On Monday, May 4, the New York Times gave prominent coverage to two recent papers that provide strong evidence that better neighborhoods or local areas for young children make a large difference in increasing future adult earnings and income for these children. This research was conducted by Harvard economists Raj Chetty, Nathaniel Hendren, and (on 1 of the 2 papers) Larry Katz.

One paper (by Chetty, Hendren, and Katz) concludes that providing housing assistance to low-income families, combined with a requirement that the family move to a low-poverty neighborhood, increases future earnings of a young child in these families by around 30%. This result only holds for children who are between the ages of 4 and 12, with an average age of 8.  In contrast, for children 13 and over, forcing a move to a better neighborhood appears to be counter-productive, possibly because the disruptive effects of the move outweigh any benefits of the better neighborhood.  For children under the age of 4 at the time of the move to a better neighborhood, the authors do not have data.

The other paper (by Chetty and Hendren) suggests that children from low-income families do much better in adult income and earnings due to growing up in some local areas (counties or local labor markets) compared to other local areas, and that this is a true causal effect of the local area. Because of data limitations, the study can only look at where the child grew up back to age 9. But the study finds that the more years during childhood the child spends in a “good” local area, compared to a “bad” local area, the higher are the child’s future adult earnings. At least from age 9 on, each extra year in a “good” local area yields the same predicted improvement in the child’s future percentile rank in the adult income distribution.

My initial reactions to these two papers include several points:

First, these estimated effects of either the child’s “neighborhood” or “local area” are quite large. For example, the 30% boost to the child’s future earnings from housing subsidies tied to neighborhood quality exceeds the 26% boost found in studies of the effects of the Abecedarian program, which provided full-time child care and preschool to low-income children from birth to age 5. As another example, a quality full-day preschool program for one-year might reasonably be predicted, based on current research, to increase future earnings for children from low-income families by 10%.

Second, the gross fiscal costs of realizing these gains from better neighborhoods might be quite high for some families. As Chetty, Hendren, and Katz point out, for families who would have received low-income housing subsidies anyway, the fiscal costs of tying housing subsidies to moving to better neighborhoods are not great, perhaps about a one-time cost of $4,000 in extra counseling costs of facilitating the move to a better neighborhood.  Therefore, there is a very strong argument for trying to use existing housing subsidies for low-income families to facilitate family moves to better neighborhoods.

But most low-income households do not currently receive large housing subsidies.  If we wanted to help all low-income families move to better neighborhoods, this would be quite expensive. Typical low-income housing vouchers in the U.S. cost around $8,000 per year per recipient family. The exact cost per child depends on how many children are in each family, and the relative ages of the children. But paying for better neighborhoods for all low-income children from birth to age 18 could be quite expensive. For a one-child family, this would be a per child cost of over $140,000 over these 18 years, although the average cost per low-income child would be lower, sometimes considerably lower, in families with more children.

These large costs might well be worth it, solely in terms of benefits for children. For example, Chetty, Hendren, and Katz estimate that the 30% increase in future earnings would amount to an increase in the present value of earnings for the typical child in their sample of $99,000, discounted back to age 8. As the typical child in their study moves to a better neighborhood at age 8, maintaining that better neighborhood would require spending $8,000 per year for 10 years, from age 8 to 17. The present value of this would be around $70,000. Even if the family only has one child, the earnings benefits exceed the costs.

However, the point is that facilitating better neighborhoods for the poor through housing subsidies for better neighborhoods would not be a cheap program if pursued as a comprehensive program.  For example, if we provided $8,000 per year in housing subsidies to all families below twice the poverty line, which is around 23 million families, the annual costs would be over $160 billion. In contrast, interventions such as universal pre-K education for all 4-year olds would cost around $30 billion annually. Benefits for low-income children from a comprehensive housing subsidy program might well exceed costs, but it is unclear whether the benefit-cost ratio for such a comprehensive program would be greater than the 5 to 1 or greater ratio that is sometimes achieved for preschool programs.

(Note to policy wonks: this ignores entirely the value to parents of the housing subsidies, which could be considered an offset to the costs of housing subsidies.  The value to parents of early childhood programs is also sometimes ignored in benefit-cost analyses. Furthermore, determining this value is not straightforward. Finally, it often seems that the political system in the U.S. places little value on what income transfers can do for low-income adults, but does place some value on what income transfer programs can do for low-income children.)

Third, if better neighborhood quality is pursued solely through moving low-income households to more income-integrated neighborhoods, this requires an enormous social rearrangement. This necessarily implies as well that middle-income and upper-income households would usually be living in neighborhoods with more lower-income households. These middle-income and upper-income households would likely fear that this would lead to a loss of neighborhood quality that might damage their prospects and their children’s prospects.  In the paper by Chetty and Hendren, they argue that current evidence suggests that upper-income households are less sensitive than low-income households to features of the local area that are related to the income segregation  of the area. The argument is then that the children of the poor benefit from greater neighborhood income integration, but the children of the middle-class and the upper-class do not suffer from greater neighborhood income integration. But whether this finding is robust to more detailed analysis of the effects of specific neighborhoods, rather than overall area traits, is unclear.

Fourth, the limitations of a housing subsidy approach to improving neighborhood quality increases the importance of improving neighborhood quality through a variety of mechanisms, and not limiting the neighborhood improvement mechanisms to housing subsidies. In both these papers, what exactly constitutes the “quality” of a neighborhood or larger “local area”, from the perspective of improving a child’s future prospects, is still to a large extent a black box. Some correlations are presented that relate different local area characteristics to the child development effects of the local area, but the relative importance of these different neighborhood or local area characteristics is unclear. We are a long way from defining with any great assurance what aspects of the neighborhood and area child environment are most crucial in shaping child development and the child’s adult outcomes.

Fifth, it is reasonable to infer from these results that some early childhood interventions will help directly improve local neighborhood quality. Income transfers to families with very young children will raise average income in low-income neighborhoods, which we would predict would lead to higher overall neighborhood quality. Preschool and other early childhood education programs will raise school test scores, which is suggested in Chetty and Hendren’s paper to be one of the area characteristics associated with better adult prospects.

These spillover benefits from better neighborhood and area quality due to early childhood interventions may add to the overall benefits of early childhood interventions. One implication of this work by Chetty and Hendren is that many social interventions may have important neighborhood spillover benefits. If educational and social interventions are pursued on a large scale, they may improve neighborhood quality enough to add considerable economic and social benefits.