Business taxes vs. human capital investments as economic development programs

Posted on April 18, 2011 by timbartik

I recently received a question from an advocate for early childhood education and other education programs. This question arises from this advocate’s interactions with state government legislative staff. These staff persons are judging these educational investments by their effects on encouraging business growth and economic development.  The staff persons are comparing these educational investments with possible cuts in business taxes. The question this advocate asked was as follows:

“Do we have the evidence to say that early childhood education and school performance is more important to state economic development than the business tax?”

In some sense, my entire book, Investing in Kids, is a lengthy response to this question. But it deserves a more useful shorter response as well.

Like most good policy wonks, I believe that the devil is in the details. So one truthful but unhelpful response is that the answer depends on precisely what educational investments and business tax changes are being compared.

A more helpful response is that high-quality educational investments have much larger effects per dollar than the most common proposals for across-the-board business tax cuts.  High-quality educational investments include high-quality universal pre-k programs, the Nurse Family Partnership, and high-quality child care and preschool such as Educare programs.

More specifically, high-quality early childhood programs provide economic development benefits for a state’s economy of $2 to $3 per dollar invested. These economic development benefits are the increase in present value of state residents’ earnings per capita. These finding are based on rigorous studies of how early childhood programs affect job skills, and how job skills affect the attractiveness of a state to business.

In contrast, across-the-board reductions in business taxes yield state economic development benefits of about 50 cents per dollar invested. These findings are based on an extensive scholarly literature on how state and local business taxes affect business growth. Across-the-board business tax cuts are relatively inefficient because these cuts  go to many locally-oriented businesses that do not bring new dollars into the local economy,  and the business tax cuts are provided  regardless of whether the business invests.

Therefore, high-quality early childhood programs have been shown to be from four to six times as effective per dollar as across-the-board business tax cuts.  The evidence for this assertion comes from extensive research on early childhood programs, business taxes, and the workings of regional economies.

However, this answer is incomplete. I’ll elaborate on this answer in a later post.

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

Why business incentive competition within metro areas makes no sense

Posted on April 15, 2011 by timbartik

The April 8 New York Times had an article by A.G. Sulzberger on competition for business within the Kansas City metropolitan area, between the Kansas and Missouri portions of the KC metro area. The article quoted me as saying that in such a competition, the “gains are much more modest than the losses”.  What are my reasons for this claim?

The primary reason for this claim is that intra-metro competition for business does little to advance the most important goal of economic development, which is higher per capita earnings for local residents. Per capita earnings for local residents does depend on local labor demand. Attracting more or better jobs to a local economy will raise per capita earnings. But a local economy is bigger than a neighborhood or even a city. Metro areas are explicitly designated by the Census Bureau to constitute local labor markets. Metro area boundaries are drawn so that there is much commuting within the metro area, and relatively little commuting across the boundary of the metro area. Therefore, what matters to local residents’ per capita earnings is local labor demand for the metro area as a whole. How that labor demand is distributed within the metro area is far less important.

Consider the example of the movie theatre chain AMC, which is mentioned in the New York Times article. AMC is currently located in downtown Kansas City, Missouri. AMC is considering building a new headquarters.  The State of Kansas is offering AMC a package of incentives to relocate its headquarters to the suburban Kansas portion of the Kansas City metro area.

According to reporter Sulzberger,

The CEO of AMC, Gerry Lopez, is “skeptical… about any broader benefit to an area where the lives of most of his employees already extend comfortably to both sides of the border.

“Will there be any net improvement to the region?” he asked. “Probably not.”

Thus, Mr. Lopez is pointing out that there is sufficient commuting of his employees that probably the relocation will have the same employees in the same jobs. The labor market benefits of such a relocation are nil.

However, the case can be made even stronger than the case made by the AMC CEO. Suppose that none of AMC’s employees happened to have cars. Suppose that as a result, the shift from Missouri to Kansas did shift employment at AMC from Missouri residents to Kansas residents.

Even under these extreme and unrealistic assumptions, the labor market gains for Kansas residents would not be large. The point is that even if the AMC employees do not commute across the state boundary, many local residents and workers do commute between the two states. The new AMC employees who get jobs in Kansas will in many cases open up job vacancies in employers in Kansas. The job vacancies will be filled by residents of both Kansas and Missouri. This “vacancy” chain will in turn open up job vacancies in Missouri that will be available even to the former AMC employees in Missouri without jobs.

