Of Human Capital

2005 Minnesotan of the Year

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.

 

 

Of particular interest to the authors is a study of 3- and 4-year-olds, beginning in 1962, in Ypsilanti, Michigan. About 60 of the 123 children involved in the study received intensive early education services at Ypsilanti’s Perry Preschool. The remaining kids served as a control group and received no services. Most of their cases were tracked into adulthood. When they reached age 27, all but six of those involved in the study were located and interviewed. More than 65 percent of the early-ed students graduated from high school, compared to 45 percent in the control group. Four times as many program beneficiaries earned at least $2,000 a month. Only 20 percent as many early-ed students had spent time in jail. Three other shorter-term longitudinal studies are also cited in the Rolnick-Grunewald paper, each showing similar results.

Rolnick and Grunewald conclude that quality early learning for impoverished children could result in a 16 percent annual rate of return on initial investments. Twelve percent of that is purely public return, the economists argue—savings resulting from the reduced costs of educating ready-to-learn children, and the attendant reduction in crime. The other 4 percent, they argue, is private—the increase on a year-to-year basis of the child’s lifetime income.

The essay recommends the creation of a $1.5 billion state endowment to permanently fund high-quality early learning for all 3- to 4-year-old kids from low-income households in the state. A 6 to 7 percent return on investment in AAA bonds, Rolnick argues, would yield about $90 million a year, plenty to pay for the program statewide. (Incidentally, Minnesota now spends about 40 percent of its budget on K–12 education, but less than 1 percent on preschoolers.)

Rolnick was unprepared for the massive response. “I wrote the paper, and I thought I was done,” he says. Hardly, says Todd Otis, president of St. Paul–based Ready 4 K. “He did the research and became almost a rock star of early childhood,” Otis says. “It’s been a real shot in the arm for the early childhood movement.”

Since 2003, Rolnick has gotten little rest. He tours the country like a presidential candidate, delivering speeches. On October 27, 2005, alone, he gave two, one in Alexandria, another in Elbow Lake. He was a keynote speaker for the National Governors Association’s conference in December 2003, alongside Florida governor Jeb Bush, and later addressed Beltway policy wonks at a national Pew Foundation economic-development conference in Washington, D.C. He has addressed the National Council of State Legislatures, sharing a podium with the head of the Bill and Melinda Gates Foundation. Most recently, he spoke at the World Bank, addressing 200 people representing 42 developing countries. Arizona, Tennessee, and Michigan are among states considering like-minded pilot projects. He and Grunewald are in demand. “Every day we get calls for people who want us to speak,” Rolnick says. “This has become a major issue.”

Its import figures to grow. In June 2005, Rolnick and Grunewald wrote a follow-up essay. This time they proposed expanding the scope of childhood development programming to meet the needs of all impoverished kids ages 5 and younger, including newborns. Citing advances in brain research that indicate the most critical neurological development occurs between birth and age 3, Rolnick now pitches $10,000 to $15,000 annual per-child “scholarships” (he admits these are really vouchers) for full-day early learning programs, coupled with voluntary parental mentoring from the day a child is born until kindergarten. Public health nurses would fill the mentor’s role.

For Rolnick, the critical new piece is that early learning programs—including federally funded Head Start programs—would have to compete for the influx of new clients. “We’d have to let the providers know they have to be high-quality to get on the list, and we’d define high-quality,” Rolnick says. “Once you’re on the list, you can compete for the scholarships. We’ll pay for performance. There will be bonuses for providers that do well, and we will give out awards and publish best practices and encourage the market to come up with new solutions.”

To those worried the state may not have enough providers, Rolnick falls back on his faith in the marketplace. “I have no doubt the market will respond if they know they’ve got customers empowered with the financial resources for these kinds of services,” he says.

Praise has poured in. In May 2005, the St. Louis Business Journal opined that Rolnick’s message “is one that takes the early childhood conversation out of child-care centers and classrooms and into board rooms, offices, and university halls.” On July 4, 2004, the Star Tribune dubbed Rolnick “the very model of an American patriot.” To MELF’s Benson, his impact is purely a matter of timing. “If he wrote that essay 8 or 10 years ago, it probably would have sat on a shelf,” Benson says. “Writing what he has written, at this point, is hitting a raw nerve at the right time.”

NOT ALL THE NERVES Rolnick is hitting are registering a pleasured response. Rolnick says he has taken heat from both liberals and conservatives. But his critics on the right are significantly more vocal.

Count Karen Effrem among them. She’s a non-practicing pediatrician from Plymouth and a board member of EdWatch, a conservative education-watchdog group. Effrem says there are too many flaws in Rolnick’s plan to count. She dismisses the economist’s claims about brain research advances and return on investment, saying his estimates of increased benefits to society are “all wrong or based on bad data.” She accuses Rolnick and his associates at Ready 4 K of planning, long-term, to impose federal and state education standards on preschools. “And they have been an unmitigated disaster for K–12,” she says.

Once created, Effrem says, Rolnick’s program would inevitably expand beyond poverty to encompass all preschoolers. That, she claims, would result in a kind of state-imposed Brave New World for early learning.

