Many in Congress and the administration have called for new investments in education in order to make the United States more competitive, with President Bush stressing the importance of education in preparing young Americans to "fill the jobs of the 21st century." Yet advocates of early childhood education have only recently stressed the economic benefits of preschool programs, and it has been difficult to win support for these short-term investments given the long-term nature of the benefits to the economy.
This policy brief analyzes the impact of a high-quality universal preschool policy on economic growth, concluding that such a policy could add $2 trillion to annual U.S. GDP by 2080. By 2080, a national program would cost the federal government approximately $59 billion, but generate enough additional growth in federal revenue to cover the costs of the program several times over.
Policy Paper #153
Introduction
Economists have long believed that investments in education, or "human capital," are an important source of economic growth. Over the last 40 years output has grown about 3.5 percent a year and the productivity of labor has grown about 2.4 percent per year. The contribution of education to labor productivity growth is estimated to be between 13 and 30 percent of the total. Further, many people believe that investments in human capital will become even more important in the future as we become a post-industrial, knowledge-based economy, and they worry that we are giving insufficient policy attention to the development of an educated workforce.
Why might a more highly educated workforce increase economic growth? A more educated labor force is more mobile and adaptable, can learn new tasks and new skills more easily, and can use a wider range of technologies and sophisticated equipment (including newly emerging ones). It is also more autonomous and thus needs less supervision, and is more creative in thinking about how to improve the management of work. All of these attributes not only make a more highly skilled worker more productive than a less skilled one but also enable a work place that employs more educated workers to organize differently, manage differently, choose technologies and equipment differently, and adjust better to changes necessitated by competition, by technical advances, or by changes in consumer demand. What is true for the firm may also be true for the whole economy. Skills beget more skills and new ways of doing business, workers learn from one another, and firms adapt their technology and their use of capital to the skills of the available workforce. The benefits of having a more educated workforce accrue to everyone, not just to the organization where these individuals happen to work. Further, these kinds of indirect (or spillover) effects for the firm or the economy as a whole may be especially important in an increasingly competitive global marketplace. Imagine an economy lacking in people able to read directions, use a sophisticated copier or a computer, or understand prevailing norms of behavior. Even if a single organization in that economy were able to find or import such skills, other organizations would not be able to invest in certain kinds of equipment or certain kinds of businesses with any assurance that they could make the investment profitable. Beyond that, a more educated workforce may produce a less crime-ridden and healthier environment with better functioning civil institutions and all the benefits that flow to the business sector from that environment.
In this paper we develop a model that is flexible enough to allow a wide range of assumptions about the role of education in promoting economic growth. The model is particularly elaborate in its treatment of the breakdown of the population into different cohorts and in determining the amount of education people in different cohorts receive. This treatment allows us to develop a realistic estimate of the timing of the growth effects of a program that will take many years to have its full impact.