The Heckman Equation and the relative difficulty of human capital investments

Posted on December 28, 2010 by timbartik

Ezra Klein links to a New York Times article by James Warren about Nobel prize-winning James Heckman’s arguments for greater early childhood investments. (Full disclosure: Professor Heckman has written a favorable blurb for my book Investing in Kids, part of which is at the top of this blog.)

Mr. Warren’s article highlights the argument by Professor Heckman that early childhood investments have higher returns than K-12 investments:  Heckman “contends that high-quality programs focused on birth to age 5 produce a higher per-dollar return than K-12 schooling…”

The way I would formulate this insight is that it is more difficult to have high-return investments in K-12 schooling, not that it is impossible to do so. The most straightforward and easy investments in early childhood investment have higher returns than the most straightforward and easy investments in K-12.

For example, in chapter 7 of investing in Kids, I estimate the impact of financing universal pre-k education by reducing K-12 spending. I assume that this K-12 spending has the same returns as economists such as Alan Krueger have estimated for lower class size in early elementary school. I find that the reduced K-12 spending would only offset about two-fifths of the positive benefits of universal pre-k for a state’s per capita earnings.

But this does not mean that more difficult reforms in K-12 could not have high returns relative to their monetary costs. Education reformers such as Kevin Carey at Education Sector and Sara Mead at Bellwether Education Partners are right to say that there are many reforms that could significantly improve K-12 education without huge monetary costs.

For example, there are potentially big gains to improving K-12 teacher quality, as shown by a number of studies, including a study by Robert Gordon, Thomas Kane and Douglas Staiger. However, implementing a system that will reliably improve K-12 teacher quality is by no means easy and straightforward. For example, there are very significant issues in how to measure teacher quality, as has been pointed out in studies by Jesse Rothstein.

As I argued in an earlier post, the advantage of early childhood investments is that there are high returns to programs implemented in a straightforward way by average quality agencies. We need not achieve some extraordinary subtlety of program design to get high economic benefits from early childhood programs.  We only need to change our thinking about what age it is appropriate to begin public policy involvement in education. Quality matters for early childhood programs, but it can be readily achieved on a large scale by typical agencies.

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How business incentives affect economic development, and why effects can be so large

Posted on December 27, 2010 by timbartik

My book Investing in Kids: Early Childhood Programs and Local Economic Development does not just analyze the economic development effects of early childhood programs.  To fully understand the economic development benefits of early childhood programs, we need to contrast their benefits and costs with more “traditional” economic development programs. These traditional programs are business incentives.

Business incentives affect economic development by directly inducing employers to increase the jobs in a local economy. The incentive may be some reduction in taxes, such as a property tax abatement. The incentive may also be providing that individual business with some special services, such as customized job training.

In my book, Investing in Kids, I conclude that well-designed business incentives can have large local benefits relative to costs. (The national perspective is different, as I will explore in a future blog post.) Per dollar invested in well-designed business incentive programs, the estimated increase in the present value of future local earnings is $3.14.

These large effects occur even though typical business incentives probably only successfully tip the location decisions of about 4% of the businesses receiving incentives. How can business incentives have such large effects even though the “batting average” is so low? There really are two key reasons.

First, if incentives are successful, short-term incentives can result in an increase in local business activity that is permanent. We induce a business investment decision in a local economy. Economic research strongly suggests that such local investment decisions tend to persist.  In some cases the induced business will close after a few years, and no business will replace it.  In other cases, the induced business prospers in the area and later expands. In still other cases, other businesses are attracted to the area due to its larger size or its new strength in this particular industry. (These spillover effects on other businesses are what urban and regional economists call agglomeration economy effects.) Research suggests that on average, these positive and negative effects even out. For example, this pattern is clearly implied by the research of Olivier Blanchard of MIT and Lawrence Katz of Harvard.

Second, an increase in local business activity causes quite persistent effects on local employment rates and wage rates. The empirical evidence suggests that after a shock that increases local employment, local residents are more likely to be employed, and more likely to be employed in better jobs, for at least the next 15 years.

