New York Times magazine article on Kalamazoo Promise

Posted on September 13, 2012 by timbartik

Journalist Ted Fishman’s article on the Kalamazoo Promise (see previous blog post for description of the Promise) appears in the September 16 Sunday magazine of the New York Times. The article can be found here.

The article describes the many profound effects the Promise has had on the lives of many students and families in the Kalamazoo area. It also mentions many challenges that the Kalamazoo area faces in making sure all students in Kalamazoo have the skills they need to succeed in college using the Promise’s tuition subsidies.

One strategy the article mentions for building on the Promise is early childhood education.  The article mentions my book Investing in Kids, and that many people in Kalamazoo are interested in using early childhood education as a key lever to help make the Promise more successful.

One addition I would make to the article is that this interest in early childhood education in Kalamazoo has gone beyond discussion. The non-profit organization KCReady4s, on whose Board I serve, has begun to operate at a pilot stage, providing support for pre-K services in 2012-2013 to over 130 students. The long-run intention is to expand KCReady4s sufficiently so that together with Head Start and Michigan’s state-funded pre-K program, Kalamazoo County will offer universal access to high-quality pre-K for all county 4-year-olds.

For those visitors to this blog who came here after reading Mr. Fishman’s article, welcome. For more information on the Upjohn Institute’s research on the Kalamazoo Promise, read my previous blog post, the Institute’s website section on the Promise, or my colleague Michelle Miller-Adams’s book on the Promise.

For those interested in this blog’s discussion of early childhood education, and how it can boost local economic development, most of my blog posts have dealt with this issue.  A post that summarizes my case for why early childhood programs can boost local job creation is here.  I’ve also discussed the role early childhood programs can play in reducing income inequality , and why universal pre-K programs have advantages over income targeted programs.  The blog has also had posts discussing the limitations of business tax incentives as an economic development strategy.  I’ve also had some blog posts discussing national job creation strategies.

Posted in Business incentives, Early childhood programs, Economic development | 1 Comment

Effects of the Kalamazoo Promise

Posted on September 12, 2012 by timbartik

The Upjohn Institute website recently posted a working paper of mine, co-authored with my colleague Marta Lachowska, on the Kalamazoo Promise. Our working paper examines the immediate effects of the Kalamazoo Promise on student achievement and behavior in high schools.

The Kalamazoo Promise, announced in November 2005, provides graduates of Kalamazoo Public Schools with up to 100% tuition subsidies for attendance at Michigan public universities and community colleges.  The program is universal, with no conditions for demonstrating financial need, and no academic pre-requisites for high school performance except for being admitted to the college or university. The tuition subsidy is also generous, depending on length of time attending Kalamazoo Public Schools. Students entering after 9th grade are ineligible; students entering at 9th grade get a 65% tuition subsidy, and then the subsidy ratchets up until students entering at kindergarten get a 100% subsidy. The program is also unusual in being funded by anonymous private donors.  (For more on the Kalamazoo Promise, see the book by my colleague Michelle Miller-Adams, or the portion of the Institute’s website dealing with the Promise.)

The Kalamazoo Promise has since inspired similar efforts in over 30 other cities.  Some of these “Promise-style” tuition subsidies use private dollars, while others use public dollars. Particularly when public dollars are used, an important issue is what are the broad public benefits of a Promise-style program?

The Promise was intended by the donors as an economic development program. The model is that the Promise will attract more and better jobs to a community both immediately and in the long-term. The immediate effects of a Promise style program are based on attracting parents. The long-term effects of a Promise-style program are based on improving outcomes for local students, some of whom are likely to remain in the Kalamazoo area, which would boost the quality of the area’s labor supply.

We do not have firm direct evidence of positive effects of the Kalamazoo Promise on local economic development.  For example, there is no strong evidence as of yet of Promise effects on jobs, housing prices, or property values.

