year time window that is often considered in OMB or CBO budget analyses. But the 10-year window is arbitrary. The figures given above are adjusted to present value terms, so the figures do attempt to discount these future fiscal benefits to reflect both inflation and the likely reduced value of future dollar benefits when viewed from the perspective of today.

Furthermore, some of these fiscal offsets will start occurring almost immediately. For example, this is true of special education cost savings.  In projections done for chapter 7 of my book Investing in Kids, I made relatively conservative assumptions about special education cost savings. As of 10 years after a universal preschool program is initiated, my estimates suggest that special education cost savings offset about 34% of the program’s annual costs.  This increases beyond the 10-year window to special education cost savings offsetting 48% of a universal pre-K program’s gross costs in the long-run.  The percentage cost savings would probably be greater for a more income- targeted pre-K program, which is largely what the Obama Administration’s pre-K proposal will be funding.

Other fiscal impact projections show even greater immediate fiscal benefits of pre-K programs. For example, Robert Lynch’s 2007 book, “Enriching Children, Enriching the Nation”, simulates that the fiscal “break-even” of an income-targeted pre-K program will occur after about 9 years.  This is probably the most relevant simulation to the Obama Administration proposal, which mostly funds pre-K for lower-income children.  But even for a more universal program, Lynch’s simulation suggest that as of 10 years after the program is begun, fiscal benefits offset over half of program costs. 

A realistic analysis of large-scale pre-K programs, based on good research evidence, suggests that expanding pre-K is one of the most fiscally sustainable policy options for the U.S. Even without a cigarette tax to finance pre-K, large-scale pre-K programs would pay for themselves in the long-run, and would pay a sizable share of costs even by the end of a ten-year time horizon.  Expanding pre-K actually would reduce the long-run ratio of government debt to U.S. economic output.  Deficit hawks should be strong supporters of expanding pre-K as a way to reduce long-run government budget deficits, even if we ignore the many benefits of pre-K for private individuals and private businesses.

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.
This entry was posted in Early childhood program design issues, Early childhood programs, Timing of benefits. Bookmark the permalink.

8 Responses to Expanded pre-K is fiscally sustainable

  1. Research out of Duke University’s Sanford School of Public Policy suggests that North Carolina’s high-quality Pre-K program, NC Pre-K, working in concert with the state’s 0-5 early childhood initiative, Smart Start, pay for themselves by the time a child reaches 3rd grade. These results are astounding considering that they are derived only considering the savings from special education placement rates and instructional cost savings.

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  3. jurisdebtor says:

    “Finally, pre-K will increase the adult earnings of former participants by over 7%, which will increase government tax revenues.”

    I am seriously confused. If Pre-K is universal, wouldn’t that diminish the advantage of attending Pre-K? Also, given the universality of the proposal, how will greater education increase incomes? Won’t we still need people doing remedial jobs that are not high paying? How does education change that?

    • timbartik says:

      Thank you for your comment. You seem to be assuming that the number and quality of jobs is fixed, or at least relatively unresponsive to the quantity and quality of labor supply. But that is not what is suggested by economic theory and empirical estimates. There is probably some displacement when the quality of labor supply is improved. In fact, in my models of the state level impact of improvements in labor supply quality due to preschool, I assume about one-third displacement, based on various empirical estimates. But preschool has such large effects on labor supply quality per dollar invested that even with one-third displacement effects, the net effects on earnings are quite large. To put it in your framework, I am not assuming that menial jobs will disappear, rather I am assuming that the mix of quality of jobs will adjust somewhat to labor supply, as will the quantity of jobs. And there is empirical support for this assumption.

      • jurisdebtor says:

        Thank you for the reply. The depth of my understanding of labor economics (and perhaps economics in general) is limited to knowing the Lump of Labor Fallacy, but I wasn’t clear on how the change in composition in the labor supply would impact the demand for labor. Interesting. Again, thanks. Cheers.

      • timbartik says:

        As one example of the empirical evidence I mean, Enrico Moretti, an economist at UC-Berkeley, has estimated the effects of an increase in a metro area’s percentage of the population that is college graduates. If the level and composition of labor demand was fixed, we might expect such a supply shift in the relative quantity of college-educated vs. non-college-educated to reduce the wages of college graduates, and increase the wage of non-college graduates. Instead, we find that everyone’s wages go up, although non-college-graduate wages go up by more. The most natural explanation of this finding is skill spillovers, so that the increased percentage of college graduates makes many employers more productive. With a more skilled local labor force, employers are better able to introduce new technologies or other productivity improvements. Moretti writes up this and other findings in a book aimed at a broad audience, “The New Geography of Jobs”. http://www.amazon.com/The-Geography-Jobs-Enrico-Moretti/dp/0547750110

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