What should policymakers do about state and local business incentives?

Posted on December 2, 2012 by timbartik

Louise Story of the New York Times has a series, starting December 2nd (2012), on state and local business incentives.

Full disclosure: I was interviewed by Ms. Story for the series, and I am quoted in the first article.

From my perspective, the most important new finding in the first article is that state and local business incentives may be over $80 billion per year. This significantly exceeds many previous estimates.

The article also points out the following issues with incentives: many incentives go to locally-oriented businesses that are unlikely to have their location decisions affected by incentives; many incentives do not have claw-back provisions allowing state or local governments to recover some incentives if the assisted businesses decide to leave; there is no systematic national data collected on these incentives; from a national perspective, these incentives can be viewed as a zero-sum game, or at least a game in which the national benefits are far less than the local benefits.

I’ve written extensively about incentives over the years, including on this blog.

One post summarizes the top 10 points about business incentives in my book.

Another post discusses how federal policy might deal with the zero-sum game aspect of incentives.

Still another post discusses what state and local policymakers might do about incentives on their own.

Business incentives would benefit from national policy, or state and local policy, that would regulate and restrict incentives. These incentive reforms would incorporate tax incentives into the regular tax system, move away from financial incentives towards customized services that would be more regularly monitored, and focus more incentives on high-priority policies such as helping distressed areas and providing jobs for the long-term unemployed.

Posted in Business incentives, Incentive design issues, National vs. state vs. local | Comments Off on What should policymakers do about state and local business incentives?

Texas pre-K: what the numbers mean

Posted on November 29, 2012 by timbartik

An excellent recent paper by Rodney Andrews, Paul Jargowsky, and Kristin Kuhn examines the effects of Texas’s state pre-K program.  (Hat tip to Sara Mead, whose blog post alerted me to this study.)

This paper by Andrews, Jargowsky and Kuhn (henceforth dubbed here the AJK paper) finds statistically significant effects of Texas’s large-scale but not universal pre-K program on 3rd grade test scores. AJK find that the program increases 3rd grade test scores by what education researchers call an “effect size” of around 0.05, although the precise numbers vary with the specification. These effects are in most cases highly statistically significant.

The estimated effects are not based on a random assignment experiment. However, they do have some reasonable control groups. In some specifications, AJK are comparing similarly disadvantaged children who did not participate in the program, to children in the same school district who did participate in Texas pre-K.  In other specifications, they are comparing children in the same school districts before and after the school district decided to participate in the state program. So the estimates are not experimental, but they rely on good “quasi-experimental” evidence in that the estimates control for many possible differences between the treatment and comparison groups.

What do the estimates mean for research on pre-K programs? First, as the authors highlight, they mean that even programs that are rated as lower-quality pre-K programs can have statistically significant effects on later academic outcomes. As AJK point out, Texas’s pre-K program is not rated highly by the National Institute for Early Education Research. NIEER only rates Texas as meeting 4 of 10 benchmark requirements. For example, according to NIEER, Texas has no required maximum class sizes or child-staff ratios, and no state monitoring of quality.  On the other hand, the Texas program does have early learning standards and requires that the lead teacher have a BA along with some specialized training in pre-K.

Second, it is important to note that only the large sample size of this study allowed effects of this magnitude to be detected as statistically significant. Some of the estimates use samples of over 500,000 students, which allows estimates to be quite precise. Most studies of pre-K have much smaller sample sizes – Perry pre-K only had 123 participants, the Chicago Child Parent Center study had around 1400 participants, my recent study with Gormley and Adelstein of Tulsa’s pre-K program had around 2600 participants, and the recent national Head Start experiment had almost 5000 participants. A standard statistical analysis suggests that to have adequate “power” to detect the effects found in Texas would require a sample size of a little over 12,000 children participating in the study. (That is, to have a power of 0.80, or a probability of 80% to detect a statistically significant effect at the 95% level of significance, when the true effect size is 0.05, would require a sample size of over 12,000.)

Thus, the implication is that for at least some pre-K programs, with modest effects, existing studies are often “under-powered” , that is have too small a sample size to detect plausible effects of the program.

