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February 13, 2013

We Shouldn’t Care About “Paying For” Universal Preschool

Posted in: Barack Obama

As social investments universal preschool is a great idea. It not only produce positive social returns but real financial ones. Over the very long term universal preschool should result in higher taxes and lower safety net spending. Dylan Matthews looks at the expected financial returns and they are impressive.

Heckman and his coauthors started from the observation that those who received preschool in the Perry experiment ended up earning more money — and thus paying more taxes — as well as using fewer criminal justice system resources (because they committed fewer crimes) and receiving less in the way of welfare, food stamps and other transfer payments. He tried to determine the annual return on investment, using those cost reductions to society, and to the government in particular, as benefits and comparing them to the upfront $18,000 a year cost.

He found that the annualized rate of return was somewhere between 7 percent and 10 percent. For comparison, historically the stock market has grown an average of 5.8 percent each year. Bonds have grown less. By this calculus, early childhood education is a better investment than either. And those benefits compound over time. If you assume the conservative estimate of 7 percent annual returns, that’s a sixty-fold increase over 60 years. Abecedarian was similarly successful. Thirty-six percent of recipients of early childhood ed going to college, compared to 14 percent of non-participants.

This highlights why Obama’s deficit rhetoric during the State of the Union is so damaging. If I could borrow money at almost zero percent interest and invest it in something I know would produces a 7 percent annual return I would be a fool not to. It would be stupid to limit my invest to only as much as I could cut from my current spending as long as someone is willing to loan me money at such low rates. The move not only pays for itself it earns me profit.

This is basically the situation the federal government is in. Yet, instead of saying we should take advantage of historically low rates to invest in things that we know will make us richer over the next century Obama is insisting that even smart investments be fully contingent short term budgeting.

The returns from the preschool will come outside the CBO’s ten year budget window so it will appears to technically increase the deficit. Since Obama insist it must not add a dime to the deficit we will only make this investment if we needlessly combine it with some short term austerity to “pay for” it. That not only hurts the economy but finding a pay for makes it politically more difficult.

If there are good investments that you can make and people are willing to cheaply loan you the money then you should make them, period. This deficit madness has ruined Washington’s ability to use basic logic.

It will be the height of irony if the concern of “burdening our children with debt” prevents us from adopting a policy that we know will make our children substantially wealthier and more prosperous.


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