However, we do have some indirect evidence of Promise effects that should be reflected in improved local economic development. From previous research, we know that the Promise has had sizable effects on KPS enrollment, increasing enrollment by over 20%. In addition, this enrollment effect has been broadly based across all ethnic groups, which has contributed to stabilizing the racial integration of Kalamazoo Public Schools.  These enrollment effects are highly unusual; I know of no other policy that could have increased enrollment and stabilized racial integration in a district such as Kalamazoo Public Schools, which was clearly in 2005 well beyond customary tipping points for school demographic change.

This newest paper by me and my colleague Marta Lachowska shows significant effects on individual student behavior. We find that students eligible for the Promise, compared to otherwise similar high school students who were not eligible, had fewer suspension days. In addition, the Promise is estimated to significantly increase the high school GPA (grade point average) of African-American students. These effects are noteworthy in that it is difficult for policymakers to improve student behavior and performance once students get to high school.

In my view, Promise-style programs and early childhood programs complement each others as ways to boost the economic fortunes of a local community. As detailed on this blog, and in my book Investing in Kids, early childhood programs intervene early to get kids on the right path, with the hard skills and soft skills to learn more as they progress in the K-12 system.  Promise-style programs provide incentives for students, school staff, parents and the community to all work together to make higher educational attainment a reality.

Both programs together have the potential for boosting a region’s labor skills. Early childhood programs have already shown through rigorous experimentation that they can do so. Promise-style programs are an ongoing social experiment that has great potential for boosting regional skills, with more study needed to confirm the magnitude of these effects.

Posted in Early childhood programs, Economic development | 2 Comments

U.S. lags in international comparisons of pre-school enrollment and public investment

Posted on September 11, 2012 by timbartik

OECD recently released its 2012 edition of Education at a Glance, which compares education statistics across leading industrial countries.  (OECD stands for Organization for Economic Cooperation and Development. It was originally set up to help administer the Marshall Plan. It has evolved into an organization concerned with economic issues in leading industrial countries.)

As pointed out by Catherine Rampell of the New York Times, and by Education Week, the latest statistics show the U.S. clearly to be lagging in both preschool enrollment and preschool spending.  For example, the U.S. is 28th out of 38 countries in the percentage of 4-year olds in preschool education. The U.S. is 25th out of 35 countries in the percentage of 3-year olds in preschool education.  (Source, OECD, Table C2.1)

To match the OECD average, the U.S. would have to expand the number of 4-year-olds in preschool by 17%, and the number of 3-year-olds in preschool by 29%. Because 45% of U.S. preschool enrollment is unsubsidized private preschool, in order to meet the gap with the OECD average by expanding publicly subsidized slots, we would need to expand publicly subsidized slots by over 30% for 4-year olds and over 50% for 3-year olds.

Leading countries in preschool enrollment include Sweden, Norway, Denmark, Germany, France, and the United Kingdom. In these countries, preschool enrollment at age 4 and age 3 is well over 80% and frequently over 90%. Furthermore, the overwhelming majority of this enrollment is in publicly subsidized slots.

For the U.S. to match the leading countries, and get to 90% preschool enrollment at age 4, we would need to more than double the number of publicly subsidized slots. To get to 90% preschool enrollment at age 3, we would have to more than triple the number of publicly subsidized slots.

The U.S. also lags in preschool spending. For example, the U.S. has public spending of  less than 0.4% of its Gross Domestic Product on early childhood education (The OECD figures for the U.S. include some public subsidies for child care as well as preschool, unlike most of the figures for other countries.) In contrast, Sweden, for example, spends more than 0.7% of its GDP on early childhood education. (Source, Table C2.2 in Education at a Glance).

The quality of a country’s labor force is increasing in importance in what it means for a country’s wages and economic prosperity.  The U.S. is lagging behind other leading countries in its investments in early childhood education access and quality.