Third, the Texas pre-K program has considerably smaller effects than is found in high-quality studies of higher-quality pre-K programs. For example, Steve Barnett concludes from his review of the research that an average effect size that we might expect in elementary school from pre-K programs would be around 0.30. This is six times the effect found in Texas.

Therefore, it is important to emphasize that good studies have found that pre-K can achieve better than the results found in Texas.

Fourth, even the modest effects found in Texas might well lead to long-term benefits that would exceed the costs of the program. Based on the 3rd grade test score estimated test score effects in Texas, I estimate that Texas’s program would be expected to increase the present value of future earnings for the average child in pre-K by around $3,500. The program’s costs are around $3,800 per child. So, based solely on 3rd grade test score effects alone, the program’s benefits and costs are about the same.

(These estimates use a similar methodology to what the Bartik/Gormley/Adelstein paper did in forecasting the future earnings effects of Tulsa pre-K.  I used estimates from Chetty et al on how 3rd grade test scores affect adult earnings.)

However, the earnings benefits predicted by 3rd grade test scores overlook possible additional benefits that would be important in a benefit-cost analysis.  One benefit overlooked is possible crime reduction benefits. In many benefit-cost studies, as summarized in my paper with Gormley and Adelstein, adult earnings benefits are half or less of the total social benefits of pre-K, with reduced crime making up most of the remaining benefits.

In addition, earnings benefits predicted by 3rd grade test scores may understate future earnings effects of pre-K. In many studies of early childhood interventions, the initial effects of the program on test scores tend to fade over time. For example, this pattern is found in Deming’s study of Head Start, and Chetty et al’s study of the effects of kindergarten class quality.  But these studies find that adult outcomes tend to increase to close to the level predicted by the initial test score effects.  In Chetty et al’s study, for example, the end of kindergarten test score effects of kindergarten class quality do a good job of predicting adult earnings effects of kindergarten class quality, whereas the 3rd grade test score effects of kindergarten class quality would predict adult earnings effects of only one-third of what we actually observe.

What might cause this fading and recovery pattern? The most plausible explanation is that early childhood programs have difficult-to-measure effects on “soft skills/social skills” that persist and significantly increase adult earnings effects.

In sum, I think the AJK study of Texas adds to the evidence that large-scale, modest quality pre-K programs can work. However, the available research evidence suggests that higher-quality pre-K programs can accomplish a lot more. And the effects of higher-quality pre-K programs will be much easier to demonstrate to skeptics with the more typical small sample sizes available to most researchers.

Posted in Early childhood programs | Comments Off on Texas pre-K: what the numbers mean

Universal public services that are redistributive and productive are the key to reducing income inequality

Posted on November 28, 2012 by timbartik

Eduardo Porter, a reporter for the New York Times, has an excellent recent column that summarizes some of the evidence for how government can effectively have large effects in reducing income inequality. His column builds on the research of sociologist Lane Kenworthy, and economist Peter Lindert.

The argument is that developed countries that use government to significantly reduce income inequality, such as some countries in Western Europe, do not do so primarily through having a more progressive tax system, in which higher income households pay much higher percentage tax rates than other households.

In fact, the U.S. overall probably has a more progressive tax system than is true for most countries in Western Europe. Many Western European countries rely heavily on value-added taxes, which are similar to a national sales tax. Because these taxes are based on consumption, the percentage of income paid in value-added taxes tends to decline somewhat for upper-income households.

Instead, Western European countries that redistribute income more than the United States primarily accomplish redistribution on the basis of having higher average tax rates. These higher average tax rates allow more government spending on transfer payments (transfer payments are cash or near-cash payments to individuals or households, such as Social Security, welfare, or food stamps) and on public services such as education.

This higher government spending on transfers and public services is the key mechanism by which Western European countries accomplish greater income redistribution.  The various levels of government in the U.S. are less effective in redistributing income not because of defects in the progressivity of our tax system, but because we have lower overall tax rates.

Government spending is more effective than progressive taxation in redistributing income for several reasons. First, there are political and economic limits to how much progressive taxes can do to redistribute income. Concern over economic incentives limits government willingness to have higher tax rates on the wealthy and on business. Perhaps more importantly, the political influence of higher income groups makes it quite difficult to have highly progressive tax systems. Politics tends over time to create various deductions and loopholes that limit the effective progressivity of tax systems.

