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    The New Economics of Preschool

    New findings, methods and strategies for increasing

    economic investments in early care and education

    Prepared by Dana E. Friedman, Ed.D.

    For the Early Childhood Funders‟


    October 2004

Permission to copy or reprint is not required, but appropriate credit must be given to the Early Childhood

    Funders‟ Collaborative and to the author Dana E. Friedman, Ed.D.

The New Economics of Preschool


    New findings, methods and strategies for

    increasing economic investments in early care and education 1Prepared by Dana E. Friedman, Ed.D.

    for the Early Childhood Funders’ Collaborative

    hose concerned with adequate funding for quality early care and education

    have a new arsenal of tools with which to make their claims. Economists T

    from various academic, business and government organizations have applied new economic

    models to early care and education and generated dollar figures for what investments in

    early childhood services can yield for the economy in the short- and long-term.

These exciting new developments are the result of a confluence of several strands of

    research and practice that challenge traditional assumptions:

    o There are now several long-term studies that have followed graduates of

    early learning programs through adulthood and documented significant

    savings in the area of remedial education, school drop outs, welfare and

    crime. The studies conclude that improvements to social and emotional

    well-being yield greater returns than a focus exclusively on cognitive


    o Neuroscientists armed with new technologies have created startling

    insights into how the brain works and what inputs are needed to optimize

    its development. These data, accompanied by colorful, computer-

    generated pictures of the brain, both stimulated and unstimulated, suggest

    economic savings from investments in early learning, particularly in the

    area of social and emotional development.

    o Building on the longitudinal studies and brain research, economists have

    begun to quantify the economic importance of early care and education in

    both the short- and long-term. This pioneering work is due, in part, to a

    desire to create appropriate economic “There are some areas of clear agreement models for today‟s service economy, between market economists and child where most workers provide services, development researchers. The time has

    versus a manufacturing economy, where come to invest in young children and there

    are substantial gains to be made from most people work to produce goods. these investments if they are made wisely.” Early childhood programs are services Jack Shonkoff, Dean, The Heller School that have been absent from current for Social Policy economic theories, however, they are and Management, Brandeis University,

    Co-Editor of From Neurons to now being used in the design of

    Neighborhoods, 2003 pioneering economic modeling.

This body of work is gaining attention at all levels of government and within the business

    community. It builds on a foundation of work that has lead to a general acceptance of the

     1 The paper was written with assistance from Louise Stoney of Stoney Associates.

    October 2004 2

The New Economics of Preschool

    importance of the early years. Now, as a result of this economic research there are financial estimates for the short-term economic contributions of early care and education services and their long-term returns on investment. There is a need for continued research as well as active dissemination, planning and implementation of a host of creative solutions to showcase and maximize the economic contributions of early care and education.

Broadening the Economic Debate

The trillium flower with three petals is used by

    Cornell University‟s Linking Economic

    Development and Child Care Project because it

    best represents the varied relationships between

    early childhood services and the economy. One

    petal represents Parents and the need to focus on

    the social infrastructure supporting workers and

    their employers. Another petal represents

    Children and the investments in human development and education, while the third petal

    is the Regional Economy that quantifies child

    care as an industry that produces jobs and 2 stimulates the economy.

    Each petal on its own is insufficient for capturing all of the short- and long-term economic contributions made by early childhood services. For instance, the educational impact on children has been a primary focus for many researchers and the significance of this long-term benefit is clearly responsible for the growing interest in universal PreKindergarten. However, the short-term economic returns that accrue from increased and stable parental employment (the Parents petal) as well as the child care industry as a whole (the Regions petal) should not be underestimated. Policy makers who face budget cuts for early care and education or propose new spending on early childhood services appreciate the research establishing the short-term returns on the investment. Clearly, early childhood education generates short- and long-term benefits for children, parents and society and all economic aspects of the field should be explored to justify the level of investments needed.

    The table on the following page outlines the various research strategies that are generating meaningful data on the economics of early care and education and whose work is reviewed in this paper.