Posted in Early childhood programs, Economic development | Comments Off on U.S. lags in international comparisons of pre-school enrollment and public investment

U.S. job growth and education jobs

Posted on September 7, 2012 by timbartik

The latest U.S. job growth figures, released this morning (September 7, 2012) by the U.S. Bureau of Labor Statistics, continued to show positive growth, but at an insufficient rate to boost employment rates and labor market conditions.

If we focus on comparisons with a year ago (which I do to avoid problems with seasonal adjustment factors as well as random monthly fluctuations), total employment in the employer survey increased from August 2011 to August 2012 by 1.8 million jobs (Table B-1).  In the household survey, the total number of persons employed increased from August 2011 to August 2012 by 2.3 million persons (Table A-1). Although an increase in employment of around 2 million is obviously better than zero job growth, this amount of job growth is barely able to keep up with growth in the U.S. population. Therefore, the employment to population ratio for Americans 16 and above was the same, 58.3%, in both August 2011 and August 2012. In contrast, the employment-population ratio prior to the recession averaged 63.0% for 2007.

A portion of the problem is the slow growth in government jobs. This is particularly marked in local government education jobs. For example, in the employer survey data, although overall employment increased from a year ago by 1.8 million jobs, private sector jobs grew by 2.0 million jobs. Government jobs decreased by 166,000 jobs over the past year.  Of this shrinkage, about half was in the local government education sector, which shrunk by 84,000 jobs.

If local government education jobs had just kept pace with private sector job growth, then over the past year, rather than shrinking by 84,000 jobs, we would have added 14,000 local education jobs. As a result, local government education employment would be higher by about 98,000 jobs over what it is today.  With even a small multiplier assumed of 1.5, we would expect a healthier local government education sector to have increased total U.S. employment over the last year by 150,000 or more jobs.

What is going on is that with the phase-out of federal government fiscal stimulus programs, and continued economic weakness, coupled with many state government political leaders being reluctant to raise taxes, education funding has been cut. A recent report by the Center for Budget and Policy Priorities finds that out of 48 states for which data were available, 26 states cut real (inflation-adjusted) per student funding from last year to this  year.

Cutbacks in education sector employment might make sense if we felt that employment in this sector was inefficiently bloated. But there are many education programs whose expansion would both add jobs and boost long-run U.S. economic productivity. These include education programs to increase access to preschool, to increase the length of the school year or add summer school, and to lower class size in early elementary grades. All these proposals have good evidence of long-run effects on increasing the productivity and output of the U.S. economy, and thereby increasing per capita incomes.

What should be done? Although short-run jobs proposals wasn’t mentioned much at the recent Democratic National Convention, the Obama Administration’s American Jobs Act, originally proposed about a year ago,  would be helpful.  Among many other provisions designed to create jobs, the American Jobs Act includes $30 billion in federal aid for local education jobs, which is intended to create about 280,000 jobs.

From a longer-term perspective, the U.S. should have a permanent counter-cyclical revenue sharing program designed to help stabilize state and local government budgets during severe recessions. This program would be triggered on and off nationally based on the unemployment rate, and would direct assistance to state and local governments   based on the severity of each area’s economic downturns. State and local governments could choose whether to direct their assistance to reduce taxes or increase spending compared to what would otherwise occur. However, given the relative popularity of education spending, I think it probable that even unrestricted federal aid would end up boosting educational investments.

Because a counter-cyclical revenue sharing program would be designed to trigger off as the national economy and state and local economies recover, it would not exacerbate the U.S.’s long-term budget deficit problems. But it would help stabilize investment in education while reducing the severity of unemployment problems during recessions.

I think it can be legitimately argued that one of the biggest mistakes of the stimulus program enacted in 2009 was the failure to include automatic triggers that would adjust the stimulus based on the economy’s progress, or lack thereof.  If we had had such triggers, then the fiscal stimulus would be continuing today, although at a reduced level, rather than having been phased out. I suspect part of the political reason for the lack of triggers is that politics makes Congress more inclined to directly control spending and tax programs, rather than to put them on autopilot.  However, given political gridlock, allowing triggers to put stimulus policy on autopilot is very helpful in making fiscal policy timelier as well as more consistent with long-run deficit reduction.