Second, even universal services tend to be far more progressive in their influence on the income distribution than is true of even the most progressive tax systems that are politically and economically feasible. If a public service is provided to all households on a universal basis, the value of this public service is usually a far larger percentage of income for lower-income households than for upper-income households. For public services and transfers whose benefits are targeted based on family income, for example welfare benefits or subsidized housing that only goes to lower-income households, the distribution of benefits is even more progressive.

Third, public services that are universal in their benefits, or that at least provide benefits to a broad majority of the public, are far more politically sustainable than is true for progressive tax systems.  Voters are more inclined to pay attention and vote on the basis of preserving benefits they receive rather than on the basis of raising taxes on someone else.

Fourth, for public services that are “productive”, that is that provide benefits whose value is greater than their cost, a relatively large amount of income redistribution can be accomplished for a lower dollar cost. If a particular public service provides $3 in benefits per dollar of costs, then we can benefit lower-income households and middle-income households quite a bit even if we raise their taxes at the same time. In contrast, if increasing the progressivity of the tax system leads to tax evasion strategies, or to real changes in investment, then raising an extra dollar of taxes from a progressive tax system may actually have economic costs of considerably greater than a dollar.

Universal preschool is a good example of a productive public service that can accomplish a great deal of income redistribution even if its benefits are universal and even if the tax system is not very progressive. For example, in my book Investing in Kids, I simulated the effects of universal pre-K financed by a regressive tax system, which is a tax system that takes a higher percentage of income from lower-income households. The regressivity I assumed for the tax system is the typical regressivity of state and local tax systems in the United States.

Even under these assumptions about universal preschool’s financing, I found that the lowest income quintile of households, that is households whose income was in the lowest fifth of the income redistribution, received benefits that were 25 times the extra taxes they paid. In contrast, benefits for middle-income households (the middle-income quintile) were about 3 times the extra taxes they paid. Upper income households (the top-income quintile) received benefits of about 32 cents per every extra dollar they paid in taxes. (For more details, see Table 8.2 of chapter 8 of my book. This chapter is one of those that is available for free online, here.)

Even with the typical regressive financing of state and local tax systems, universal preschool produces clear benefits to a majority of all income groups. But the benefits are highly skewed towards benefitting lower income households the most, followed by middle-income households.

If we want less income inequality, a more progressive tax system is a worthy goal. But even more important is the amount of productive public spending the government is able to undertake.   A government with smart spending on productive public services can do a great deal to affect income redistribution at affordable costs. If these public services are truly productive, the benefits in increased economic output from the services will exceed the economic costs of the taxes levied.

Posted in Distribution of benefits, Early childhood programs | Comments Off on Universal public services that are redistributive and productive are the key to reducing income inequality

Is our political system really interested in focusing on job creation for the long-term unemployed?

Posted on November 20, 2012 by timbartik

The more I read about the inside political debates during the Great Recession and its aftermath, the more I doubt whether the current U.S. political system puts a top priority on boosting employment among the long-term unemployed.

For example, based on Michael Grunwald’s book The New New Deal, which focuses on the politics and impact of Obama’s fiscal stimulus package, a tax credit program to expand job creation for the unemployed failed several times due to lack of support from the political system. Democratic Senators opposed it because they preferred to expand various spending programs as part of the stimulus. Republicans opposed it because they opposed Obama’s entire stimulus program.

Both Democrats and Republicans agree with Rahm Emannuel’s well-known statement that politicians should never let a serious crisis go to waste. If it’s a recession, and jobs are needed, Republicans use this as an opportunity to advocate for permanent tax cuts for all. Democrats use this as an opportunity to advocate for expanding a wide variety of spending programs. The politics are irresistible: let’s use the need for job creation to advocate for policies we favored already, for other reasons.

Tax cuts or spending increases during a recession do create jobs. But the problem is, they do so at such a high cost per job that during a truly “Great” Recession, it is politically difficult to have a big enough stimulus to create a sufficient number of jobs to re-employ the long-term unemployed.

