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Interview with James Heckman

We visit with noted scholar and Nobel prize winner James Heckman about the economic return on early childhood investment.
Interview with James Heckman

James Heckman

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Professor James Heckman
The Heckman Equation

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Show 0941: Interview with James Heckman

Air date: October 11, 2009



Rob:  Understanding the value of early childhood investment is something our first guest today is noted for.  Born and raised in western Oklahoma, James Heckman is a noted scholar, and winner of the 2000 Nobel Prize in Economic Sciences.  I had the opportunity to sit down with Dr Heckman to talk more about the economic return on early childhood investment.

Rob:  We often speak about childcare as a social issue, but is it also an economic issue?

Dr Heckman:  Definitely.  It's an economic issue because, what we've come to understand is that skills are the essential core of the modern economy.  We ask, what is a major contributor to productivity?  Well we know that capital goods are important, we know machines and so forth.  But people are important too, and skilled people.  And so education is at the heart of the modern economy.  And what's at the start of education?  A good start.  So in that sense we know because of the economics of the issue that there's a very powerful argument to be made for investing in early childhood.  Because it starts the process which is a dynamic process where skills beget skills, where motivation begets motivation.  And when children get properly started on a trajectory of success, they become very successful, complete school, go on, graduate college, and not drop out of high school, and become skilled participants in the modern economy.  So when we study this on a purely economic basis, we see a very high economic rate of return.  A return that's higher than what you get in conventional investments in the stock market over the last, forget the last 10 months or so, but if you look at the stock market between 1945 and say 2008, the average rate of return is about 5.8 percent, six percent on equity, just holding a stock, and you know, getting the capital gains and the appreciations, dividend streams.  If you look at what the rate of return is for a child, investment in a child, the early years investment, what you find is a rate of return that's between six and ten percent.  Now for both boys and girls, six to ten percent per year, each year, for the rest of your life, that's much higher than most passbook savings, much higher than what you get from the stock market.

Rob:  So, essentially what we're talking about is workforce development.

Dr Heckman:  Well, you're talking about workforce development, but you're also talking about other aspects.  It's not just, it's development, it's enhancing the productivity, it's avoiding other drains on society as well though.  For example, another benefit of the program would be reduced crime.  And reduced crime, reduced burden on the schools to remediate early disadvantaged, and so on an economic basis you have those additional factors besides workforce development.  But yes, it's workforce development as a primary output, but as well reduced crime is a huge benefit.

Rob:  Increasingly we're learning that we live in a very competitive global economy, how do we stack up compared to other countries?

Dr Heckman:  Well, we have slipped, there's no question about it.  Fifty years ago the American education system was the marvel of the world.  We had one of the most highly educated workforces in the world.  And what's happened is that we no longer have that distinction, by any means, we're way behind other countries.  And the level of literacy, and the level of, sort of disadvantage, at the bottom part of the distribution has actually been increasing.  So we actually find that more than twenty percent of all Americans who are in the workforce, or eligible to be in the workforce, say over age sixteen, say sixteen to sixty-five, about twenty percent of those workers, or potential workers, don't have the literacy to understand the instructions on a bottle of pills.  So if you were to say, take a pill once a day, don't take more, or do some kind of not so complicated indication of how to handle the medication, twenty percent fail to have that knowledge.  And that's just the tip off of a much very large problem which is suggesting that we have a growing group of people.  You know we're in a funny situation in America right now.  A greater proportion of all Americans who are say fifteen to twenty-five, are going to college than ever before.  Okay?  But at the same time, a greater proportion is dropping out of high school.  So, we actually have seen, society is dividing into two parts.  And that bottom half is actually creating a greater burden on society.  And this is not even illegals coming in from Mexico who don't have education.  I'm talking about people born in the United States, raised in the United States, and so forth.  So what you're seeing is a very productive top end of the distribution which is creating wealth, producing a lot of ideas, and then you have a bottom end that is actually withdrawing from society, not participating, and actually if anything, creating a drain on society through drugs, through you know basically not working, and through non-active participation in school, and a lot of other aspects of the social life.  So we're getting a polarizing society.  So yes there's an economic benefit, yes there's also a social benefit.

Rob:  Let me give you a figure here in Oklahoma of ninth graders, only eighteen percent six years later have completed secondary education, into their second year of college or some type of skills training.  Is that a warning flag for our state?

Dr Heckman:  It's a warning in the sense that these people who are graduating, or not graduating, are going to create a burden on themselves and the rest of society.  Well, I mean we see what is happening, the world is shifting towards a higher level of education, skilled demand for skills has increased there's no question about it.  In a situation, whether we have a global competitiveness where large pools of unskilled labor are in the workforce, the only way Americans can remain competitive is by being skilled, doing things that other people can't do.  That requires education.  Lots of people can do manual labor, whether it's in Vietnam, whether it's in southern China, what we have done traditionally and we need to move in to much more is specialization in the high end task kind of things that uniquely are American, the ability to innovate, to create, and to produce good new ideas, and to respond flexibly to the changing challenges.  So I think this figure looks bad from the point of view of producing a workforce that is competitive and creating something that is gonna lead to long term economic success.

Rob:  Final question, how do we get there?

Dr Heckman:  Well I think there are a number of programs and plans that are put in place, to somebody walking into this area cold, there is always a bewildering array of plans and policies that gets to be a little bit crazy for people to look at.  I think what we've come to understand though is an early start plays a very important role.  So when we start, for example, in year zero to three even, we recognize that the child's brain and the child's whole personality is really, fundamentally, it can be shaped in a productive way.  Now by shaped, I don't mean you build a sort of a uniform person, in a template, that's going to, you know, be like robots off of a factory, not at all.  But I think what we can do is challenge and supplement the kind of skills that children bring, even starting at birth, their social-emotional skills, and of course, their academic skills.   Look, in rich environments, in wealthy families, most wealthy families, not all, but in most wealthy families, what you have is a structure where children are being bathed in all kinds of supplements.  Parents are taking the kids to museums.  Parents are speaking to the kids.  The verbal supplements that they get are enormous.  Disadvantaged kids don't get that.  So what happens is you start the cycle of disadvantage very early on.  In many cases by the time the kid enters grade school, the disadvantaged compared to the advantaged have such huge gaps that it's impossible to ask the school system alone to make up for this.  So, we have to think of a life cycle plan, where we target different groups within the life cycle.  We target different groups that are, have different susceptibilities and with different strategies at different stages of life; that's the part that's emerging for really understanding how we create people.

Rob:  It was a pleasure, thank you.

Dr. Heckman:  Thank you.