The point is that we don’t need to have everyone commute across state boundaries for labor market conditions to tend to spread out across the entire metro area. We just need “sufficient” commuting for labor market conditions for similar workers to be similar throughout the metro area.

My assertion is more than simply saying that the Kansas City metro area as a whole does not have net benefits from the suburban Kansas portion of the metro area enticing jobs away from the Missouri portion. My assertion is that these business incentives do not produce large labor market benefits even judged from a “Kansas-only” perspective. Why? Because relocating jobs within a metro area does not, in general, provide any labor market benefits for anyone within the metro area, and it is these labor market benefits that should be the focus of local economic development policy.

The exception to this rule might be for jobs provided to a very low income neighborhood within a metro area, when the low income residents of that neighborhood are quite isolated from the overall metro area labor market. In that case, there may be some gains for the quality of that neighborhood from relocating jobs to that neighborhood. This can be done, for example, through policies such as the federal Empowerment Zone program of the 1990s.

However, in general we should be encouraging metro areas to have cooperative economic development policies across all jurisdictions within the metro area. Encouraging such cooperation is more difficult for metro areas than span state boundaries.

A metro area that is cooperating in economic development is better prepared to consider what policies will best promote a long-run increase in local per-capita earnings. Such policies include cost-effective business incentives as well as high-quality early childhood programs and other investments in improving the skills of the local labor force.

Posted in Business incentives, Incentive design issues, National vs. state vs. local | Comments Off on Why business incentive competition within metro areas makes no sense

Budget deficits and early childhood programs

Posted on April 14, 2011 by timbartik

For better or worse, it appears we are engaged in a debate about how to reduce projected future budget deficits. This is true both at the federal level and in many states.

What relationship, if anything, do early childhood programs have to this debate?

First, high-quality early childhood programs can significantly reduce budget deficits. This is particularly true for long-run budget deficits.

In the short-run, high-quality early childhood programs can reduce budget deficits by reducing a variety of remedial K-12 system costs. The most important short-run cost savings are in special education costs. Depending upon the exact situation, budgetary savings from reduced special education costs grow over 13 years to between half of early childhood program costs up to a third more than early childhood program costs.

In the medium-run, high-quality early childhood programs begin to reduce budget deficits by reducing the costs of juvenile crime. These cost savings from reduced crime increase over time as former child participants age and become adults.

In the long-run, high-quality early childhood programs have their most profound impacts by increasing adult earnings for former child participants. These increased earnings lead to both increased tax revenues and reduced spending on welfare programs.

Long-run budget deficit projections include projections by Lynch that preschool programs yield budget savings of 2 to 3 times their costs, and projections from Dickens, Sawhill, and Tebbs that the federal revenue increase alone from preschool programs will in the long-run be over five times costs.  The latter projections by Dickens et al are more dynamic projections that allow initial growth to spur capital formation that accelerates growth.

Second, high-quality early childhood programs increase per capita earnings, which is closer to an ultimate goal than reducing budget deficits.

Why are we interested in reducing budget deficits? From any rational perspective, the only reason to be frightened of future budget deficits is that they might interfere with the ability of the U.S. to achieve greater economic prosperity for most Americans.  If budget deficits grow to be difficult to sustain, they impose interest costs on future generations, and may contribute to lower levels of private investment. The lower levels of private investment will reduce future earnings per capita before taxes, and higher interest charges will reduce per capita earnings after taxes.

Economic policy should be aimed at a broad-based economic prosperity, shared by all. A smart plan to reduce future budget deficits can be part of such a policy, as a means to the end of shared prosperity. But an equally important part of such an economic policy plan is to provide the resources needed for cost-effective public investments that will increase the future productivity of the economy. Among the most rigorously proven of such public investments are investments in high-quality early childhood programs.

We should not allow fear of budget deficits to reduce needed investments in early childhood programs, which will reduce budget deficits in the long-run as well as promoting the true ultimate goal of economic policy, which is broad-based prosperity.  Both public and private investments are crucial to future American prosperity. As we try to reduce budget deficits, we should remember this saying: don’t throw the “babies” out with the bathwater!

