The national perspective: are business incentives a zero-sum game?

Posted on February 14, 2011 by timbartik

Most of this blog’s posts on business incentives and early childhood programs have taken a state and local perspective. I have focused on whether these policies produce “local economic development benefits”, which are defined as higher per capita earnings for residents of that state or local area. This focus ignores effects on per capita earnings of U.S. residents outside that state or local area.

This post and several future blog posts will consider business incentives and early childhood programs from a national perspective.  The national perspective is discussed in chapter 10 of Investing in Kids.

This post focuses on business incentives. It is often asserted that business incentives are a “zero-sum game”. The argument for business incentives being a zero-sum game is that any increase in state or local business activity due to a state or local area’s business incentives will lead to a corresponding reduction of business activity in other state or local areas.

The obvious case in which this argument makes sense is a company choosing a location for a new branch plant.  A state or local area offering a business incentive to that company may succeed in tipping the location decision towards choosing that state or local area. However, if the branch plant had not chosen the state or local area offering that incentive, it would have chosen some other area.  The net national increase in economic activity would seem to be zero.

However, the zero-sum argument applies more broadly than just the case of business incentives for new branch plants. This argument can also be applied to business incentives offered to new small businesses, or to encourage business expansion. Any additional business activity competes with other businesses for sales. If a business incentive induces some new business activity or business expansion to increase its output and market share, this may reduce the market share of other businesses.

For example, suppose a state or local area adopts a business incentive package that is successful in encouraging the creation and expansion of new local high-tech businesses that sell to a national market. That success may reduce the market share of high-tech businesses in other state or local areas.

In chapter 10 of Investing in Kids, I show that this zero-sum game is “mostly true”, but not entirely so. Specifically, I estimate that it is 79% true.

Business incentives lower business costs. This reduction in business costs should induce some overall increase in national business activity.

However, this increase in national business activity due to business incentives is less than the increase in state and local business activity due to business incentives.  At the state and local level, business incentives can have larger effects because the incentives can affect business activity not only by inducing new national activity, but also by changing the location of business activity. Also, it turns out that it is easier to change the location of business activity than to induce new business activity.

As reviewed in chapter 10 of Investing in Kids, the effects on national business activity of business incentives are about one-fifth of the effects of business incentives at the state or local level. In other words, although state and local business incentives are mostly stealing jobs from other states, they also do induce some new national business activity.

The implication is that typical high-quality business tax incentives in the average state do not make economic sense from a national perspective. Recall that I estimated that for each dollar a typical state invests in a high-quality business tax incentive, the resulting increase in the present value of state residents’ per capita earnings is $3.14. In other words, the ratio of state economic development benefits to costs is 3.14.

But at the national level, the increase in business activity from business tax incentives, and hence the increase in per capita national earnings, is less than one-fifth as great. At the national level, for each dollar invested in business tax incentives, I calculate that per capita national earnings increase by 65 cents.

This implies that investing in business tax incentives does not make sense from the perspective of the average American household. The average American household would pay more for such business tax incentives than the return in the form of increased future earnings.

This raises the question of what, if anything, federal policy can and should do about business incentives.  This will be considered in a future blog post. But before getting to that issue, a prior issue is whether this argument applies equally well to all types of incentives in all types of local areas. This will also be the subject of future blog posts.

Also, what about early childhood programs? Are their benefits also different from a national perspective than from a state or local perspective? And what do any such differences imply for federal policy towards early childhood programs?

To preview some of the conclusions, I conclude that early childhood programs’ benefits increase when viewed from a national perspective, compared to a state or local perspective. This contrasts sharply with business incentives. While federal policy should explore restraining some business incentives, early childhood programs should be encouraged by federal policy to expand and improve.

Posted in Business incentives, National vs. state vs. local | 2 Comments

Interview on public radio

Posted on February 14, 2011 by timbartik

An interview with me (Tim Bartik) about my book Investing in Kids aired this morning (February 14) on Kalamazoo’s public radio station, WMUK.

A 5 minute and a 25 minute version of this interview can be found at the news portion of WMUK’s website.

I appreciate the efforts of WMUK news reporter Gordon Evans. He’s a talented interviewer who does his homework.