For example, estimates suggest that spending increases have a cost per “job-year” created (one job for one year) of $92,000, whereas tax cuts have a cost per job-year created of $145,000. Although spending increases are a bit more cost-effective than tax cuts, a cost of close to $100,000 per job year makes it difficult to address our large employment problems. The latest estimates from the Hamilton Project suggest we are short 11 million jobs of getting back to pre-recession employment conditions. At a cost of $100,000 per job-year created, a fiscal stimulus of $1.1 trillion would be needed to make up this entire job gap.

This job gap has significant long-run costs. A lost job will lead to persistent losses in wage rates and reduced employment rates for the unemployed. This signifies a loss of job skills, job connections, and self-confidence among the unemployed. The monetary cost of this alone to the unemployed has been estimated, for example in research by Steve Davis and Till von Wachter, to be over $100,000 during recessions. CBO has identified the loss of job skills among the unemployed as a significant cause of a decline in the U.S. economy’s long-term growth potential. In addition to these costs for the unemployed and the economy, persistently high long-term unemployment has costs for our tax and transfer system, for example in increased costs for the unemployment insurance system.

Based on the Hamilton Project’s current projections, if U.S. job growth averages 208,000 jobs per month for the foreseeable future, which would match the performance in the best year (2005) since 2000, the U.S. will not return to pre-recession employment conditions until 2020.

If we really want to help create jobs on a large scale for the long-term unemployed, we need measures that target such job-creation. Only targeted measures, which are conditional on the job creation we’re seeking, can be sufficiently cost-effective that they can meet an appreciable share of our job needs at an affordable cost.

For example, I have advocated in the past for a strategy that would include two components:  a job-creation tax credit, which would incentivize job creation of all types by small business and small non-profits; a wage subsidy program run by local workforce agencies that would provide large subsides for new jobs targeted at the long-term unemployed. The former program targets job creation in general; the latter program targets a portion of those jobs at the long-term unemployed, to minimize the erosion of their long-term earnings ability.

I estimate the gross costs per job created from either of these two measures to be around $30,000 per new job. But the created jobs will increase tax revenue and reduce welfare spending. The net costs per job created, after accounting for these budget feedbacks, would be reduced to less than $20,000 per job created.

These targeted job creation programs can be more cost-effective in creating jobs precisely because they are targeted. Tax credits are provided or wage subsidies are paid conditional on jobs being created. This reduces budget costs that are not associated with job creation, and provides greater incentives for job creation.

Why isn’t there more of a political constituency for such job creation initiatives? In my view, because such job-creation initiatives are targeted only at one political goal: job creation. This job creation principally benefits the long-term unemployed, who are not a politically influential group. The targeting that helps job creation programs to be economically cost-effective is precisely what makes such programs politically ineffective.

What is the solution? I think the only ultimate solution is political: the long-term unemployed need to have more of a political voice. But that is easier said than done.

Posted in Business incentives, Incentive design issues | Comments Off on Is our political system really interested in focusing on job creation for the long-term unemployed?

Why education is important, and early childhood education salaries

Posted on November 19, 2012 by timbartik

The statistics for this blog reveal that by far the top two “search terms” that lead to this blog are variations on the following: “Why education is important”; “early childhood education salary”.

I suspect these search terms mostly come from students who are either completing course assignments or considering career options. This blog has included posts (for example, this post, or this video)  that argue that education is important, not only because it helps the individual being educated, but also because an individual’s education has broad spillover benefits for everyone engaged in the economy.  This blog has also included posts (for example, this post)  that present evidence that typical salaries in early childhood education are quite low.

It is ironic that what many people learn from this blog is that education is of great importance to our society, and yet we do not pay decent salaries for our early childhood educators. It is hard to see how the simultaneous existence of these two facts can be justified morally or economically.

If education is of great social importance, we should be willing to go to some considerable effort to improve education’s quality.  Even if one believes that greater school choice, or stronger accountability requirements for schools, can improve the quality of education without greater expense, surely we should at least consider what could be done to improve education through paying better salaries to teachers at all levels. In improving the quality of any service, surely we should consider employing positive as well as negative incentives for improvements, the “carrot” and not just the “stick”.