Such persistent effects occur because employment experience pays off for individuals. In the short-run, an increase in local employment allows local residents to have a greater chance of getting a job, or of getting a better job. This increased employment experience not only increases an individual’s job skills, but also increases their self-confidence and reputation with employers. As a result, long-run employment rates and wage rates are higher.

However, this all assumes that the business incentives are high-quality, which I consider in a subsequent blog post.

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Supply-side early childhood economics

Posted on December 23, 2010 by timbartik

Early childhood programs can be described as “supply side” programs because they improve local economic development by improving the quantity and quality of local labor supply.  Many non-economists are unaware that both conservative and liberal economists are in some sense “supply side” economists. Both liberal and conservative economists  are interested in how we can cost-effectively boost economic output and incomes by boosting the quantity and quality of various factors of production. Where economists of various political persuasions differ is over what policies can effectively boost the supply of different productive factors.

If the key local economic development benefit is higher per capita local incomes, then local economic development really is aimed at improving labor market outcomes. It is mainstream labor economics that labor market earnings can be improved by either increasing the quantity and quality of labor demand or labor supply. The key distinction between policies working on either side of the labor market is whether they directly seek to affect  employers, or potential workers. Regardless of which side of the labor market we work on, what happens on one side of the labor market affects the other side. Increases in the quality and quantity of labor demand will lead to potential workers making decisions to improve the quantity and quality of their labor supply. Increases in the quantity and quality of labor supply will lead to employers making decisions to hire more workers and/or more workers in more skilled jobs.

In discussing local economic development, many non-economists have in mind an implicit model in which labor demand does not respond to labor supply. For example, people will say that there is no point in increasing the number or skills level of workers in a state if there is high unemployment, as these new or better workers will just leave the state. But the empirical evidence suggests this intuitive model is incorrect. Even in a high unemployment local labor market, boosts to the quantity and quality of labor supply will lead to boosts in the quantity or quality of employment.

A wide variety of policies may boost the quantity or quality of local labor supply or demand, and thus boost local economic development.   Why, then, place any special emphasis on early childhood programs? The main reason is that among all these policies, early childhood programs have some of the best evidence of having a high “bang for the buck”. Effective economic development policy should focus on boosting local economic development using cost-effective policies, not at any cost.

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The importance of “soft skills”

Posted on December 22, 2010 by timbartik

John Funk, in his blog at Topics in Early Childhood Education, reminds us that for a child to learn in the preschool classroom, we must first address certain fundamentals: “security, association, belonging, dignity, hope, power, enjoyment and competence”.

We can call these fundamentals “soft skills”. The evidence suggests that it is the development of such soft skills in early childhood programs that is the key to their long-term effects on adult earnings and state economies. Research by Nobel prize-winning economist James Heckman supports the importance of soft skills development to long-term effects of early childhood programs.

Advocates of early childhood programs should remember that some of the estimated long-term effects of these programs appear, to anyone new to these issues, to be somewhat implausible. For example, we provide the child with 3 hours per day of preschool, for one school year at age 4. And these 500 hours of the child’s time are supposed to dramatically affect  skills and earnings in adulthood? Yet this is what evaluations find, for example for the Perry Preschool program or the Chicago Child-Parent Center program.

It is difficult to believe that knowing a few more letters or numbers upon entry to kindergarten, by itself, will dramatically affect adult outcomes. We would expect such achievement gains for hard skills, by themselves, to depreciate over time. Many studies of early childhood programs do find such depreciation of hard skills.

But well-run early childhood programs develop both hard skills and what we can call “soft skills”: how the child interacts with peers, with authority figures, and most of all, how the child views him or herself. A child entering kindergarten who is more self-confident, who believes that his or her plans can affect his or her surroundings, and who can get along with other students and teacher, will be more successful in kindergarten. This success in turn will encourage the child’s confidence and planning, and change how the child is viewed by peers, teachers, and even parents. All of this leads to further success in first grade and beyond.

In other words, soft skills, rather than decreasing over time, tend to grow over time. It is this soft skill growth that also allows hard skills to grow and develop. This long-term virtuous cycle of soft skill growth leading to further soft skill growth and hard skill growth is what allows relatively modest early childhood interventions to have long-term effects. It is the malleability of such soft skill development in early childhood that allows early childhood programs to have such powerful long-term effects.