Posted in Early childhood programs, Economic development, Timing of benefits | Comments Off on Budget deficits and early childhood programs

Trends in early childhood care and education, 1995 to 2005

Posted on April 13, 2011 by timbartik

Clive Belfield has a useful paper, recently posted at the National Institute for Early Education Research website, on trends in usage and spending for early childhood care and education. The paper combines data from three National Household Education surveys, from 1995, 2001, and 2005.

The entire paper is well-worth reading for a variety of revelations about these trends. In this brief blog post, I want to point to three findings from this report that seemed to me particularly noteworthy.

First, the data clearly show the effects of the expansion of state pre-k programs. From 1995 to 2005, the proportion of four-year olds in public early care and education programs, or in private programs with no fees, doubled from 9% of all four-year-olds to 18% of all four-year-olds (Table 2).

Second, despite this expansion of free or low-cost programs for four year olds, average family spending for four-year-old care and education still increased over this decade, by 13% in real terms (adjusted for inflation) averaged over all families, both those spending money and those not spending money on early childhood care and education (Table 4). But this increase in family spending on early childhood care and education for four-year-olds is less than the increase in family spending on early care and education for younger children. The percentage increase in real spending for early care and education was 16% for three-year-olds, 29% for two-year-olds, and 18% for children less than two years old.

Professor Belfield’s conclusion, with which I concur, is that an increase in families’ demands for early childhood care and education for four-year olds was only partially offset by the expansion of publicly subsidized programs for four-year olds.

Third, Professor Belfield’s analysis of early care and education usage for all families with children less than five shows a continued trend for usage to still be considerably higher for upper-income families. His analysis is based on income quintiles, in which all families are ranked by family income, and then we divide all families into fifths, or “income quintiles”, by this ranking on family income. Controlling for other family characteristics, families in the highest income quintile in 2005 use early care and education by about 5 hours more per week than is true for families in the lowest-income quintile (Table 3). Families in the second highest income quintile also use early care and education services significantly more than families in the lowest income quintile. The data suggest that the lowest usage of early care and education is among families in the middle-income quintile and second-lowest income quintile. However, usage among families in all three of the lowest income quintiles is quite similar and is not statistically significantly different.

These patterns suggest that given that high-quality early care and education can provide significant benefits, our task is to both expand access to high-quality early childhood care and education for the lowest-income families, while also expanding access for working-class and middle-income families. All three of these income groups, from the poor to the middle class, show a gap compared to upper-income families.

Posted in Distribution of benefits, Early childhood programs | Comments Off on Trends in early childhood care and education, 1995 to 2005

Financing early childhood programs

Posted on April 12, 2011 by timbartik

John Merrow, a veteran education reporter for PBS and NPR, has an interesting recent blog post on preschool education. In this blog post, he accurately observes that despite much rhetorical support for early childhood education, our society has not been willing to commit the needed financial support on a large-enough scale. He then discusses how to finance the needed support, and says the following:

“Me, I would get rid of senior year of high school and spend that money where it will do a heck of a lot more good, on early education. (Maybe cut subsidies for corn, et cetera, and use those dollars as well.)

What would you do?”

What I would first do is recognize that the costs of these programs are modest. As I estimated in chapter 4 of my book Investing in Kids, the cost of universal pre-k education for 4-year olds would be about $47 per capita. (That is, the cost in a particular state or local area, or in the U.S. as a whole, divided by the population of that area, would be about $47.). The cost of the Nurse Family Partnership program at full-scale, with services for all eligible disadvantaged first-time mothers, would be about $12 per capita. Even a full-time child-care and preschool program for the first five years, similar to the Abecedarian program or Educare, would at full-scale, with all disadvantaged families served, amount to only $131 per capita.

Total governmental revenue (federal, state and local revenue) is about $15,000 per capita. (This is calculated using Tax Policy Center figures from 2008.) Even if we thought that the federal government has too many issues with budget deficits and health care reform to take on early childhood programs, total state and local government revenue is about $6,700 per capita. The cost of early childhood programs is just a tiny fraction of these amounts. All three of the above programs put together amount to $190 per capita, which is only 1.3% of total government revenue, and 2.8% of total state and local government revenue.

