A Capital Investment

Portrait: Art RolnickBy Thomas Lee

What exactly is the public good? Art Rolnick has spent a career using economics to answer that question Continue reading…

Art Rolnick didn’t set out to be a maverick. He didn’t even set out to be an economist.

But after nearly 40 years at the Federal Reserve Bank of Minneapolis, this 62-year-old senior vice-president and director of research and University of Minnesota alumnus has become both — an economist who has challenged “common sense” government policies (like public funding for sports stadiums) and has become a vocal advocate for innovative programs to increase access to early childhood education.

Interested in mathematics early on, Rolnick decided the field was too theoretical.

“I started out in math at Wayne State University but ended up in economics,” he says. “When I entered the Ph.D. economics program at the U of M in 1967, I was told that it was a very rigorous program. I didn’t know if I was going to make it or not. It was hard and demanding but it paid off. It made me a much better economist.

“The Minnesota model is that your arguments have to be very rigorous before you come out with a policy statement,” he explains. “The program pushes you to use theory to its ultimate end. It isn’t simply looking at data and making up stories. You have to be much more careful in the questions that you ask.”

Rolnick, who arrived at the Fed in 1970, says he was heavily influenced by economic giants in the department like Neil Wallace, Tom Sargent, and Chris Sims. But it was Walter Heller who convinced him that economists could play a powerful role in shaping public policy. (Heller was a top economic adviser to Presidents John Kennedy and Lyndon Johnson and helped LBJ develop the Great Society and the War on Poverty.)

“At the time, it started me thinking,” Rolnick says. “I realized then that economists may be able to make a significant contribution. That was an eye-opener for me. I could apply economics to real world situations.”

Rolnick first came to both local and national attention in the early 1990s with a paper that criticized states for spending billions of dollars in tax breaks and subsidies competing with each other to attract and retain businesses.

At the time, Northwest Airlines was asking the state for millions of dollars in subsidies to build a new maintenance facility in Duluth. Absent that commitment, the company implied, it would move operations to Detroit. Rolnick felt such competition was a “zero sum game”; such competitive maneuvers didn’t create new jobs so much as move them from one city to another. The public earned no return on their investment, he says.

Minnesota eventually issued nearly $50 million in state bonds to finance construction of the maintenance facility. But the carrier closed it down when its mechanics went on strike in August 2005. The airline filed for bankruptcy a month later.

“This doesn’t make a whole lot of sense to me,” says Rolnick, who has since become a strong opponent of using public money to build new stadiums for the Vikings and the Twins. “You are a private company. If this was such a good investment, go out and get some private funding. Why are you coming to the public?”
Art Rolnick
The idea of a “public return” has guided Rolnick’s thinking throughout his career. How could the state spend its money in a way that would produce the greatest good for all of its citizens? To attract businesses and create jobs, he’s argued, the state is better off investing in roads, education, and health care, because such quality-of-life investments yield a well-trained and productive workforce.

“Build the human capital and they will come,” Rolnick says. “If you want sustainable economic growth, that’s the way to do it. If you build a sports stadium, it sure looks like economic development. But stadiums are quiet most of the time. Who’s got the best school systems? The most productive workforce? That’s what attracts the businesses.”

Rolnick has put those views to work again with his high-profile effort to promote early childhood education. In the past, getting kids ready for kindergarten was seen mostly as a moral issue, not an economic one. But Rolnick prepared a paper demonstrating that a $20,000, two-year investment in early childhood education per at-risk child produced an inflationadjusted 16 percent return for the public, easily beating the stock market and sports stadiums, he says. That’s because those kids go on to become better students, get better jobs with good pay, and, more importantly, stay out of trouble. That, in turn, means less crime and less drain on public resources.

The paper became a sensation. At the invitation of Jeb Bush, then governor of Florida, Rolnick was the keynote speaker at the National Governors Association in 2003. He has given speeches on the subject to the prime minister of Turkey, the Saudi royal family, and the queen of Jordan.

“I think the economic argument did it,” Rolnick says. “Nobody quite put it that way before. Let’s look at it as an economic return and compare investing in at-risk kids, scholarships, and job training to building sports stadiums and auto factories. It convinced a lot of business people. Companies have to worry about the quality of the workforce, crime in their communities, the quality of life when they recruit employees from their base.”

These days, Rolnick is working on a $30 million pilot program in St. Paul that will provide pregnant mothers with a nurse to advise them on everything from nutrition to parenting skills. Once the child turns three, he or she receives an annual $10,000 scholarship to get ready for kindergarten. Early childhood programs will have to compete for the money and students.

“You can argue that all of the training I got from the U, thinking long and hard how this is going to work, made all of this possible,” Rolnick says. “You have to constantly test ideas in the field. It’s the Minnesota school of thought. You’ve got to be rigorous, vet ideas through best academic theory and practice, and make sure ideas are well thought through.”



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This page contains a single entry by cla published on June 23, 2008 6:58 PM.

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