Inequality, early childhood programs, economic productivity, and the middle class

Posted on May 16, 2011 by timbartik

I just finished reading Robert Reich’s latest book, After-Shock: The Next Economy and America’s Future. Reich argues that increased inequality in the United States has had high costs. These include costs for macroeconomic stability and costs for the democratic representativeness of American governmental institutions. Other authors, such as Larry Bartels, and Jacob Hacker and Paul Pierson, have also argued that  increased inequality has large costs for the proper functioning of American political institutions.

I agree that increased American inequality has large costs. (I don’t think a blog post is adequate to “prove” that proposition, so let’s just accept that inequality is bad as a proposition.) But the usual conventional wisdom is that significantly reducing inequality has large economic and political costs. The economic costs are that most proposals to address inequality reduce the overall efficiency of the economy. The political costs are that most proposals to address inequality have costs for the majority of the population.

What is unusual about some high-quality early childhood programs, such as universal pre-k, is that these programs simultaneously; (1)  reduce inequality, (2) increase the overall efficiency of the economy, and (3) have net benefits for the middle-class.

Very few other public policies help both the poor and the middle-class while increasing the productive capacity of the economy.   Broad measures that increase the skills of the poor and the middle class are one of the few ways to help both these groups while increasing measured GDP.

Helping the poor through income transfers such as welfare has costs in increased taxes for the rest of the population. Furthermore, such programs tend to have some negative effects on labor supply, reducing the size of the economy. So, transferring income to the poor has some tradeoffs: it reduces the social and economic costs of inequality, but at a cost to the middle class and overall economic growth.

Subsidizing the work of the poor through wage subsidies to the poor, wage subsidies to their employers, or public employment, may help the poor while also boosting the size of the economy. However, such work subsidies increase the taxes of the middle class.

Training programs targeted on the poor, if effective, may help the poor while increasing the economy’s productivity. However, such programs probably have net costs for the middle class.

Health care reform programs potentially can provide broad benefits for various income groups. If run well, such programs may increase the efficiency of the health care sector, and in that sense increase the productive capacity of the economy. However, this increase in economic productivity is somewhat more subtle and harder to measure than policies that increase the quantity and quality of labor supply.

The point is that universal pre-k is a very unusual program in the mix of benefits it offers for society. Increased American inequality is an important issue. Making significant progress in reducing inequality requires that policies have broad support. Such broad support is much easier to obtain if the policies also help the middle class and provide obvious benefits for the overall economy.

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Top ten points about business incentives in my book

Posted on May 13, 2011 by timbartik

Although the main focus of my book is early childhood programs, I also extensively discuss business incentives.  Even for those interested primarily in early childhood programs, understanding the pros and cons of business incentives is important.  Political debates over state economic development policy often advocate for expanded business incentives, even at the expense of cutback on public investments in education, including early childhood programs. Sound economic development strategy must include a judgment as to the mix of human capital investments and business incentives that will make up the strategy.

So, what are the top ten points of my book about business incentives?

  1. Well-designed business incentives can yield benefits for state economies that exceed costs.
  2. Across-the-board business tax cuts are far less-cost effective than well-designed business tax incentives.
  3. Customized business services, such as customized job training and manufacturing extension services, are far more cost-effective than even the best-designed business tax incentives.
  4.  The benefits of business incentives will vary with how they are financed, and will be lower if the business incentives require large cuts in public services.
  5. Business incentives are more effective if they target expansion by export-based businesses.
  6. The benefits of business incentives depend greatly on whether state residents get the created jobs, and what wages those jobs pay.
  7. Business incentives’ benefits are more front-loaded than the benefits of early childhood programs.
  8. Business incentives have reduced local benefit in local economies that already have healthy job growth.
  9. Because most of a state’s benefits from attracting jobs are offset by losses to other states, the national benefits of business incentives are only one-fifth of the own-state benefits.
  10. The European Union provides a useful model of how the U.S. federal government might regulate state use of business incentives.
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Top ten points of my book

Posted on May 12, 2011 by timbartik

A reader requested my summary of the “Top Ten” points of my book. Unfortunately, for reasons of logic, I think I need to do this list in order from 1 to 10 rather than in David Letterman’s reverse order. I’ve included links to blog posts that elaborate on some of these points.