Posted in Early childhood programs | Comments Off on Interview on public radio

A response to commonly-expressed concerns about preschool

Posted on February 11, 2011 by timbartik

I recently received a request for some information from some early childhood advocates. They were talking to a state legislator in their state. (I leave the state unnamed because I think it doesn’t matter – there are similar debates going on in many states.) This legislator believes that the Nurse Family Partnership program is an effective program. (NFP provides first-time, disadvantaged mothers and their child with nurse home visitation services from the pre-natal period to age 2.)

However, the legislator did not believe that preschool programs were sufficiently proven. One concern was that the effects of state-funded pre-k programs on test scores would fade by 3rd grade. The legislator in particular was concerned that state-funded pre-k, by itself, would not affect high school graduation rates.

Another concern was that the Perry Preschool program, for which the legislator thought there was evidence of long-term success, was too expensive. (The Perry Preschool program, an experimental program begun in the early 1960s, provided half-day school-year preschool at ages 3 and 4 to children from low-income families in Ypsilanti Michigan. Participants have been followed through age 40. There is indeed strong evidence of large effects of Perry Preschool in increasing educational attainment, increasing earnings, and reducing crime. But the program was expensive, at an estimated cost in 2006 dollars of $17,759 per child.)

In sum, the legislator believes that preschool is either: (1) ineffective in the long-run, or (2) too expensive to be politically feasible. (Even if preschool modeled after Perry is expensive, it is still clearly economically feasible and sensible if the benefits exceed the costs. But it might not be politically feasible.)

I think it is interesting that the legislator is concerned about the research underlying the case for preschool, but is not concerned about the research underlying the case for the Nurse Family Partnership. I think the research on both is equally strong.

I wonder if part of the issue is that the NFP is much cheaper than universal pre-k. For example, in chapter 4 of my book, Investing in Kids, I estimate that at full-scale, universal pre-k would cost $14.3 billion, versus $3.7 billion for the NFP. Or, to focus on current spending, the National Institute for Early Education Research estimates state funding for pre-k at slightly over $5 billion. As for NFP, with an estimated 21,494 families in the program, and an annual cost of $4500 per family, total current spending on the program is a little less than $100 million.

In other words, it is much cheaper to make major expansions in NFP than to expand state pre-k by the same percentage. A legislator who wants to prove his or her commitment to children by increasing the funding for some early childhood program by 50%, or by saving funding for some program, would find it easier to meet that commitment with NFP than with preschool.

The early childhood advocates asked me what response might be made to the legislator’s concerns. Here is my response, lightly edited to preserve anonymity.

There is very good research on the Chicago Child-Parent Center Program’s long-term effectiveness. This program is run by Chicago Public Schools.  It has a price tag of about $5500 per school year. Some of the kids participated for 2 years and some for one year. As my book reviews (p. 146), the evidence suggests that both groups benefitted, but that there were “diminishing returns”: the benefits of 2 years are not twice the benefits of one year, although they are somewhat greater.

The latest results for CPC were published in early 2011. (Arthur Reynolds, Judy Temple, Barry White, Suh-Ruu Ou, and Dylan Robertson, “Age 26 Cost–Benefit Analysis of the Child-Parent Center Early Education Program”, Child Development, Jan/Feb 2011, pp. 379-404.)  This latest research follows CPC participants through age 26 . The program reduced the drop-out rate from 27% in the comparison group to 20% in the treatment group, which is a large effect given that we’re talking about effects 14 years later. The program reduced special education assignments from 25% in the comparison group to 14% in the treatment group. It reduced grade retention from 38% in the comparison group to 23% in the treatment group. Juvenile crime was reduced from 25% of the comparison group to 17% of the treatment group, and adult felony crime from 18% of the comparison group to 13% of the treatment group.  You can find all these stats in the paper’s Table 3.

Reynolds and his co-authors used these results to calculate benefits and costs (Table 4). The preschool program has overall benefits of about 11 times its costs. The program’s ratio of benefits and costs from the viewpoint of taxpayers, ignoring effects on participants, is about 7 to 1.

This report release in February 2011 generated a lot of PR. Here’s the NIH press release:  http://www.nih.gov/news/health/feb2011/nichd-04.htm

CPC is quite similar to many state-funded pre-k programs.  The only real difference is that most state-funded pre-k programs only provide services at age 4, whereas in Chicago, half the kids went for one year to the program, and half the kids went for 2 years.  However, as mentioned above, the evidence suggests that the benefit to cost ratio for a one year program probably exceeds the benefit to cost ratio for a two year program.