The other biggest issue I have with the 2009 stimulus is the failure to focus more resources on policies that would directly incentivize job creation, such as public service jobs and subsidies for employer job expansion. More targeted job creation program would have a bigger job creation effect per dollar of stimulus.  I have commented more on this in a previous blog post.

I don’t want to be misunderstood. The stimulus clearly created millions of job years of additional employment, and funded many highly useful projects.  However, it could have been designed to create more jobs and be more politically sustainable.

What we need to figure out is where to go from here.  I think progress depends in part on whether there is vigorous public advocacy of doing more to deal with the long-run unemployment problem.  Unfortunately, this is working against the general (and mistaken) public opinion that during a recession, the government should act like a household, and cut spending.

Posted in Early childhood programs, Economic development, National vs. state vs. local | Comments Off on U.S. job growth and education jobs

“You can’t be pro-business unless you’re pro-education”

Posted on September 5, 2012 by timbartik

San Antonio Mayor Julian Castro, in his keynote address on September 4th to the Democratic National Convention, made the following notable statement: “You can’t be pro-business unless you’re pro-education”.

In the context in which he made that statement, Mayor Castro’s statement expresses a profound and important truth. However, such a statement can be misleading if exaggerated.

Mayor Castro went on to talk about the need for “smart investment” in “a workforce that can fill and create the jobs of tomorrow”. Among the smart investments he referred to is ensuring “that more four-year-olds have access to pre-K”.

In this context, investing in high-quality pre-K education is among the most cost-effective ways that state and local political leaders can promote long-run economic development of their local economies, which means boosting the per capita income of local residents. That is the main point of this blog, and of my book Investing in Kids.  These programs have large enough effects on adult skills, and enough former participants will stick around the local economy, that large-scale expanded pre-K can significantly raise the human capital of a local workforce. And numerous studies have shown that increased local human capital will increase the quantity and quality of local jobs. For each dollar invested in high-quality pre-K, simulations suggest that the present value of local residents’ per capita earnings increases by around $3.

So, if you’re pro-business, you should be highly supportive in smart investments in effective educational improvement programs such as high-quality pre-K.

However, this doesn’t mean that each and every proposal for increased educational spending will qualify as a “smart investment” that effectively promotes local and national economic development.  Nor does it mean that each and every proposed educational reform that claims to increase teacher quality or school quality is a pro-business reform.

What we need to focus on are educational improvements that have good evidence of success, and that can feasibly be implemented on a large scale. Demonstrated high returns and the potential for large scale implementation are the keys to proposed educational investment having the potential to really affect the long-run growth of business investment and good jobs.  In this category are large scale investments in high-quality early childhood education programs.

Posted in Early childhood programs, Economic development | Comments Off on “You can’t be pro-business unless you’re pro-education”

Educational improvements: hard solutions versus easy solutions

Posted on September 4, 2012 by timbartik

Julie Mack, the education reporter at the Kalamazoo Gazette, recently wrote a column on school choice, largely based on an interview with me. In that column, she accurately described me as concluding that school choice has been disappointing in that it does not seem to have had large and persistent effects in improving student achievement.

For example, consider charter schools. In some cases, rigorous evaluation in some settings of some charter schools suggest that they may sometimes out-perform some traditional public schools. For example, there are some favorable evaluations of KIPP schools, and some favorable evaluations of charter schools in Boston. But on average, across all charter schools in all settings, it does not seem that charter schools are any more effective than traditional public schools in increasing student achievement.  Perhaps the best way to interpret these disparate results is that for some low-income urban students in troubled public schools, well-run charter schools can sometimes improve achievement, but this finding does not apply to all charter school approaches or all students.

I would apply similar comments to other proposed school reforms such as merit pay and more rigorous accountability systems for public schools. I think there is potential for these reforms to sometimes improve education, but I suspect that large educational gains from these reform proposals will be difficult to consistently realize.

