Economics of Early Childhood Literacy

In the March 2003 issue of Fedgazette, Art Rolnick and Rob Grunewald of the Federal Reserve Bank of Minneapolis published their findings regarding the economic impact early childhood literacy.

Early Childhood Development: Economic Development with a High Public Return

Arthur J. Rolnick, Senior Vice President Director of Research

Robert K. Grunewald, Regional Economic Analyst

Early childhood development programs are rarely portrayed as economic development initiatives, and we think that is a mistake. Such programs, if they appear at all, are at the bottom of the economic development lists for state and local governments. They should be at the top. Most of the numerous projects and initiatives that state and local governments fund in the name of creating new private businesses and new jobs result in few public benefits. In contrast, studies find that well-focused investments in early childhood development yield high public as well as private returns. Why the case for publicly subsidizing private businesses is flawed and misguided Over the last few years, the future of Minnesota's economy has been called into question. The resulting debate illustrates how little is understood about the fundamentals that underlie economic development. While many recognize the success of the Minnesota economy in the past, they see a weakening in the foundations of that success. Some point to the decline in corporate headquarters located in Minnesota. Some point to the lack of funding for new startup companies, particularly in the areas of high-tech and biotech. Some point to the possible loss of professional sports teams. Some think the University of Minnesota is not visible enough in the business community. And still others raise the broader concern that Minnesota's citizens and policymakers have become too complacent and unwilling to make the public commitment to be competitive in a global economy. Those who raise these concerns conclude that Minnesota and local governments need to take a more active role in promoting our economy. Often that implies that the state or local governments subsidize private activities that the market is not funding. Proponents of this view argue that without such subsidies, either well-deserving businesses will not get funded or other states will lure our businesses to greener pastures. State and local subsidies to private businesses are not new. In the name of economic development and creating new jobs, Minnesota, and virtually every other state in the union, has a long history of subsidizing private businesses. We have argued in previous studies that the case for these subsidies is short-sighted and fundamentally flawed.1 From a national perspective, jobs are not created—they are only relocated. From a state and local perspective, the economic gains are suspect because many would have been realized without the subsidies. In summary, what often passes for economic development and sound public investment is neither. If subsidizing private businesses is the wrong way to promote Minnesota's economy, then what is the right way? To answer this question, we need to understand that unfettered markets generally allocate scarce resources to their most productive use. Consequently, governments should only intervene in markets when they fail. Market failures can occur for a variety of reasons; two well-documented failures are goods that have external effects or public attributes. Unfettered markets will generally produce the wrong amount of such goods. Education has long been recognized as a good that has external effects and public attributes. Without public support, the market will yield too few educated workers and too little basic research. This problem has long been understood in the United States and it is why our government, at all levels, has supported public funding for education. (According to the Organisation for Economic Cooperation and Development, for example, the United States in 1999 ranked high on public funding of higher education.2) Nevertheless, recent studies suggest that one critical form of education, early childhood development, or ECD, is grossly underfunded. However, if properly funded and managed, investment in ECD yields an extraordinary return, far exceeding the return on most investments, private or public. A convincing economic case for publicly subsidizing education has been around for years and is well supported. The economic case for investing in ECD is more recent and deserves more attention. Public funding of education has deep roots in U.S. history. John Adams, the author of the oldest functioning written constitution in the world, the constitution of the Commonwealth of Massachusetts, 1779, declared in that document that a fundamental duty of government is to provide for education.3 Publicly funded schools have been educating children in the United States ever since. Today over 85 percent of U.S children are educated in publicly funded schools. John Adams argued for public funding of education because he realized the importance of educated voters to the well-being of a democracy. We suspect that he also understood the economic benefits that flow to the general public. Investment in human capital breeds economic success not only for those being educated, but also for the overall economy. Clearly today, the market return to education is sending a strong signal. Prior to 1983, the wages of a worker with an undergraduate degree exceeded a worker with a high school degree by roughly 40 percent. Currently, that difference is close to 60 percent. The wage premium for an advanced degree has grown even