In 2021-22, after decades of advocacy by a range of stakeholders, Washington debated how the federal government should increase its investment in early childhood education and care (ECE).

President Biden’s Build Back Better plan proposed a broad expansion of investments in professional ECE services for low-, middle- and some upper-income families using a combination of private centers, care in providers’ homes and pre-kindergarten programs in public schools. ¶ The proposal came close to passing, but was stalled because Democratic Senators Manchin and Sinema joined their Republican colleagues in opposing it. This was the closest an ambitious ECE investment policy had come to passing since the Nixon administration a half century prior. While the federal initiative fell short, some states, including Vermont, New Mexico and Minnesota, are ambitiously moving forward. ¶ What’s at stake?

Put succinctly, the impacts of early childhood subsidies on children’s life trajectories depend on the quality of the experiences the subsidies introduce – and, importantly, the quality of the experiences the subsidies displace. Policies that subsidize low-quality care may induce parents to shift their children into these settings because they save the family money, but this undermines children’s development. In contrast, subsidies for high-quality care generate lifelong benefits for children, their future families and coworkers, as well as society as a whole.

It’s also clear that what economists call market failure – in this case from multiple sources – leads to a glaring shortage of investment in young children. Well-designed public policies that boost investment, especially for children from more disadvantaged families and communities, can lead to more socially equitable – and cost-effective – outcomes. But note the tension here: the quality of the care that’s promoted matters enormously, so more than money matters. Indeed, ensuring both adequate funding and care quality is the central challenge of policy in this arena.

Early Experiences Matter – A Lot

A rock-solid body of evidence shows that early childhood experiences influence people’s development of lifelong capacities and dispositions, not to mention their health. The human brain develops many foundations for cognitive skill through neuron proliferation and pruning in the first few years of life. And stress hormones generated in response to the environment early in life push personalities toward cooperation or conflict.

Lack of high-quality investment in children before the age of five, especially in children from more disadvantaged families, allows gaps in capacities to open up. And while K-12 investments thereafter can stop these gaps from widening further, they do not close them. But happily, early intervention can work. An interdisciplinary team including Nobel Laureate James Heckman decisively concluded that “prevention is more effective and less costly than remediation, and earlier is far better than later.”

The most credible evidence comes from controlled experiments. In these experiments a large group of families is recruited early in their children’s lives. Within this group, the researchers randomly assign a subset to have access to some enriched experience – a “treatment” in social scientists’ parlance.

For instance, the treatment could be access to a free, full-day, high-quality development center between the child’s first and third birthday along with free transportation between home and center. Or treatment could be a $4,000 scholarship that the family can spend at any local childcare provider of their choice. The control group members go on as before. Because there is nothing systematically different between the treatment group and the control group except access to the treatment, we can credibly interpret average differences in later outcomes between groups as the effect of the treatment. Dozens of such experiments have been run in the U.S. and many more elsewhere. And the results constitute strong evidence that environment matters – that we have the power to shift the trajectory of people’s lives through early childhood experiences.

Why Public Investment Makes Sense

Economists generally see advantages in har- nessing private markets to allocate resources – but not in all cases. To understand why it makes sense to intervene by investing public funds in early care and education, consider the evidence of four important market failures, each of which contributes to underinvestment in young children’s developmental experiences.

First, credit constraints prevent a large share of parents with young children from marshalling the resources needed to invest as much as they would privately choose if they could borrow against future income. One study published in 2012 estimated that roughly half of young parents are credit constrained, yet only 12 percent of older parents are. But instead of compensating for young families’ relative lack of financial resources, public policy reinforces the imbalance. Government (state, federal and local) invests a measly one-ninth as much annually per child in care and education services in the first five years of life as in the next twelve.

Second, as is the case for K-12 and higher education, the benefits of ECE spill over from the child to their future neighbors, employers and more broadly, society. Parents, who largely bear the costs of their kids’ early care, may limit their concerns primarily to the private benefits within their family and will have little will to sacrifice their own consumption to pay for benefits reaped by others. Ideally, future neighbors and employers would kick in money so that they could reap those future benefits – but of course, that’s not possible.

These spillovers explain why there is a near-consensus that government should invest heavily in K-12 and higher education. It seems a strange societal lapse that we don’t spend comparable sums on the first few years of life, when the evidence suggests that the societal returns are high, too.

Third, facing the dual responsibility of providing material benefits and nurturing for their young, parents must decide how to divide their limited time between earning and parenting. From an economic perspective in which resources are scarce, the goal is not to maximize parents’ time earning, but to productively balance a host of options for them to use their time. On average, for children in the first five years of life, parents provide the care directly for 149 hours a week and outsource care 19 hours a week. Thanks to constraints on earnings and the failure to consider spillover benefits of investment in kids, it’s clear that some parents whose time would be better spent in paying jobs stay home to parent full time.

Another market failure stems from the difficulty in assessing the quality of nonparental care. The direct consumers of the services – children under five – aren’t in a position to judge. Nor are their parents, who are mostly absent.

