Fred McKinney (opinion): A reliable rate of return on early childhood education

The following op-ed was featured in CT Insider.

One of the major contributions Nobel Prize laureate and University of Chicago economist James Heckman made to American society is his groundbreaking work on the rate of return on early childhood education. His studies and those inspired by his research show a consistent rate of return of 13 percent or higher on public spending on high-quality early childhood education. Early childhood education (ECE) is defined as education for children between birth and preschool.

If ECE were any other investment alternative, there would be money flowing into it to take advantage of these returns. But when it comes to quality early childhood education, it is a struggle for governments at all levels to invest in the most vulnerable American citizens — children under age 5. Connecticut Gov. Ned Lamont appointed a Blue-Ribbon Commission to study the issue this year. Their report will be coming out soon.

States, including Connecticut, are looking into committing more public dollars into quality ECE, but despite the high rate of return potentially yielded in supporting the development of children, ECE competes against other legitimate and significant interests and priorities.

Another great economist, John Maynard Keynes, coined the term “marginal efficiency of capital” (MEC) that equates the cost of capital to the rate of return of alternative investments. Keynes and modern financial theory suggest that capital (or public dollars in the case of government spending) should first flow to the capital expenditures with the greatest returns. If there are other federal, state, or local uses of public dollars that return more than 13 percent, we should support those expenditures in the first instance. If there are other public uses that yield returns lower than quality ECE and we have the resources, we should support those priorities only after higher returning investments are made.

But this is rational economic theory, not objective political reality. I have been struggling with trying to understand why we are not rushing to support ECE for children between birth and preschool.

Before exploring those reasons, it is important to briefly review some financial terminology. The rate of return on a public or private investment is determined by the discount rate — think interest rate — that equates the cost of an investment to the present value of future net cash flows. In the case of public investments such as quality ECE, the cost of the investment is simply the amount of taxpayer resources used to pay for the services. The present value of future cash flows for private investments is based on projections of those cash flows that are reduced to account for the fact that a dollar today is worth more than a dollar a year from now. Estimating the future cash flows associated with quality ECE is less about additional future cash flows and more about reductions in other public expenditures.

Exhaustive studies show dollars spent on children between the ages of birth and 5 years of age reduce other public costs in the future. An example is the cost associated with incarceration, public welfare, and unemployment and underemployment. In 2023, Connecticut spent on average $91,000 per incarcerated inmate, while the cost of ECE was $15,000 per year per child. Not surprisingly, Connecticut is a high-cost state when it comes to incarcerating our fellow citizens and educating our children. These costs vary by state. The cost of incarceration in Texas, for example, is a third of the cost of incarceration in Connecticut. While not every child that fails to receive quality ECE ends up in prison, the math and rate of return analysis is consistent — society can spend the money now on ECE or we can spend a lot more later for incarceration.

Early childhood education reduces both arrest rates and criminality, and also increases the likelihood of completing 12 years of public education and graduating from college. These results translate into higher earnings, less reliance on public assistance, and greater contributions by citizens in the form of tax payments and philanthropic contributions. All these positives contribute to the total return on ECE. And this does not include the impact of ECE allowing more women to work and contribute to the economic sustainability of their families.

The problem with rate of return analysis for children under 5 years of age, particularly our most vulnerable young citizens, is that they are not a constituency with power. They have no voice. Building roads, which are necessary and have an excellent rate of return, have strong lobbyists. K-12 public education has strong teachers’ unions to support their efforts. Police and public safety have strong unions and political support. But who advocates for children, particularly poor children? Rich parents can afford high quality ECE, but poor parents cannot. Income and wealth inequality contribute to the lack of public support for high quality ECE for all children.

Investing in our youngest children pays significant dividends. You should call your state representatives and demand they use your money wisely, which is one of their primary duties, and fully fund high-quality early childhood education for all children. The rate of return on ECE is firmly established, but more importantly, ECE helps our children reach their full human potential. When this happens, we all benefit.

Fred McKinney is the co-founder of BJM Solutions, an economic consulting firm that conducts public and private research since 1999, and is the emeritus director of the Peoples Center for Innovation and Entrepreneurship at Quinnipiac University. McKinney is an unpaid, volunteer trustee of Connecticut Voices for Children, a 501-c3 organization, and is not speaking on the agency’s behalf.