Rob Grunewald - Associate Economist
Bjorn Markeson - Development Associate, First Children's Finance
Published December 1, 2007 | December 2007 issue
By Robert G. Lynch
Economic Policy Institute
A growing amount of evidence shows that investment in early childhood development is associated with a stronger future workforce, savings to remedial education and reductions in crime. In 2003, Art Rolnick and Rob Grunewald of the Minneapolis Fed argued that an investment in early childhood education could yield a return as high as 16 percent annually with a public return to nonparticipants of 12 percent, adjusted for inflation. The results were based on a study of the Perry Preschool Project in Ypsilanti, Mich., where at-risk children randomly selected to attend a high-quality preschool program were compared with a group od similar children who did not attend. Years later, the children who participated in Perry had higher achievement in school, lower crime rates and higher earnings in the workforce.
In addition to Perry, three other longitudinal studies demonstrate strong economic returns from early childhood investment, and a host of papers from neuroscience and developmental psychology illustrate how the early years impact a child's future. While this body of work makes a strong case for investing public dollars in early childhood education, relatively little research has looked at the effect of investment in early childhood education on state and federal budgets.
Specifically, how much would investment in such programs cost state and/or federal government agencies? When would government begin realizing a positive budget impact? And how large would the impact be?
Robert Lynch's recently released book, Enriching Children, Enriching the Nation, helps fill this gap. It provides a careful analysis of the long-term costs and benefits of investing in preschool for 3- and 4-year-old children. Lynch, an economist at Washington College, applies the results of the Chicago Child-Parent Center longitudinal study to all 50 states and conducts an accounting exercise to explore how costs and benefits of a similar program would likely change over time. The book first presents an overview of the CPC study in which children who attend a high-quality preschool program are compared with children without such a program. Like the Perry Preschool program, the CPC program had a substantial positive impact on children's lives that has lasted well into adulthood.
Lynch then presents budget scenarios for federal and state government investments in a CPC-style preschool program. For example, the book shows that it takes less than a decade for the annual benefits of federal or state investments in preschool to become higher than costs. The author presents results both for universal preschool programs and for those focused on children from low-income families. Finally, the book considers the net benefits to federal and state governments, depending on which level of government foots the bill.
The CPC program in Chicago has provided a half-day of prekindergarten and family-support services to economically disadvantaged children since 1967. The study of the CPC program has followed a sample of 1,539 low-income children born in 1980. The 989 children who completed the CPC prekindergarten program were compared to a similar group of 550 children who did not attend primarily because a CPC program was not available in their neighborhood. The researchers use a quasi-experimental design to control for characteristics that differ between the two groups. Results based on 2004 data (when the participants were 24 years old) show that those who attended a CPC program were less likely than the comparison group to have been retained in a grade, to have required special education, to have been arrested for a crime or to have been a victim of abuse or neglect.
Lynch points out that teachers in the program are well trained; they have at least a bachelor's degree with certification in early childhood education. The program also emphasizes parent involvement at the center.
The CPC study uses standard benefit-cost methodology, estimating the value of a stream of future benefits and comparing those to initial and anticipated future costs. Since a dollar tomorrow is worth less than a dollar today—because of inflation, risk, impatience to consume something now rather than later—future costs and benefits are mathematically discounted in order to calculate their present value. After adding up the (discounted) benefits from better school performance, higher earnings and reductions in crime, including reduced pain and suffering to crime victims, the benefit-cost ratio was about 10 to 1, that is, $10 of program-induced benefit for every $1 of program-related cost.
Lynch applies the framework developed in the CPC study and considers the budgetary impact of the federal government or state governments implementing a CPC-style preschool program that is either targeted at children from low-income families or available for all children. The average cost of the program on a per child basis is $6,300 in 2006 dollars, differing slightly by state.
Lynch first estimates the number of children served annually and the occurrence of benefits as cohorts age. For example, reductions in special education spending kick in within the first few years, but governments don't see increased earnings and tax revenue for about 15 years. Lynch then calculates the benefits and costs in each year for the nation and by state.
This approach differs from the benefit-cost analysis of the CPC study. Instead of showing the discounted present value of benefits versus costs, Lynch gives policymakers a glimpse of the potential ebb and flow of benefits and costs annually through 2050. It's the difference between a "What's the bottom line?" perspective and a cash-flow picture. The book and accompanying Web site list these ebb and flow results nationally and by state, showing for each the number of years needed for annual benefits to exceed costs, as well as the ratio of benefits to costs in 2050.