     2 R. Ribeiro and M. Warner. (January, 2004). Measuring the Regional Economic Importance of Early Care and Education: The Cornell Methodology Guide, p. 1. (

    October 2004 3

The New Economics of Preschool


    TYPE OF ECONOMIC Short-term Effects Medium-term Long-term Effects

    RESEARCH Effects

    For child: For society/economy: For child: Cost/Benefit Analysis, o Enhanced academic o Greater school system o Higher likelihood of e.g. achievement efficiency graduation/college enrollment o Perry Preschool o Improved o Higher wages/ employment Reduction in o Abecedarian Intervention health/nutrition potential special education o Chicago Child-Parent o Increased well-o Lower teen pregnancy Reduction of grade Center being/less abuse o Less delinquency repetition

    o Increased non-For society/economy: Higher student cognitive skills and o Sound basic education learning social competence o Increased income tax revenues productivity during school years o Lower welfare dependence o Reduction in o Reduction in delinquency/crime abuse/neglect o Lower reliance on

    public health care

    Builds on findings from For labor market/economy: Builds on findings from Macroeconomic Studies Cost/Benefits Analyses Cost/Benefit Analyseso “Dynamic complementarity”- on the Impact on more able people acquire more Human Capital, e.g. skills; more skilled people Work of Dr. James J. become more able Heckman, University of o Younger children have a longer Chicago period of time to recoup


    o Builds on findings Builds on findings from For society/economy: Microeconomic Studies from Cost/Benefit Cost/Benefits Analyses o General public benefits from on the Impact on Analyses less disruptive students and Human Capital, e.g. o Education savings, fewer crimes Work of Art Rolnick, Rob especially compared o Parents transfer new skills to Grunewald, Federal Reserve to other civic younger siblings Bank of Minneapolis investments, e.g. o Benefits to future generations

    stadiums, industrial (more education, income, less

    parks crime)

    o Break the chain of poverty

    o Higher returns than other

    government spending for

    economic development, e.g.

    stadiums, industrial parks

    For society/economy: Studies on Impact of o Direct effect of tax cuts on Fiscal Policies on rewards for working, saving, Children, e.g. investing, and on after-tax Work of William Gale, income Brookings Institution, o Indirect effect of tax cuts on Laurence J. Kotlikoff, Boston economic growth, savings University; Jagadeesh o Burden imposed on today‟s Gokhale, Invest in Kids children and future generations

    o Impact on taxpayers with and

    without children

     3 Cost/Benefit information adapted from C. Belfield. (February 2004). Early Childhood Education: How

    Important are the Cost-Savings to the School System? NY: Center for Early Care and Education, p.4.

    October 2004 4

The New Economics of Preschool

    TYPE OF Short-term Effects Medium-term Long-term Effects

    ECONOMIC Effects


     For society/economy: Economic o # of ECE Development Studies, establishments (e.g. e.g. small businesses) and # Work of Dr. Mildred of jobs created by these Warner, Cornell University businesses and Louise Stoney, Stoney o Economic activity Associates; National stimulated when ECE Economic Development and businesses purchase Law Center local good and services

    o Economic activity from

    ECE staff when they

    spend wages on local

    goods and services

    o Leveraging of state and

    federal investments --

    new dollars drawn into

    the regional economy

    o Economic activity

    stimulated by parents

    who are able to work

    and/or earn higher

    wages due to child


Cost/Benefit Analyses

The longitudinal studies conducted on the Perry Preschool Project, Abecedarian

    Intervention and Chicago Child-Parent Center have yielded sound empirical evidence that

    high quality early childhood programs yield significantly positive benefits for children in

    terms of IQ, school achievement, grade retention, need for special education, and social

    adjustment. The Perry Preschool Project involved 123 children followed until the age of

    27 years, who attended roughly two years of preschool for 2.5 hours/day, and received

    home visits from the teacher once a week. Participants were compared to a control group

    that did not receive these services. The analysis indicates that for every dollar invested 4in these services, over $7 in benefits was returned for the participants and society. The

    greatest savings are estimated to come from the reduction of crime and increases in

    earnings for participants.

Similarly, the Abecedarian Project in North Carolina provided 111 low-income children

    with a full-time high-quality preschool experience from infancy through age five.

    Participants and a control group have been followed over time, with the most recent

    assessment conducted when participants were 21. The research focused on a different set

    of social benefits than was measured in the Perry Preschool Project. The largest benefits

    from the Abecedarian Project were derived from increased earnings of the mothers and

     4 W.S. Barnett. (1996). Lives in the Balance: Age-27 Benefit-Cost Analysis of the High/Scope Perry

    Preschool Program. Monographs of the High/Scope Educational Research Foundation: Number 11.

    Ypsilanti, MI.

    October 2004 5

The New Economics of Preschool

    subsequent earnings of the participants, as well as a reduction in smoking and health-

    related expenditures. The more favorable findings for children who participated in the

    program compared to children who did not, reveal a benefit of $3.78 for each dollar 5invested.