I modeled most of the simulations in my book after the effects estimated for CPC.  I was doing projections based on the Age 21 results, and the Age 26 results are generally consistent with the Age 21 results.

What about the reported fade-out for long-term effects on test scores of some state pre-k programs? With respect to this fade-out, there are two issues: (1) does this study showing fade-out have a good comparison group?; (2) do effects fade only for “hard skills” or also for “soft skills”? (By hard skills I mean the academic skills that might be measured by reading and math test skills. By soft skills I mean various social and personality skills such as the ability to deal with peers and authority figures, and self-confidence and the ability to plan and defer gratification.)

On the first issue, there is very rigorous evidence with excellent comparison groups of short-term effectiveness of many state pre-k programs in affecting kindergarten readiness. These studies use an evaluation technique called “regression discontinuity”, which is generally regarded as being as unbiased as random assignment experimentation, although with a bit more statistical noise in it. The intuitive idea here is that we give the same test to entering preschoolers and entering kindergartners, and then compare two kids who are similar age, but one is just old enough to have participated in the preschool program last year, that is they just “made the age cut-off”, whereas the other kid is starting preschool this year because they “just missed” the age cutoff last year. These studies show large effects of some state pre-k programs on kindergarten readiness in terms of test scores, in many cases much larger effects than are found on average for Head Start.

Longer-term studies of most state pre-k programs are more difficult. Many state pre-k programs use some criteria where they target students at risk.  Because of this selection, it is difficult to find a good comparison group. We would expect children selected because they have risk factors to do worse over time.  Therefore, it is difficult to determine whether any observed “fade-out” of effects on test scores is due to actual decline in preschool effects, or is due to other risk factors that have a cumulative effect over time.

On the second point, there are many studies showing that some early educational investments have fading hard skill effects over time, but their soft skill effects go up over time or at least are reflected in much better adult outcomes, for example much higher earnings. Soft skills are at least as important as hard skills for success in life.

For example, take the recent study by Harvard Professor Raj Chetty and his colleagues on kindergarten and life success. (Raj Chetty, Nathaniel Hilger, Emmanuel Saez, Diane Whitmore Schanzenbach, and Danny Yagan, “How Does Your Kindergarten Classroom Affect Your Earnings? Evidence from Project Star”) This is the study that was widely publicized as “showing” that a good kindergarten teacher was worth $320,000.

One of the interesting findings of this study is that the effects of ”kindergarten class quality” on test scores dramatically fade over time. Yet kindergarten still has effects on adult earnings later on (mid to late 20s) that are large. This is clearly shown in Figure 6 in the paper. The upper panel shows that the effects of kindergarten class quality on test scores fades almost to zero by grade 4. But the lower panel shows large effects on adult earnings. For comparison, the bottom panel shows the effects of kindergarten class quality on earnings that would be predicted based on its test score effects in each grade. What this shows is that if you just looked at test score effects in grade 4 of kindergarten quality, you would predict almost no effects of kindergarten quality on adult earnings. Yet when we look at actual adult earnings, the effects are quite large.

As another example, there’s a well-done paper by Professor David Deming at Carnegie Mellon who looks at Head Start. (“Early Childhood Intervention and Life-Cycle Skill Development:  Evidence from Head Start”). His comparison group is good: he compares siblings in the same family, with some kids in the same family who attend Head Start and some who don’t.  This comparison group is good because it controls for many family risk factors that would influence long-run outcomes for children.

Deming shows that test score effects of Head Start drop by more than half by ages 11-14. Despite this, Head Start has large effects on a variety of outcomes by early adulthood. For example, Head Start increases high school graduation rates by a little over 8 percentage points.

This fade out and re-emergence of the effects of early interventions may be because some of the aspects of “soft skills” such as self-confidence, ability to deal with peers and authority figures, and ability to plan, are not well measured by cognitive test scores. However, such “soft skills” heavily affect how productive a worker is in the labor market.

This is the argument pushed by Nobel prize-winning economist James Heckman.  His views can be found in his slides from a recent December 10 lecture, and in a New York Times article by James Warren based on that lecture.

