Inputs in the Production of Early-childhood Human Capital: Evidence from Head Start

From Chris Walters:

Studies of small-scale “model” early-childhood programs show that high-quality preschool can have transformative effects on human capital and economic outcomes. Evidence on the Head Start program is more mixed. Inputs and practices vary widely across Head Start centers, however, and little is known about variation in effectiveness within Head Start. This paper uses data from a multi-site randomized evaluation to quantify and explain variation in effectiveness across Head Start childcare centers. I answer two questions: (1) Is there meaningful variation in short-run effectiveness across Head Start programs? and (2) Is variation in Head Start effectiveness related to observed inputs? To answer the first question, I develop an empirical Bayes instrumental variables procedure that measures variation in local average treatment effects (LATE), accounting for non-compliance with experimental assignments. I estimate that the cross-center standard deviation of cognitive effects is 0.3 test score standard deviations, which is substantially larger than typical estimates of variation in teacher or school effectiveness. Next, I assess the role of inputs in generating this variation, focusing on inputs commonly cited as drivers of the success of small-scale model programs. My results show that Head Start centers offering full-day service boost cognitive skills more than other centers, while Head Start centers offering frequent home visiting are especially effective at raising non-cognitive skills. Other key inputs, including the High/Scope curriculum, teacher education and certification, and class size, are not associated with increased effectiveness in Head Start. Together, observed inputs explain a small share of the variation in Head Start effectiveness. These findings suggest that replicating the effects of successful programs may be difficult, as the factors responsible for their success are largely unidentified.

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A Model of Secular Stagnation

From two of my favorite macroeconomists, Gauti Eggertsson and  Neil Mehrotra:

In this paper we propose a simple overlapping generations New Keynesian model in which a permanent (or very persistent) slump is possible without any self-correcting force to full employment. The trigger for the slump is a deleveraging shock which can create an oversupply of savings. Other forces that work in the same direction and can both create or exacerbate the problem are a drop in population growth and an increase in income inequality. High savings, in turn, may require a permanently negative real interest rate. In contrast to earlier work on deleveraging, our model does not feature a strong self-correcting force back to full employment in the long-run, absent policy actions. Successful policy actions include, among others, a permanent increase in inflation and a permanent increase in government spending. We also establish conditions under which an income redistribution can increase demand. Policies such as committing to keep nominal interest rates low or temporary government spending, however, are less powerful than in models with temporary slumps. Our model sheds light on the long persistence of the Japanese crisis, the Great Depression, and the slow recovery out of the Great Recession.

HT: Paul Krugman

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Christy Romer: After A Financial Crisis, Economic Disaster Is Not Inevitable

Bonnie Kavoussi’s Blog: Christina Romer: After A Financial Crisis, Economic Disaster Is Not Inevitable.

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Seven Tax Issues Facing Small Business

Originally posted on Donald Marron:

Today I had the chance to testify before the House Small Business Committee on the many tax issues facing small business. Here are my opening remarks. You can find my full testimony here.

America’s tax system is needlessly complex, economically harmful, and often unfair. Despite recent revenue gains, it likely will not raise enough money to pay the government’s future bills. The time is thus ripe for wholesale tax reform. Such reform could have far-reaching effects, including on small business. To help you evaluate those effects, I’d like to make seven points about the tax issues facing small business.

1. Tax compliance places a large burden on small businesses, both in the aggregate and relative to large businesses.

The Internal Revenue Service estimates that businesses with less than $1 million in revenue bear almost two-thirds of business compliance costs. Those costs are much larger, relative to revenues or assets…

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Structural Transformation, the Mismeasurement of Productivity Growth, and the Cost Disease of Services

From Alywn Young:

If workers self-select into industries based upon their relative productivity in different tasks, and comparative advantage is aligned with absolute advantage, then the average efficacy of a sector’ s workforce will be negatively correlated with its employment share. This might explain the substantial difference in the reported productivity growth of contracting goods and expanding services. Instrumenting with defense expenditures, I find that the elasticity of worker efficacy with respect to employment shares is substantially negative, albeit imprecisely estimated. The middle of the range of estimates suggests that the view that goods and services have similar productivity growth rates is a plausible alternative characterization of growth in developed economies. 

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Summers: We haven’t done it in 15 years and Japan hasn’t done it in a generation

Starts around the 9 min mark. HT: Mark Thoma

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Heterogeneous Mark-Ups, Growth and Endogenous Misallocation

From Michael Peters:

The recent work on misallocation argues that aggregate productivity in poor countries is low because various market frictions prevent marginal products from being equalized. By focusing on such allocative inefficiencies, misallocation is construed as a purely static phenomenon. This paper argues that misallocation also has dynamic consequences because it interacts with firms’ innovation and entry decisions, which determine the economy’s growth rate. To study this link between misallocation and growth, I construct a tractable endogenous growth model with heterogeneous firms, where misallocation stems from imperfectly competitive output markets. The model has an analytical solution and hence makes precise predictions about the relationship between growth, misallocation and welfare. It stresses the importance of entry. An increase in entry reduces misallocation by fostering competition. If entry also increases the economy-wide growth rate, static misallocation and growth are negatively correlated. The welfare consequences of misallocation might therefore be much larger once these dynamic consid- erations are taken into account. Using firm-level panel data from Indonesia, I present reduced form evidence for the importance of imperfect output market and calibrate the structural parameters. A policy, which reduces existing entry barriers, increases growth and reduces misallocation. The dynamic growth effects are more than four times as large as their static counterpart.

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