Posted in Early childhood programs | 4 Comments

The importance of “stayers”

Posted on December 21, 2010 by timbartik

High-quality early childhood programs will increase the adult skills of former child participants. But this only pays off for local economic development if a significant number of former child participants live in the local economy of their childhood when they become adults. They need not stay in the same local economy their entire life – many people leave their home metropolitan area or state for college, and others eventually leave for a retirement area. But for their original home economy to gain from their skills, they need to live in that home area during their working careers.

Based on research done for my book, Investing in Kids, many former participants in early childhood programs will live in that same local economy for most of their working careers. Around 70% will live in their childhood state. Around 55% will live in their childhood metro area.  For the smallest metro areas, with less than one-third million in population, the percentage living in their childhood area for most of their working careers will dip by about ten percentage points, compared to the average metro area.  For the slowest-growing quintile of metro areas, the percentage living in their childhood area for most of their working careers will dip by about five percentage points, compared to the average metro area. (In addition to the results provided in my book, more detailed results and methodology are provided in my Upjohn Institute working paper on this topic.)

The implication is that enough participants in early childhood programs stick around that the size and quality of these programs will affect the quality of the local labor force.  If the effectiveness of early childhood programs in leading to adult skills is high enough, investing in these programs can potentially pay off for a state or local government.

Why do so many people stay in or return to the local economy of their childhood as adults?  This probably reflects ties to the familiar places and people of their home.  Smaller metro areas offer less diverse opportunities, but may foster stronger ties. Slower-growing metro areas will have fewer job opportunities, but less labor market competition from in-migrants.

As Adam Smith stated in the Wealth of Nations over 200 years ago, “a man is of all sorts of luggage the most difficult to be transported.”

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Sports Stadiums vs. Other Business Incentives vs. Early Childhood Programs

Posted on December 20, 2010 by timbartik

Irene Sege, Communications Director for Strategies for Children, recently wrote a blog post at their blog Eye on Early Education on the economic development benefits of sports stadiums vs. early childhood programs.

Sports stadiums are probably one of the least efficient types of conventional business incentives. There have been numerous studies of sports teams and sports stadiums as local economic development programs – for example, the book Sports, Jobs and Taxes, which I reviewed for National Tax Journal.

Why do sports stadiums tend to be inefficient in terms of generating local economic development benefits? I discuss this in chapter 5 of Investing in Kids. First, much of the spending associated with stadiums tends to come from local residents buying tickets and sports-related goods and services. If the stadium had not been funded, much of this spending would have instead gone to spending on other local goods and services. Thus, much of the new business activity associated with the stadium displaces other local business activity.

In contrast, if business incentives are used to attract a new manufacturing branch plant, then almost all the spending on the output of that new branch plant will come from outside the local economy. This new outside spending will in turn generate multiplier effects on the local economy.

A second reason for the usual inefficiency of sports stadium-related incentives is that many of the local jobs associated with sports stadiums tend to be low-wage. Because the jobs are lower wage, any multiplier effects of these workers’ respending the money on other local goods and services will be modest. In addition, the expansion of these low-wage jobs may tend to erode local wage standards.

Of course, some of the jobs associated with sports stadiums are very high-wage: the jobs of the professional athletes. But these athletes are usually not local residents. Most of the spending of these athletes will occur elsewhere.

In contrast, if business incentives are targeted on high-wage jobs that are held by local residents, then the multiplier effects of such jobs will be greater. In addition, increasing such jobs not only helps the local residents who obtain the jobs, but may tend to increase wages at other jobs in the local area.

In chapter 5 of Investing in Kids, I calculate that for each dollar invested in sports stadium related projects, it would be quite plausible that the increase in the present value of state residents’ earnings – which is the book’s definition of “economic development benefits” – could be only 57 cents.  Of course, one should add the caveat that the economic development benefits will vary with the specifics of individual projects. There may be some sports stadium projects that do have local economic development benefits exceeding costs. And there may be intangible benefits of sports stadiums other that the jobs and earnings generated. For example, some local sports fans may derive some value from just the presence of a major league sports team, even if they never buy tickets to games. A sports team can be seen as an amenity of a local area. Such amenity benefits of sports teams may justify some local support for sports stadiums. But there is some logic to having the beneficiaries of this amenity, that is local sports fans, pay to finance business incentives related to sports stadiums.

