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Of Human Capital

2005 Minnesotan of the Year

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Most know Art Rolnick as the Minneapolis Fed research economist who hates stadiums. (Actually, he just thinks they make lousy public investments.) He stirred up dust a few years ago by urging Congress to ban business-bidding among cities and states—taking aim at the very heart of conventional economic development. Lately, he’s been tub-thumping the virtues of early childhood education. At first glance, it appears the man’s intellectual hunger is both insatiable and indiscriminate. But peer a little closer and you’ll see—Rolnick rarely strays from the logical path. Plus, this guy can really dance.

On this foggy October morning, the resemblance of Arthur J. Rolnick to former New York governor Mario Cuomo seems more inspired than accidental. Rolnick, 61, is an economist and senior vice president and director of research at the Federal Reserve Bank of Minneapolis. But today he’s playing the politico. He’s huddled over a table at a country club in Alexandria, drinking coffee and talking with four young Democratic legislators from greater Minnesota; all are attending a rural education conference at which Rolnick has already delivered a well-received speech on birth-to-age-5 childhood development. From there, Rolnick rushed directly to this table for an unvarnished strategic huddle, musing over ways to increase funding for his public/private early-education initiative.

State representative Denise Dittrich, a first-term Democrat from Champlin who sits on the House Education Policy and Reform Committee, rhapsodizes about Rolnick’s goal of building a $1.5 billion endowment with state, federal, and private contributions. The fund would generate about $90 million in annual interest, the economist says, which could be used to finance quality early education for every “at risk” kid in the state, as well as programs for mentoring parents. “I believe that this has the potential to break the cycle of poverty,” Champlin says. Rolnick, a man not given to incautious rhetoric, nods. “I don’t say that publicly,” he adds, “because I don’t have the evidence. But I think it probably will.”

Rolnick has been focused on this issue for the past two years, and his plan to invest in kids—he often refers to them as “human capital” as a way of reinforcing his dollar-based arguments—has recently sprouted legs. Last year, in a rare moment of accord, the Legislature and the governor agreed to devote $1 million in seed money to the Minnesota Early Learning Foundation (MELF), a pilot project spearheaded by Minnesota Business for Early Learning (MnBEL). The latter group, a coterie of business leaders, had been swayed by Rolnick’s assertions that quality early education programs could produce a lifelong, 16 percent annual return on society’s investment in impoverished kids. It’s a hardheaded, bottom-line argument that holds that poor kids who come to kindergarten ready to learn cost less to educate, tend to avoid welfare and jail as adults, and grow up to become contributing members of a productive, quality workforce. Impressed, Cargill, the McKnight Foundation, and the United Way kicked in another $2.5 million to help launch MELF. So MELF is off to a nice start. But there is more to do.

The outstate legislators and Rolnick discuss crafting a bill for the next legislative session that would increase funds for the initiative. “I’d like to take this to the Commerce Committee,” says Representative Frank Moe, another freshman Democrat, who hails from Bemidji. Rolnick nods thoughtfully. “So…I want to sell it as economic development,” the economist says slowly, almost dreamily, as if working out the argument in his head.

Then he shifts back into high gear, drilling the legislators with suggestions for winning support for the bill—or are they instructions? “Make it as bipartisan as possible,” he says. “Talk about why Republicans should be on there. For every Democrat you have, you should have a Republican. And have some men, so it doesn’t look like it’s just a Democrat/woman issue.”

For an egghead research economist who professes distaste for politics—the whole business is “unseemly,” he says—Rolnick seems rather attuned to the black arts of vote-getting. “For Art to say he is not a politician is a bit of a stretch,” chuckles Duane Benson, the former Republican legislator who recently was tapped to head up MELF. “He probably doesn’t think he is. But politicians learn early on that the message is important and the messenger is more important. He kind of grasps both. He is a good messenger, and he believes in his message.”