The point is that relatively modest adjustments in tax rates or tax breaks, or modest reforms in existing government services, suffice to provide the initial financing for even full-scale implementation of several early childhood programs. Viewed in this light, it becomes somewhat arbitrary what tweak one chooses to make in existing government activities to free up revenue for large-scale early childhood programs. It is not clear to me that it is politically advantageous to identify some specific budget reform that is arbitrarily designated to help finance early childhood programs.

Posted in Early childhood programs | Comments Off on Financing early childhood programs

Limitations of special education cost savings as an argument for early childhood programs

Posted on April 11, 2011 by timbartik

A previous post argues that in some cases, some targeted preschool programs may yield large short-term and medium-term savings in special education costs. For example, these cost savings may start out at 11% after 1 year, and then increase by 11% per year for the next 13 years. The program would eventually cover more than 100% of its costs.

In theory, this finding gives some entity a strong incentive to pay for such a preschool program. Who that entity would be depends on who reaps the cost savings if special education costs are lowered. In many cases, this may be the local school district.

However, I have some serious doubts about pushing special education cost savings as a primary argument for early childhood programs. These doubts fall into three categories.

First, as mentioned in the previous post, there is the issue of whether these special education cost savings will actually be realized and can be demonstrated to be realized. For these special education cost savings to be realized, the criteria for designating students for special education must remain unchanged as the early childhood program expands and lowers its participants’ average needs for special education services.  It would be easy for designation criteria for special education services to change in subtle ways over time, and thus negate any cost savings.

Second, I am concerned that presumed special education cost savings will be used as an excuse for asking preschool services to be paid for by local school districts. If local school districts can over time fully cover their costs for preschool by lower special education costs, why shouldn’t the funds for preschool come out of the K-12 budget?

Third, and this is the most important point, there are many early childhood programs with large economic development benefits that may not have such large special education cost savings. Early childhood programs may in some cases help some children have better life courses and skills as adults without affecting their participation in special education.

If special education cost savings are a primary motivation for early childhood programs, then this distorts the design of early childhood programs towards programs that will reap such savings.  The design of early childhood programs will be distorted away from programs that may have larger effects on adult skills.

If we want short-term benefits from early childhood programs, effects on parental in-migration and property values may be a more reliable guide. (See my previous blog posts on such effects.) These effects reflect parental valuation of the long-term earnings benefits of early childhood programs for their child participants. These long-term earnings benefits are closer to an ultimate goal of early childhood programs. Special education cost savings are a narrower and more partial goal that can distort program design if over-emphasized.

Posted in Early childhood program design issues, Early childhood programs, Timing of benefits | Comments Off on Limitations of special education cost savings as an argument for early childhood programs

Special education cost savings from pre-k programs can be higher for targeted pre-k programs, or if special education costs are higher, or if special education effects of a program are higher

Posted on April 8, 2011 by timbartik

In a previous post, I provided estimates of the savings in special education costs from a high-quality universal pre-k program. I stated that these cost savings started out at about 4% of the pre-k program’s costs in kindergarten. That is, in the program’s second year, the cost savings from the first-year cohort would cover about 4% of the annual costs of serving the second-year cohort. These cost savings result from estimated cost savings due to reduced special education assignments of universal pre-k attendees in kindergarten.

These cost savings then grow over time. In the program’s 3rd year, there are savings from reduced special education assignments for both the first-year cohort, which will be in first grade, and the second-year cohort, which will be in kindergarten.  These cost savings in the 3rd year will cover 8% (=4% from first-year cohort in first grade, plus 4% from second-year cohort in kindergarten) of the pre-k program’s costs in the third year.

Cost savings will continue to grow until all grades from kindergarten through 12th grade have students who have participated in the universal pre-k program. The cost savings will then stabilize at 48% of the annual program costs of the universal pre-k program. The cost savings are a little less than 4% times 13 years because there is some out-migration out of state over this time period.

My estimates of special education cost savings are quite conservative estimates for a universal pre-k program.  Could the immediate special education cost savings be higher for some early childhood programs? Yes, they could be higher.  What could lead to higher special education cost savings?

