investinginkids

A recent New York Times article by Annie Lowery pointed out that several important programs with strong research support for effectiveness are being threatened in the federal appropriations process.

In particular, a House appropriations subcommittee recommended cutting all fiscal year 2012 funding ($350 million) for the Maternal, Infant, and Early Childhood Home Visiting Program. This program, included in one small portion of the federal health care reform bill, funds home visitation programs with strong research evidence of success.

Among these programs is the Nurse Family Partnership. NFP provides disadvantaged first-time mothers with nurse home visitation services from the pre-natal period until the child is age 2. These services focus on better pre-natal care and better parenting practices, as well as on helping the mother improve her life course. Several random assignment experiments have shown strong evidence that NFP has significant benefits in improving mothers’ employment and education, and reducing the child’s involvement in crime during adolescence.  In my book, Investing in Kids, I estimate that for each dollar invested in NFP, the nationwide increase in per capita earnings is $2.47, and the increase within the state in which NFP is delivered will be $1.85.

Among those protesting this cut in funding, which would decrease the scale of a program with demonstrated effectiveness, is Ron Haskins of the Brookings Institution and Jon Baron, President of the Coalition for Evidence-Based Policy.  Ron Haskins was one of the key Republican congressional staff members involved in the 1996 welfare reform bill.

At current writing, it is unclear whether the Nurse Family Partnership program, and other social programs with a strong evidence base for success, will survive the appropriations process. Press reports suggest that negotiations among the White House, Senate Democrats, and House Republicans are getting close to a deal on fiscal year 2012 appropriations.

What I find disturbing is that NFP and other programs with strong research support are even threatened in these appropriations debates. What politicians should be advocating for is not “more government” or “less government”, but rather “more effective government”. This means expanding government programs that work, and either reforming or cutting government programs that don’t work.

We need to change our political culture. Our current political culture relies too much on ideology, gut instinct, anecdote, and political clout to identify favored and disfavored programs. But if we want a better economy and a better society, we need to do more to reallocate resources towards programs that have at least some reasonable research evidence for economic and social benefits that exceed costs.

We need more support at the federal level for groups such as the Coalition for Evidence-Based Policy. We also need support at the state level for groups such as the Washington State Institute for Public Policy.   This organization, created by the Washington state legislature in 1983, provides non-partisan research evidence on the benefits and costs of alternative state public policies. We need to modify the political cultures of states – which includes not only legislators, but the news media, the business community, and other influential groups – so that there is more credence given to whether programs actually work instead of to ideologies that decide such questions without any empirical data.

A well-known quote from Franklin Delano Roosevelt, from a speech given in May of 1932, goes as follows:

“The country needs and, unless I mistake its temper, the country demands bold, persistent experimentation. It is common sense to take a method and try it: If it fails, admit it frankly and try another.”

Given the magnitude of the many economic and social challenges facing the U.S., we need to figure out how to recover that spirit of openness to experimentation, combined with the discipline to be willing to act on the basis of the results of that experimentation.

A few months ago I read the following quote in a local newspaper from a business leader, which expresses a commonly-held sentiment:

“Government doesn’t create jobs…People opening that new pizza shop [or] that new dry cleaners – those are the people who are creating jobs and putting other people to work.”

This quotation reflects a profound misunderstanding of the economy which is unfortunately quite common.  It is a misunderstanding that has led and is leading to some mistaken economic policies.

Economics has long been subject to fads in which some sector of the economy claims that only its contribution matters. For example, during the 18^th century, the ”phyiocratic” school of economists argued that only agricultural development created real wealth, as all other sectors depended on the production of food.

Sometimes regional economists talk as if only businesses that “export” their goods and services outside the region matter. After all, if the regional economy is not bringing in new dollars from outside, who is going to buy the products of that new pizza shop or new dry cleaners?

Today, some commenters talk as if only the private economy matters. After all, if the private economy disappeared, how could we even have a government? Therefore, let’s get the government out of the way, so the private economy can flourish. I don’t know whether the business leader quoted at the beginning of this blog post shares this position. But his comment can lead to that approach.

But a more perceptive analysis recognizes that all sectors of the economy ideally can provide productive goods and services that can help contribute to greater well-being. Our economy is interdependent. The value of what we produce, and the number and quality of jobs, can be affected by all sectors of the economy.

Arguably some sectors of the economy are “more essential” in that if they were abolished, more dramatic downturns in well-being would ensue. But at any given point in time, the path to greater prosperity potentially may be found in any sector of the economy, as that may be the sector where the next $x of investment may be most productively spent.

