(This essay was published in Hong Kong Economic Journal on 25 March 2015.)

 

During his State of the Union address on February 12, 2013, President Obama referred to University of Chicago Professor James Heckman’s research and his finding of a 7‐10% return on investment per annum for certain early childhood education programs. These rates of return are higher than those for equity in the stock market between 1945 and 2008.

 

In 2013, Congress introduced a bill to expand access to high-quality, full-day preschool for 4-year-olds from low- to moderate-income families. Professor Heckman pointed out that early childhood educational policies such as this bill are socially fair and economically efficient.

 

Heckman is considered to be among the ten most influential economists in the world. He won the Nobel Prize in Economic Sciences in 2000 for his pioneering work in econometrics and microeconomics.

 

His recent research has focused on inequality, human development and lifecycle skill formation, with a special emphasis on the economics of early childhood education. He is currently conducting new social experiments on early childhood interventions and reanalyzing old experiments. He is also studying the emergence of the underclass in the U.S. and Western Europe. His work has revolutionized our thinking about the subject and shows why current policies to reduce inequality and poverty in many parts of the world, including Hong Kong, are ineffective.

 

Professor Heckman will be in Hong Kong this week and will deliver a public lecture at the University of Hong Kong on 30 March on “Investing in Early Childhood.”

 

His path breaking research in this field concluded that the rate of return to a unit dollar invested in human capital is greatest in the prenatal period, followed by 0-5 years of age. The following oft-cited graph captures this relationship:

 

 

There is an old Chinese saying: “one’s achievement at age eighty has been pre-determined at age three.” Professor Heckman’s research takes this old saying and shows how and why intervening in the years from birth to five can make a significant difference in the life achievements of young children in terms of their future income, health, criminality and other forms of behavior.

 

In other words, by altering the initial conditions that children are born into (and those even before they are born), we can change their life’s outcomes. His research gives new hope to promoting economic prosperity for all, particularly for disadvantaged children and their families.

 

Everyone knows that education boosts productivity and enlarges opportunities, so it is natural that proposals for reducing inequality emphasize effective education for all. But according to Heckman, “existing solutions ignore a powerful body of research in the economics of human development that tells us which skills matter for producing successful lives. They ignore the role of families in producing the relevant skills. They also ignore or play down the critical gap in skills between advantaged and disadvantaged children that emerges long before they enter school.”

 

While education is a great equalizer of opportunity when done right, most policy is going about it with the wrong approach. “Current programs don’t start early enough, nor do they produce the skills that matter most for personal and societal prosperity,” he says.

 

His research shows that both cognitive skills and non-cognitive skills (character-based skills such as perseverance, motivation, self-regulation, far-sightedness, risk aversion, adventurousness, self-esteem, and preference for leisure) matter for a child’s future achievements. The family into which a child is born plays a powerful role in determining lifetime opportunities. Some kids win the lottery at birth, far too many don’t — and most people have a hard time catching up over the rest of their lives. Children raised in disadvantaged environments are not only much less likely to succeed in school or in society, but they are also much less likely to be healthy adults.

 

The growing number of children growing up in single parent households because of rising divorce rates in rich countries has been found to be the single most critical factor compromising a child’s future success. In Hong Kong, divorce rates have also been rising rapidly in the past three decades. Today Hong Kong is among the top 10 in the world in terms of crude divorce rates.

 

The much discussed generational gap of today’s young people born in the 1980s and 1990s with their elders, may reflect the fact that a growing proportion of them grew up in single parent households. In 1981, 1.2% of adolescent children aged 11-20 living at home had single parents. These were children born in the 1960s. The figure increased to 2.9% in 1991, 7.0% in 2001, and 11.7% in 2011. Children born in the 1980s and 1990s had a significantly different upbringing compared to those born in the 1960s and 1970s in this important respect.

 

Table: Percentage of Children Living at Home with a Single Parent

 

1981 Census 1991 Census 2001 Census 2011 Census
Children age 1-5 0.4% 0.6% 2.8% 3.9%
Children age 6-10 0.9% 1.9% 5.0% 8.2%
Children age 11-20 1.2% 2.9% 7.0% 11.7%

 

It is worth noting that a rapidly growing percentage of children aged 1-10, in the critical years of early childhood development, are now growing up in single parent households. Between 1981 and 2011 the percentages have typically increased by tenfold. These are very large increases.

