Commentary: Md.'s best economic development opportunity

Maryland, like virtually every state in the union, touts public subsidies and preferential tax treatment to private businesses as tools of economic development that yield high public returns. A close examination of such investments, however, yields a disturbing result - while the private returns are high, the public returns are illusory.

Moreover, these tools divert public funds from a critical economic investment. Research shows that an investment in human capital - high-quality early childhood development (ECD) programs - can yield extraordinary public returns. Yet seldom is ECD viewed as economic development, and seldom is it properly funded. In light of this research, Maryland should re-examine its approach to economic development.

Why are the public returns from conventional economic development projects illusory? Most public subsidies that businesses receive have no effect on their location or expansion decisions. Surveys show that business location and expansion decisions are largely influenced by economic fundamentals, such as proximity to markets, quality of work force, and overall quality of public services.

Subsidies only influence a small percentage of these decisions. Hence, in most cases, the return on the public investment is zero. That is, the public is subsidizing something that would have happened anyway.

What about those subsidies that actually affect location decisions? Here subsidies don't create new jobs, they only relocate jobs from one area of the state to another or from one state to another. But moving jobs back and forth across political boundaries is a zero-sum game, with a zero public return. Moreover, such subsidies and preferential tax treatment may violate the Commerce Clause of the U.S. Constitution, which implies that states should not interfere with interstate commerce. (See the Sept. 2, 2004, ruling Cuno v. DaimlerChrysler, 6th U.S. Circuit Court of Appeals.)

If subsidizing private business locations and expansions is not the road to economic development and growth, what is? While there are no guarantees, the evidence is clear that a community significantly increases its chances for economic growth when it invests in human capital, that is, when the community invests in education. Studies show that high levels of education attainment are consistent with strong economic performance.

Moreover, recent work on educational performance finds that the best way to invest in human capital is to start well before children reach kindergarten, and to provide for high quality programs that have well-qualified teachers, small classroom sizes, and parent education, including home visits. Investing in ECD not only enhances education attainment and work force productivity, it provides significant economic benefits to the community at large.

While all children can benefit from a high-quality ECD program, benefits to the public are highest when reaching children from the poorest families. Results from several longitudinal studies, including the well-known Perry Preschool study in Ypsilanti, Mich., show that children from low-income families who received high- quality ECD were less likely to be placed in a special education program, were more likely to graduate from high school, were more likely to have good-paying jobs and were less likely to commit crimes than children in a comparison group who did not attend the program.

Based on the Perry Preschool study, we estimate that the public earns at least a 12 percent annual rate of return (a total public and private return of 16 percent), adjusted for inflation, from a high-quality preschool program. That is an extraordinary rate of return when compared with other public investments, and even those in the private sector.

Research on early brain development lends additional weight to investing in human capital during the earliest years. This work shows that a high percentage of the brain is developed by the age of five, and that a healthy environment plays a critical role in brain development. In particular, if a child is raised in a stressful environment, the architecture of the child's brain can be severely compromised; as a result, the ability of that child to learn and interact positively with other children is compromised. And the research shows that, on average, children who start behind stay behind.

Hence, these independent lines of research lead us to conclude that the early years are critical for learning and brain development, and that investments in ECD can significantly improve outcomes.

We recognize, however, that Maryland has limited public resources, and there are many demands on these funds. Nevertheless, the return on ECD compares very favorably with most legitimate public investments. We also recognize that public funding of ECD programs will be difficult to sell politically because the real returns from ECD programs are much less visible and less immediate than conventional economic development investments. Nevertheless, unlike public subsidies and tax breaks to private companies, this is economic development that really works.

Rob Grunewald is economic analyst and Art Rolnick is senior vice president and director of research with Federal Reserve Bank of Minneapolis. The views expressed are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or this newspaper. Rolnick will be speaking at Ready At Five's Symposium on June 29. For more information visit www.readyatfive.org or call 410- 727-6290.

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