This includes the government. Government, if and when it is working rightly, produces useful goods and services. These goods and services both directly benefit the public, and help support the private economy. If government is working rightly, the value of these goods and services exceeds the foregone private consumption due to the taxes or bonds used to finance the government’s spending.

Government creates jobs. It creates jobs directly due to its spending. The job creation due to public spending will in the short-run exceed the jobs lost due to the needed taxation to support that spending. We shouldn’t exaggerate that short-run stimulus, but it is real and should be considered in policy analysis.

But more importantly, if government provides productive services, it helps support the private economy. These supports include a legal system of property rights, a criminal justice system that preserves public order, roads and other transportation infrastructure that facilitate commerce, and human capital development programs that develop the skills of the labor force. It is in this last category that early childhood education can make a productive contribution.  All these productive services help the private economy provide more and better jobs, and produce greater economic well-being that is more broadly shared.

Perhaps the comment that “government doesn’t create jobs” is meant to simply convey a commitment to the value of private business enterprise. If so, certainly it is true that the “business climate” is important. It is important that business costs be reasonable, which includes the costs affected by business taxes and regulation. Regulations should be designed so that benefits exceed costs. It is also important that the government provide services that help business costs be reasonable, for example by helping to lower transactions costs, make transportation easier, and increase labor productivity.

Some commentators have argued that our recent and ongoing debates over deficits and debt have been driven by the American people’s lack of trust in government, and even their lack of understanding of what government does and what their taxes pay for.  Pollster Stanley Greenberg recently argued in the New York Times that “[V]oters feel ever more estranged from government…If government is seen as useless, what is the point of….  aim[ing] to use government to advance some public end?”  Jared Bernstein, former chief economist to Vice President Biden, recently argued  that

 “If too many Americans don’t believe in or understand what government does to help them, to offset recessions, to protect their security in retirement and in hard times, to maintain the infrastructure, to provide educational opportunities and health care decent enough to offset the disadvantages so many are born with…if those functions are unknown, underfunded, and/or carried out poorly, why should they care about how much this deal or the next one cuts?”

One of the key challenges in creating more and better jobs and broader economic well-being in the American economy is to identify areas where a dollar of investment is most likely to be productive. A large part of this task should of course be left to private sector investment decisions. But some of the most productive investments are public investments.  This includes but is not limited to investment in high-quality early childhood programs. As I have argued regularly on my blog and in my book “Investing in Kids”, high-quality early childhood programs produce $2 to $3 in extra per capita earnings per dollar invested. Government can use early childhood programs to create more and better jobs, and broader economic well-being, both in the public sector and in the private sector.

It is essential today both to refocus government priorities on the most productive public investments, and to communicate to the public about why high-quality public investments matter.  Early childhood program advocates should be at the forefront of helping reprioritize public investments, and at the forefront of communicating why wise use of government can make a difference to our prosperity.

I have been asked by several people lately for my reactions to recent reports about the short-run multiplier and input-output effects on state economies of early childhood programs.  Over the years, these reports have been produced by America’s Edge, by the Linking Economic Development and Child Care project at Cornell University, and by the Insight Center for Community Economic Development.

These reports talk about the importance of high-quality early childhood programs for future work force skills and for providing child care support for parents. But what sometimes gets highlighted in media coverage are the short-term impact estimates on jobs of the spending associated with early childhood programs, and the multiplier effects of that spending.

For example, the recent news coverage of a report on Michigan highlighted that “investing in quality early childhood education…could …create up to 58,000 new jobs.” This job creation comes at a cost to the state of Michigan budget of $1.4 billion in additional spending. This additional spending is the amount estimated to serve 75% of all young children from birth through age 4 in Michigan with child care and preschool.

The implied cost per job created is about $24,000 (=$1.4 billion divided by 58,000 jobs created). This compares quite favorably with other job creation proposals. For example, the Obama Administration estimated that the economic stimulus had a cost “per job-year created” of about $112,000. I have argued in the past, at this blog and elsewhere,  that we need more cost-effective job creation proposals, such as a “job creation tax credit” or a combination wage subsidy and public service jobs program, that might create new jobs at about $30,000 per job-year created. $30,000 to create one job for one year is a modest cost compared to the likely benefits of job creation when unemployment is high.