(1)    Special education cost savings will be higher if the early childhood program’s percentage effects on special education usage are higher. For example, these special education percentage effects might be higher for targeted pre-k programs compared to universal pre-k programs.  The baseline level of special education assignments may be higher for the more disadvantaged children that would be in a targeted pre-k program. Furthermore, pre-k programs may have somewhat greater effects in general for disadvantaged students compared to more advantaged students.

(2)    Special education cost savings will be higher if special education costs per special education student are higher. Some states and school districts may have higher special education costs per student. Also, the trend in special education costs per student is upwards, so over time we would expect special education cost savings to become greater.

(3)    Special education cost savings will be higher if the baseline rate of special education assignment is higher. Some states and school districts may have higher rates of special education assignments. Furthermore, these special education assignment rates may be growing over time.

(4)    Special education cost savings will be higher if the early childhood program affects weekly hours per special education student as well as assignment rates. Most previous analyses of special education cost savings have only looked at how the early childhood program affects special education assignment rates. But early childhood programs may also affect the average number of hours that students are in special education, which will also affect costs.

(5)    Special education cost savings may be higher in present value terms and political significance if the cost savings are skewed towards the immediate years after participation in the early childhood program, for example if these cost savings are greater in kindergarten and first grade than in 11th and 12th grade. Many previous analyses of special education cost savings have assumed that the cost savings are uniform across all 13 grade levels from kindergarten to 12th grade.

For example, suppose I redo my special education cost savings analysis for a targeted program. Then I conclude that the next-year cost savings for kindergarten would be 11%. (Note on assumptions: I adjust my numbers by assuming only the most disadvantaged group participates, but I continue to assume that some participants in the targeted pre-k program are displaced from other pre-k programs.) Such a program would pay for itself by the time the first-year cohort is in 10th grade.

In addition, I assumed annual special education costs per special education student were around $10,000, with about 90% of these costs paid locally. A recent study in Montgomery County Maryland estimated special education costs in that school district per special education student, over and above general education costs, of a little over $16,000 per special education student.  Suppose we modify my simulation of special education costs to reflect an assumption of special education costs of this magnitude.  Then the special education cost savings in the year after the targeted program is started, when the first-year cohort is in kindergarten, would be 17% of the program’s annual costs. The program would pay for itself in special education cost savings by the time the first-year cohort is in 6th grade.

The Montgomery County report also estimates that some pre-k programs may not only reduce special education assignments, but also reduce hours in special education for those students in special education.  The report estimates, in its Table 12, that full-day Head Start reduces the percentage of students in special education in kindergarten from 24% to 11%. This is similar to the magnitude of reduction of special education assignments that I assume from a targeted program. But in addition, full-day Head Start reduces the weekly hours in special education of special education students from 9.8 hours to 3. 7 hours.

I can’t use these weekly hours reductions to generate cost savings, because I don’t know how the costs of special education vary with weekly hours. Presumably there are both fixed and variable costs of serving special education students, and I don’t know their relative magnitude. Also, these weekly hours reductions may be related to the types of special education assignments that students have, and I do not know how pre-k programs affect the types of special education assignments and what their relative costs are.

However, the bottom line is that these weekly hours reductions may yield even further cost savings, beyond what is estimated in most studies.

I should note that all these estimates of special education cost savings assume that as early childhood programs expand, the criteria used by the K-12 system to assign students to special education remain the same. If the K-12 system responds to the reduced “need” for special education services of entering kindergartners by expanding special education participation of less needy students, then these cost savings will not be realized.

What does this all mean for policymakers and researchers? I think this points to the need for much more current research on immediate cost savings from reduced special education usage.

This research could be done most rigorously by a regression discontinuity analysis. Such a regression discontinuity analysis would require looking at both entering pre-k students, and entering kindergartners who have participated in a year of pre-k.  Rather than a full-blown evaluation of special education eligibility for all these students, which might raise some ethical issues, I would suggest that the students all be subject to similar tests of literacy and math skills, and social and emotional behavior, along with any other short tests that might be thought to predict special education participation. These test scores would then be used to predict special education participation for the entering kindergartners. We could then predict what the special education participation would have been for the entering pre-k students if they had instead been entering kindergarten.  The analysis would control for student age, and would be expected to show a “discontinuous” jump down in predicted special education participation for students just old enough to have participated for a year in pre-k, versus similar students just below the age cutoff.