Most of the popular education reforms are hard to implement consistently well in all settings. This is in part because educational quality is inherently difficult to improve. There are many factors, such as poverty and family background, that affect how much students learn. School quality and teacher quality affect educational achievement in complex ways, and are difficult to measure accurately.  The success of educational reforms rest on complex details in how these reforms are implemented.  The devil is in the details, and it is hard to consistently get such details right on a large scale.

But there are relatively easy approaches to improving educational achievement that we know will work. For example, a consistent finding in educational research is that more student time engaged in educational activities will increase student learning.  Student learning can be increased through adding on days to the school year, or requiring mandatory summer school for students who are behind.   Student learning can also be increased by adding on high-quality early childhood education, as I have describe in this blog and in my book Investing in Kids. Adding early time also has the advantage that it intervenes when children are more malleable, which allows this additional learning time to leverage future learning improvements as well.  To use Nobel-prize-winning economist James Heckman’s phrase, “skills beget skills”.

Adding summer learning time, or days to the school year, or early childhood education,  are easier reforms than most other school reforms from an administrative standpoint.  Adding learning time does not require us to reinvest schools.

On the other hand, adding learning time may be sometimes more politically difficult than some other school reforms, as adding learning time would typically require more funding. The promise of other school reforms is that they can boost achievement levels without requiring more funding.

However, from a long-term perspective, many initiatives to add learning time, including early childhood education, will eventually pay for themselves.  Adding extra learning time, especially from early childhood up to early elementary grades, will reduce long-term costs for special education and remedial education, reduce future criminal justice system and welfare costs, and add tax revenues from extra adult earnings of former participants in these programs.

I also don’t think that this is an “either-or” proposition. We can immediately move to boost educational achievement by adding early learning time. And we can keep on trying to incrementally improve educational quality in other ways as well, by experimenting with different ways of boosting school quality and teacher quality. However, we should recognize that boosting educational quality per hour of student time is not an easy thing to do, and therefore we should not rest our hopes of immediate large educational improvements on assuming that reform will work on a large scale.

Boosting student achievement on a large scale is a sufficiently important goal that we should be willing to take vigorous action that we can be assured will work, even if this costs money in the short-run.   Educational improvements are vital to the economic future of state and local areas, and the entire nation.  Investing in added learning time, while also working to incrementally improve educational quality, is a balanced strategy that responds to the urgency of our need for educational improvements.

Posted in Early childhood program design issues, Early childhood programs | 1 Comment

Business taxation and state economic development goals

Posted on August 31, 2012 by timbartik

The Upjohn Institute has posted a recent working paper of mine, co-authored with my colleague George Erickcek, that looks at how different types of business tax cuts affect economic development goals such as job creation. The Institute’s website also right now has a highlight that summarizes some of the content of the working paper.

One main point of the paper is that among business tax reductions, an across-the-board reduction in state business taxes is not the most cost-effective way to increase state job growth.  The same boost to job growth could be achieved at a far lower revenue cost by well-designed business tax incentives.

Well-designed business tax incentives would be targeted in two ways. First, they would be targeted at “export-base” businesses with high multiplier effects. Second, these business tax incentives would be targeted at businesses that actually are creating jobs.

“Export-base businesses” is regional economics jargon for businesses that sell their goods and services outside of the state’s economy, to non-state residents and businesses. Examples would be most manufacturing industries. The problem with business tax cuts for locally-oriented, non-export-base businesses – fast food restaurants, for example – is that their sales and hence employment are largely determined by the size of the state’s economy, not by business taxes.

In contrast, when export-base businesses expand their sales to non-state residents, they bring new dollars into the state’s economy. These dollars are used to directly hire state residents for new jobs. In addition, some of these new revenues for a state’s export-base businesses are used to buy goods and services from suppliers located in the state, further boosting state employment. The boost in employment at export-base businesses and their state suppliers in turn boosts spending by these businesses’ workers, which will boost demand for retailers in the state, thereby boosting state retail employment.