The benefits are divided into three categories: government budget benefits, increased compensation and savings to individuals from reduced crime. As might be expected, budget benefits to government show a net gain over time from investments in preschool. By 2050, suggests Lynch, the ratio of benefits to costs for state governments that invest in cooperation with the federal government in a preschool program targeted at children from low-income families range from 1.95 in Alabama to 7.25 in Delaware. The book makes the case that legislators in 2050 would be thanking their predecessors for having made an investment in preschool.
As shown in the table below, programs targeted to 3- and 4-year-old children from the lowest quarter of income distribution begin paying for themselves earlier than universal programs (a payback period of 6 years versus 9 years) and have a higher benefit-cost ratio in 2050 (12.1 to 1 versus 8.2 to 1). The author doesn't advocate one strategy over the other, but simply shows that, on a per child basis, the economic return is higher for a targeted program. The reasons are clear: Children from low-income families are more likely to require remedial education services and to commit crime than children from middle- or high-income families. In addition, middle- and higher-income families would have been more likely to send their children to preschool if a universal public system had not existed—that is, the costs would have been borne privately.
Both federal and state governments benefit from investments in preschool, argues Lynch. "Approximately 38 percent of the total budgetary benefits accrue to the federal government and 62 percent go to state and local governments," he writes. This suggests that both levels of government would be better off if they invested in preschool.
But what if just one unit of government takes on the costs of early childhood education? While net benefits to federal and state governments vary by funding source, Lynch's estimates "show that the investment still pays for itself in the end, and it is sensible for state governments or the federal government or both to invest in high-quality early childhood education."
Lynch's forecasts are useful for future planning, but we thought it would be interesting to apply his methodology to the past. Using the author's parameters, we did a rough calculation of the impact of an investment in preschool looking backward over time; that is, what would government budgets look like in 2006 if an investment in preschool had been made in 1972? Had politicians and the public been so enlightened, the impact would likely have been substantial.
In Minnesota, for example, the state budget would have begun to enjoy benefits exceeding costs in 1988, 16 years after the initial investment. Total cumulative benefits relative to costs would have turned positive in 1997. As of 2006, the benefit-cost ratio would have been 2.60 to 1, and total accumulated net savings would have ranged between $1 billion and $1.5 billion through 2006 (in 2006 dollars).
We then compared hypothetical government savings in remedial education and crime and increased government revenue with actual expenditures and Census Bureau revenue data from 1972 to 2006. We estimate that Minnesota could have realized major savings in K-12 education ($2.12 billion), police protection and corrections ($1.56 billion) and increased tax revenue ($335 million). However, net benefits would have been reduced by higher expenditure for postsecondary education—more students would likely have moved through the state's college and university system on financial assistance. Even so, these calculations might give current legislators the same pause they give Lynch's anticipated 2050 legislators.
While Lynch's analysis is careful, there are caveats to consider. The author doesn't use a dynamic model to analyze the impact of public investment. If taxes were raised or government revenue shifted to fund preschool, for instance, those changes would have negative economic impact; Lynch neglects to include such effects. In addition, the analysis assumes that the benefits from the urban CPC study are applicable to states that lack large cities, an assumption that may be unfounded. Both of these considerations could lead to lower estimated budget impacts of preschool. In contrast, the author argues that his analysis likely underestimates total benefits because unmeasured positive impacts, such as likely improvements in health, reductions in adult welfare usage and other life changes, were not included.
It's also important to note that an investment in preschool for 3- and 4-year-old children is just one of a number of available investments for children from birth to age 5. Other examples include home visiting programs for pregnant mothers, access to health care and incentives to improve child care. As policymakers consider investing in early childhood education, they should realize that investing in a mix of research-tested birth-to-5 programs will likely have higher payback than investing in preschool alone.
Lynch's book is accessible to readers not steeped in the details of early childhood research and policy. The introduction and first chapter ably provide motivation for the analysis and give a sound overview of key early childhood studies, including those of the federal Head Start program. Subsequent chapters carefully present results and include easily digestible graphs.
Still, while the book is accessible to the lay public, it clearly isn't designed for leisure reading. We heartily recommend Enriching Children, Enriching the Nation, but wouldn't suggest you wrap up a copy for a friend's birthday. However, sending your state legislator a copy or a link to the book's Web page, which includes state fact sheets, might lead to the enlightenment we wish our policymakers had had 30 years ago.
* First Children's Finance is a national organization based in Minneapolis that builds the business infrastructure of child care and early education through capital investment, business planning and management services.