These cost/benefit analyses underscore an important realization about the lasting effects

    of early care and education which is, “the real benefits are not from making children

    smarter, but from nurturing children‟s non-cognitive skills, giving them social, emotional 6and behavioral benefits that lead to success later in life.” This insight supports the

    claims that early care and education provides substantial long-term economic gains for

    future labor markets and future generations.

Some economists have examined specific economic benefits to determine where the

    greatest cost/benefits occur. Analyses by Clive R. Belfield of Teachers College,

    Columbia University, find enormous cost savings to the school system from the provision

    of early childhood education. The medium-term cost-savings to the state from

    investment in early care and education ranges from $2,591 to $9,547 per child

    participating in the program. The medium-term cost savings to the state from universal

    preschool programs range from $555 million to $828 million over the period K-12. 7These figures represented between 1.9% and 2.8% of total expenditures on education.

    The authors calculate the cost offset to the school system from investments in early care

    and education to be between 41% and 62% of the initial costs of the program.

Macroeconomic Studies of the Impact on Human Capital

James Heckman, a Nobel Laureate in Economic Sciences from the University of Chicago

    has made dramatic claims about the impact of early care and education because of the

    social skills that children learn in the early years which set a pattern for acquiring positive

    life skills later in life. He posits that our “preoccupation with cognition and academic “smarts” as measured by test scores to the exclusion of social adaptability and motivation 8causes a serious bias in the evaluation of many human capital interventions.” In

    addition, by focusing only on formal education as a mean to acquiring life skills, we

    ignore the important non-institutional sources of skill formation, such as families,

    employers, and communities.

Heckman also believes that analysis of human capital policies erroneously assumes that

    abilities are fixed at very early ages. In fact, child development research has

    demonstrated that basic abilities can be altered in the early years of life. Heckman‟s

    fundamental premise is that “skills beget skills,” i.e. more able people acquire more skills,

    and more skilled people become more able. This “dynamic complementarity” of skill

    and ability formation is not reflected in current economic models of analysis.

     5 L. N. Masse and W. S. Barnett. (2002). A Benefit-Cost Analysis of the Abecedarian Early Childhood

    Intervention. New Brunswick, NJ: National Institute for Early Education Research. 6 Committee for Economic Development. (September 2004). A New Framework for Assessing the Benefits

    of Early Education. A Working Paper. NY: p. 7. 7 C. R. Belfield. (2004). Early Childhood Education: How Important Are the Cost-Savings to the School

    System? NY: Columbia University, p. i. 8 J.L.Heckman. (2000). Invest in the Very Young. Chicago, Il: Ounce of Prevention Fund, p. 2.

    October 2004 6

The New Economics of Preschool

    Dr. Heckman began his research by investigating the economic return of job retraining

    programs for steelworkers. He realized that these programs were ineffective because

    steelworkers had difficulty learning new skills late in life and they had fewer years in 9which to recoup the costs of training. Heckman makes a strong case for a higher return on human capital when dollars are spent on the young rather than the old. For the same

    reasons, he further asserts that in order to encourage college attendance, investments in early

    childhood would be more effective than grant or loan programs to economically or

    cognitively disadvantaged teens. Heckman concludes, “The returns to human capital

    investments are greatest for the young for two reasons: (a) skill begets skills, and b) younger 10persons have a longer horizon over which to recoup the fruits of their investments.”

     Microeconomic Studies on the Impact on Human Capital

The effects of early care and education on human capital are based on: a) the future

    productivity of participants; and b) the improved socialization of participants who are

    more likely to pursue healthy, socially positive behaviors. A working paper by the

    Committee for Economic Development states that, “Although raising human capital is an

    easily agreed-upon goal, finding cost-effective programs that lead to long-term increases

    in human capital is difficult. The possibility of early education as a potent economic 11development tool presents a fresh opportunity.”

This opportunity has been pursued with gusto by Art Rolnick and Rob Grunewald from

    the Federal Reserve Bank of Minneapolis, who challenged the way in which Minnesota

    subsidized private businesses, and suggested that a far more effective way to generate a

    return on investment would be to focus on early care and education. “If properly funded

    and managed, investments in early childhood development yield an extraordinary return, 12far exceeding the return on most investments, private or public.”

Like Heckman, Rolnick and Grunewald rely on the longitudinal cost/benefit analyses

    discussed above and claim economic gains not only for those being educated, but for the

    overall economy. While the child who has experienced early care and education is more

    likely to succeed in school and later contribute to society, a child without early care and

    education is more likely to drop out of school, receive welfare benefits and commit crime.