These indirect boosts in suppliers’ employment and retailers’ employment are the “multiplier” effects of boosting export-base businesses.  These multiplier effects will be larger for export-base businesses with stronger local supplier links. These multiplier effects will also be larger for better-paying export-base businesses, as a boost to their employment will have stronger effect on demand for local retailers.

Therefore, targeting business tax incentives at high-wage export-base businesses will have stronger employment effects than cutting business taxes for all businesses.  But even more cost-effective job-creation effects can be achieved by further targeting business tax incentives only on export-base businesses that are creating jobs. This is more cost-effective for two reasons. First, conditioning business tax incentives ion job creation provides a greater reward for job creation. Second, businesses that are creating jobs are likely to be more responsive to job creation incentives than many businesses that are in no position to add employment.

In our working paper, we estimate that well-designed business tax incentives, by being more narrowly targeted on businesses most likely to respond to business tax cuts and create more jobs, can achieve the same state job creation goals as across-the-board business tax cuts at about one-sixth the costs per job created.  This is an important finding for state policymakers seeking to cut business taxes without excessively cutting state public services.

Does this mean that well-designed business tax incentives should be made as large as possible? No, because we also need to account for the opportunity cost of the funds used for these incentives.  If such incentives are excessive, they may result in cuts in public services that also are important to state job creation.

A balanced state economic development strategy would combine some strategic use of well-designed business tax incentives with productive business services, and support for human capital investments such as early childhood education.

Posted in Business incentives, Incentive design issues | Comments Off on Business taxation and state economic development goals

How much can pre-K do to close income gaps in kindergarten readiness?

Posted on August 14, 2012 by timbartik

I was recently asked how pre-K’s effects compared with the usual income gaps in kindergarten readiness.  How much can high-quality pre-K do to help children from low-income families catch up to children from more middle-class families?

My paper with Gormley and Adelstein on Tulsa pre-K provides an answer to this question. In this paper, the average test score gap at kindergarten entrance between children eligible for a free lunch, and children who must pay full price, is 14 percentile points.

Half-day pre-K for one school year raises test scores of low-income children about 12 percentile points. Full-day pre-K for one year raises test scores of low-income children about 18 percentile points.

Therefore, research suggests that even one-half day of pre-K for only one school year will close most of the gap across income groups in kindergarten readiness.  A full-day of pre-K more than closes these income gaps.

Of course, if pre-K is universal, these income gap-closing features are reduced. Universal pre-K helps children from all income groups, but has stronger percentage effects for children from low-income families. But universal pre-K will help raise the overall achievement levels, productivity, and economic future of the entire economy, which is a goal worth pursuing. Universal pre-K increases the size of the overall economic pie, while helping low-income groups the most in percentage terms.  Universal pre-K advances both economic efficiency and equity goals.

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

State government revenue capacity

Posted on July 18, 2012 by timbartik

The New York Times gave front-page coverage, on July 18, 2012, to a recent report by the State Budget Crisis Task Force. This report argued that states faced major long-term budget problems due to “rising health care costs, underfunded pensions, ignored infrastructure needs, eroding revenues and expected federal budget cuts”, to quote the New York Times’ summary.

I have argued in this blog that states should make major investments in early childhood programs and other human capital investment programs. The Task Force report might raise the issue of whether states will have the capacity to do so.

After reading through the report, I think that if one looks at the overall data on state governments’ fiscal situations, that states will have the capacity to make the needed investments in human capital development, if they make wise budget decisions.

To gauge state revenue capacity, one needs to compare state revenue to the economy. A common way to do so is to compare state revenue with personal income.

If we do this calculation, total state government tax revenue has averaged 6.4% of personal income over the period from 1977 to 2007. There is not much long-term time trend in this percentage. At the various business cycle peaks, state government tax revenue has stayed in the range from 6.4% to 6.6%. 1979 business cycle peak: 6.4%; 1989: 6.5%; 2000: 6.6%; 2007:: 6.5%).