  1. Investing in high-quality early childhood programs has a high return for state economies of $2 to $3 per dollar invested.
  2. The evidence for the effectiveness of early childhood programs is among the most rigorous of any public program. .
  3. Early childhood programs can produce long-term effects on adult outcomes by increasing “soft skills”, even though effects on “hard skills” sometimes fade.
  4. Early childhood programs have effects on the income distribution that are far more progressive than is true of business tax incentives.
  5. Early childhood programs have significant short-term benefits in reducing special education and other remedial program costs, and in attracting parents and thereby raising local property values.
  6. A state’s investments in early childhood programs have large national benefits due to out-migration of program participants to other states.
  7. We know enough about what makes for quality in early childhood programs that an average agency can produce good results with adequate funding.
  8. We need to know more about which early childhood programs are most successful, so we need to encourage innovation in program design with rigorous evaluation of results.
  9. Significant expansion of early childhood programs is politically likely to depend on state government actions.
  10. The federal government should encourage state and local expansion of high-quality early childhood programs, with an emphasis on encouraging innovation and evaluation.

There are other important points in my book, in particular in analyzing business tax incentives and across-the-board business tax cuts. But the above 10 stand out in my present thinking as the main points on early childhood programs.

Posted in Distribution of benefits, Early childhood program design issues, Early childhood programs, National vs. state vs. local, Timing of benefits | Comments Off on Top ten points of my book

Request to my readers for questions

Posted on May 11, 2011 by timbartik

In 127 posts to this blog since December of 2010, I have covered most of the main points of my book Investing in Kids.  I need to shift this blog to more coverage of ongoing events related to early childhood programs and local economic development. This might include recent research papers, policy debates at the state and local level, etc.

Here is where you come in. In discussing early childhood programs with legislators and other political leaders, with business leaders, or with members of the public in general, what questions are you running into? What skepticism or concerns do these political actors express about early childhood programs? Or, in your own work, what research findings are you curious about? What policy debates in your state or local level would you like this blog to respond to or comment on?  The possible policy debates include not only early childhood programs, but economic development programs, the workings of state and local economies, and state budget and tax policy.

Please email any questions or possible blog topics to me at bartik@upjohn.org . Or, you can post your questions or suggested topics in the comments on this blog post.

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Early childhood programs and possible new federal funds

Posted on May 10, 2011 by timbartik

Education Week published an article on May 9 that covered some possible federal encouragement for states to invest more in early childhood programs.  The recent federal budget deal gave the U.S. Department of Education $700 million to have a new competitive federal grant programs for states doing educational reform.

According to Education Week, the federal Department of Education is thinking of devoting a significant chunk of these new funds, or even the entire amount, to encourage innovative state efforts in early childhood education.

How can the federal government best use some sizable chunk of this $700 million to encourage better early childhood education systems?

Compared to the overall need for early childhood programs in the U.S., $700 million is not large. In my book Investing in Kids, I estimate that universal pre-K for the U.S. would cost around $14 billion. High-quality full-time child care and preschool for all disadvantaged children from birth to age 5 would cost around $40 billion.

On the other hand, according to the National Institute for Early Education Research (NIEER), overall state funding for pre-k is about $5.4 billion. And according to the Education Week article, Steve Barnett of NIEER estimates that full funding of pre-k for all disadvantaged children would cost about $2 billion. Finally, high-quality evaluation of all state-funded early childhood programs could probably be accomplished at a cost less than $700 million. Therefore, particularly if the federal government’s efforts are focused, it might do appreciable good in at least a few states.

In my opinion, a federal effort to encourage state programs in early childhood education should focus on encouraging quality. To get funds, states should have to provide plans for what incentives and training the state is providing to improve the quality of early childhood programs.  States should also have to provide plans for better evaluation of early childhood programs. (For example, for pre-k programs, this could include regression discontinuity evaluations.)

As part of the federal program, participating states should be provided with sufficient funds to allow some significant expansion of quality slots in preschool and/or child care programs. Such significant expansion requires that relatively few states be targeted by the proposed program.  I think states should be given flexibility in how to use these additional slots, in terms of age range of children included and in which children are targeted for participation in these additional slots. Given the range of conditions in the various states, how programs should best be expanded may vary greatly across the states. We should not assume that there is one correct federal answer on how to expand these programs.

