The strengths and limitations of multiplier spending effects of early childhood programs

I have been asked by several people lately for my reactions to recent reports about the short-run multiplier and input-output effects on state economies of early childhood programs.  Over the years, these reports have been produced by America’s Edge, by the Linking Economic Development and Child Care project at Cornell University, and by the Insight Center for Community Economic Development.

These reports talk about the importance of high-quality early childhood programs for future work force skills and for providing child care support for parents. But what sometimes gets highlighted in media coverage are the short-term impact estimates on jobs of the spending associated with early childhood programs, and the multiplier effects of that spending.

For example, the recent news coverage of a report on Michigan highlighted that “investing in quality early childhood education…could …create up to 58,000 new jobs.” This job creation comes at a cost to the state of Michigan budget of $1.4 billion in additional spending. This additional spending is the amount estimated to serve 75% of all young children from birth through age 4 in Michigan with child care and preschool.

The implied cost per job created is about $24,000 (=$1.4 billion divided by 58,000 jobs created). This compares quite favorably with other job creation proposals. For example, the Obama Administration estimated that the economic stimulus had a cost “per job-year created” of about $112,000. I have argued in the past, at this blog and elsewhere,  that we need more cost-effective job creation proposals, such as a “job creation tax credit” or a combination wage subsidy and public service jobs program, that might create new jobs at about $30,000 per job-year created. $30,000 to create one job for one year is a modest cost compared to the likely benefits of job creation when unemployment is high.

Similar costs per job created numbers for early childhood programs have been produced for other states. The implied costs per job created are $45,000 for New York, $31,000 for Illinois and Maine, $29,000 for Pennsylvania, and $25,000 for Montana.

How should such numbers be interpreted? I have an extensive discussion of this issue in my book Investing in Kids, pp. 104-110. But here are some summary thoughts.

These job creation numbers provide a useful counterweight to political arguments over government taxation and spending that stress the damages that taxes can do to job creation. In discussing government budget decisions, too often the discussion omits the positive effects of spending on job creation. Spending creates jobs through the various multiplier effects highlighted in these reports. These include child care centers and preschools buying supplies from local vendors, and child care teachers and preschool teachers buying goods and services from local businesses.

It is entirely proper to point out that child care and preschool, because they are relatively labor intensive, and because they pay modest salaries, tend to create a larger number of jobs per dollar spent than some other types of spending.  In addition, in part because of the modest salaries in early childhood programs, more of the salaries paid are likely to be spent locally.

However, it should be noted that the press reports of these job creation numbers omit the negative effects of the taxes needed to finance this extra spending. These job creation numbers for a state from higher early childhood spending will only be achieved if the additional child care spending is financed from outside the state, by the federal government or some national foundation.

In most plausible political scenarios, this additional state spending would have to be largely financed by higher state taxes. The net short-run effects on job creation would combine the effects of spending that are highlighted in these reports, plus the negative effects of higher state taxes.

The net effect is likely to be positive in the short-run. Higher state taxes will not reduce demand for goods and services as much as the higher state spending will raise demand for state goods and services.  The spending has an immediate and direct effect in creating jobs in the state by increasing demand for early childhood services. In contrast, the higher taxes have only indirect effects on demand. Some proportion of the higher taxes would otherwise have been saved or spent out of state, and that proportion of the higher taxes will not negatively impact state demand for goods and services.  In addition, it is likely that early childhood spending is more labor intensive than the goods and services whose consumption is reduced by higher taxes.

For example, in some simulations that I have done with my colleague George Erickcek, we calculate that the short-run negative job effects of higher state taxes offset about two-thirds of the positive job creation impacts of higher state spending. There is a job creation impact of spending more on early childhood programs, but it is not as large as the impact if the spending was paid for by some entity outside the state.

As I have mentioned earlier in my blog, I estimate that in the short-run, high-quality preschool can create jobs at a cost of about $175,000 per job created. I get a higher cost per job created than the $24,000 to $45,000 range sometimes cited in press reports for two reasons. First, I include the negative effects of financing higher preschool spending through higher taxes.  Second, I assume that preschool teachers in high-quality preschool will be paid similarly to public school teachers. This reduces the job creation impact per dollar spent compared to using current average preschool salaries, which are much too low.  Although paying higher salaries lowers the short-run job creation impact per dollar spent on preschool, the evidence suggests that in the long-run, paying higher salaries will help build a higher quality program that will maximize long-run economic impacts.

In addition, as I have argued in this blog and in my book, I believe that state and local economic development policy should NOT focus simply on creating job growth and economic growth. The focus should be on increasing per capita earnings.

It is perhaps politically useful to sometimes cite figures on total jobs created in a state, or effects on the growth of state output of goods and services. This is similar to the way that state and local economic developers often talk about their work. Economic developers often focus simply on job creation. Who gets those jobs, and whether those jobs actually benefit anyone in the local economy – that is not traditionally seen as their responsibility.

But the real goal of state economic development policy is to raise the standard of living of state residents. This is accomplished in economic development policy largely through raising state residents’ per capita earnings. This is accomplished by raising employment to population ratios in the state or state wage rates.

Early childhood programs rank much higher as an economic development strategy if we focus on increasing earnings per capita rather than increasing job growth or the overall size of the local economy.  Much of the impact of early childhood programs is by raising the wage rates of former participants. Furthermore, early childhood programs do not attempt to have the in-migration effects of simply creating jobs. This is not a criticism from the standpoint of sound public policy, as it is not at all clear that current state residents’ benefit much from attracting additional population via job growth.  But stressing job growth and state economic output growth does not play to the real strengths of early childhood programs, which is increasing quality job opportunities for persons growing up in the state.

For early childhood programs to be seen as vital to state and local economic development strategies, we must encourage state policymakers, and state residents, to rethink what the goals are of state economic development. Whenever possible, we should stress the goal of higher earnings per capita. Creating jobs is merely a means to the end, and is better accomplished through creating quality jobs that state residents are able to fill.

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