In sum, here is how I would respond to a legislator with the stated concerns:

(1)   A high-quality preschool intervention can be achieved at a cost of around $5,000 per child, less than one-third the cost of the Perry program;

(2)    There is considerable evidence of the effectiveness of many state funded pre-k programs;

(3)    Long-term effectiveness of preschool is consistent with some fading of effects on school test scores, as success in life depends at least as much on soft skills.

I should mention that I would be interested in hearing other “frequently asked questions” about the effectiveness of early childhood programs. Maybe I can address some of these in future posts at this blog. Please post any such questions in comments on this blog post. Or email me at bartik@upjohn.org .

Posted in Early childhood programs | 3 Comments

Metro area growth and business incentives

Posted on February 10, 2011 by timbartik

How might metro area growth affect the economic development benefits of business incentives? This topic is considered in chapter 9 of Investing in Kids.

We might expect fast-growing metro areas to be less in need of new jobs.  If an area is fast-growing, most of the available local resident labor pool will already be tapped. New jobs, whether created by business incentives or otherwise, would be more likely to go to in-migrants. As a result, the local economic development benefits from creating new jobs by business incentives would be smaller.  Local residents would receive fewer benefits.

This is precisely what my empirical work finds for metro areas whose growth rates are in the highest 40% of all metro areas. These are metro areas whose annual employment growth rates exceed 1.9%.

In my empirical work, metro area growth matters a great deal to the benefits of new job creation. For these fastest-growing metro areas, the effects of additional job growth on metro area earnings per capita are only one-seventh of effects in slower-growing metro areas.

As a result, in these fastest-growing metro areas, business incentives do not pay off for local residents. For these fastest-growing metro areas, for each dollar invested in business incentives, the increase in local per capita earnings is only 42 cents.

In contrast, as discussed in a previous post, in fast-growing areas, there will be considerable economic development benefits of early childhood programs.  This pattern makes sense. If a metro area already has plenty of jobs, creating more jobs through business incentives does not help local residents much, because jobs are already available. But helping local residents get better skills, through early childhood programs, still does pay off, because it enables local residents to move up to higher wage jobs.

Faster-growing local areas should therefore reassess their local economic development strategies. Expanding investments in business incentives does not make as much sense for these areas. Instead, these areas need to consider how to better prepare their local residents for jobs.  This includes investments in high-quality early childhood programs.

Obviously this advice is less relevant in today’s economy. Relatively few local areas already have plenty of jobs. However, as the economy recovers, some local areas will create plenty of jobs and have low unemployment. When this occurs, such local areas might be well-advised to reallocate their economic development budgets from business incentives to early childhood programs.

Posted in Business incentives, Local variation in benefits | 1 Comment

Prevailing metro area growth trends: effects on economic development benefits of early childhood programs

Posted on February 9, 2011 by timbartik

I am exploring in a series of posts how a metro area’s characteristics might alter the economic development benefits of the area’s investments in early childhood programs or business incentives. This is important because we want to see whether these programs have economic development payoffs in all types of local areas, or only in certain types of local areas. These issues are explored in detail in chapter 9 of Investing in Kids.

Today’s post considers how prevailing metro growth trends might alter economic development benefits of early childhood programs. A later post will consider implications of metro area growth for business incentives.

What I mean by the prevailing metro area growth trend is what the area’s growth would have been without the proposed investment in early childhood programs. Do the economic development benefits of an area’s investment in early childhood programs vary with whether the area would otherwise be slow growth or fast growth?

We might expect an area’s investment in early childhood programs to be lower for slow-growth metro areas.  We would expect slow-growth areas to lose more of their children to out-migration. This would lower the economic development returns to investing in those children, from the perspective of the local area.

However, my empirical estimates suggest that the effects of metro area growth are slight. The percentage of children who stay in a metro area as adults is only significantly lower for the metro areas who are in the slowest growing fifth of all metro areas. In the metro area data I am using, these are metro areas whose annual population growth averages less than 0.2%.

For these slowest growing metro areas, the economic development benefits of early childhood programs will be about one-tenth lower. With this modest difference, I find local economic development benefits still considerably exceed local costs for all three types of early childhood programs I analyze. (These three types are universal pre-k, high-quality full-time child care and preschool from birth to age 5, and the Nurse Family Partnership.)

What is going on here? Apparently, even if a metro area’s growth is slow, many children brought up there will still stick around as adults. The slower growth probably has larger effects on whether outsiders migrate in. Even if the area’s growth is slow, with reduced in-migration, residents who stick around still can have a reasonable chance of getting jobs as adults.  As a result, early childhood programs can still pay off as economic development investments in slow-growth local areas.