More efficient business incentives will have higher local economic development benefits. In chapter 3 of Investing in Kids, I calculate that well-designed business incentives, that are well-targeted at high-wage business that are “export-base” businesses (sell their goods and services outside the state) will have much higher ratios of economic development benefits to costs. For each dollar invested in well-designed business incentives, the increase in the net present value of state residents’ earnings could plausibly be $3.14.

I also show in the book that well-designed early childhood programs can offer sizable local economic development benefits. Well-designed early childhood programs directly provide local residents with higher earnings, which is my definition of “economic development benefits”, largely by increasing the skills of former child participants. For example, I calculate that a well-designed pre-k program may, for each dollar invested, increase the present value of state residents’ earnings by $2.78. Future blog posts will explore this issue in more detail.

All of this discussion takes a state or local perspective. As I will discuss in future blog posts, early childhood programs look even better from a national perspective, while most business incentive programs look worse. Even when sports stadiums and other business incentives are successful, they tend to redistribute business activity across the U.S., while early childhood programs generate more new national business activity.

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

How early childhood programs affect economic development, and why spending isn’t more important

Posted on December 20, 2010 by timbartik

Early childhood programs primarily affect local economic development by helping their child participants develop into adults with better skills.  Of secondary importance are the benefits of these programs for parents, for example in providing free child care.  Of much less importance are the effects on these programs via multiplier effects of government spending for these programs, for example the increased spending of preschool teachers at local retailers.

For example, in chapter 4 of Investing in Kids, I estimate that for every dollar invested in universal pre-K, the “economic development benefits” for a state — which is the increased present value of state residents’ earnings — goes up by $2.78. Of that $2.78, $2.69 is due to effects on former child participants who stay in the state, $0.05 is due to effects on parents, and $0.04 is due to the increased government spending on preschool. Effects on parents are greater for other early childhood programs, such as high-quality full-time child care. However, the economic models I use suggest that the economic development benefits of simply spending more taxpayers’  money on early childhood programs are modest relative to the costs.

Why aren’t the spending multiplier effects of early childhood programs greater? First, what I am modeling are the effects of spending more money on early childhood programs when that spending is financed by higher state taxes. By itself, spending more money on early childhood programs has larger multiplier effects. Preschool teachers will spend more money at local restaurants and other local retailers, boosting local output and employment in these industries.  Preschools and other early childhood programs will buy some supplies from local sources, providing another local economic boost.

But state governments must, as a general rule, balance their budgets. Therefore, the increased local demand due to more spending must be matched by higher state taxes. These higher state taxes will reduce the after-tax incomes of state residents, which will reduce their spending on state goods and services.

There is some net demand stimulus from simultaneously increasing state taxes and spending. This is one form of what in macroeconomics is known as the balanced budget multiplier effect. This balanced budget multiplier effect can be especially important at the state level. (This point was made forcefully in a short 2001 paper for the Center on Budget and Policy Priorities by Peter Orszag, President Obama’s first director of OMB, and Nobel prize-winning economist Joseph Stiglitz.)   The increased spending tends to affect demand for state goods and services more than the increased taxes. Much of the increased government spending directly goes to hire state workers and buy state goods. On the other hand, a large percentage of the increased taxes will reduce demand for goods and services produced in other states — for example, due to increased taxes, a state resident may make fewer purchases at online retailers, or spend less on out-of-state travel.

However, the key point here is that although the net effect of more spending and taxes is positive, this net effect is smaller than if this increased spending was somehow funded by some organization or person from outside the state.

A second point is that any stimulative effect of more spending and taxes causes a one-time increase in the level of state output and earnings. This one-time shock to the level of labor demand will raise local employment rates and wage rates, However, the effect on local employment rates and wage rates will tend to dissipate gradually over time due to migration (and eventually, mortality). This dissipation reduces the effects of taxing and spending on the present value of local per capita income.

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How hard is it to achieve quality on a large-scale in pre-K programs?