Similar costs per job created numbers for early childhood programs have been produced for other states. The implied costs per job created are $45,000 for New York, $31,000 for Illinois and Maine, $29,000 for Pennsylvania, and $25,000 for Montana.

How should such numbers be interpreted? I have an extensive discussion of this issue in my book Investing in Kids, pp. 104-110. But here are some summary thoughts.

These job creation numbers provide a useful counterweight to political arguments over government taxation and spending that stress the damages that taxes can do to job creation. In discussing government budget decisions, too often the discussion omits the positive effects of spending on job creation. Spending creates jobs through the various multiplier effects highlighted in these reports. These include child care centers and preschools buying supplies from local vendors, and child care teachers and preschool teachers buying goods and services from local businesses.

It is entirely proper to point out that child care and preschool, because they are relatively labor intensive, and because they pay modest salaries, tend to create a larger number of jobs per dollar spent than some other types of spending.  In addition, in part because of the modest salaries in early childhood programs, more of the salaries paid are likely to be spent locally.

However, it should be noted that the press reports of these job creation numbers omit the negative effects of the taxes needed to finance this extra spending. These job creation numbers for a state from higher early childhood spending will only be achieved if the additional child care spending is financed from outside the state, by the federal government or some national foundation.

In most plausible political scenarios, this additional state spending would have to be largely financed by higher state taxes. The net short-run effects on job creation would combine the effects of spending that are highlighted in these reports, plus the negative effects of higher state taxes.

The net effect is likely to be positive in the short-run. Higher state taxes will not reduce demand for goods and services as much as the higher state spending will raise demand for state goods and services.  The spending has an immediate and direct effect in creating jobs in the state by increasing demand for early childhood services. In contrast, the higher taxes have only indirect effects on demand. Some proportion of the higher taxes would otherwise have been saved or spent out of state, and that proportion of the higher taxes will not negatively impact state demand for goods and services.  In addition, it is likely that early childhood spending is more labor intensive than the goods and services whose consumption is reduced by higher taxes.

For example, in some simulations that I have done with my colleague George Erickcek, we calculate that the short-run negative job effects of higher state taxes offset about two-thirds of the positive job creation impacts of higher state spending. There is a job creation impact of spending more on early childhood programs, but it is not as large as the impact if the spending was paid for by some entity outside the state.

As I have mentioned earlier in my blog, I estimate that in the short-run, high-quality preschool can create jobs at a cost of about $175,000 per job created. I get a higher cost per job created than the $24,000 to $45,000 range sometimes cited in press reports for two reasons. First, I include the negative effects of financing higher preschool spending through higher taxes.  Second, I assume that preschool teachers in high-quality preschool will be paid similarly to public school teachers. This reduces the job creation impact per dollar spent compared to using current average preschool salaries, which are much too low.  Although paying higher salaries lowers the short-run job creation impact per dollar spent on preschool, the evidence suggests that in the long-run, paying higher salaries will help build a higher quality program that will maximize long-run economic impacts.

In addition, as I have argued in this blog and in my book, I believe that state and local economic development policy should NOT focus simply on creating job growth and economic growth. The focus should be on increasing per capita earnings.

It is perhaps politically useful to sometimes cite figures on total jobs created in a state, or effects on the growth of state output of goods and services. This is similar to the way that state and local economic developers often talk about their work. Economic developers often focus simply on job creation. Who gets those jobs, and whether those jobs actually benefit anyone in the local economy – that is not traditionally seen as their responsibility.

But the real goal of state economic development policy is to raise the standard of living of state residents. This is accomplished in economic development policy largely through raising state residents’ per capita earnings. This is accomplished by raising employment to population ratios in the state or state wage rates.

Early childhood programs rank much higher as an economic development strategy if we focus on increasing earnings per capita rather than increasing job growth or the overall size of the local economy.  Much of the impact of early childhood programs is by raising the wage rates of former participants. Furthermore, early childhood programs do not attempt to have the in-migration effects of simply creating jobs. This is not a criticism from the standpoint of sound public policy, as it is not at all clear that current state residents’ benefit much from attracting additional population via job growth.  But stressing job growth and state economic output growth does not play to the real strengths of early childhood programs, which is increasing quality job opportunities for persons growing up in the state.

For early childhood programs to be seen as vital to state and local economic development strategies, we must encourage state policymakers, and state residents, to rethink what the goals are of state economic development. Whenever possible, we should stress the goal of higher earnings per capita. Creating jobs is merely a means to the end, and is better accomplished through creating quality jobs that state residents are able to fill.