Pre-K as Cost-Effective Economic Development?

Timothy BartikIn the past I have complained (and I plan to complain in the future!) about the way in which state and local governments typically encourage local economic growth using tax give-aways (incentives!) for businesses.

I appreciated this TEDx talk’s research-driven approach to arguing for a different model, based on investing in Pre-Kindergarten education.  Since my city just went through this issue last year at the ballot box, I took notes.

Economic Benefits of Pre-K

Timothy Bartik’s argument is as follows:

1. A major determinant of local wages is the level of education, measured (by proxy) using the % of college graduates in a given metropolitan area.[1] 

2. More interestingly, however, is that the direct benefits to the individual of a college education – $725K more earnings per person over a lifetime – are bested by the indirect benefits of a college education on the earnings potential of other people in the area – $998K over a lifetime.  [See minute 7:35 of the video.] 

3. In other words, the herd – or to be more anthropologic, the metropolitan area – benefits more than the individual, from an educated workforce.

4. People are not as mobile in the United States as we think.  60% of Americans stay within the state they were born. [See minute 10:30 in the video.] That means that investments by state and local governments actually do get enjoyed by the state and local residents.  Hence, he argues, we’re not overpaying on educating kids, only to suffer brain drain.

What about costs?

Bartik acknowledges that costs will always be an issue. 

Among the hardest parts about investing in Pre-K as an economic development plan is the giant lag time between Pre-K implementation and higher education outcomes, leading to higher wages over a couple of decades.

The time horizon far outweighs any political leader’s calculus for holding office, as well as most taxpayers’ willingness to invest in a wealthier future.

But boy does it seem affordable to me.

Bartik puts a $30 Billion number on instituting universal Pre-K in the United States.  That seems to me like a shockingly low number to invest nationally on economic development.

Maybe he’s way low on that estimate.  It’s hard to say.

Or maybe we overpaid by about $1 Trillion to depose Saddam Hussein, occupy and rebuild Iraq over 10 years.  It’s hard to say. 

Seems like we could spend 3% of the cost of an optional Iraq War to actually, you know, occupy and rebuild America.

 


[1] It seems relevant to mention here that the public school district where my 7 year-old attends 2nd grade has a graduation rate of between 3% and 7% ‘college readiness,’ as defined by minimum scores on a standardized test.   I will now light myself on fire.

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On Insurance, Part II – The Good, The Optional, & The Bad

Right Way Wrong WayPlease see my previous post, on Insurance as Risk Transfer Only

Good uses of insurance

  1. Car insurance – mandatory and necessary, appropriately transfers risk of sudden damage to car or bodily health away from you to a company that can spread that risk around.
  2. Homeowners and renters insurance – similarly transfers risk of catastrophic damage to real and personal property to a company with enough capital to accept diversified risk.  The wealthier you are when you buy the insurance, the larger the deductible you can and should afford.
  3. Health insurance – transfers the risk of high or catastrophic health-care costs and is absolutely necessary to well-being and wealth.

Optional uses of insurance

If you find yourself the primary or sole caregiver of minor children, and you have limited savings, the next 2 types of risk transfer are mandatory.  Otherwise they’re optional.

  1. Disability Insurance – Transfer the risk of a loss of earnings and earnings potential.  You need to buy enough insurance that you could feed, clothe and house yourself and your dependents.  With no dependents, you have much less need for this type of insurance.
  2. Life Insurance – Remember: This is not a good way to invest.  This is only a good way to provide for minor children or a non-working spouse should you die.  Because I urge life insurance as a risk transfer only, and not as an investment, I lean toward term life insurance for the duration of your children’s minority years.  Once they’re 18, or 22 if college bound, they can fend for themselves.  Term life insurance increases the likelihood that you will calculate only the amount of insurance you need to transfer risk and not get caught up in the sales pitch that life insurance is a good investment.  Remember, it’s not.

Bad uses of Insurance

6. Warranties – I’m indifferent to car warranties, as I don’t know enough about them.  But electronics warranties are a complete waste of your money.  It’s extra insurance you do not need, on an ‘asset’ which depreciates in value faster than you can count backwards from 100.  The warranty company depends on you neglecting to exchange your electronic device, because in 2 years there’s something better out there anyway.  As I wrote earlier, warranties are the ultimate “neglect-based” business, along with life insurance policies.

7. Car Rental Insurance – Chances are you’re already double-covered by your own automobile insurance, as well as insurance from your credit card.

Have you noticed the rental agencies really like to push three difference types of insurance on you?  Unless you’ve got a very special situation, you don’t need that stuff.

“Can I at least put you down for bumper to bumper coverage?”  Stop. Bugging. Me.

6. Variable Annuity – Monstrosity.  The chimera that neither breathes fire nor flies straight.  High cost, low return, illiquid.   Perfect!

 

Here’s a quick quiz:

Question: Why does the Wall Street Journal always carry headlines such as: “Are variable annuities a good idea or just too costly?” instead of more honest headlines like “Are you a moron who likes to be separated from your money?  Try variable annuities!”? [1]

Answer: An awful lot of insurance company advertisers vie for eyeballs right next to that variable annuity article.

 

Please see related posts Insurance, Part I – Risk Transfer Only

and

Insurance Part III – Calculations of Life Insurance as an investment



[1] The authors of these variable annuity articles seemingly know they’re terrible, but they also seem to know who pays the bills.  I feel badly for them, writing the articles must be torture.  Here’s a few recent samples from the Wall Street Journal this Spring: “Cheaper Annuities With Benefits,” “New Annuity Guarantees Raise Questions,” and “They’re Changing Our Annuity!”

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