Posted on December 17, 2010 by timbartik

Several prominent education and political bloggers have recently argued that implementing high-quality pre-K on a large scale is not a “proven” solution, but rather is hard to do. Kevin Carey of Education Sector argued on December 6 that high-quality pre-k is not a “proven “ solution because the research evidence for “robust long-term effects mostly relies on “small localized pre-K programs”.  Sara Mead of Bellwether Education Partners said that “delivering quality public services for children, of any sort, at scale is HARD, and getting to quality at scale in some of these services – particularly health care and child welfare services – is probably a lot harder than fixing the K-12 system.” Matt Yglesias of the Center for American Progress argued that “proving high-quality preschool on a mass scale isn’t some kind of easy to implement alternative to the tricky task of providing high-quality elementary school on a mass scale.”

As these arguments suggest, part of the concern of these bloggers is the politics of K-12 education reforms.  The concern is that groups opposed to some K-12 education reforms may use pre-K or other services to children as an argument against education reforms. If child outcomes can be dramatically improved via large-scale pre-K or other solutions that are more straightforward than K-12 reforms, perhaps these easier solutions should be preferred.

I certainly agree that the quality of pre-K is important. In chapter 5 of my book, Investing in Kids, I show that variations in pre-K quality make an enormous difference in the local economic development benefits of pre-K programs. For example, feasible variations in pre-K class size can alter economic development benefits by over 30 percent. In later posts in this blog, I will explore some of the effects of various features of pre-K quality on program effectiveness.

However, I think that these bloggers have overstated their case. Although there are some challenges to ensuring pre-K quality, the evidence suggests that it is quite doable for a state or school district to achieve quality in pre-K on a large scale, IF it is willing to spend the needed resources per child and adopt reasonable program design standards. Pre-K is a program that your mythical “average American state” or “average American school district” can implement in a quality way on a large scale.

The evidence on the long-term effectiveness of pre-K goes beyond small “hothouse” programs such as the Perry Preschool program in Ypsilanti, Michigan.  Long-term effectiveness is also shown for the Chicago Child-Parent Center program. This was a large scale program run by Chicago Public Schools.

Furthermore, programs that are similar to CPC have been run in a number of states, and have shown short-run effectiveness. William Gormley’s studies of Oklahoma’s near-universal pre-K program suggest that it significantly improves kindergarten readiness. The National Institute for Early Education Research has done some studies of pre-K programs in a variety of states that also show evidence of short-run effectiveness.  These studies all use what is called “regression discontinuity” analysis to measure program effectiveness. “Regression discontinuity” analysis is considered the next best thing to random assignment experimentation in measuring a program’s effects.

These state programs evaluated by Gormley and NIEER are generally run at a large scale, and are run by “ordinary” school districts or other agencies, not in some extraordinary way monitored by researchers.  Of course, this short-run effectiveness does not prove long-run effectiveness. However, the short-term results are favorable enough and similar enough to the CPC program that it is reasonable that these programs will have long-run effects.

It is not surprising that pre-K helps improve child outcomes in a way that can be straightforwardly implemented. Pre-K, if run at appropriate class sizes, and with appropriately skilled teachers and a good curriculum, adds additional learning time. We know that one reform that works in education is adding more “time on task”. Pre-K is one straightforward way of doing so.

None of this logically implies that K-12 education reforms aren’t also needed. It would be a shame if the need for pre-K was used to argue against K-12 education reforms. Indeed, K-12 education reforms may help the effectiveness of pre-K and other early childhood programs. For example, it has been argued by Ellen Galinsky that part of the success of the Abecedarian program (a full-time child care and pre-K program from birth to age 5) was its location in Chapel Hill, which had a good K-12 system that could help follow through on the boost provided by the Abecedarian program.  In sum, high-quality pre-K and K-12 education reforms can complement each other.

Posted in Early childhood program design issues, Early childhood programs | Tagged | 9 Comments

The politics and economics of state versus federal action on early childhood programs

Posted on December 17, 2010 by timbartik

Many are accustomed to seeing federal action as the key to large-scale social reforms. However, in the case of early childhood programs, successful social reform may be more likely to occur due to state and local activism. Such activism can be motivated by concerns over local economic development.