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Powerpoint on early childhood programs and local economic development

Posted on May 9, 2011 by timbartik

I gave a talk this morning to the Youth Human Capital and Economic Development Network. This network is sponsored by the Human Capital and Economic Opportunity Working Group of the Milton Friedman Institute at the University of Chicago. This overall working group is co-directed by Nobel-prize-winning economist James Heckman, and Rob Dugger of the Hanover Investment Group. This project is being financially supported by the Institute for New Economic Thinking.

The powerpoint from this presentation has now been posted. This powerpoint provides a good summary of some of the key points of my book, Investing in Kids.  I think the powerpoint is self-explanatory even without the accompanying talk.

Posted in Early childhood program design issues, Early childhood programs, Economic development, National vs. state vs. local, Timing of benefits | Comments Off on Powerpoint on early childhood programs and local economic development

Third-grade reading skills, poverty, and high school graduation

Posted on May 6, 2011 by timbartik

Sociology professor Donald Hernandez has an interesting paper on how third grade reading skills and poverty influence high school graduation rates.

The bottom-line: both a child’s third grade reading skills and whether a child’s family experiences poverty have large effects on high school graduation rates.

Here are some of the starkest results:

*** For children who are “proficient readers” in 3rd grade,  and who come from families that never experienced poverty from grade 2 to grade 11, only 2% fail to graduate from high school by age 19.

*** For children who are NOT “proficient readers” in 3rd grade, and who come from “non-poor” families, the percentage not graduating from high school jumps from 2% to 9%. Even for children from non-poor families, early reading proficiency matters.

*** For proficient 3rd grade readers whose families did experience poverty, the percentage not graduating from high school jumps from 2% (for non-poor families) to 11%. Even for proficient readers, family poverty status matters quite a bit to educational outcomes.

*** But reading proficiency matters even more to the poor. For non-proficient 3rd-grade readers whose families experienced poverty, the percentage not graduating from high school is 26%, far above the 11% for children from “poverty experience” families who were proficient readers in 3rd grade.

We know from previous research by Greg Duncan and his colleagues that adult outcomes depend more on family income status when the child was 5 or less than on family income status when the child was ages 6 to 15. The stresses on a child from family poverty (e.g., frequent moves) appear to matter most when the child is younger.

Therefore, improving adult outcomes for children can be accomplished both by boosting their parents’ incomes, and by educational interventions, such as high-quality early childhood programs, that can boost early educational achievement.  Either strategy can work separately. But the policies work even better together.

The political appeal of educational interventions such as early childhood programs is that there is broader political support for helping young children. Helping their parents is more politically controversial.

Posted in Early childhood programs | Comments Off on Third-grade reading skills, poverty, and high school graduation

Federal versus state roles in education

Posted on May 5, 2011 by timbartik

The Center on Education Policy has released a fascinating set of papers on a hidden aspect of American history: the role of the federal government in encouraging public schools in the states.

The papers are in response to calls for the federal government to return to its “traditional” role of not being involved with elementary and secondary education. However, as CEP shows, the federal government has been involved with encouraging education since before the Constitution was adopted.

Specifically, the Land Ordinance of 1785 and the Northwest Ordinance of 1787 provided new territories and states with land that was dedicated to supporting public schools. These ordinances set a precedent. Similar provisions were attached to other federal legislation setting up territories and admitting new states.

What was the rationale for this federal intervention? According to one of the CEP papers, the key issue was the need for adequate education to support the new democratic nation:

“Many of the revolutionary leaders and Founding Fathers, most famously Thomas Jefferson, held a fervent belief in the importance of education. They felt that providing a public education was the only means by which to ensure that citizens were prepared to exercise the freedoms and responsibilities granted to them in the Constitution and thereby preserve the ideals of liberty and freedom. Education was the most promising way to make sure that Americans, no matter where in the country or territories they were located, were being raised as English-speaking citizens loyal to the ideals of democracy…” (Usher, p. 5)

From an economist’s perspective, the rationale for federal intervention is spillovers. One state’s action in promoting education has benefits for the entire nation in promoting understanding of democracy.

Spillovers remain an important reason that rationalizes federal support for education. Such spillovers include more than education’s role in helping everyone play their role as citizens. Spillovers also include the role of education in helping people become productive workers. Because Americans are to some degree mobile, one state’s actions in educating its current residents to become productive citizens and workers will benefit other states.