These analyses should be careful to estimate the true incremental costs of special education, and should be careful to include any variation in special education hours as well as special education participation. In addition, these analyses should be validated by data showing that as the pre-k program has expanded, that we observe trends in aggregate special education participation and usage in kindergarten that are at least roughly consistent with the estimated effects of the pre-k program expansion.

Posted in Early childhood programs, Local variation in benefits, Timing of benefits | 2 Comments

State economic development benefits from reducing ADHD

Posted on April 7, 2011 by timbartik

In chapter 12 of Investing in Kids, I also consider the state economic development benefits from reducing “attention deficit hyperactivity disorders”. We might imagine public health and education policies that might intervene to reduce such disorders.

I based my estimated economic development effects on research by Currie et al (2009). They estimate how occurrences of ADHD/conduct disorders at various ages affect test scores in secondary school.  I use these test score effects to estimate adult earnings effects. I also simulate how many of these youth are likely to remain in the state, thus affecting state labor force quality and the number and quality of jobs in the state.

I specifically examine policies that might reduce the incidence of multiple period ADHD disorders. The idea is that once an ADHD disorder had been diagnosed, appropriate intervention might reduce future recurrences.

I estimate that reducing one case of multiple-age-period ADHD had state economic development benefits of $31,000. This is the resulting increase in the present value of state residents’ earnings.  Such a benefit would justify considerable spending on public health or education interventions to reduce ADHD incidence.

Posted in Early childhood programs, Economic development | Comments Off on State economic development benefits from reducing ADHD

Governors’ budget proposals reveal debate over how state government can best respond to economic distress

Posted on April 6, 2011 by timbartik

The Center for Budget and Policy Priorities (CBPP) has a useful recent report that summarizes the budget proposals for fiscal year 2012 of 48 Governors. (Fiscal year 2012 runs from July 1 2011 to June 30 2012 in most states.)  The report is entitled “Governors Are Proposing Further Deep Cuts in Services, Likely Harming Their Economies”, which is an accurate summary of the report’s perspective. The report was written by Michael Leachman, Erica Williams, and Nicholas Johnson.  The report is up to date as of March 21, 2011.

I think this report is well worth reading by advocates for early childhood programs. It puts their state’s policy debates in a broader context. Even if you are primarily focused on programs in your own state, it is worth remembering that these same policy issues are being debated in most states.

Most states face fiscal problems due to the length and breadth of the Great Recession, rising costs for services such as Medicaid, and declining federal aid to states as most stimulus funds expire.  How are states responding to these fiscal problems? In most cases, by emphasizing public service cuts more than tax increases. According to CBPP, 39 states are proposing major public service cuts. Only 7 states are proposing significant revenue increases.

Even in the face of these fiscal problems, 7 states are proposing tax cuts. Significant corporate tax cuts are being proposed in 6 states. A primary purpose of such business tax cuts is to encourage state economic growth.

These service cuts include early childhood programs. According to the CBPP report, cuts in pre-k are being considered in 6 states, including Georgia, Iowa, North Carolina, Pennsylvania, Texas, and Washington.

Educational programs in general are also being cut. 19 states are proposing cuts in K-12. 20 states are proposing cuts in higher education.

What might be the possible impacts of these state proposals on state economies, both in the short-run, and in the long-run?

First, cutting state spending has more negative effects on a state’s economy in the short-run than the alternative of increasing taxes. This is because cuts in state spending tend to fall more heavily on goods and services produced in the state, by both the public and private sector. In contrast, a larger proportion of any tax increase would have instead been spent on goods and services produced out of state.

Closing state budget gaps through either spending cuts or tax increases damages a state’s economy in the short-run.  (That is one of the rationales for federal stimulus aid to states, which boosts the national economy by reducing the damaging actions that states are forced to take to close budget gaps.) But states right now appear to be considering budget closing options that will maximize the short-run economic pain.

In some simulations we did for the Michigan budget and economy back in 2003, my colleague George Erickcek and I examined the relative economic damages caused in the short-run by state tax increases versus state budget cuts.  On the various economic measures considered, such as jobs, personal income, and gross state product, state spending cuts were at least 40% more damaging than a similar magnitude of state tax increases.  Although obviously the details of such simulations would depend on the state, the time period, and the exact taxes and spending changes considered, I think the broad conclusion we reached would be robust in many states’ circumstances.

