Public investments in projects like new stadiums never achieve returns equal to those from early childhood education—which several small studies have assessed at 7 percent to 20 percent. Now Minnesota is testing whether scaling up can produce the same results.Early childhood education ; Early childhood education - Minnesota

Arthur J. Rolnick

Rob Grunewald

English

Research Papers in Economics

Communities & Banking    3
F
For more than 20 years, govern-
ment  leaders  at  the  state  and 
local levels have invested pub-
lic dollars in economic develop-
ment schemes that represent a 
zero-sum game.1 In the name of 
boosting the local economy and 
creating new jobs, virtually ev-
ery state has tried to lure com-
panies  with  public  subsidies. 
But  the  case  for  the  resulting 
bidding  wars  is  shortsighted 
and fundamentally flawed. 
by Arthur J. Rolnick and Rob Grunewald 
Federal Reserve Bank of Minneapolis
P
h
o
t
o
 
G
e
t
t
y
 
I
m
a
g
e
s
Early 
Education’s Big
Dividends
Early 
Education’s Big
Dividends
The Better Public Investment
This Communities & Banking article is copyrighted by the Federal Reserve Bank of Boston. The views expressed are not necessarily those of 
the Bank or the Federal Reserve System. Copies of articles may be downloaded without cost at www.bos.frb.org/commdev/c&b/index.htm.4   Spring 2008
Jobs  are  not  created  by  such  pro-
grams—they  are  only  relocated.  From  a 
national  perspective,  the  public  return  is, 
at most, zero. Even the apparent economic 
gains at state and local levels are suspect be-
cause, more often than not, subsidized com-
panies have other reasons for location deci-
sions and the public subsidy is just gravy. 
What passes for economic development and 
sound  public  investment  is  often  neither. 
There are better investments: for example, 
human capital investments, especially when 
started early.
Early Childhood and 
Economics
Speaking to business leaders in Omaha, Ne-
braska, in February 2007, Federal Reserve 
Chairman Ben Bernanke pointed to a grow-
ing body of research demonstrating the high 
returns that investments in early childhood 
development  have  garnered  “in  terms  of 
subsequent educational attainment and in 
lower rates of social problems, such as teen-
age pregnancy and welfare dependency.”2
It should be no surprise that the Fed-
eral Reserve is interested in this. Although 
the  Fed  focuses  much  of  its  research  on 
monetary policy and banking issues, it also 
studies how economies grow and the condi-
tions that affect growth. Workforce quality 
and public investment in human capital de-
velopment are critical for economic growth. 
Research shows that human capital invest-
ments that start in early childhood can have 
especially impressive returns. 
Investments  prior  to  kindergarten—
especially  for  children  considered  at-risk 
because of poverty, abuse, neglect, parent 
chemical  dependency,  among  other  fac-
tors—can have a substantial impact on the 
sorts of students, workers, and citizens the 
children eventually become. This is the most 
efficient means to boost the productivity of 
the workforce 15 to 20 years down the road. 
As  University  of  Chicago  Nobel  laureate 
economist James Heckman says, “Enriching 
the early years will promote the productivity 
of schools by giving teachers better-quality 
students. Improving the schools will in turn 
improve the quality of the workforce.”3 
But  what  about  the  zero-sum  game 
that many localities play? We don’t pretend 
to have all the answers, but we’re certain 
that investing in early childhood education 
is more likely to create a vibrant economy 
than using public funds to lure a sports team 
by building a new stadium. Several longitu-
dinal evaluations reach essentially the same 
conclusion: The return on early childhood 
development programs that focus on at-risk 
families far exceeds the return on other eco-
nomic-development projects. 
Cost-benefit analyses of the Perry Pre-
school Program in Ypsilanti, Michigan, the 
Abecedarian Project in Chapel Hill, North 
Carolina,  the  Chicago  Child-Parent  Cen-
ters, and the Prenatal/Early Infancy Project 
in Elmira, New York, showed annual rates 
of  return,  adjusted  for  inflation,  ranging 
between 7 percent to just over 20 percent.4 
The findings lead to another question. Can 
the  success  of  small-scale  early  childhood 
development programs for at-risk children 
be reproduced on a much larger scale? 
Increasing the Scale
There are reasons to be skeptical. Programs 
such as Head Start and some other attempts 
to  reach  a  large  number  of  at-risk  fami-
lies  have  not  consistently  generated  high 
returns. Although a full critique of Head 
Start  is  beyond  the  scope  of  this  article, 
several  studies  have  concluded  that  even 
though pockets of success exist, long-term 
gains from Head Start have fallen short of 
the results achieved by the Perry Preschool, 
Abecedarian, and other programs we stud-
ied. It is true that Head Start is not funded 
at the levels of those model programs, but 
we think the problem cannot be solved by 
more funding alone. We argue that funding 
a top-down, planned system is unlikely to 
yield consistently high returns. Large-scale 
efforts can succeed if they are market based 
and incorporate four key attributes: a focus 
on  at-risk  children,  parental  involvement, 
measurable  outcomes,  and  a  long-term 
commitment. 
Getting  those  attributes  into  large-
scale programs requires the flexibility, in-
novation, and incentives that are inherent 
in markets. For some, that is a radical idea, 
but  many  middle-  and  upper-class  fami-
lies have long benefited from the power of 
markets for early childhood education—by 
choosing  the  early  learning  centers  that 
their  children  attend  and  by  demanding 
results from those providers. 