As I outline in my book, the benefits of early childhood programs spillover and provide benefits for other states. This benefit spillover is due to out-migration. For every $1 of benefits that accrue to a state residents from their own state’s investments in early childhood programs, from 34 cents to 36 cents accrue to other states.

The own-state benefits from early childhood programs are big enough to rationalize state investments from a state perspective, without any federal aid.  But the spillover benefits for the nation are big enough to rationalize a sizable federal subsidy for early childhood programs.  Both these statements are simultaneously true.

The issue for federal policy towards early childhood education, and towards K-12 education as well, is how to encourage the positive national spillovers of education through federal policy, while avoiding rigidities in funding rules that might inhibit local innovation.

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State government budget problems are not like household budget problems

Posted on May 4, 2011 by timbartik

The average voter may think of state government budget problems as if they are analogous to the voter’s budget problems. For the average voter, if somehow household spending exceeds household income, the easiest and most natural response is just to cut back on spending.

However, state governments are not like households. The best solution to state budget problems is not the same as a household’s best solution to its budget problems. Both Ezra Klein and Karl Smith make this point in recent blog entries.

Here are some of the key differences between state budget problems and their solutions, and household budget problems and solutions.

First, unlike households, it is much easier for state governments in the short-run to adjust income rather than expenses. A state government can easily adjust income by raising tax rates. A household would probably need to work additional hours, which may be hard to do.  In contrast, a middle-class household in many cases finds it relatively easy to make significant cutbacks in some of the luxuries and frills in its budget. In contrast, short-run dramatic slashes in state government spending often severely disrupt the operation of needed public services and may even increase long-run budget deficits. Karl Smith makes these points in greater detail in a recent blog post.

Second, during a recession, governments, including state governments, are called on to spend more to fulfill the government’s “safety net” function. Therefore, actually cutting state government spending during a recession, rather than cutting projected spending, may make it difficult for government to fulfill its safety net function. This would not be true of most households.  It might be true of a few households, for example of households in cases where some former household members lose their job and move back in. Under such a circumstance, households as well would find it difficult to cut back on total food spending.

Third, government spending and taxes affect the overall economy. So do household decisions about spending and work, but many of these effects are quite different.  For state governments, both spending cuts and tax rate increases have negative economic effects upon the state economy. But the negative effects of spending cuts are greater than the negative effects of tax rate increases. More of the spending cut will be felt in reduced demand for goods and services produced within the state, whereas much of the tax rate increase will be felt in reduced demand for goods and services produced in other states.

Therefore, when faced with a budget shortfall during a recession, it is better for a state government to have short-run increases in taxes rather than short-run cuts in spending.  Ideally, these short-run increases in taxes should be designed to expire as the state economy recovers. Furthermore, state governments should certainly always be exploring budget reforms that would more effectively deliver government services at lower costs. However, such budget reforms typically require some up-front costs and take time to be implemented.

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Is competition among states in business incentives a good thing?

Posted on May 3, 2011 by timbartik

In a previous post, I concluded that under some conditions, competition among states in investment in early childhood education could be a good thing. I argued that such competition could meet two  of Harvard professor John Donahue’s criteria for devolving a policy area to the states: “where external impacts are minor or manageable, … and where competition boosts efficiency instead of inspiring destructive strategies…”

In contrast, competition among states in business incentives makes less sense. It makes less sense because business incentives clearly do not meet the needed criteria for being a policy area in which authority should be devolved to the states.

For business incentives, “external impacts” are NOT “minor or manageable”. Rather, these external impacts are a majority of the impact. In chapter 10 of Investing in Kids, I conclude that business incentives have negative external impacts on other states of about 79% of their own-state impact. That is, if a given business incentive offered by state X increases per capita earnings in that state by $Y, that incentive will reduce per capita earnings in other states by 79% of $Y.

These negative external impacts are less true for business incentives that are not tax or financial incentives, but rather provide services to individual businesses to boost productivity. These productivity-boosting business incentives include customized job training and manufacturing extension services. Such business services can boost the overall productivity of the U.S. economy.

Competition among states in business incentives encourages excessive use of business tax incentives whose national benefits are only 21% of the benefits for that state. Competition among states distorts the use of business incentives away from services that would boost national productivity.

Ideally, federal policy would seek to restrict states’ use of business tax incentives. As I outline in Investing in Kids, and in a previous blog post, the European Union provides one model for such federal regulation.

Posted in Business incentives, National vs. state vs. local | 1 Comment