The Economic Rationale for Investing in Children: A Focus on Child Care. Macroeconomic Rationales


In the late 1970s and early 1980s there was a considerable amount of discussion of rationales for public sector employment and training interventions which were based on macroeconomic concerns. Since I do not perceive much of a carry over from these rationales to child care, I provide only a cursory review as a matter of completeness(6).

Unemployment and Inflation

Explaining persistent unemployment  and how government policies might affect it  has been perhaps the central problem in economics ever since the 1930s (though the long expansion of the 1990s in the U.S. has, for the moment, meant less attention is paid to this issue). The "Keynesian revolution" pushed government spending as a major countercyclical policy. In a recession, such spending could raise output and employment at a social cost less than the financial costs since it would mobilize otherwise underutilized labor and capital. Public sector employment programs were touted, particularly in the 1930s, as a major fiscal instrument for this purpose.

In the late 1970s and early 1980s we experienced a period of stagflation, with both high unemployment and high levels of inflation. This posed new problems for policy analysis since it was the general view that increased government spending to reduce unemployment could well lead to increased inflation. The belief was that there was, at best, an unemployment  inflation tradeoff and at worst that government spending to reduce unemployment below certain levels (the "natural rate of unemployment") would lead to accelerating inflation with no long term affect on unemployment.

At this point, economists began modeling the interaction of public employment and training programs and the unemployment-inflation trade-off. They sought to determine, among other things, the conditions under which government employment and training programs might yield more employment gains for any given degree of inflationary pressure than other forms of general government fiscal expansion would(7).

With respect to employment and training programs, the issue was the extent to which the programs either shifted labor demand towards high unemployment groups through targeted programs (wage subsidies or direct public employment would be examples of programs shifting labor demand) or shifted labor supply from those markets where there was an excess supply of workers toward those in which there was an excess demand (I discuss these types of programs in the following section on segmented markets). So the rationale for employment and training programs which follows from these models is that they may contribute to improving compatibility of low unemployment and low inflation.

Long Term Growth

In addition to the concerns about fluctuations in economic activity and the related short-term issues of unemployment and inflation, macro economics has devoted attention to determinants of the long term rates of national economic growth and how government policies may affect these rates. In the 1950s and 1960s "growth accounting" analysis sought to provide measures of the relative contribution of various factors to long-term growth rates. The traditional inputs thought to determine the level of national economic output were capital and labor. However, measured growth in labor and capital could explain only a small proportion of the total growth in national output. This left a large fraction of growth that was simply labeled "the residual factor." Immediately analysts sought to attribute the "residual factor" to other inputs. A leading one was a more refined measure of the growth of skills in the labor force, basically human capital. Much of the rest was simply labeled "technological change." The famous Solow growth model formalized the relationships between growth in inputs and the growth rate in aggregate economic output.

Interest in growth models faded for several decades, but just in the last ten years there has been a renewal of interest in new formulations of the Solow-type growth model which are referred to as endogenous growth models.

Applications to Child Care of Macroeconomic Rationales

The basic rationales applied to child care carry over, as in the previous sections, from the emphasis on investment in human capital. The more skilled the labor force the lower is the unemployment rate which is compatible with low rates of inflation. Individual parents are unlikely to take into account this added benefit from having more human capital engendered in their children as a result of exposure to specific types of child care situations. To the extent they fail to do so there will be social benefits that will not be obtained and it may be sensible, therefore, for the public sector to subsidize the greater human capital in order to obtain these social benefits. This rationale would seem more salient for arguments for public investment in the quality of child care since that might be expected to contribute more to eventual skill development than mere quantity.