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Remarks at the Early Childhood Research Collaborative Conference

December 7, 2007
Early Childhood Research Collaborative Conference | Federal Reserve Bank of Minneapolis 

Remarks at the Early Childhood Research Collaborative Conference

NB: The italics in this talk are from the original speeches.

Let me begin by welcoming you, once again, to the Federal Reserve Bank of Minneapolis and also by telling you what a pleasure it is to sponsor this conference with the University of Minnesota. I've had the privilege of leading this institution for a number of years now, and it has been a rewarding experience to observe and participate in the fruitful relationship that exists between the Bank and the University.

Working together, the University's economics department and the Bank's research department—and you would be forgiven if you think those are one and the same—have produced research that has sparked revolutions in economic theory and monetary policymaking, and has even helped spawn a Nobel Prize or two along the way. In addition, this academic partnership—which is further realized by the Bank's cooperation with the University's Humphrey Institute of Public Affairs, its Journalism and Law schools, and other departments—has generated educational programs and influenced public policy initiatives, often in surprising ways. In that regard, perhaps none is more surprising than forming an Early Childhood Research Collaborative and holding research conferences on the subject of early childhood development.

I use the word "surprising" because when you think of the Federal Reserve and its research and policy responsibilities, the first topic that comes to mind is likely not early childhood development. Frankly, it is unlikely to be even the second or third topic that comes to mind. But that's changing. Increasingly, state and local governments are looking to their Federal Reserve banks for support on this emerging issue—and not just the Minneapolis Fed. Why is this happening? Let me begin to answer that question by citing some recent speeches by my colleagues in the Fed:

Sandy Pianalto said that when she became president of the Cleveland Fed, she asked her research department to put a sharper focus on the issues that are shaping her district. Education was at the top of the list. "We all should care about this issue," Sandy said, "and I am convinced that it begins with early childhood education."

Janet Yellen, president of the San Francisco Fed, has noted that "skill acquisition is a cumulative process that works most effectively when a solid foundation has been provided in early childhood. As such, programs to support early childhood development, such as preschool programs for disadvantaged children, not only appear to have substantial payoffs early but also are likely to continue paying off throughout the life cycle."

Finally, a few words from Jeff Lacker at Richmond: "On many issues, the economics of the question are not decisive, though economics does tend to spotlight the often-overlooked costs associated with many otherwise seemingly attractive ideas. On some questions, however, economic research sends a fairly clear message. I believe that early childhood development is such an issue."

So as you can see, other Federal Reserve banks have also been out front on this seemingly un-Fed-like topic. But let me step back and put these statements in a broader context that will further explain why the Federal Reserve has taken an active interest in early childhood development.

As all of you know, this country's central banking system includes 12 district banks and a Board of Governors in Washington, D.C. While the role and purpose of those 12 district banks could be the subject of a separate speech, one clear function of those banks is to understand what makes their regional economies tick. This recalls Sandy Pianalto's charge to her research department: Tell me what issues matter most to our district's economy.

This charge is one shared by all Federal Reserve banks, and it is a responsibility that has attained a sharper focus in recent decades as Congress has passed a series of laws, beginning with the Community Reinvestment Act of 1977, to ensure equal access to financial services and equal opportunity for all citizens. More than just supervising banks to ensure that they are upholding the letter of the law, Federal Reserve banks are working with their local communities on issues ranging from housing to credit availability to education.

But it's not just our district economies and our legal mandates that have motivated us to take a hard look at education: This topic circles back to core economic research, the very kind that the Bank and University have contributed to over the years. One such field of investigation is that which compares the economies of various countries and tries to answer one of the most vexing questions in economics: Why are some nations rich and others poor?

Bob Lucas has made important contributions to this line of research, especially on the issue of human capital. In a 2003 Annual Report essay for the Minneapolis Fed, Lucas made a key point that has relevance for the work done by many of you in this room: "It is a unique feature of human capital that it yields returns that cannot be captured entirely by its ‘owner.' … These pervasive external effects introduce a kind of feedback into human capital theory: Something that increases the return on human capital will stimulate greater accumulation, in turn stimulating higher returns, stimulating still greater accumulation and so on." The key words there are "and so on." To all of you familiar with the benefit/cost ratio attributed to certain early childhood development programs, the "and so on" of these programs adds up to some serious positive external effects.

On the question of the comparative wealth of nations, Lucas famously said that once you start thinking about that question, it's hard to think of anything else. I would suggest that the same is true at a more micro level for the United States: When you start thinking about why some states and cities are richer than others, it's hard to think of anything else. It's a motivating question that, when you come right down to it, frames much of the economic and policy debate in this country. And if the answer to this question involves human capital, then the next question follows: Why are some states and cities better educated, or better at education, than others? These are the types of questions that perplex policymakers and economists, and also Federal Reserve banks, and that's why we keep asking them.

And, of course, there are no easy answers, which is why all of you made the questionable decision to travel to Minnesota in December. You would think that with all of that intellectual firepower that I referred to at the beginning of this speech, we would have picked a more temperate month for you to pay a visit. Or maybe this just reveals how serious we are about this topic, and how seriously all of you take this issue.

Before I close, I want to briefly describe the current efforts under way here at the Minneapolis Fed on this issue. As many of you know, Art Rolnick and Rob Grunewald, following on the work of some of you in this room, have been making the economic case for early childhood programs for at-risk children for a number of years. Over this time, they have been challenged by skeptics to bring their ideas to scale. It's one thing to cite focused studies with relatively small numbers of families and tout the high returns, these skeptics say, but it's quite another to actually implement those ideas in a broad way.

Art and Rob accepted that challenge and drafted a proposal that, in effect, puts the market to work to stimulate demand and create a supply of quality child care programs. I won't go into the details here, but I will add that Art and Rob's plan—as adopted by the Minnesota Early Learning Fund, a unique nonprofit funded mostly by corporate donations—will get its first real test in St. Paul beginning in January, when 1,200 at-risk families will receive scholarships for high-quality child care. Additionally, other Twin Cities school districts, as well as those in rural Minnesota and other parts of the country, have begun programs that incorporate Art and Rob's market-based approach. Will the skeptics be proved wrong? Time will tell, but as an economist, I can say that I'm hopeful. Finally, I would like to end with a fitting quote from Fed Chairman Ben Bernanke, who gave a talk earlier this year on this very subject:

"Although education and the acquisition of skills is a lifelong process, starting early in life is crucial. Recent research—some sponsored by the Federal Reserve Bank of Minneapolis in collaboration with the University of Minnesota—has documented the high returns that early childhood programs can pay in terms of subsequent educational attainment and in lower rates of social problems, such as teenage pregnancy and welfare dependency. The most successful early childhood programs appear to be those that cultivate both cognitive and noncognitive skills and that engage families in stimulating learning at home."

There's that partnership again. And in that quote, Bernanke also makes reference to the academic work underpinning this conference, for he cites research by Jim Heckman, who of course is in attendance. And speaking of Jim, I would be remiss not to acknowledge the huge debt that the profession owes him for almost single-handedly establishing the economic bona fides of this issue. His research was the foundation for the work produced at this Bank and by the University and has influenced every serious economic and policy research project on this issue, which means he has also had a vicarious hand in many of the policy reforms taking place across the country—however nervous that makes him feel.

Thank you very much.