The economic case for state and local activism, versus federal activism, is two-fold. First, as outlined in chapter  10 of my book Investing in Kids, most of the economic development benefits of early childhood programs accrue within the state that carries out the early childhood programs.  For example, based on the calculations in the book, 73% of the economic development benefits of a universal pre-K program accrue within the state implementing universal pre-K. Other states reap 27% of the benefits, due to former child participants moving to other states and increasing the quality of their labor supply. But enough people stay in their home state that most of the increase in labor force quality occurs in the state implementing universal pre-K.

Second, we have yet to fully work out what is the best design and process for early childhood programs.  This argues for flexibility. Such flexibility seems more likely if there are a variety of state and local designs of early childhood programs rather than one single-best federal design.

Of course, flexibility can also be achieved with federal funding, if the funding allows for a variety of program designs. For example, as Ron Haskins   of the Brookings Institution and Steve Barnett   of the National Institute for Early Education Research have recently argued, we could consider allowing some states significantly increased flexibility in using funds from  Head Start, the child care block grant  and Title I to create a coordinated early education system.  Whether the federal government is likely to allow such flexibility is questionable.

The political case for state and local activism, versus federal activism, rests in part on the practicalities of the issues facing the federal government. The federal government faces a structural budget deficit problem, largely driven by increasing health care costs, as has been pointed out by numerous budget observers, such as the Washington Post’s Ezra Klein.  Given the fiscal challenges facing the federal government, large-scale expansion of federal funding for early childhood programs seems problematic.

Past precedent also suggests that state and local activism may be needed to significantly expand early childhood programs. As argued by Larry Katz and Claudia Goldin in their book, The Race Between Education and Technology,  the major past educational expansions in the U.S. — the common school movement of the 19th century, and the high school movement of the late 19th century and early 20th century — were driven by grassroots activism. These expansions of education were not due to federal action. They were due to state activism. Average citizens perceived that these educational expansions were in their own enlightened self-interest.

If state and local activism is to fully support early childhood programs, the case for local benefits must be clear. Among the most obvious local benefits of early childhood programs are local economic development benefits.

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Why local economic development is important

Posted on December 16, 2010 by timbartik

So, early childhood programs might have “local economic development benefits”, which means higher local earnings per capita. Why are local economic development benefits important?

First, local economic development benefits are important for political reasons. For cities and states, advancing their own economic development is of central importance. As argued by Harvard political scientist Paul Peterson in his influential book City Limits, “local governments are primarily interested in maintaining the economic vitality of the area for which they are responsible”. Whether ar state or local area can be competitive in the earnings per capita it offers residents is critical to whether the state or local area is able to survive and thrive. State and local public policies always must take into account the goal of local economic development. Some policies directly aim at promoting local economic development. Even policies that aim at other goals (education, public health, public safety, environmental quality) must be pursued in a way that is consistent with continued strong local economic development.

Second, local economic development offers a benefit that is quite valuable to local residents: more and better job opportunities in their home community. Most Americans have strong ties to the familiar places and people of their home community. Some people will of course move if needed to attain greater economic success. But providing more or better jobs in the home community allows local residents to attain greater earnings while preserving their valuable ties to their home community.

As economist Paul Courant has pointed out, “having a place in the local community…is a valuable asset.” This asset is sometimes labeled “a sense of place”. As explained by economist Roger Bolton, “A sense of place [is] a concept widely used by geographers, architects, and planners. It refers to a complex of intangible characteristics of a place that makes it attractive to actual and potential residents… The returns to the sense-of-place asset are a general measure of security – security of stable expectations, and security of being able to operate in a familiar environment and to trust other citizens, merchants, workers, etc…There is also a basic feeling of pleasure at living in a community…that has been created by a combination of social interactions in a particular setting.” Creating more jobs and better jobs in a local community allows more local residents to stay and economically prosper while preserving and enhancing this important component of human well-being, a strong “sense of place”.

Therefore, if research can establish that early childhood programs provide significant local economic development benefits, then early childhood programs gain political support and substantive importance. State and local political leaders, business leaders, and residents are more likely to support investments in early childhood programs if they offer local economic development benefits. From a broader national perspective, if early childhood programs help promote local economic development, then they provide a good that is an important part of the well-being of a nation.

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