more. Prior to 1985, the wages of a worker with a graduate degree exceeded those of a worker with a high school degree by roughly 60 percent. Today, that difference is over 100 percent. Minnesota represents a good example of the economic benefits that flow from education. Evidence is clear that our state has one of the most successful economies in the country because it has one of the most educated workforces. In 2000, almost a third of persons 25 and older in Minnesota held at least a bachelor's degree, the sixth highest state in the nation. To ensure the future success of Minnesota's economy, we must continue to provide a highly educated workforce. The economic case for public funding of early childhood development Knowing that we need a highly educated workforce, however, does not tell us where to invest limited public resources. Policymakers must identify the educational investments that yield the highest public returns. Here the literature is clear: Dollars invested in ECD yield extraordinary public returns. The quality of life for a child and the contributions the child makes to society as an adult can be traced back to the first few years of life. From birth until about 5 years old a child undergoes tremendous growth and change. If this period of life includes support for growth in cognition, language, motor skills, adaptive skills and social-emotional functioning, the child is more likely to succeed in school and later contribute to society.4 However, without support during these early years, a child is more likely to drop out of school, receive welfare benefits and commit crime. A well-managed and well-funded early childhood development program, or ECDP, provides such support. Current ECDPs include home visits as well as center-based programs to supplement and enhance the ability of parents to provide a solid foundation for their children. Some have been initiated on a large scale, such as federally funded Head Start, while other small-scale model programs have been implemented locally, sometimes with relatively high levels of funding per participant. The question we address is whether the current funding of ECDPs is high enough. We make the case that it is not, and that the benefits achieved from ECDPs far exceed their costs. Indeed, we find that the return to ECDPs far exceeds the return on most projects that are currently funded as economic development. Many of the initial studies of ECDPs found little improvement; in particular, they found only short-term improvements in cognitive test scores. Often children in early childhood programs would post improvements in IQ relative to nonparticipants, only to see the IQs of nonparticipants catch up within a few years.5 However, later studies found more long-term effects of ECDPs. One often-cited research project is the High/Scope study of the Perry Preschool in Ypsilanti, Mich., which demonstrates that the returns available to an investment in a high-quality ECDP are significant. During the 1960s the Perry School program provided a daily 2 ½-hour classroom session for 3- to 4-year-old children on weekday mornings and a 1 ½-hour home visit to each mother and child on weekday afternoons. Teachers were certified to teach in elementary, early childhood and special education, and were paid 10 percent above the local public school district's standard pay scale. During the annual 30-week program, about one teacher was on staff for every six children.6 Beginning in 1962, researchers tracked the performance of children from low-income black families who completed the Perry School program and compared the results to a control group of children who did not participate. The research project provided reliable longitudinal data on participants and members of the control group. At age 27, 117 of the original 123 subjects were located and interviewed.7
1 Melvin Burstein & Arthur Rolnick, “Congress Should End the Economic War Among the States: Federal Reserve Bank of Minneapolis Annual Report Essay,” The Region 9, no. 1 (March 1995), 3-4.
2 “The Ruin of Britain's Universities,” The Economist 365, No. 8299 (16 Nov. 2002), 51.
3David McCullough, John Adams (New York: Simon & Schuster, 2001), 222-225.
4 Martha Farrell Erickson & Karen Kurz-Riemer, Infants, Toddlers and Families: A Framework for Support and Intervention (New York: The Guilford Press, 1999), 19.
5 Dale C. Farran, “Another Decade of Intervention for Children Who Are Low Income or Disabled: What Do We Know Now?” in Handbook of Early Childhood Intervention, ed. Jack P. Shonkoff and Samuel J. Meisels (Cambridge University Press, 2000), 511-512
6 Lawrence J. Schweinhart, Significant Benefits: The High/Scope Perry Preschool Study Through Age 27 (Ypsilanti, Michigan: High/Scope Press, 1993), 32.
7 Dale C. Farran, “Another Decade of Intervention for Children Who Are Low Income or Disabled: What Do We Know Now?” in Handbook of Early Childhood Intervention, ed. Jack P. Shonkoff and Samuel J. Meisels (Cambridge University Press, 2000), 516.
8 Lawrence J. Schweinhart, Significant Benefits: The High/Scope Perry Preschool Study Through Age 27 (Ypsilanti, Michigan: High/Scope Press, 1993), xv, 55.
9 James J. Heckman and Pedro Carneiro, “Human Capital Policy,” working paper, University of Chicago, August 2002.
10 Dale C. Farran, “Another Decade of Intervention for Children Who Are Low Income or Disabled: What Do We Know Now?” in Handbook of Early Childhood Intervention, ed. Jack P. Shonkoff and Samuel J. Meisels (Cambridge University Press, 2000), 513-515.
11 Early Childhood and Family Support, Minnesota Department of Education Early Learning Services [cited December 2002].
12 Ibid.
13 Ibid.