This argument goes against some people’s intuition. You hear people make the argument that there’s no point in investing in higher education or preschool because the newly educated will just leave the state or local area if there are no jobs.

This argument ignores two empirical realities. First, it turns out that even if an area’s growth is slow, many people stay, and the proportion leaving only goes up slightly.

Second, more and higher quality labor supply attracts labor demand. The number and quality of local jobs is not fixed by some mysterious “business climate”. Rather, the number and quality of jobs responds to local labor supply. To put it another way: one of the most important components of an area’s “business climate” is the quality of its labor supply. Increased quality of local labor supply can be achieved by many policies. Among such policies, high-quality early childhood programs have the distinction of causing large effects on local labor quality per dollar invested.

Posted in Early childhood programs, Local variation in benefits | Comments Off on Prevailing metro area growth trends: effects on economic development benefits of early childhood programs

Political perceptions of pre-k

Posted on February 8, 2011 by timbartik

Sara Mead of Bellwether Education Partners has an interesting blog post at Education Week that focuses on her views on how to overcome the political challenges facing the pre-k movement.  She is reacting to a quote from Joe Klein of Time magazine about President Obama’s State of the Union speech:

“When [President Obama] dealt with education, he eschewed the standard Democratic talking points about early-childhood programs like Head Start, which have become code words for spending more money on poor kids. Instead, he talked about accountability, which is code for breaking the stranglehold of teachers’-union work rules.”

Sara Mead argues that this means that to be more politically successful, the pre-k movement must embrace educational reform. This means talking about shutting down lousy early childhood programs, identifying measurable short-term results for early childhood programs, and holding programs accountable for achieving those results.

I agree with Sara Mead that pre-k programs should be held accountable for achieving results. Better measurement of results and greater accountability are together likely to considerably improve pre-k quality over time.  A better accountability system will also develop more knowledge about what works in pre-k. For example, we certainly need to know quite a bit more about what pre-k curricula are most effective. As I have outlined in a previous post, it is quite possible to do large-scale, ongoing, and rigorous monitoring of the results of pre-k programs.

Politically, I suspect that Sara Mead is right that pre-k proposals that have stronger accountability provisions will fare better in the current U.S. political environment.  (Such accountability provisions may not be necessary in other political environments, for example in other countries, as I discussed in a previous post.) In a political environment that is doubtful about any government intervention, any new proposed intervention must constantly strive to prove itself to skeptics.

However, this overlooks a very straightforward reaction to Joe Klein’s quote. If early childhood programs have become “code words for spending more money on poor kids”, there is an obvious response: design these programs so that they don’t just serve poor kids.  This is precisely the appeal of pre-k programs that are universal, or at least are broadly enough targeted that they serve middle-class families, not just low-income families.

Furthermore, as I have outlined in a series of posts, there is considerable evidence that the benefits of pre-k are significant for children from middle-class families. Therefore, there are both substantive and political reasons for supporting pre-k programs that are “spending more money on poor kids and middle- class kids.”

In addition, advocates of accountability, a category in which I include myself as well as Sara Mead, must face the difficult issue of how to evaluate pre-k’s effects on “soft skills”.  As outlined in a previous post, the long-term effects of pre-k are probably due more to pre-k’s effects on “soft skills” than “hard skills”. Hard skills are cognitive skills that might be measured by reading and math tests. We know a great deal about how to measure such skills. Soft skills include social skills, such as getting along with peers and teachers, as well as self-confidence and the ability to plan for the future. Such soft skills are harder to measure, and we know less about how to measure these skills.

In sum, for both political and substantive reasons, pre-k programs must demonstrate to skeptics that they are quality programs that provide benefits to a broad group of households. As my book Investing in Kids argues, it is also helpful politically to point out that such programs can increase the overall economic development of a state or local area. The broad benefits of a proposed pre-k program are at least as important as its commitment to strong accountability mechanisms. Finally, we need to be honest about the limits of current accountability measures, even as we strive to improve such measures.

