Investing in Kids: Early Childhood Programs and Local Economic Development

7. Bringing the Future into the Present: How Policymakers Should Deal with the Delayed Benefits of Early Childhood Programs

175 7 Bringing the Future into the Present How Policymakers Should Deal with the Delayed Benefits of Early Childhood Programs As discussed in Chapter 4, early childhood programs and business incentives differ in their benefits’ timing. Business incentives deliver sizable economic development benefits almost immediately. Jobs are attracted,andthisimmediatelyincreasesemploymentratesandupgrades many state residents to better jobs. In contrast, most benefits of early childhood programs are long delayed. Early childhood programs have some economic development benefits in the short term. Free child care and other services to parents increase parental labor supply. Spending more money stimulates the state economy. But these short-term economic development benefits are modest. During the years right after these programs are begun, earnings of state residents go up by only 20 to 30 percent of program costs. Annual earnings effects of these programs do not exceed annual costs until at least 20 years later. (Figure 7.1, which reproduces Figure 4.2, shows the time pattern of effects.) These delays in benefits occur because so many of the benefits are due to the improved adult labor supply of former child participants. Better child development’s benefits are only achieved in the long run. The delayed nature of benefits from early childhood programs raises two issues. First, how should policymakers weight future benefits versus current costs? I will argue that policymakers should not discount future benefits too much. At any reasonable discount rate, benefits exceed costs for high-quality early childhood programs. However, policymakers often do drastically discount or disregard social benefits that are in the future. This leads to the second issue. Given that policymakers discount the future too much, what can be done to encourage policymakers to adopt early childhood programs? How can we get policymakers to adopt programs that are socially beneficial but politically unattractive because their benefits are delayed? Various approaches will be discussed to making such programs more attractive. We can work on 176 Bartik costs. Short-run costs can be postponed or reduced. Alternatively, we can work on benefits. Long-run benefits can be shifted toward the present . Short-run benefits can be increased. Improving the short-run benefits versus costs of early childhood programs would put these programs on a more level playing field with business incentive programs. As will be discussed below, business incentive programs use various techniques to increase short-run benefits relative to costs. The magnitude of short-run benefits versus costs is not an immutable attribute of a program, but can be affected by policy. Figure 7.1 Ratio of Annual Economic Development Benefits for State Residents to Program Costs, Each Year after Permanent Program Is Begun, for Three Early Childhood Programs and a Business Incentive Program NOTE: As defined in this book, annual economic development benefits for state residents are just effects on state residents’ earnings per capita. This figure assumes that one of three early childhood programs is begun in 2011 and continues permanently. The figure reports effects on state residents’ earnings due to increases in the earnings of the state's original residents who remain in the state. For comparison, the figure also shows effects for a permanent program of business incentives whose scale remains at the same percentage of the state economy over time. This figure is identical to Figure 4.2. 4.5 5.0 osts Abecedarian NFP B i i ti 3.5 4.0 o annual co Business incentives Universal pre-K 2.5 3.0 benefits to 1.5 2.0 of annual 0.5 1.0 Ratio 0.0 2000 2020 2040 2060 2080 2100 Bringing the Future into the Present 177 DISCOUNTING What social discount rate should be used for evaluating public policies ? This question has been extensively debated in the economics literature . Recently, the debate over discount rates has been reignited in discussing environmental issues. Environmental issues such as global warming often involve trade-offs between short-run costs and long-run environmental benefits. The discount rate used to compare future benefits with current costs makes a big difference in whether specific policies pass a benefit-cost test. Low social discount rates support stringent environmental policies. High social discount rates support lax environmental policies. For this book, I assume we are determining a discount rate for comparing consumption over time. What is the value of a dollar of consumption a year from now, or 10 or 30 years from now, compared to a dollar...