Original Source Date: February 1, 2010
Impact Highlights
| Annual ROI | Time Horizon | Confidence |
|---|---|---|
| 8.5% | 40.0 years | 1 - Very Strong |
| Activities | Outcomes | Indicators |
|---|---|---|
| Education | Children | College graduation, Education Spend, Educational attainment rate, Health Incidents, High school graduation, Income, Poverty & Assistance, Property Tax, Unemployment, Violent crime, Welfare Spend |
| Geography | Demographics |
|---|---|
| Great Lakes, Michigan, United States | Children |
Article Details
Investing in early childhood education has long been advocated as a strategy to enhance economic efficiency and reduce social disparities. A seminal study on this topic is “The Rate of Return to the High/Scope Perry Preschool Program,” which offers an in-depth analysis of the economic benefits derived from early intervention programs targeting disadvantaged youth.
Overview of the High/Scope Perry Preschool Program
Initiated in the early 1960s in Ypsilanti, Michigan, the High/Scope Perry Preschool Program was designed to support the cognitive and socio-emotional development of disadvantaged African-American children. The program provided 2.5-hour weekday preschool sessions during the school year, complemented by weekly home visits from teachers. The curriculum emphasized active learning, encouraging children to plan, execute, and reflect on their activities, fostering decision-making and problem-solving skills.
Methodology of the Study
The study conducted a comprehensive cost-benefit analysis of the Perry program, addressing several critical challenges:
Compromised Randomization: The original random assignment of participants faced adjustments to balance gender and socioeconomic status, necessitating corrections in the analysis to account for these modifications.
Data Limitations: With participant data available only up to age 40, the study employed advanced statistical methods to project lifetime earnings and benefits beyond this age.
Valuation of Non-Market Outcomes: Assigning monetary values to non-market outcomes, such as crime reduction and improved health, posed significant challenges. The study utilized conservative estimates to ensure the robustness of the findings.
Key Findings
The analysis revealed that the Perry Preschool Program yielded substantial economic returns:
Social Rate of Return: The program’s annual social rate of return ranged between 7% and 10%, surpassing the historical average return on equity.
Benefit-to-Cost Ratio: For every dollar invested, the program returned approximately $7 to $12 in societal benefits, even after accounting for the deadweight costs of taxation.
These figures underscore the program’s effectiveness in generating long-term economic benefits, particularly through improved educational outcomes, increased earnings, and significant reductions in criminal activity among participants.
Implications for Policy
The study’s findings have profound implications for public policy:
Economic Efficiency: Investing in early childhood education programs like Perry can yield returns that exceed many traditional investments, highlighting their economic viability.
Social Equity: Such programs play a crucial role in mitigating social disparities by providing disadvantaged children with opportunities that lead to improved life outcomes.
Informed Decision-Making: Policymakers can utilize these findings to allocate resources effectively, ensuring that investments are directed toward programs with proven long-term benefits.
Calculating the Annual Return on Investment (ROI)
1. Determine Total Costs of the Program
The cost per participant in the Perry Preschool Program was approximately $15,166 (in 2000 dollars).
This includes:
Teacher salaries
Facility use
Home visits
Administrative costs
2. Estimate Total Societal Benefits
Over the participant’s lifetime, the estimated present value of benefits was between $105,324 and $151,592 (depending on the discount rate used).
These benefits include:
Increased lifetime earnings from better education and employment
Reduced costs from crime (less incarceration, policing, victim costs)
Lower welfare dependency
Improved health outcomes
Greater tax revenues
Reduced special education needs
3. Calculate the Net Present Value (NPV)
Let’s use the midpoint of estimated benefits:
Average Total Benefits = $128,458
Total Costs = $15,166
Net Benefits = $128,458 – $15,166 = $113,292
4. Use the Internal Rate of Return (IRR)
The study uses the internal rate of return (IRR) method to find the discount rate at which the present value of benefits equals the present value of costs.
The IRR is essentially the annual rate at which the investment in the program returns value to society, and it ranges from:
7% to 10% annually, depending on assumptions (such as the value of reduced crime or education costs avoided).
This is calculated using time-series data on when benefits occur (e.g., earnings during working years, crime reduction in adolescence/adulthood, etc.).
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