Public agencies can run into the same problem. Quality assessment now relies on short, expensive and consequently infrequent in-person classroom visits and simple structural rules of thumb like staff-child ratios, the physical layout of the care setting and curriculum choice. These are, at best, coarse and noisy proxies for quality. And since the decision makers lack the ability to reliably differentiate higher- from lower-quality care, private providers of higher-quality care are easily undercut by lower-quality providers – and the market does not deliver resources to sustain high-quality care. Raising the reliability and reducing the cost of care-quality measurement is therefore a strategic priority in reducing market failure.

What Works

As noted earlier, the most important insight about the impact of early childhood investments on children’s development is that it turns on the difference between the quality of the care experience it induces and the quality of the care experience it displaces. Complicating the matter, free access to one care environment might generate positive effects in one group of children and negative effects in another. Certainly, children who would experience high-quality care absent the subsidy would likely see little benefit from the subsidy, while those who would otherwise be stuck with inferior care would get more from the subsidy.

Public investments in early childhood care and education take many forms. The key dimensions are the eligible age range, the family income range, provider types and the funding level. School-based pre-K programs along with Head Start focus on ages 3 and 4. Early Head Start serves children in the first three years of life but has funding to provide for only a tiny fraction of the age group. The Child Care and Development Fund (a federal program) serves children across all ages. Since younger children need more supervision and nurturing, costs fall with children’s age. But one reality stands out: high-quality care generates large benefits across all ages, while mediocre-quality care does not.

Some principles emerge from the evidence. First, the effects of care are larger and more reliably positive for children from more dis- advantaged families, suggesting higher rates of return to programs focused on them. Children from more financially constrained families gain the most in terms of long-run outcomes. And no wonder: these children tend to have the lowest-quality care experiences, absent public investment.

Second, the short- and medium-run effects on test scores were larger for earlier programs than more recent programs. However, the evidence on long-run effects in adulthood – the payoffs that really matter for cost-benefit analysis – is less clear. A common pattern in long-run studies is that test-score effects fade with time, but the positive life-quality effects like steady employment and income and stable family life endure to adulthood – most likely due to effects on aspects of children’s development beyond measurable cognitive skill (such as executive functioning). The long-run effects of recent programs are unknown, of course, because the children are not yet grown.

Third, effects are more reliably positive for higher-quality programs. Subsidizing low-quality care will pull more children into that experience and generate more negative effects. Some parents will nonetheless be attracted by the potential cost saving and either not recognize the negative impact or accept the consequence in return for saving money. Quality assurance in subsidized programs is thus a critical challenge for policymakers.

Fourth, the quality of the care experience may be influenced by the socioeconomic composition of the families participating. Children from more disadvantaged families experience more positive effects from programs that put them into experiences in mixed-income care settings.

A careful review of evidence from multiple demonstration projects followed children for decades to see treatment effects on long-run adult earnings, use of public benefits, criminality and other outcomes. Keep in mind that demonstration projects are not public programs. They are set up by researchers to offer care and education to limited numbers to develop credible evidence about the effects of such services. Prominent early childhood care and education demonstration projects include the Perry Preschool Project, the Carolina Abecedarian Project and the Infant Health and Development Program, each of which served children from disadvantaged families.

Moving from demonstrations to investment policy scale, studies have estimated the effects of the federal Head Start program serving children from poor families using both experimental and nonexperimental methods. And the overall impact is gratifying. Sneha Elango and colleagues from the University of Chicago concluded: “Evidence from demonstration programs and Head Start provides a strong case for the effectiveness of means-tested early childhood education in promoting child development. ... They also support work by mothers with young children.”

Another federal subsidy program, the Child Care and Development Fund, with a budget similar in size to Head Start but a different structure in terms of quality assurance, income eligibility, and parental activity requirements, has been studied less and has experienced more change in recent years than Head Start. CCDF initially started as a welfare-to-work support program with greater emphasis on parental careers than on child development, and it included only minimal care-quality assurance. One early assessment (albeit with a design lacking a randomized control group) found negative effects on child cognitive skill and behavior. However, reforms over the past decade have increased the program’s emphasis on quality assurance. So the jury is still out.

More generally, evidence from pre-K programs in the U.S. along with Canadian and European universal childcare programs typically show substantial positive effects for disadvantaged children but little impact on those from more-advantaged families.

Ensuring Quality at Acale is Hard

There’s no way to produce high-quality care cheaply. Young children require an adult’s attention – and adults’ time is valuable, whether it is the time of family members who might otherwise be working outside the home or that of someone who is paid. However, there are a wide range of approaches for subsidizing care and ensuring quality, from relying on public agencies to relying primarily on family choice.

