13th annual Municipal Finance Conference


13th annual Municipal Finance Conference


The Fiscal Effects of Investing in High-Quality Preschool Programs

Charles Baschnagel and William T. Dickens
William T. Dickens University Distinguished Professor of Economics & Social Policy - Northeastern University

April 14, 2009


Randomized treatment-control experiments suggest large returns to investments in prekindergarten education. Several studies consider the social benefits of such investments, but none have considered the full potential gains to government budgets. We embed estimates of the effects of two model programs in a growth model of the U.S. economy to judge the impact they would have on federal, state and local government budgets. Assuming a 3 percent discount rate we find that both programs would pay back in reduced costs and increased revenues in excess of three-fourths of their costs within a seventy-five year budget window. Both programs would eventually reap a positive return for government budgets if policymakers were sufficiently patient.

Investing in Children

Children living in families with low incomes and those with poorly educated parents are much more likely than other children to grow up to be adults with less education, lower incomes, poorer health, and shorter lives. There have been many attempts to break this cycle of poverty by enriching the environment in which disadvantaged children grow up and to better prepare them to enter school. In order to decide if these programs actually deliver the results they are aiming for, random assignment experimental evaluations with long time horizons must be conducted. Unfortunately, relatively few of these “gold standard” evaluations have been carried out. However, some programs — notably Perry Preschool and the Abecedarian Project — have been shown to have positive effects on later life outcomes in such studies.

Other studies have shown that the social benefits of these programs can substantially outweigh the social costs suggesting that they could be excellent social investments. Most of the benefits of these programs accrue to the participants, mainly in the form of higher income, which is due in large part to their obtaining more education. On the other hand, most of the costs fall on taxpayers when pre-kindergarten programs are implemented as public programs. Taxpayers, however, also reap some of the benefits. If program participants earn higher incomes, they will pay more taxes and be less likely to rely on government transfers. If they are less likely to require special education or to repeat grades, they will cost less to educate. This study attempts to calculate the fraction of the total costs to taxpayers that would likely be recovered if large scale versions of two early childhood programs were to be instituted. We use a simulation model of the U.S. economy to estimate the net effects of investing in pre-kindergarten programs on government budgets.

Ideally, governments would undertake all projects for which net social benefits are positive. However, if a program which has been shown to have positive net social benefits also pays for a large fraction of its own costs with revenue increases and savings, it then becomes more attractive than other programs that produce the same level of benefits but without the fiscal dividend. More such programs could be undertaken within a limited budget. Thus, we believe that the estimates we provide here are a useful supplement to the more traditional benefit-cost analysis of these programs.