Any legislator or policy maker who acknowledges the great importance of education for our economy and society should be asked whether they are willing to support greater resources for proven solutions to improve education quality. These proven solutions include funding early childhood education at a high enough level that we not only have access to pre-K for all children, but also have quality programs. Quality programs require high enough per-child funding that pre-K teachers can be paid decent salaries.

Posted in Early childhood program design issues, Early childhood programs, Economic development | Comments Off on Why education is important, and early childhood education salaries

Boosting the recovery and long-run economic growth through job-creation incentives for the long-term unemployed, and early education investments

Posted on November 16, 2012 by timbartik

The Congressional Budget Office recently released a report exploring why this economic recovery from the recession trough has been unusually slow. As the report shows, as of the second quarter of 2012,  3 years after the Great Recession’s trough in the second quarter of 2009, the U.S. economy has shown real GDP growth of a little under 7% from the trough level. But the average U.S. recovery since World War II would have shown real GDP growth of about 9% more, or around 16%.

CBO attributes two-thirds of the slow economic recovery growth to slower-than-usual growth in the U.S. economy’s productive potential. The other one-third of the slow economic recovery is due to the economy not moving as fast as in previous recoveries back to its true potential.

The slow growth of productive potential could be seen as slow growth in the potential supply of national economic output. The slow growth of the economy relative to its potential can be seen as slow growth in the demand for economic output relative to supply.

CBO argues that the slow growth of potential output is due to three factors. The first factor is slower than usual growth in working age population due to both the aging of the U.S. population, and an end to the longstanding trend of increased labor force participation by women. In addition, the prolonged recession has reduced the skills of some of the long-term unemployed, which has probably raised the economy’s unemployment rate when it is performing at its potential. (Other research suggests about a one point rise in the economy’s “natural” unemployment rate, from 5% to perhaps 6%.)

A second factor is a slower than average growth in “total factor productivity”, that is in the economy’s technological and institutional ability to produce higher output with a given quantity of capital and labor.

A third factor is smaller growth than usual in net capital investment during the recovery, although CBO explains this slow growth as really being due to other factors. The slower growth of the work force means less net capital is needed to keep up with workforce growth, and slower growth of total factor productivity means new investment is less profitable. In addition, the weak demand during the recession and the housing crash has reduced incentives for investment.

The one-third of the sluggish recovery that is due to insufficient demand for the economy’s potential production is primarily attributed by CBO to four factors. First, consumer spending has been sluggish due to consumers losing housing wealth and having low wages, as well as poor consumer confidence.

Second, housing demand has been sluggish due to the housing bubble and slower household formation growth.

Third, federal government purchases, particular in defense, have grown more slowly than in many previous recoveries.

Finally, the most important factor has been slow growth in state and local government spending.  CBO finds that the U.S. economy would have been producing 1% more in total output as of the second quarter of 2012 if state and local government spending had growth as it historically has done during economic recoveries.

Two policy directions that I have advocated in the past would help speed up the recovery and build long-term growth. First, well-designed wage subsidies that would encourage small businesses and small non-profits to hire the long-term unemployed for newly created jobs could help boost current output and employment, while also increasing the long-run productive potential of the U.S. economy by helping maintain the skills of the long-term unemployed. As I have outlined before, such a program could be designed similarly to a past program run in the state of Minnesota called MEED. Such a program might create about 1 million new jobs per year, at gross annual budgetary costs of $30-35 billion, and net annual budgetary costs, after considering increased tax revenues and reduced transfer payments, of $15-$20 billion.

Second, a sustained commitment by all levels of government towards expanding early childhood education programs would help boost short-run demand and supply of economic output while significantly boosting long-run growth in productivity. Expanding early childhood education spending, whether through state initiatives, or federal aid, would boost state and local spending, which has been a big reason for the slow recovery. If early childhood education programs are full-day or include wraparound child care, these programs would also increase women’s labor force participation. For example, if we created universal full day pre-K for all four-year olds, such an initiative might cost $30 billion annually. If such an initiative were tax-financed, it would immediately create 170,000 jobs. If such an initiative were deficit-financed, it would immediately create 300,000 jobs.

