Saturday, June 13, 2009

The Heckman Equation Project

Well, he already is a stata command, so why not introduce an entire equation for Jim Heckman? Most people West of Chicago believe that he merits another Nobel Prize. Would he agree?

Flipping through the slides of the Heckman Equation Project, I see a media push to solidify the intellectual case for investing more in the very young. Children cannot "buy" their parents. In a world where parents have ample discretion over investments of time and $ in children, some children may be left under-invested in during a critical phase. Learning begets learning, skill begets skills. Economists have fancy words such as dynamic complementarity but at the end of the day -- a well functioning adult is a mixture of ability, focus , ambition and tenacity. Each of these can be learned and need to be reinforced.

The challenge is the political economy. The young people tend to be immigrants and minorities while the older people whose tax $ would pay for these programs tend to be white. There is the whole diversity and redistribution literature that is pessimistic about the likelihood of a democracy making the investments that Heckman calls for.

Now there is one way out. Chris Mayer has done some interesting work on why home owners (old white people) favor good schools in their district even when they don't have kids going to school in the district. He argues that the schools are capitalized and this raises the price of the asset.

In the Heckman case, migration actually attenuates the Mayer point. If kids were stuck and couldn't move, the rich in the community would have a greater incentive to invest in them because they would grow up and be thugs and trouble the neigbhorhood --- or in a Moretti/Rauch sense they could raise the neighborhood's human capital level.

Thus in a world with migration, the Feds have to finance this. I hope that Jim Heckman can use his considerable clout to push this debate forward. The political economy here hinges on cross-group bridging social capital (see Luttmer's JPE paper on the taste for redistribution).

Similar to Poterba's old JPAM paper, the public finance behind Heckman's plan in an over lapping generations model is a transfer from rich, old whites today to young minority kids. Because the old whites die, unless they are very altruistic to the minority kids or to their descendents, the young minority kids who will receive the investments under the Heckman plan have no way to pay back the old white "donors" even if they do earn 10% a year on their investment.