Rolnick denies that, saying the program would be completely voluntary and would closely involve parents at every stage. Further, he argues against including wealthy and middle-class children, with some possible exceptions, because for those groups, the benefits would be negligible. “What are we doing?” he says. “We’re empowering people to be better parents and giving them resources to do things that middle-class parents already do.”

Mitch Pearlstein, founder and president emeritus of Minnesota’s conservative think tank the Center for the American Experiment, is skeptical but provisionally supportive. His “qualifications and cautions” are many, he says, and have to do with research that indicates Head Start and other early education programs have had spotty records over four decades. “Generally, by the time the kid gets to third grade, it’s as if he or she were never in the program,” Pearlstein says. “So the benefits fade pretty quickly.”

Pearlstein also says the sample size of kids measured in the Perry Preschool study is “absurdly low.” Furthermore, the “hands-on, intimate” environment offered by the Perry Preschool would be very difficult to replicate on a large scale. And while the Perry program’s kids did better than the control group, the outcomes were nonetheless fairly disappointing, Pearlstein says. “What,” he asks, “does that say about overly excited expectations for early childhood education going forward?”

Still, Pearlstein is willing to give Rolnick’s ideas a chance, if for no other reason than fatalism. The move toward expanded early childhood education in the United States is “inescapable, unstoppable,” he says, and this plan, at least, is in Rolnick’s capable hands. “Art’s a good free marketer,” Pearlstein says. “I’m just skeptical of what happens when government gets heavily involved. I fear a general drift toward more inflexibility, more bureaucratic control, more union control and so forth. I have my doubts that, over time, the program will develop as good folks like Art may be envisioning it now.”

State senator Steve Kelley, of Hopkins, the chairman of the Senate Education Committee and a candidate for Minnesota governor, is one of the rare Democrats who are openly skeptical about Rolnick’s ideas, less on the merits of the proposal than on the politics. Kelley notes that a linchpin of Rolnick’s plan is redirecting to early learning programs an existing $500 million, century-old, congressional land-grant endowment, created to perpetually fund Minnesota education. Doing that, Rolnick says, would render tax hikes to finance the early-education program unnecessary. The economist would then couple the state’s contribution with equal commitments from the federal government and the private sector, creating a $1.5 billion endowment.

The problem, Kelley says, is that those proceeds already are in use for K–12 education and can’t be removed without replacement funds. “It might be a good idea,” Kelley says. “But to the extent it pulls resources from the general fund, they don’t explain how we’re going to make up the shifts of [land-grant] money to that specific area.”

As usual, Rolnick has an answer. The land-grant endowment currently generates about $30 million in annual interest for K–12 education. The solution, he says, is to divert $30 million from current economic development incentives—money that, you’ll recall, Rolnick thinks is being wasted anyway—to K–12. Problem solved.

Economist Heckman, who also has analyzed the Perry school research, allows that there are some good reasons to be skeptical. But he also insists that change is needed urgently, and no one has a better idea. “I’m not saying it’s perfect, and I see there is a huge need for research,” Heckman says. But American families are in trouble, he says. At the same time that birth rates among the middle-class and wealthy have fallen, they are rising among the poor, especially among disadvantaged, young, single mothers. “That’s why I think these programs have a role to play,” Heckman says. “There are a lot of kids who are not getting the kinds of opportunities that other kids are getting.”

YOU MIGHT ALMOST GET the impression that Rolnick is on a lonely, quixotic quest to give poor kids a break. In fact, he has many allies, some of the closest in the business community, persuaded by his arguments that early investment can help create a quality workforce and a return on investment from an education system that, too often, seems a fiscal black hole.

One key ally is Al Stroucken, CEO of H. B. Fuller Company, who last year was named chairman of MnBEL, and who has pushed for high-quality early learning to help make Minnesota globally competitive. Cargill’s Rob Johnson, who has directed his company to devote more of its philanthropic dollars to disadvantaged children, is on board, too, as are others. Progress is palpable. MnBEL’s 200 executives successfully lobbied for the creation of the MELF pilot program, while another pilot project, the Invest Early initiative in Itasca County, was devised very much along the lines of Rolnick’s proposal, funded by a $1.5 million Blandin Foundation grant.

“I’m very high on Art,” says Chuck Slocum, the founder and president of the Minnetonka-based Williston Group consultancy that organized MnBEL. “He’s committed to his vision, but he has also shown a pragmatic flexibility toward people who are at other places on the learning curve or who have different approaches. He is able to do that.”

Slocum says some of the economist’s ideas germinated in discussions among business executives who realize that without a fundamental change in the structure of education, the state will cease to compete. But it took Rolnick, an economist who speaks their language, to bring it all together, he says.

“The level of understanding and strategic thinking that business brings to this issue, I just don’t think it would have been there, or possible to organize, if Art hadn’t already been there talking about the payback,” Slocum says. “He has pragmatically pulled the pieces together. He has thought it through sufficiently, and he has got an answer.”

“My bottom line is, let’s just try it,” Rolnick says. “There is a high probability that it will be successful.”

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