In this series of posts, I am exploring how the economic development benefits of business incentives and early childhood programs vary when considered from a national perspective, compared to a state or local perspective. This topic is explored in depth in chapter 10 of Investing in Kids.
Why do we care about the differences between the state perspective and the national perspective? We care mainly because of what this difference implies for federal policy. If national benefits of some program exceed state benefits, there is a risk that states may underinvest in the program. If national benefits are less than state benefits, states may overinvest in the program. In either case, there may be a rationale for some federal policy intervention.
A previous post found that the benefits of typical high-quality business tax incentives were much lower from a national perspective, compared to a state perspective. This post will look at the national benefits of early childhood programs.
In chapter 10 of Investing in Kids, I find that the national benefits of early childhood programs are significantly greater than benefits from a state or local area perspective. In shifting from a state perspective to a national perspective, the percentage increase in benefits is similar for the three programs I consider: preschool; the Nurse Family Partnership; full-time child care and preschool. For each program, the percentage increase in benefits is slightly over one-third.
For early childhood programs, national economic development benefits exceed state economic development benefits because of out-migration. Some participants in a state’s early childhood programs will end up spending some or all of their adult worklife in some other state. These increased earnings in other states will be counted from a national perspective, but not from a state perspective.
Why do national benefits exceed state benefits for early childhood programs, while national benefits are less than state benefits for business tax incentives? Early childhood programs provide services that raise economic productivity. Business tax incentives do not directly raise business productivity. Business tax incentives only induce certain changes in business behavior. Some of those changes in business behavior, such as increased national investment, may increase national output. Other changes in business behavior due to business tax incentives, such as business’s making different business location decisions, do not in general improve business productivity.
The excess of national benefits over state benefits for early childhood programs are the benefits that accrue to other states. These “other state” benefits are sufficient to potentially justify a considerable federal subsidy for such programs.
For example, I calculate that for each dollar a typical state invests in universal pre-k, the state’s own economic development benefits are $2.78, and the national benefits are $3.79, which implies that other states receive economic development benefits of $1.01. In other words, if state X on its own decided to not invest in universal pre-k, it would be in the self-interest of other states to subsidize state X to provide universal pre-k.
However, there are other issues involved in deciding on federal policy towards early childhood programs. I will consider these issues in a future blog post.