It’s not as if Rolnick has never before made a political splash. This is the guy whose biggest impact statewide came from talking smack about public investments in sports stadiums. He is the one who, in the mid-1990s, pushed Congress to ban bidding wars over business relocations among cities and states. (Remember, for example, Lawson Software’s migration from Minneapolis to St. Paul?) His influence soon will be felt in the nation’s highest court. According to the Commerce Clause of the U.S. Constitution, cities and states aren’t supposed to interfere with interstate commerce. Last September, in a case essentially based on Rolnick’s anti-bidding-war assertions, Ohio’s Sixth Circuit Court of Appeals ruled that a subsidy paid to DaimlerChrysler to keep the company in Toledo—offered when the automaker threatened to move its plant to Detroit—was unconstitutional. The U.S. Supreme Court will hear the case during its 2005–2006 term.

None of that exactly explains why a researcher who normally is fixated on pre–Civil War banking, a theoretician, and go-to guy on worldly and arcane economic matters for reporters at the New York Times, BusinessWeek, and the Economist has spent so much time obsessing over underprivileged preschoolers. “I’ve been trained to think about how to improve public policy,” Rolnick says. “And there’s an argument here.”

THERE WAS A TIME when Art Rolnick thought the whole world was Jewish. He was just a little boy at the time, brought up by a pair of liberal Jewish Democrats in what was then a mostly Jewish neighborhood of Detroit, circa 1950. That belief in an entirely Semitic universe wouldn’t have lasted long, however. His father, Sydney, ran a grocery—one of the first supermarkets in the nation—in central Detroit, and, at age 14, young Arthur would begin lending a hand. Even then, before the exodus of whites to the suburbs turned from trickle to torrent, the store’s clientele was 90 percent black. The family sold the business in 1965, a fortuitous decision. Just two years later, Detroit would explode with race riots. Economic inequality and lack of job opportunities for disadvantaged black youths were later cited by academics as being among the complex causes of the unrest. For Rolnick, the lessons of those dark days would linger.

His parents never attended college, but they encouraged their son’s education, and he proved an assiduous student. While attending Detroit’s Mumford High School, he emerged as something of a numbers whiz, so he took up the study of mathematics as an undergrad at Wayne State University, eventually earning a bachelor’s degree. Befitting an economist-to-be, he seems to have had no trouble counting dollars and cents: Rolnick financed his way through school by selling bagels, clearing a profit of $30—or roughly $300 in today’s dollars—per week. He claims he misses the old business.

As he moved into graduate studies at Wayne State, Rolnick sought something meaningful to do with his talent and was drawn to economics. It was the height of Lyndon Johnson’s Great Society; economists had real clout. In particular, Walter Heller, under whom Rolnick would later study while earning his PhD at the University of Minnesota, was making an impact. The chief economic adviser under presidents Kennedy and Johnson, Heller proposed tax cuts that passed Congress in 1964 and sparked an economic boom. He developed the first voluntary wage-price guidelines and devised the theory of governmental revenue sharing, which directed federal funds to state and local coffers, on the assumption that money would be spent more efficiently closer to home.

Rolnick wanted his career to have that kind of impact, too. “You’ve got to understand,” he says. “I feel very fortunate. I was able to go to a great university, get a great education, a lot of it at public expense. And so I wanted to give back and do something.”

He earned a master’s degree at Wayne State, then moved to Minneapolis to pursue a doctorate. But he felt something shift while studying under Heller. Rolnick’s market-oriented ideas differed from Heller’s tendency to rely on government intervention: much to his own surprise, Rolnick gravitated toward the philosophies of Milton Friedman, the much-vilified conservative economist whose supply-side theories would be adopted by the Reagan administration. Friedman argued that governments intervening in economic problems usually just made matters worse, and he insisted they adhere to a strict diet of monetary-policy enforcement to control inflation, as well as supply-side management to help markets grow and to reduce unemployment. Today, Rolnick declares himself a free-market, neoclassical economist. “I’m one who starts at the point of saying that where markets work, they generally work well,” he says.