    Their calculations suggest that the direct benefits to children who attended the early

    childhood program, such as increased after-tax earning and fringe benefits, were smaller

    than those gained by the general public. “Based on present value estimates, about 80% of

    the benefits went to the general public, yielding over a 12% internal rate of return for 13society in general.” The calculations follow that two years of a high quality early

    education experience such as the Perry Preschool program would cost $9,000 per year, or

     9 Heckman, p. 2. 10 Heckman, p. 5. 11 Committee for Economic Development. (September 2004). A New Framework for Assessing the

    Benefits of Early Education. A Working Paper. NY: p. 3. 12 A. Rolnick and R. Grunewald. (December 2003). Early Childhood Development: Economic

    Development with a High Public Return. Fedgazette. p. 7. ( 13 Rolnick and Grunewald, p. 9.

    October 2004 7

The New Economics of Preschool

    $18,000. At a 12% return, the value created in 30 years from this investment is $124,776 14in today‟s dollars.

Rolnick and Grunewald suggest that cost/benefit analyses may understate the true, long-

    term impact of early care and education because they do not measure the positive effects

    on children born to participant families after the study period. Younger siblings of

    participants are likely to benefit from having better informed parents. In addition, these

    studies do not take into account the effect on future generations. “With increased

    education and earning, participants‟ children would be less likely to commit crime and

    more likely to achieve higher levels of education and income than if their parents hadn‟t 15attended the Perry Preschool program.” A profound, long-term effect of early care and

    education, with significant economic gains, would be the ability of quality early

    childhood programs to break the chain of poverty, which the authors claim may very well

    be the case.

The authors conclude, “The conventional view of economic development typically

    includes company headquarters, office towers, entertainment centers, and professional

    sports stadiums and arenas. We have argued that in the future any proposed economic

    development list should have early childhood develop at the top. The return on

    investment from early childhood development is extraordinary, resulting in better 16working public schools, more educated workers and less crime.”

A working paper from the Committee for Economic Development applies the same

    reasoning as Heckman, Rolnick and Gruewald to demonstrate how early care and

    education is a far better investment than the industrial parks, professional sports teams,

    and inducements to high-profile companies on which government spends billions. They

    even posit that these traditional “inducement and marketing” policies often have negative

    returns on investment. When compared to the returns projected by the Perry Preschool

    Project and Abecedarian Early Intervention Project, there is little question that early care 17and education is a much more successful economic investment.

Studies on the Impact of Fiscal Policies on Children

Concern about how the next generation will pay for today‟s tax and health care policies is

    the focus of work by William G. Gale of the Brookings Institution and Laurence J.

    Kotlikoff of Boston University and the National Bureau of Economic Research. In

    concert with the working group, Invest in Kids, the National Economists Club and the

    Early Childhood Funders‟ Collaborative, among others, the authors show how recent tax

    cuts and medicare spending increases enacted since 2001 will “redistribute resources

    across generations by raising the fiscal burdens placed on future generations and reduce

    the burdens placed on current generations...and could plausibly run into the tens of

     14 R. H. Dugger. (August, 2004). U.S. Workforce Quality, Fiscal Sustainability, A Ten Year Plan. New

    York: Committee for Economic Development, Invest in Kids Working Group. p.12. 15 Rolnick and Grunewald, p.10. 16 Rolnick and Grunewald, p. 11. 17 Committee for Economic Development. (September, 2004). Developmental Education: The Value of

    High Quality Preschool Investments as Economic Tools. NY.

    October 2004 8

The New Economics of Preschool

    18thousands of dollars per child.” The fact that many children‟s initiatives are

    discretionary programs, e.g. Head Start, WIC, Title I Education funding, leaves them

    vulnerable at both the federal and state levels as legislators look for funds to pay for the

    tax cuts and subsequent debt. The authors conclude that projected budget deficits facing

    the nation as a result of recent fiscal policies provide a sound justification for investing in

    children. Because of the fiscal burdens imposed on future generations, it is imperative

    that the nation equip future generations with the human capital and other resources

    needed to be productive. The human capital and labor market studies reviewed in this

    paper further demonstrate the wisdom of investing in early care and education as a means

    of achieving long-term economic growth even in a time of fiscal constraint.