But the more important effects of early childhood investment are long-term. After 15 years of sustained investment, universal high-quality early childhood education would begin to significantly boost the growth of the economy’s productivity. This wouldn’t help in the current recovery, but it would help boost the economic prospects of the U.S. economy long-term. With a labor force with better reading and math skills, the “hard” skills, as well as better social skills, the “soft” skills, employers will find it easier to introduce new technologies and new methods of workplace organization. As I have outlined on this blog, and in my book, for each $1 invested in high-quality early childhood education, the long-run boost to the present value of earnings is close to $4, and the boost to overall economic output would be even greater.

We often talk about the budget deficit or other political issues of the moment. But the budget deficit is only important insofar as it affects what we really care about, which should be building broad economic prosperity for all economic groups in the U.S. economy. Early childhood investments would help build that prosperity for all in the long-term. While doing so, such early childhood investments would also contribute to achieving short-run economic goals of greater job growth.

Posted in Business incentives, Early childhood programs, Economic development | Comments Off on Boosting the recovery and long-run economic growth through job-creation incentives for the long-term unemployed, and early education investments

What works to reduce income inequality?

Posted on November 2, 2012 by timbartik

Lane Kenworthy has an excellent recent essay on what the U.S. can do to increase equality of opportunity. (Kenworthy is a well-known sociologist at the University of Arizona, who has written several insightful books on issues of poverty and income inequality.)

However, I want to focus attention on one statement in his recent essay with which I disagree:

“Suppose the United States increased tax rates for all households and used the revenue to fund universal early education…That step would do little to counter income inequality, but it could substantially expand opportunity.”

It is true that tax-supported universal early education would not immediately have large effects in reducing income inequality. Tax-supported universal early education would also not directly have government take money away from the rich and transfer that money to the poor.

However, under the range of plausible assumptions about how early education affects different income groups, universal early education would significantly reduce income inequality. Some researchers, such as Nobel prize-winning economist James Heckman, argue that early childhood education has much larger effects on children from low-income families than for children from higher-income families.

If this is so, then universal early childhood education would have much larger dollar effects on the future adult income of children from lower income families. This would have significant effects in redistributing economic opportunity and income.

In my book, Investing in Kids, I estimate the income distribution effects of universal pre-K, under the assumption that the benefits of universal pre-K fall off quite rapidly with higher incomes. For example, I assume that dollar effects on average adult earnings for the middle income quintile are less than a third of the dollar effects on average adult earnings for the lowest income quintile. (Each quintile comes from ordering all households by income, and then dividing that distribution into five equally sized groups of households.)

This results in huge income redistribution effects of universal pre-K.  I assume universal pre-K is financed by taxes that are modestly “regressive”, that is the taxes are a larger percentage of income for low income groups. But even under that assumption, the net impact on income of different groups is highly progressive.

For example, I estimate that after adjusting for both tax costs and future earnings benefits, universal pre-K will increase the net present value of the income of the lowest income quintile by 6%. The middle-income quintile has the net present value of their income increased by 0.4%. The highest income quintile has a slight loss from universal early education – this group’s taxes exceed the future earnings benefits, so the net present value of this group’s income declines by a small amount, about 0.1%.  (All these numbers, and more details on how they are calculated, can be found in chapter 8 of my book. This is one of the chapters that can be downloaded for free.)

But universal early education can have large effects on reducing income inequality even if the benefits don’t flow so disproportionately to the poor. In my recent paper on Tulsa’s universal pre-K program, co-authored with William Gormley and Shirley Adelstein of Georgetown, our estimates imply that universal pre-K will increase the future average adult earnings of all income groups by about the same annual dollar amount.

However, the same dollar annual earnings boost for all income groups is a much larger percentage boost in the fortunes of low-income groups. Common sense as well as mainstream economics thought would say that adding the same dollar amount to the incomes of the poor has much greater social welfare benefits than adding the same dollar amount to the incomes of higher-income groups.