Posted in Distribution of benefits, Early childhood program design issues, Early childhood programs | Comments Off on Political perceptions of pre-k

Metro area size and business incentives

Posted on February 8, 2011 by timbartik

In a previous post, I explored how the economic development benefits of a local area’s investment in early childhood programs might vary with the local area’s population size. In today’s post, I explore how metro area size might affect the economic development benefits of business incentives.  This issue is also considered in chapter 9 of Investing in Kids.

By “business incentives”, I mean assistance to individual businesses that is more or less customized to that individual business. In the U.S., most such state and local business incentives are tax incentives. For example, at the local level, one of the most common business incentives is a property tax abatement. Under property tax abatement, a new branch plant or a plant expansion might pay below-normal property tax rates for some period of time.

The economic development benefits of business incentives depend on who gets any new jobs created. Ultimately, any new jobs created by business incentives (or by anything else) must be reflected either in increased employment rates for local residents, or increased population, for example through in-migration. Obviously some of the new jobs created by a business incentive can directly go to local residents who already were employed. But this creates job vacancies that must be somehow filled. The chain of job vacancies will continue until a job is filled either by a local resident who would have otherwise not been employed, or by a person who otherwise would have lived elsewhere.

The more jobs go to local residents who would otherwise be nonemployed, the greater the local benefits of any new job creation, whether brought about by business incentives or otherwise.

My empirical research for Investing in Kids suggest that who fills newly created jobs only differs significantly for metro areas below about 800,000 in population. For these metro areas, newly created jobs are more likely to be filled by increasing local employment rates, and less likely to be filled by increased in-migration.

However, these differences are modest. I estimate that for metro areas with less than 800,000 in population, the economic development benefits of business incentives are about one-sixth greater than for larger metro areas.

What is going on here? One can speculate that smaller metro areas may be less likely to attract in-migration due to job growth. Therefore, a higher percentage of any newly created jobs will go to current residents who would otherwise not be employed.

Combining these results for business incentives with previous results for early childhood programs, we find that in smaller metro areas, the balance of economic development benefits is tipped slightly towards business incentives and away from early childhood programs. However, these differences are modest. Regardless of metro area size, both business incentives and early childhood programs can pay off for a local area’s economic development.

Posted in Business incentives, Local variation in benefits | 1 Comment

Proposed pre-k budget cuts in New Jersey

Posted on February 7, 2011 by timbartik

Steve Barnett of the National Institute for Early Education Research (NIEER) has a blog post on recent proposals to cut back New Jersey’s Abbott preschool program from a full-day to a half-day program. This Abbott program, which was prompted by a New Jersey Supreme Court decision, includes preschool services at ages 3 and 4 to all children in certain urban school districts.

According to Professor Barnett, the proposal to reduce the Abbott program from full-day to half-day is intended to save somewhere between $150 million (Barnett’s figure) and $300 million (the figure of those advocating for this change).  These budget savings would be used to provide extra K-12 funding to districts with higher percentages of senior citizens or higher transportation costs, or that have demonstrated budget efficiencies.

I suspect that proposals to trim early childhood budgets in one way or another will become increasingly common in the next few years. Numerous states face significant fiscal challenges. The length and severity of the “Great Recession” is one reason for these fiscal challenges. Another reason for these fiscal challenges is that federal stimulus funds to help state and local governments have mostly run out. Current political realities make it unlikely that there will be large amounts of additional federal budget aid to state and local governments.

I hope in a future budget post to suggest some principles to guide how advocates for early childhood programs should react to these budget cutback proposals. In this post, I want to simply consider this specific proposed cutback in New Jersey.

As I have discussed in a previous post, expanding pre-k from a half day to a full-day probably has a lower ratio of benefits to costs than for a half-day program. However, it is clear that there are benefits to children in moving from a half-day to a full-day. The measured benefits for economic development are somewhat less than costs, but it is likely that if we include unmeasured benefits for economic development, then benefits do exceed costs.

Whether a cutback from a full-day to a half-day makes sense depends in part on what alternative use is made from these funds. For example, if the proposal was to use these additional funds to expand preschool access for disadvantaged children in other New Jersey school districts, this proposal is more likely to have merit. If the proposal was to expand specific K-12 programs with demonstrated high effectiveness, the proposal might have merit.

However, the benefits are lower and more uncertain if the proposal is to use the cost savings to provide more general assistance to K-12 districts with certain characteristics. My calculations in chapter 5 of Investing in Kids suggest that as a general rule, investing extra dollars in preschool education is likely to have a higher payoff than investing extra dollars in general support for K-12 education. This is not meant to imply that investing in K-12 education is a bad idea. However, the payoff to early investment per dollar invested is higher.