Why  not  give  the  same  purchasing 
power to those of lesser means? Our idea 
is  to  provide  scholarships  that  empower 
parents of at-risk children to access high-
quality  early  education.  Programs  eligible 
to  attract  scholarship  children  must  have 
characteristics  that  correlate  with  school 
readiness  outcomes,  such  as  well-trained 
teachers,  relatively  low  ratios  of  children 
to teachers, and research-backed curricula. 
Qualified early education providers would 
then compete for the scholarship children, 
and  parents  would  make  decisions  about 
which  providers  they  preferred  for  their 
children. This market-based approach is in 
contrast to the more conventional approach 
of increasing funding of existing programs, 
such as public school-based preschool pro-
Cost-benefit analyses showed annual rates of 
return, adjusted for inflation, ranging between 
7 percent to just over 20 percent.Communities & Banking    5
grams, child-care subsidies, and Head Start. 
Nevertheless, those programs can benefit by 
enrolling the scholarship children.
To  establish  a  successful,  long-term 
commitment, we have proposed a perma-
nent scholarship fund for all families with 
at-risk  children.5  A  pilot  of  a  scholarship 
model based on this proposal began in Janu-
ary in St. Paul, thanks to volunteer families 
in  targeted  neighborhoods,  funding  from 
the Minnesota Early Learning Foundation, 
and  the  enthusiasm  of  preschool  provid-
ers that are expanding facilities to meet the 
need. For the next four years, low-income 
families  with  3-year-old  children  will  re-
ceive scholarships of up to $13,000 to pay 
for two years at a high-quality early educa-
tion program. 
Additionally, mentors will provide par-
ent education for families receiving schol-
arships, including information about avail-
able human-services, financial, and health 
resources,  and  guidance  on  selecting  an 
eligible early education program. Research 
shows that reaching children with multiple 
risk factors as early as possible is essential. 
Even age 3 may be too late. Therefore, the 
parent mentoring component is starting as 
early as prenatal in the pilot neighborhood. 
An independent evaluation of the scholar-
ship pilot will measure the impact on child 
outcomes, changes in the number of open-
ings at high-quality programs, and parents’ 
involvement in their children’s education. 
We  argue  that  earnings  from  an  en-
dowment for early childhood development 
would be an effective source to provide schol-
arships for children in low-income families 
throughout Minnesota. An endowed fund 
would send a signal to the market of early 
education programs that funds for scholar-
ships will be available into perpetuity. 
What would a permanent scholarship 
fund cost? In Minnesota, we estimate that 
a one-time outlay of about $1.5 billion—
about  the  cost  of  two  professional  sports 
stadiums—would  create  an  endowment 
that could provide scholarships on an an-
nual basis to the roughly 17,000 Minnesota 
3- and 4-year-old children living below pov-
erty. With the endowment’s funds invested 
in corporate AAA bonds, earning about 6 
percent to 7 percent per year, we estimate 
that $90 million in annual earnings would 
cover the costs of scholarships, parent men-
toring,  program  monitoring,  and  assess-
ments—and would supplement 
existing revenue sources as need-
ed for early childhood screening 
and teacher training reimburse-
ment programs.
Compared with the billions 
of dollars spent each year across 
the  country  on  high-risk  eco-
nomic development schemes, an 
investment  in  early  childhood 
development is a far better and 
more  secure  tool. We  are  con-
fident  that  such  investments—
driven  by  a  market-based  ap-
proach  that  focuses  on  at-risk 
children,  encourages  parental 
involvement,  produces  measur-
able  outcomes,  and  secures  a 
long-term  commitment—will 
achieve a high public return. 
Early Childhood Education
Arthur  J.  Rolnick  is  a  senior  vice  presi-
dent and the director of research at the Fed-
eral Reserve Bank of Minneapolis, where Rob 
Grunewald is an associate economist. 
Endnotes
1This article is based on a Federal Reserve Bank of San 
Francisco article, “The Economics of Early Childhood 
Development as Seen by Two Fed Economists,” Com-
munity Investments 19, number 2 (fall 2007), which 
was partially based on A. Rolnick and R. Grunewald 
“Early Intervention on a Large Scale,” Education Week 
26, no. 17 (January 4, 2007): 32, 34-36. 
2Benjamin S. Bernanke, “The Level and Distribution 
of Economic Well-Being,” remarks before the Greater 
Omaha Chamber of Commerce, Omaha, Nebraska, 
February  6,  2007,  http://federalreserve.gov/Board-
Docs/Speeches/2007/20070206/default.htm.
3J. Heckman and D. Masterov, “The Productivity Ar-
gument for Investing in Young Children,” Early Child-
hood  Research  Collaborative,  discussion  paper  104, 
August 2006, p. 43. Online at http://www.earlychild-
hoodrc.org/papers/DP104.pdf.
4Jean  Burr  and  Rob  Grunewald,  “Lessons  Learned: 
A Review of Early Childhood Development Studies” 
(Minneapolis: Federal Reserve Bank of Minneapolis, 
April 2006), http://minneapolisfed.org/research/stud-
ies/earlychild/lessonslearned.pdf/earlychild.
5For a detailed description of the scholarship fund, see 
A. Rolnick and R. Grunewald, “A Proposal for Achiev-
ing High Returns on Early Childhood Development,” 
working paper, Federal Reserve Bank of Minneapolis, 
March 2006, http://www.minneapolisfed.org/research/
studies/earlychild/highreturn.pdf.
P
h
o
t
o
g
r
a
p
h
:
 
I
S
t
o
c
k
p
h
o
t
o

Early education's big dividends: the better public investment

http://www.bostonfed.org/commdev/c&b/2008/spring/Rolnick_early_education_pays.pdf

Early education's big dividends: the better public investment

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics