Do Education and Training Belong in the Recovery Package?

Abstract

Ramped-up education spending should be part of an economic stimulus package, Institute Fellow Harry Holzer argues, because it will increase the gross domestic product, lead to more hiring, add income to local economies, and contribute to future productivity.

The version of the American Recovery and Reinvestment Act passed last week by the House of Representatives contained tens of billions of dollars in new funding for education. The money would be passed to the states to cover ongoing educational obligations that might otherwise need to be cut. The bill also expands such federal programs as Head Start pre-kindergarten and Pell grants for low-income people to attend college.

Recently, some economists (like Harvard's Martin Feldstein) and other commentators have questioned whether such expenditures belong in the recovery package. Efforts are afoot to reduce or eliminate them in the Senate version of the bill on grounds that such expenditures, while perhaps justifiable in an education initiative, won't spark enough new economic activity and employment in the short term to qualify as a stimulus. Similar arguments have also been made against the bill's modest increases in employment and training funds.

But these arguments are flawed. For one thing, expenditures on educational services are economic activities that directly increase the gross domestic product. These expenditures will no doubt "stimulate" increased hiring at Head Start centers, schools, community colleges, and universities. More teachers, administrators, and the entire range of personnel (from bus drivers and custodial staff to information technology managers, counselors, and the like) will almost certainly find work. In turn, they will then have additional income to spend in their local economies, thus stimulating broader recovery in those places. Output and employment would grow directly and indirectly, and fairly quickly at that.

Such a stimulus could buy us long-term gains too. Done right, a huge one-time expenditure like the recovery package can and should be an important investment in future productivity. Just as investments in physical capital and infrastructure can augment our future economic potential, so too will investments in human capital, or skills.

Even greater equity could be an upshot of the stimulus. Much of the education spending in the recovery package is targeted at low-income children and adults—the very people whose educational attainment clearly lags behind and who most need a shot in the arm.

Fairness aside, the country pays a high price—whether in lost output, high crime, or bad health—every year because the poor have limited earnings capacity. Returns to investments in poor children will reverberate for a long time, even in stronger economic climates.

Similar arguments can be made about the proposed expenditures in job training for youth and adults. In fact, recessionary periods are, in many ways, good times to invest in such training. When employment runs high, workers are reluctant to spend time away from work to get training. The forgone income is just too great. But this potential cost is lower amid an economic downturn—which is why enrollments in universities tend to rise when economies turn down.

Of course, low-income adults and youth do need earnings to support themselves and their families, even for a short time. That's what makes income stipends or other payments to these individuals while they study or train so important. Indeed, training's short-term stimulative impact rises whenever it can be combined with any form of paid work experience, as with on-the-job training, apprenticeships, or internships.

Education and training can thus be both an effective short-term stimulus and a long-term investment in the economy. Far from being a dichotomy in which we must choose one or the other, this policy "two-fer" belongs in a recovery package.

Harry J. Holzer is an institute fellow at the Urban Institute, a professor of public policy at Georgetown University, and a former chief economist at the U.S. Department of Labor.

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