At one end of the spectrum, government takes charge of quality assurance by providing the service directly. This is the approach we use to deliver K-12 public education and in many other areas of public service (fire-fighters, military, national parks, transportation security, etc.). Many state programs follow this lead by tying pre-K services to public K-12 public schools. Of course, this isn’t a surefire formula for success: public organizations may be subject to bureaucratic inefficiencies and variation in quality (as in K-12 schools). But compared to private, for-profit services, there is less incentive to skimp on quality.

In one step toward decentralization, Head Start contracts out services to nonprofits in local communities via multiyear agreements. Head Start has a detailed, robust set of performance standards to ensure quality that contractors must meet. Another approach toward decentralization is to provide vouchers to parents to subsidize services at eligible private and nonprofit providers.

CCDF mainly uses this approach (along with some contracting), but often with weaker performance standards than Head Start. The program is backstopped with standard licensing requirements but relies more on family choice to ensure quality. The most decentralized subsidy programs lack any quality assurance beyond family choice. This approach is really confined to programs benefiting higher-income families who receive subsidies via dependent-care tax credits or tax-advantaged flexible spending accounts.

Federal and state policymakers have created quality-rating systems that gather information about providers’ quality, then offer the information to potential customers as well as using the ratings as incentives in setting subsidy levels. This light-touch approach is attractive to many Americans but has been stymied by the fact that quality has been expensive to measure reliably. Rather than give up on this approach, it would make a lot of sense to invest in technological innovation to improve the process.

In fact, I am pursuing this with a multidisciplinary team of researchers. We are running an experiment that hand-scores videos of classrooms using consistent and equitable measures of quality that predict child devel- opment gains, and then trains machine-learn- ing algorithms to recognize these patterns in other classroom videos. Many childcare pro- viders have cameras in classrooms so man- agement or parents can monitor activities. This approach would enable reliable, real- time, low-cost automated measurement of care quality that is scalable. This should serve as a support to teachers’ professional develop- ment and aid in decisions on program man- agement and development, as well as possibly informing public investment decisions.

In the meantime, the void is filled by promoting and monitoring proxies such as child-staff ratios and teacher turnover rates. A few conclusions are straightforward and intuitive. Dividing a caregiver’s attention among more children makes it harder to be responsive to their needs and adds stress to the caregiver’s job – hence the value of the child-staff ratio benchmark. By the same token, children get attached to caregivers and build trust and a feeling of security. High turnover among caregivers undermines this, while higher pay promotes it. To the latter point, there’s solid evidence that minimum wage increases reduce ECE staff turnover and increase customer (family) satisfaction.

Rather than tying subsidies to care for specific groups of children, much recent policy has leaned toward grants to any provider or subsidies for specific care inputs – real estate, food or staff compensation. There are plainly downsides to this hands-off approach. Giving resources to private, for-profit providers without any accountability for serving children well or for serving those likely to get the most from the experience is a recipe for waste and even harm to children’s development. Similarly, subsidizing particular inputs rather than subsidizing care per se can distort service production decisions toward inefficiency. For example, if money is available for rental subsidies, care centers may spend relatively less on curriculum or salaries.

Provider subsidies can and should be cou- pled with responsibilities to ensure service quality. Tying subsidies to adequate teacher compensation standards seems an obvious step forward. Wages are currently an embarrassment. Childcare workers average lower hourly wages ($14.22) than pet caretakers ($15.46) or parking lot attendants ($15.01).

How about just giving families cash, via a child allowance or child tax credit, as was done during the pandemic? This approach has advantages. It provides financial resources in a phase of households when resources are short. It’s relatively simple to administer. It’s also neutral with respect to whether the money supports parental or nonparental care. However, the amounts usually contemplated are quite low. Whereas we invest about $15,000 per year per child in K-12 education, the expanded child tax credit was only about a quarter of that.

Further, parents were free to use the income from tax credits as they wished. This is a double-edged sword. On the one hand, this is an advantage when parents use it to choose wisely among care options. On the other hand, this eliminates the guarantee that the public resources are invested in the child, via high-quality care and education services.

The latter is no small risk. In recent research, co-authors and I estimated that cash transfers would have only one-fifth the impact on child skill development as targeted subsidies for high-quality care. Compared with the care subsidy, the cash transfer on average made parents better off – but children worse off.

What’s At Stake

Controlled experiments show that the wide gaps in adult outcomes we usually observe between children from advantaged and disadvantaged families are not inevitable. Gaps in early childhood experiences open up in the first five years of life because we ask the most of families when they have the least to offer and government systematically underinvests in early development. Badly designed and poorly funded early childhood care and education subsidies can actually harm children – quality assurance is key.

There are many ways to increase investments in early care and education efficiently. That said, the lowest hanging fruit available to policymakers may be innovation that reduces the cost and increases the scale of care-quality measurement.

We only get one shot at the first five years for each child, while the consequences of our policy choices affect their entire lives. Rather than thinking of early care as a costly burden, we should recognize it as a unique investment opportunity that will pay dividends (or if badly done, generate losses) for decades ahead.

I’d go further: as long as government fails to close the large investment gaps in early childhood development, America is certain to break its promise of equal opportunity.