(Note: These calculations are done using data downloaded from the Tax Policy Center of the Urban Institute, which ultimately comes from Census of Governments data. I also downloaded more recent Census of Governments data for FY 2010. These data were combined with personal income data by quarter from the U.S. Bureau of Economic Analysis. Percentages were calculated for fiscal years.)

As of the latest date with available Census Bureau data, fiscal year 2010, state government tax collections were only 5.8% of personal income. The more recent data available in the Task Force report appears consistent with these data.

The unusually low state tax revenue figures for fiscal year 2010 probably have mostly to do with the excess cyclical sensitivity of most state tax systems to the economy.  It may also have something to do with state budget decisions during this time period from 2007 to 2010 to either cut taxes or avoid tax increases. The unusually low state tax revenue figures probably don’t have much to do with long-term trends that might adversely affect state tax revenues, such as more consumption of less heavily taxed services or of goods sold over the internet.  These long-term trends would be of secondary importance over the short-time-period of 2007 to 2010, and in any event, there are many revenue measures that states can take to react to these long-term trends.

As the economy recovers, states certainly will have the capacity to move state tax collections closer to historical averages for state tax revenue. This by itself should raise average state tax revenues by about 10% per capita. (An increase from 5.8% of personal income to 6.4% is an increase of about 10 percent).

In addition, as the economy recovers, the expanded output per capita and personal income per capita will also increase state revenue capacity. According to the Congressional Budget Office, the U.S. economy is currently at least 5% below its potential output (Figure 2-1, The Budget and Economic Outlook, Fiscal Years 2012 to 2022.) As the U.S. economy recovers from the Great Recession, this will increase state government fiscal capacity another 5% or so.

State government tax revenue is currently a little over $700 billion per year. A 15% boost in state revenue capacity due to economic recovery would boost available state tax revenues by over $100 billion annually.

Furthermore, we expect some long-term growth in real per capita incomes. The long-term economic assumptions of the Social Security Board of Trustees are for the U.S.’s economic productivity to increase by 1.7% per year. This is in line with other long-term forecasts. Even if we are pessimistic, we would expect real per capita incomes to grow by 1% per year or so over the long-term. Over the next 20 years or so, such growth would add over 20% to state’s capacity to raise real per capita revenue. That will add another $100 billion to $150 billion to state revenue capacity.

In order for states to actually use this revenue capacity, they may need to make tax reforms to broaden tax bases or raise nominal rates. For example, some state taxes, such as the sales tax, are tending to decline as a percent of personal income over time.  State tax changes to broaden the base of the sales tax or to raise tax rates may be needed if sales tax revenues are to maintain the same percentage of personal income over tax. Maintaining a stable state tax revenue share of personal income requires active state policy measures. This may involve policy actions that could be perceived in the political arena as “raising taxes”. However, if a state’s tax revenue as a percent of personal income is not going up, then a state’s overall real tax burden on its various taxpayers is not really increasing.

The Task Force properly points out that states will face many competing demands for funds, due to the rising costs of Medicaid, the possible loss of federal grants with federal fiscal retrenchment, rising costs of public employee pensions, and infrastructure needs. The wild card here is Medicaid and health care costs. If health care reform can lead to a slowing in health care costs growth, this will help both the federal fiscal situation, as well as the state fiscal situation.  Pension reform will also be needed.

However, states will not be without considerable revenue capacity, of hundreds of billions of dollars per year, to deal with these many important issues.  If we have reasonable health care reforms and pension reforms, state governments should have the fiscal capacity to make needed investments in infrastructure as well as in early childhood programs and other human capital investment programs.