 

Heckman synthesized two currently unrelated streams of literature – the human capital approach to health economics and the economics of cognitive and non-cognitive skill formation – to shed light on the formation of skills over the lifecycle, and help us understand the origins of human inequality so we can devise policies to reduce it.

 

He found that ability gaps between individuals and across socioeconomic groups open up at early ages, for both cognitive and non-cognitive skills, as do gaps in health status. These gaps are highly correlated with family background factors such as parental education and maternal ability, which, when statistically controlled for, largely eliminate these gaps. Intervention at early ages is therefore warranted before it is too late.

 

He looked at a wide range of abilities, which appear to be manipulable at different ages. IQ scores become stable by age 10 or so, suggesting a sensitive period for their formation below age 10. The ability to speak a second language without accent is acquired before the age of 12. If syntax and grammar are not acquired early on, they appear to be very difficult to learn later on in life. Early aggression has been shown to be a predictor of adult levels of criminality and violence. On the other hand, interventions with adolescents can affect non-cognitive skills, as demonstrated in studies from neuroscience concerning the malleability of the prefrontal cortex into the early 20s.

 

Heckman’s most important point is that skills beget skills. Small initial skills gaps that appear in early childhood will accelerate into increasingly larger gaps over time if they are not remedied. Human capital accumulation over the lifecycle is like a multiplicative process, not an additive one. He calls this dynamic complementarity. This is a unique aspect of human capital investments because they are embodied in a person. These conclusions underscore Heckman’s emphasis on early childhood education.

 

If a disadvantaged child can receive help at an early stage, and be helped to acquire the most relevant types of skill when their learning capacity is most effective, then skill gaps between disadvantaged children and others can be narrowed more effectively and also most cost effectively.

 

Some critics say early childhood education is expensive. Heckman agrees they are costly, but he argues that the focus should be on the large return on the investment. Quality early childhood programs for disadvantaged children more than pay for themselves in better education, health and economic outcomes.

 

The conventional wisdom is to level the playing field for disadvantaged children with cash transfers, tuition assistance and a higher minimum wage. Heckman points to research showing that factors determined before the end of high school contribute to roughly half of lifetime earnings inequality. This is our blind spot, he says. “Success nominally attributed to the beneficial effects of education, especially graduating from college, is in truth largely a result of factors determined long before children even enter school.”

 

The low returns to interventions targeted at disadvantaged adolescents confirm his analysis of why these programs have been largely unsuccessful. In contrast, studies that show high economic returns for remedial investments in young disadvantaged children support Heckman’s conclusions.

 

High-quality early childhood programs are great economic and social equalizers — they supplement the family lives of disadvantaged children by teaching consistent parenting and by giving children the mentoring, encouragement and support available to functioning middle-class families.

 

What doesn’t work? Investing in smaller class sizes is not as effective as making sure each child has the foundational skills to do well inside the classroom, regardless of its size. Because skill begets skill, it’s common sense that adult literacy programs and many job-training programs are too little, too late. It is much more effective and cost efficient to create instead of remediate.

 

Public policy so far throws money at programs that don’t produce results as good or better than those obtained from early childhood education. The “War on Poverty” started in the Johnson Administration has fallen far short of its stated goals. Heckman calls for a different type of intervention policy.

 

Why aren’t we moving forward and changing our ways by making investments in life-changing early childhood development for disadvantaged children? Two things: unfounded doubt and the fear of doing things differently.

 

Heckman believes it is time to make a change and adds that “policymakers can promote success by staying true to a few essential principles: focus on disadvantaged families, start at birth, integrate health, develop cognitive and character skills, and encourage local innovation in quality programs from birth to age five.” If we fail to change our policies we will see the growth of the underclass in the US, Western Europe and elsewhere as families continue to pass on their disadvantages to their children.

 

Economic growth and equality have often been seen as conflicting policy goals. Many have argued that there could be tradeoffs between them, and one could not have more of both. Trickle down economics promised to deliver both but it has come under much criticism for failing to do so.  It was an approach that is based on manipulating demand side factors like jobs and industries..

 

Heckman ‘s approach focuses on families and children as they grow up – the supply side – and the kinds of programs that can foster human flourishing and improve our economic productivity in the process. He shows there is no trade-off between equity and efficiency. Early investment in the lives of disadvantaged children will help reduce inequality, in both the short and the long run, and promote prosperity.

 

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