Therefore, the specific proposal being considered in New Jersey does not seem to be the most efficient use of scarce funds for investment in education. More information on New Jersey’s budget situation would be needed to examine alternative budget proposals that might make sense.

One alternative  that should be considered is to use increased state and local taxes to fund any needed additional K-12 funding that might be required, rather than financing this K-12 funding through reduced preschool funding.  In the short-run, solving state budget problems through tax increases rather than spending cuts will help better preserve demand for goods and services produced in the state. (This is not necessarily true in the long-run, but depends on the particulars of a tax and spending package. Early childhood spending, as argued in the book Investing in Kids and this blog, does have large economic effects in the long-run, so tax increases would be better than cutting back on high-quality early childhood programs in the long-run.)

Why is demand for goods and services less adversely affected through tax increases than through spending cuts? The reason is that only a portion of tax increases would have been spent by private households on goods and services produced in the state, whereas spending cuts directly reduce demand for goods and services produced in the state.

I will elaborate on this analysis in a future blog post on state budget problems and early childhood programs.

Posted in Early childhood program design issues, Early childhood programs | Comments Off on Proposed pre-k budget cuts in New Jersey

Metro area size: effects on the economic development benefits of early childhood programs

Posted on February 4, 2011 by timbartik

My book, Investing in Kids, provides evidence that a state or local government’s investment in high-quality early childhood programs will have a payoff for that state or local area. That payoff is what I call “economic development benefits”: higher per capita earnings for state or local area residents. The book compares the economic development benefits for early childhood programs with the economic development benefits of business incentives, for example business tax incentives such as property tax abatements.

A natural question is whether these local economic development benefits vary with local area characteristics. Do early childhood programs pay off in economic development benefits for all types of local areas? Or do significant benefits only occur for certain types of local areas?  These questions are explored in chapter 9 of Investing in Kids.

In today’s post, I consider how the local economic development benefits of early childhood programs vary with a local area’s population size. A later post will consider how business incentive benefits vary with a local area’s population size.   Further posts will consider how local economic development benefits vary with a local area’s growth.

We might expect early childhood programs to have smaller economic development effects in smaller metro areas because of out-migration.  We might expect that fewer participants in early childhood programs will remain in that same metro area during their working careers.

However, when we look at the data, we do not find large differences in “staying” except in the smallest metro areas. In the empirical work done for the book, these are metro areas with populations of less than 330,000.

Furthermore, these differences in “staying” are not large. I estimate that the local economic development benefits of early childhood programs are about 20% smaller for the smallest metro areas, compared to other metro areas.

As a result, I estimate that regardless of metro area size, an area’s investment in early childhood programs will still have local economic development benefits exceeding costs.

What is going on here? One interpretation is that smaller metro areas may foster stronger local ties. Therefore, more people end up sticking around as adults than one might expect. Only for the smallest metro areas do we find significant reductions in “staying”, and even for these smaller metro areas, the differences are not great.  Therefore, metro area size does not have large effects on the attractiveness of early childhood programs as economic development investments.

Posted in Early childhood programs, Local variation in benefits | 1 Comment

Does “universal pre-k” need to be a full-day, two-year program?

Posted on February 3, 2011 by timbartik

A commenter on this blog argues that “universal pre-k” is too costly because of the large estimated costs of providing full-day preschool for all 3 year olds and 4 year olds. She argues that “According to UPK advocates, “Universal pre-k” means full day UPK for all 3 and 4 year old children in the nation…”

I can’t speak for all UPK advocates, but by “universal pre-k”, I do not necessarily mean a full-day program for all 3- and 4-year-olds. The program may be half-day or full-day, or may be for both 3- and 4- year olds, or only for 4-year-olds. In Investing in Kids, the specific preschool program whose effects I estimate is a half-day program for four-year-olds only.

I should also note that in general, state pre-k programs, including “universal” programs, are mostly for 4-year-olds. For example, in the 2009 State of Preschool Yearbook by NIEER, 25% of the nation’s 4-year-olds are in state-funded pre-k, versus 4% of all 3-year-olds. Furthermore, of the state programs (with some states having more than one program), 10 state programs are half-day programs, 10 state programs are full-day programs, and 31 state programs leave this to local option. But total reported spending per child on pre-k averages $4711.  This suggests that the majority of students in state-funded pre-k are in half-day programs for 4-year-olds only. So, in practice, state-funded pre-k seems to usually mean a half-day program for 4-year-olds.

