Investing in Kids: Early Childhood Programs and Local Economic Development.
Business Economics (2011) 46, 261--263.
Nothing could be timelier for the business economist than a new book focused on local policies for job creation. With employment above 9 percent and state unemployment rates as high as 12 percent, the pressure on state and local politicians to do something about jobs is high. Your company's CEO is likely to want to know how to respond to various proposals. Forward thinking business economists may want to get ahead of the curve by developing responses or even crafting proposals as a preemptive strategy before they are asked some Friday afternoon to have one in the CEO's inbox by Monday morning. A better reference could not have been designed for this task than Investing in Kids. It presents an overall approach to analyzing local economic development policies of all types and provides specific evidence on the effects of a wide variety of business tax incentives, as well as business incentives that are business services.
The book's author is a senior economist at the Upjohn Institute for Employment Research and one of the editors of Economic Development Quarterly. He has an admiral command of the relevant literature and facts. The book adopts the local economic development perspective and evaluates policies strictly in terms of their local impacts on jobs and per capita incomes. Contrary to what one often reads in the newspapers, there are good economic reasons for local politicians to spend money on business incentives. State economic development programs can increase the present value of state per capita earnings by more than $3 for every dollar invested. Moreover, these jobs and earnings increases come fairly quickly, which is a matter of some importance to officials running for office on 2-or 4-year cycles.
Whether this means that local and state business incentives are good policy is a much more complicated question. Most of the jobs and earnings increase comes from moving jobs from other communities rather than net new job creation. Nationally, the return is less than a dollar in additional earnings from new jobs. Once the business investment spigot is turned on, it is hard to turn off, and a considerable portion of such funds are spent on such businesses as sports franchises and retailers that push even the local return down toward S0.50 cents on the dollar. On the other hand, well-designed policies that target export-based businesses with customized-job training and manufacturing extension services have generated far higher local returns and can boost productivity overall. Substantive benefits from moving jobs from low unemployment to high unemployment communities can produce net gains nationally. Business services that are well publicized and subject to annual legislative approval may be less subject to abuse than tax entitlements.
Investing in Kids provides economists with plenty of information to make up their own minds about whether government financed business incentives for specific businesses are good policy and to identify the winners and losers. Non-economists may find their heads spinning once they get off the merry-go-round of economic modeling and political calculation required to evaluate these impacts. Much depends on which regression coefficients one finds most plausible and on the confidence intervals surrounding them (the latter topic gets too little consideration, one of my few quibbles with the book). The author does a good job of pointing out which differences matter and which do not, as well as why one estimate is to be preferred over another. Indeed, if business economists could set their bosses to read this book they would improve their chances of a raise and a bigger budget for econometric modeling, though not necessarily in that order.
At this point you may be wondering why this book is called Investing in Kids. What makes this book different from standard treatments of economic development policies is that it adds analyses of investments in labor supply, specifically investments in young children before they start school. Such investments typically are not seen as job creating. The author's calculations show this to be shortsighted. A variety of preschool programs can increase employment and earnings about as much as reasonably well-designed demand-side business incentives, increasing the net present value of earnings by $2.00 to $3.00 per dollar invested. Moreover, from a national perspective such programs are not merely redistributive because they enhance productivity and generate even greater benefits than are captured locally. For this reason, the author argues that such supply side investments are to be greatly preferred over traditional business incentives, even taking into account the goals for local economic development.
Simply pointing this out to local officials is somewhat less likely to affect behavior than a public service announcement telling young people to eat healthier and exercise more. As this book makes clear, the job creation and earnings benefits of investments in learning and development for young children do not really kick in for 20 years. At reasonable social discount rates net present value still turns out to be quite large as indicated above. However, elected officials tend to discount anything that pays off after the next election at much higher rates. That makes such programs a hard sell with local and state elected officials. Investments in supply-side initiatives at the high school or post-secondary level are likely to be an easier sell because of the quicker pay-off in terms of jobs. The author extends the analysis to those types of programs as well, but he points out that there is less evidence that we know how to get high returns from marginal investments at this end of the pipeline.
One chapter ot the book is devoted to solving the political problem created by the long time required for job-related benefits from preschool investments. Capitalization of the value of such policies in property values would make the long-term benefits more salient today (though this would not address the immediate demand for more jobs). Strategies are suggested for increasing the likelihood of capitalization. For example, ratings systems could be created to highlight the quality and effectiveness of local preschool programs, and the results could be marketed much as test scores and graduation rates for local schools are advertised to home buyers. The author also suggests designing preschool education programs to reduce costs of child care and provide job training for parents, exploiting synergies with these activities to boost up-front employment gains.
Investing in Kids also provides chapters on increasing the likelihood that supply-side and demand-side economic development programs produce the expected returns and on ethics. Design matters, and the book provides some key information about what works. In addition, the author's disinclination to turn to the federal government for solutions is partially rooted in an awareness of the unknowns, which makes local innovation highly desirable. He is quick to point out that there is a federal role in paying for rigorous evaluations of the results of those innovations. Without such evaluations, these "laboratories of democracy" do not yield much useful information.
Through extensive quotes the chapter on ethics provides insights into the generally low level of ethical discourse regarding policy. Partisans from right and left construct straw men, which are easily demolished but bear little resemblance to the actual policies under consideration. None of the preschool policies under consideration, for example, have ever been shown to weaken the family, and they are all completely voluntary. For anyone new to early childhood or business incentive programs, this guide to what is misleading, exaggerated, and occasionally accurate regarding ethical claims will be highly useful. Even more useful are the author's suggestions for policy designs to avoid ethical pitfalls.
At the end, the author throws his lot in with Keynes, quoting the well-known statement that "Soon or late, it is ideas, not vested interests, which are dangerous for good or evil." The best hope for the ideas in this book is that they will reach local and state business leaders who, in my experience, are much more farsighted than their political counterparts. They understand that business interests are tied to communities and the quality of the local labor supply in the long run, notwithstanding Keynes' other well-known maxim.
By Timothy J. Bartik. 2011. Kalamazoo, Ml. W.E. Upjohn Institute for Employment Research. Pp. 417. $45.00 cloth, $20.00 paper.
W. Steven Barnett National Institute for Early Education Research at Rutgers, The State University of New Jersey, New Jersey, U.S.A