Posted in National vs. state vs. local | Comments Off on State government revenue capacity

Federal versus state and local roles in children’s programs

Posted on July 17, 2012 by timbartik

I was recently asked to comment on a report by First Focus, which describes itself as “a bipartisan advocacy organization dedicated to making children and families a priority in federal policy and budget decisions”. This report, released on June 27, 2012, is a lengthy analysis of federal budget resources devoted to children from fiscal year 2008 up through President Obama’s proposed FY2013 budget. The PowerPoint that accompanied the report’s release makes some specific recommendations on how to improve federal investments in children.

The main point of the First Focus report is that the federal government underinvests in children, and that there are political and budgetary threats that may make that underinvestment worse over time. The federal government devotes about 8% of federal spending to children, even under a broad definition of spending devoted to children. With the demise of federal stimulus spending, with budget deficit concerns leading to major cuts in discretionary spending, and with pressure to rein in health care spending that helps children, there are serious threats to even that modest share of federal spending.

This limited investment in children’s programs raises both moral and economic issues. From an economic perspective, as this blog has long argued, underinvesting in high-quality early childhood programs undermines long-run, broad-based job creation and wage generation for the U.S. From a moral perspective, it would seem that children certainly have a moral claim on assistance that will help expand their capabilities.

However, I want to go beyond the purposes of the First Focus organization to consider the following issue: if we want to increase investment in children’s programs, is this more effectively done through expanding federal investment, or state and local investment?

For educational investments, including early childhood education investments, I believe the needed investment will only happen with heavy involvement from state and local governments.  Most of the funds for educational investments have traditionally come from state and local governments. Over 90% of K-12 educational revenues come from state and local governments, not the federal government. With large federal deficits, and increasing health care spending pressures, it seems unlikely that the federal government is going to make major new educational investments in children over the next 10 to 20 years.

Furthermore, it is unclear whether greater centralization of budgetary decisions actually helps increase educational investments. Empirically, when states such as Michigan move educational budget decisions to the state level, the evidence suggests that this probably reduces educational spending.  Centralization makes it less clear to the average voter how their taxes are related to the benefits of educational investments. As most voters are supportive of educational investments, obscuring the link makes it more difficult to expand educational investments.

Finally, for educational investments, we don’t need a dominant federal budgetary position for there to be adequate incentives for government to be involved. As this blog has outlined, a sufficient number of former preschool participants or K-12 students will stick around a state economy for investments in education to pay off for a state economy.

Where federal involvement in children’s programs is definitely needed is for programs whose dominant purpose is income redistribution. We cannot expect state and local governments to invest adequately in programs that only benefit lower-income children (or, for that matter, lower income adults).  Income redistribution efforts by state and local governments are concerned about fears of attracting low-income migrants through higher benefits, and repelling middle-income and upper-income households through the taxes needed to support income redistribution programs.

In fact, much of the federal spending on children highlighted in the First Focus report occurs through income redistribution programs, including Medicaid, Social Security and SSI, and welfare and food stamps. (These 5 programs by themselves are over half of the $284 billion in federal spending in FY 2013 on children identified in the First Focus report.)  There is no way that state and local efforts in these budgetary areas will be anywhere near adequate without substantial and dominant federal involvement.

The policy recommendations made by First Focus appropriately emphasize expanding federal support for some of these income redistribution programs. These recommendations include reauthorizing the Children’s Health Insurance Program (CHIP), and expanding the Child Tax Credit and the Earned Income Tax Credit. (See page 30 of the Powerpoint accompanying the report.)

I would add to this that the federal government has a large and important role to play in ensuring increases in employment and earnings for a broad range of U.S. households.  This includes macro policies that will promote both short-run and long-run job creation.  States can also generate job creation, but there is some tendency for state job creation efforts to focus too much on stealing jobs from other states.

We need expanded investment in children’s programs. But it needs to come from a combination of expanded federal investment, in policy areas where that makes sense, and from grassroots support for expanded state and local investment, in areas such as early childhood education where that state and local investment makes sense.

Posted in Early childhood programs, National vs. state vs. local | 1 Comment