For example, we estimated that the full-day version of Tulsa’s pre-K program for 4-year-olds would be likely to increase the present value of adult earnings for children eligible for a free lunch by about $27,000, compared to about $25,000 for children whose family income was high enough that they had to pay full-price for lunch.  Not much of a difference.  But we also estimated that this adult income boost would be sufficient to increase the present value of adult earnings of the free-lunch children, over their entire working career, by 10.4%, compared to 5.5% for children from families ineligible for a lunch subsidy.

By itself, universal early education does not “solve” the problem of income inequality.  But if public policy keeps on finding and adopting public policies that help a wide variety of families, but increase the income of disadvantaged families by a higher percentage, over time this mix of policies would have profound effects on income inequality and the nature of U.S. society.

Posted in Distribution of benefits, Early childhood programs | 3 Comments

My TEDx talk on why early childhood programs are key to local economic development

Posted on October 29, 2012 by timbartik

My recent TEDx talk is now posted on YouTube.  In 15 minutes, this talk summarizes my argument for why early childhood programs can build stronger local economies.  It summarizes some of the key points from my book Investing in Kids.

The argument is that there is strong research evidence that high quality early childhood programs will help former participants have better skills as adults.  A sufficient number of former participants will remain as adults in the same local community, which gives large-scale early childhood programs the potential of significantly increasing local labor force quality.  Better local labor force quality will increase job growth and wages for everyone in the local community.

TEDx talks are independently organized forums that follow the TED model of succinct, informative talks for a broad audience on a variety of topics. This particular TEDx event was organized by Dennis Sullivan and Doris Bergen of Miami University of Ohio. It included a variety of talks on early childhood programs, all of which can be found linked at the event’s webpage.

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Why some business tax credits are so costly per job created

Posted on October 12, 2012 by timbartik

A just-posted working paper, by my colleague Kevin Hollenbeck and me, examined the state of Washington’s business tax credit for R&D spending.  Our conclusion is that this tax credit is quite costly per job created.  The cost per job-year created (a job-year is one job created for one year) is at least $40,000 to $50,000.

This is quite costly per job-year created because the local economic development benefits of jobs created through business tax incentives are likely to only be a small fraction of the earnings associated with those jobs. As I have argued since my 1991 book, Who Benefits from State and Local Economic Development Policies?, only a fraction of the jobs brought to a state economy through economic development incentives go to local residents. For every 5 jobs created, only 1 results in higher employment rates – the rest go to in-migrants. So even if the created jobs pay over $50,000, the benefits for state residents of the new jobs will be considerably less than $50,000.

Why is this particular business jobs tax credit so costly? First, the business tax credit is not targeted at what regional economists call “export-base” industries. By “export-base” industries, regional economists mean industries that sell their goods and services to customers from outside the region.

State and local business tax credits that go to locally-oriented businesses are less likely to generate net local jobs. Even if the tax credit helps create jobs in assisted businesses, these businesses will increase their market share with the consequence of reducing the market share of other locally-oriented businesses. As one example, if we subsidize McDonald’s to expand, even if this subsidy is successful in inducing such an expansion, this expansion reduces sales and hence jobs at Burger King.

For Washington’s R&D tax credit, only 40% of the potential job creation due to the credit is in export-base industries. The 60% that goes to locally-oriented, non-export-base firms does not do much for the state’s economic development.

Second, this particular tax credit provides no incentive for expansion for about 30% of the Washington firms that received credits. This is because the credit was not refundable, and these firms reduced their taxes to zero before fully utilizing their R&D credit.  As a result, these firms would not increase their credits received by expanding their R&D activities. This lack of an incentive for expanding R&D activities reduces the job-creation effects of the credit.

Targeted business tax credits can sometimes be effective in job creation. But such success requires attention to the details of credit design.  Credits should be targeted at export-base firms, and provide a meaningful incentive for expansion to all assisted firms. Finally, credits will have larger net effects on a state economy if they are in firms that have high multiplier effects, which are likely to be firms with strong links to local suppliers, and which pay high wages.

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The limits of later interventions for disadvantaged students, and the case for early childhood programs

Posted on October 1, 2012 by timbartik

A recent paper by Nuria Rodriguez-Planas presents discouraging information on the long-term results of a program to help at-risk high school students. (The full paper requires subscription access to the journal, but working paper versions of many of the results can be found here and here.)