That attitude may be especially suitable to employment at the Federal Reserve Bank, the stolid institution that determines U.S. monetary policy. Rolnick joined the Fed’s Minneapolis branch as a research economist in 1970, rising to the post of research director by 1985. In the process, says University of Chicago economist and Nobel laureate James Heckman, Rolnick helped make Minneapolis one of the Federal Reserve’s powerhouse research institutions, easily the best among the Fed’s 12 regional branches, rivaling even the research output of the Reserve Board in Washington, D.C. “Rolnick played a huge role in that,” Heckman says. “He’s practiced, he’s wise, he’s careful, and he’s very thoughtful. He’s taken seriously.”

Certainly David Strom, the president of the Minnesota Taxpayers League and a staunch anti-tax conservative, takes Rolnick seriously. “I’m a big fan of Art Rolnick,” he says. “Art is one of three or four people I automatically assume are right until it’s proven otherwise. I tend to be very much a skeptic, but Art strikes me as brilliant and thoughtful. And he dances well.”

True: Rolnick and his wife, Cheri, are serious competitive ballroom dancers. About 10 years ago, after their sons had reached their twenties and parenting duties no longer consumed most of the couple’s time, the Rolnicks starting taking dance classes for recreation and exercise. “It’s just one thing we like to do together,” Rolnick says. “My wife is a great dancer.”

One of the pair’s instructors, it turns out, danced in competitions, and the couple soon found themselves sucked into ballroom dancing contests. Five years ago, they entered their first competitive event. “Competition is a whole different thing because you’ve got to practice all the time,” he says. “Let me tell you, it’s a sport. It’s hard work.” Clearly, the exercise has done Rolnick no harm. He is trim and fit, a youthful 61-year-old who could easily pass for 50. Maybe 47, in a dimly lit room.

The Rolnicks now compete four to five times a year against other couples in the 35-plus age bracket. They have placed as high as third in a national competition, their biggest success to date. “I think it was my good looks that did it,” Rolnick deadpans.

HIS ABILITIES TO THINK ON HIS FEET and to move nimbly even in the spotlight’s heat have served Rolnick well. Such traits have certainly aided him in the political debate surrounding early education.

To hear Rolnick tell the story, his recent fixation on the schooling of preschoolers just sort of shimmied into his path. Two years ago, he was attending a breakfast gathering put together by former Minnesota governor Al Quie and ex-Minneapolis mayor Don Fraser for Ready 4 K, a local early education advocacy group. Quie and Fraser were arguing for state funding. But to Rolnick, their pitch seemed incomplete. “I naively raised my hand and said, ‘This sounds good, but I can make all kinds of moral arguments for K–12, higher education, reducing pollution, reducing crime,’” he recalls. “‘I just think you’re not going to make much headway without making the economic case for it.’”

Rolnick had just turned himself into Minnesota’s pied piper of early learning: “They said, ‘Okay, Rolnick, write us up a white paper, the background.’ I didn’t know what I was getting myself into.”

The result was an essay, coauthored with Minneapolis Fed regional economic analyst Rob Grunewald, titled “Early Childhood Development: Economic Development with a High Public Return.” It was fairly arcane stuff, but its impact was dramatic. By framing the childhood development argument in terms of returns on investment, the authors hoped to appeal directly to fiscally minded members of the business community.

The paper begins by recasting an old Rolnick argument: subsidizing business relocations in the name of economic development—allowing cities and states to battle over businesses—is a zero-sum game. While St. Paul benefits mightily from the arrival of Lawson Software, Minneapolis loses just as much when the company leaves. The net gain to the state overall is essentially nothing.

In contrast, there’s considerable economic benefit to be gained from city and state investments in children, Rolnick and Grunewald observe. Their case is built on data. The writers cite studies of disadvantaged children placed in intensive early-learning programs.

 


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