Second, across the board business tax cuts are likely to have disappointing economic payoffs, especially in the short-run, but likely also in the medium run and long-run. Holding other factors equal, such as the quality of public services, state business tax cuts will boost long-run economic growth. But the amount boosted is modest compared to the size of the business tax cuts. As I discussed in a previous blog post, per dollar invested in across the board business tax cuts, we would expect the present value of state residents’ earnings (my definition of “economic development benefits”) to increase by $0.51. In other words, the earnings benefits are less than the costs.

In contrast, as this previous blog post also discussed, business tax incentives are much more efficient than across the board business tax cuts. They are more efficient because they are more targeted at new investments of export-base businesses. Targeting new investments that really boost the state economy is more efficient than less-targeted business tax breaks.   Furthermore, customized services to business can be even more cost-effective than even the best-designed business tax incentives.

Third, these large cuts to pre-k, K-12, and higher education may cause serious issues for some states’ long-run and short-run economic development. In the long-run, these cuts may reduce some states’ labor force quality, making it more difficult for these states to develop new and better jobs. In the short-run, these cuts may make some states less attractive to parents looking out for their children’s future. (Most of the blog posts at this blog have focused on these issues, so I’m not going to provide specific links.)

Of course, it could be claimed that some of these spending cuts may lead to reforms that may significantly reduce spending without decreasing the quality of educational services. This is a more convincing argument to the extent that the cuts are actually accompanied by well-structured reform measures that increase the efficiency of educational services.  My sense is that in many states, the state government is not directly addressing reforms; rather,  the state government is putting pressure on school districts or universities to make reforms in the course of dealing with major spending cuts.

Cutting pre-k does not suggest that there will an increase in the efficiency of educational services.  Because pre-k has a higher bang for the buck than other educational spending, pre-k spending should be increased as part of a policy package to make educational spending more productive.

How do we boost state economies when states are in economic distress? Current state policies assume an answer to that question that cuts educational spending and avoids increasing taxes or even reduces taxes. Alternative policies might include tax increases, more efficient business incentives, and reforms to increase the productivity of educational spending from early childhood on up.

Posted in Business incentives, Early childhood programs, Economic development, Incentive design issues | Comments Off on Governors’ budget proposals reveal debate over how state government can best respond to economic distress

The economic development benefits of converting low-weight births to normal-weight births

Posted on April 5, 2011 by timbartik

In chapter 12 of Investing in Kids, I extend my estimates of economic development benefits beyond early childhood programs, to other changes that would increase human capital. Unlike the case of early childhood programs, I don’t analyze the costs of achieving these changes. Rather, I simply estimate the benefits if certain changes can be induced to occur.

These estimates can play a role in benefit-cost analyses. If researchers or policy advocates can identify a program that will achieve a specified human capital result at a known cost, these cost estimates can be combined with my benefit estimates.

One human capital change I consider is intervening to convert a low-weight birth into a normal weight birth. Such a change might be brought about by better pre-natal care.

Lower birth weight lowers skills and hence adult earnings in two ways. First, low birth weight lowers educational attainment. Second, low birth weight has direct effects on cognitive ability beyond its effects on educational attainment.

I use the estimated earnings effects of low-birth-weight from research by Rucker Johnson and Robert Schoeni (2007). Johnson and Schoeni compare the earnings of brothers in families where one or more brothers fall into both the low-birth-weight and normal-birth-weight groups. These estimates from Johnson and Schoeni are combined with my estimates of how many of these children will remain in the same state for their working career, and estimates of how state labor force quality affects jobs and wages.

Based on this analysis, the state economic development benefits from switching one low-weight birth to a normal –weight birth are $136,000. These benefits are the increase in present value of state residents’ per capita earnings.

These benefits would justify considerable costs for programs that can be shown to reduce the incidence of low-birth-weight.  For example, a program that would only have a probability of 10% in converting a low-weight birth to a normal-weight birth would have benefits exceeding costs even if its costs were $13,000 per birth.

These large economic development benefits from reducing low-birth-weight indicates again that early intervention can have high economic benefits. This principle applies to programs beyond early childhood education.

Posted in Economic development | Comments Off on The economic development benefits of converting low-weight births to normal-weight births