The paper looks at the “long-term” results of the Quantum Opportunity Program. This program provided extensive mentoring, educational services, and financial incentives to at-risk high school students, starting in 9th grade and continuing for up to 5 years.  The long-term results are for when the participants were 24 years old. The estimated effects of QOP are based on a random assignment experiment, in which eligible students were randomly assigned to either receiving program services, or being in a control group. Because of the random assignment, we can be highly confident that the estimated effects are true causal impacts of the program on outcomes.

The upshot is that the program had short-run effects on educational outcomes, which faded over time. Females had some positive long-run effects on employment rates at age 24. But males showed increases in criminal activity and arrests at age 24.

Let me focus on one outcome, high school graduation. The point estimate is that the program increased the rate of high school completion for the entire sample by 2.1%. That is, the control group had a high school completion rate by age 24 of 61.6%, and the estimate is that the program increased high school completion from 61.6% to 63.7%. This 2.1% increase is not statistically significant, which means that we cannot reject the hypothesis that the true effect is zero, and the observed positive effect happened by chance.

This 2.1% effect on high school graduation occurred for a program that cost almost $25,000 per student.  Although high school graduation is beneficial, it seems unlikely that its social benefits are sufficient to justify that cost. For example, if we average these benefits across all program participants, the average present value of future earnings effects per program participant from these high school completion numbers would be a little under $4,000. (This multiplies the 2.1% effect times the present value of converting a high school dropout to a high school graduate of $175,234 estimated in chapter 12 of my book Investing in Kids.)

Let’s compare the cost-effectiveness of this “later intervention” with the cost-effectiveness of high-quality early childhood programs.  Let’s consider results for the Chicago Child-Parent Center program. CPC is a half day preschool program. About 55% of the preschool participants were in preschool at both ages 3 and 4, and 45% were only in the preschool program at age 4.

According to research by Art Reynolds and his colleagues, CPC increased high school graduation rates at age 28 by 6.4%. The comparison group had high school completion of 75.1%, and CPC is estimated to have increased high school completion to 81.5%.

This was done by a program whose average cost per participant was $8,512. This averages costs over one-year and two-year participants. The available evidence suggests the benefits per dollar spent are greater for one-year participants than two-year participants. That is, children participating in the program do better if they participate for two years rather than one year, but they don’t do twice as well.

Just considering high school graduation rate results by themselves, CPC clearly pays off. The 6.4% increase in high school graduation rates would be predicted to increase the present value of future earnings by over $11,000 per program participant. (This multiplies the 6.4% times the present value of converting a high school dropout to a graduate from my book Investing in Kids.) Other evidence suggests that pre-K programs often have effects on adult earnings that significantly exceed what one would expect based on their effects on educational attainment (see discussion on pp. 94-95 of Investing in Kids.) Reynolds et al estimate earnings benefits of over $22,000. And CPC also has large benefits in reducing crime rates.

But what I want to focus on here is the comparison of this early intervention of the CPC preschool program with the later intervention at 9th grade of the Quantum program.  The early intervention, at one third the cost per participant, achieves a three times greater effect on high school graduation rates.  In other words, this preschool program’s cost-effectiveness, or “bang for a buck”, is 9 times as great as that of the Quantum program.

For the cost of the Quantum program for one student, we could serve 3 children in the CPC program. And the expected effect on high school graduation for each of these three children is three times as great as the results for the one student in the Quantum program.

Of course, this comparison is specific to these two programs. But I think it illustrates a larger point. It is more challenging to find interventions for highly disadvantaged children that work once these children get to 9th grade.  By 9th grade, many disadvantaged children have problems that are difficult to overcome.

There are later interventions that can work. For example, high school Career Academies, which provide more focused career education for students, have shown good evidence of long-run success.  But these later interventions are more difficult to design, and may be only suitable for a smaller proportion of all students.

If we want highly cost-effective interventions that have been proven to work for a wide variety of children, and when run at a large scale, we need to look to early childhood programs. These programs intervene early, when intervention can more easily make a difference to life prospects.

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