Some of the best long-term evidence for pre-k is on half-day programs. Both Perry Preschool and the Chicago Child-Parent Center program are half-day programs. For Perry Preschool, about 80% of the children participated for both ages 3 and 4, whereas 20% participated only for age 4. The experiment did not find significant differences in effects between two-year and one-year participants, but the sample size for one-year participants is tiny. For the CPC program, about half participated for both ages 3 and 4, and half participated only for age 4.  The differences in estimated effects between one-year and two-year participants were in favor of two-year participants, but two-year participation did not come close to “doubling” the effects of preschool.

In chapter 5 of Investing in Kids, I consider the benefits and costs of expanding from my baseline preschool program, a half-day program for 4-year-olds only, to either a full-day program or a program that also served 3-year-olds.  For going from a half-day program to a full-day program, the only rigorous study is by Robin, Frede, and Barnett (2006). I used their results for test score effects to calculate the benefits for state economic development of an expansion to full-day preschool, versus the costs.  I calculate that the measured benefits for state economic development are less than costs.

However,  the economic development benefits of going from half-day to full-day preschool may exceed costs if full-day preschool has effects on adult earnings that go beyond what one would expect based on test score effects. Such effects are plausible, as much of preschool’s benefits are due to effects on “soft skills”.  In addition, full-day preschool is likely to have other benefits that are not “economic development benefits”, such as reduced crime. Full-day preschool may also improve access to preschool over half-day preschool.

Therefore, benefits may exceed costs in going from a half-day to a full-day preschool program. But it seems unlikely that benefits go up in percentage terms as much as costs when expanding from a half-day preschool to a full-day preschool.

I also consider the benefits and costs of expanding from a program for 4-year-olds only, to a program that includes both 3-year-olds and 4-year-olds. I base these estimates on a study by Arthur Reynolds of the Chicago Child-Parent Center program.  Using these estimates of test score effects of one year of preschool, versus two years of preschool, I estimate the economic development benefits to a state economy of expanding services to 3-year-olds, versus the added costs. I calculate that the estimated benefits exceed the costs.

However, although benefits exceed costs, the percentage increase in benefits is not as great as the approximate doubling of costs when adding in 3-year-olds. So, the ratio of economic development benefits to costs of the expansion is less than the benefit-cost ratio for the original program for 4-year-olds only. This has implication for state budget choices. Suppose that we could get some additional funds for state-funded pre-k. Suppose we had a choice between using those funds to add additional four-year-olds, with similar characteristics to the four-year-olds currently being served,  to the state-funded program, versus adding age 3 preschool for some children who would have received preschool services at age 4.  These results imply that the benefits from serving more four-year-olds exceed the benefits from doubling preschool years for some students.

Therefore, the empirical result suggests we get the highest benefit-cost ratio from a high-quality half-day program for 4-year-olds only. There are probably net benefits from expanding to 3-year-olds, and benefits may also exceed costs from expanding to a full-day for 4-year-olds. But the benefits per dollar probably are somewhat lower for these expansions.

One way of explaining this pattern of results is that there may be what an economist would call “diminishing returns” to time in preschool. Children learn more with more time in preschool, but what they learn per additional hour may decline with more time.  This may be particularly true when going from a half-day to a full-day preschool program.  There may be limits to how much pre-k students can learn during a day.

These conclusions are for comparisons of adding services to children from similar backgrounds. These results may not hold when the tradeoff is between adding more 4-year-olds from higher-income families to a state’s preschool program, versus offering more years of service to children from lower-income families. This choice is a more difficult one.  The net benefits versus costs would depend on the particulars of the situation.

The evidence seems clear that even a half-day preschool program for four-year-olds can have large benefits. It may seem amazing that a program that provides perhaps 500 hours of services per child can have large long-term effects. As discussed in a previous post, these long-run effects probably occur because preschool’s effects on “soft skills” tend to appreciate over time. A child who develops better social skills and self-confidence will find those skills reinforced by their experiences. Success will lead to future success, and skills will beget skills.

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