Economic Development

    The credit for the proliferation of local and regional What is the Child Care Industry studies linking economic development and child care in New York State? belongs to Mildred Warner, an economist at Cornell Regional economic analyses typically include

    data on all full and part-day child care and early University. In collaboration with Louise Stoney, an

    education programs, including: child care centers, independent consultant in early care and education Head Start, PreKindergarten, nursery schools, after-policy, studies have been done on the importance of school programs and family child care homes. (Most early care and education services to regional care studies have excluded unregulated home-basedbecause it is difficult to count.) In New York State, economies in the states of Kansas, New York and these programs represent: Massachusetts, as well as in the New York State ? 22,000 small businesses counties of Nassau/Suffolk (Long Island), Chemung ? 119,000 employees and Tompkins. Additionally, the Linking Economic ? a $4.7 billion dollar industry

    ? 750,000 working parents, who collectively Development and Child Care Project, led by Warner,

    earn over $30 billion annually has created a website that includes a database of Investing in New York; An Economic economic information and links to economic Analysis of the Early Care and Education 19research information around the country. Sector, NYS Child Care Coordinating Council, 2004 Warner posits that in order for economic

    development approaches to be applied to child care, “the industry must begin to present 20itself as a participant in the economic sector.” Traditionally, state and local

    governments have assumed a “competitive stance” to attract higher-income taxpayers and industry to the region. In other words, they saw growth as attracting new businesses to

    the area; businesses that would create jobs and generate economic activity. The factors

    considered in economic projections did not include any aspects of the social

    infrastructure. However, “new theories of economic development emphasize investments

    in the social infrastructure and the quality of life as foundations for a new creative

     18 W. G.Gale and L.J.Kotlikoff. (2004). Effects of Recent Fiscal Policies on Today‟s Children and Future

    Generations. Working Paper. p. 3, p. 12. 19 The Cornell website provides links to all state and local studies on the economic impact of the early care

    and education industry, along with research reviews and lessons learned. The website also includes an

    interactive methodology guide, a quantitative database of current, national sources of comparative data on

    the early care and education sector, and a host of other resources that can help states conduct these

    economic analyses. 20 M. Warner, R. Ribeiro and A.E.Smith. (2002). Addressing the Affordability Gap: Framing Child Care as

    Economic Development. Journal of Affordable Housing and Community Development Law,12(3), p. 295.

    October 2004 9

The New Economics of Preschool

    21economy.” Thus, if early care and education begins to present itself as an industry that

    not only improves the quality of life but also creates jobs, generates economic activity and

    draws new (federal and state) dollars into the regional economy -- the result is a win/win

    for everyone. One can see the power of the numbers describing the magnitude of the early

    care and education industry in New York State in the box above.

Limitations of Current Short-Term Study Methodologies

    To date, most studies of the short-term economic importance of child care have relied on

    input-output analysis (I/O). This is a standard tool used by economic development

    professionals to estimate the regional economic impact of an industry, including

    estimates of the "direct effects" as well as the ripple or "multiplier effects" of the industry.

    Direct effects include quantifying total gross receipts (revenues) of the industry as well as

    the number of small businesses, employees, children enrolled and families served.

    Multiplier effects result from spending by an industry. These multipliers, or "ripples" can

    be counted at two levels, including:

     indirect effects that measure how much economic activity is stimulated by

    early care and education businesses when they purchase goods and services

    from local suppliers; and

     induced effects that measure how much economic activity is generated by

    early care and education employees as they use their wages to purchase goods

    and services from local businesses.

Most studies of the short-term economic importance of the early care and education

    industry also attempt to estimate the economic value “An economic analysis provides an of enabling parents to go to work. This is typically opportunity to bring together feminist done by estimating the number of parents who use notions of care and count them in paid child care, multiplying this by the average wage, traditional economic development terms. and then stating that some portion of this sum can be Future research must look at other

    physical infrastructures and how they are attributed to child care. Unfortunately, there is no measured and adapt these approaches to research to indicate what portion of earnings can, in an investment in a social infrastructure fact, be attributed to child care services. Several like child care. These analyses can help studies have attempted to address this issue. Two identify practical community development

    tools that bridge the divide between Colorado studies, in Larimer and Boulder Counties,

    physical capital and human development conducted a survey to estimate the wages that some models. Policies typically reserved for parents would forgo if paid child care were no longer economic development can be applied to available. In a telephone survey to Larimer County child care.” households, 41% indicated that one parent would Warner, Ribeiro, and Smith, Addressing the

    Affordability Gap: Framing Child Care as have to stop working if paid child care were no longer Economic Development, p. 310 available, while 20% of households reported that one

    parent would have to reduce the number of hours 22worked each week if there were no child care.

     21 Warner, Riberio and Smith, p. 295. 22Larimer County Early Childhood Council. (July, 2003). Economic Impact of the Early Care and

    Education Industry in Larimer County. CO, p. B-5.

    ( .)

    October 2004 10

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