Publicly-financed education

1. Publicly-financed education Today: Why is K-12 education provided by the government for free?

2. Important announcements • Test 1 on Monday • Reminder on calculators • Basic or scientific calculator only • No memory • Exception: One- or two-number memory is okay • No graphing ability • No calculators with communicative ability • No blue book needed • Tip • Try to take old Test 1 under the given time constraints

3. Timeline • On Monday, we went through topics related to direct and indirect governments • Today • We finish Unit 2 by looking at Chapter 7 • Topics in education • Time for review (30-45 minutes) • More problems • Your questions

4. Publicly-provided education • Real annual spending per pupil on public elementary and secondary schooling has increased by 81% from 1980 to 2006 • Why is this so? • Citizen preferences? • Positive externalities of education? • Generates more taxes as adults • Socialization reasons

5. Citizen preferences • Some people believe that each person has a right to a minimum level of education • Recall social utility function • At low levels of education, social welfare could be min{educi} • Basic education needed to be functional in society • Equitability issues • Prevention of de facto caste system if only the rich can afford education

6. Positive externalities • An economist would go further, claiming that there are positive externalities in education • Less likely to have civil unrest • More income to tax later in life • Ability to understand public policy • Debate exists as to the level of positive externalities • Empirical findings are not conclusive

7. What about higher education? • In-state students at California’s public colleges and universities have their educations substantially subsidized • Are there positive externalities from higher education? • Argument against • Diminishing externalities from education • Arguments in favor • Research externalities • Inefficient loan market for students

8. Diminishing marginal returns argument • The diminishing marginal returns argument claims that the positive externalities are greatest for the early years of education • With this argument, the amount of subsidized higher education may be above the optimal quantity

9. Research externalities • Higher education in some fields provides substantial amounts of externalities • Research that benefits many people in society • This leads to the question: Should different fields of study in college have different subsidization levels? • Hard sciences may deserve a higher subsidy • Fields with no research externalities would get small subsidy by this argument

10. Potential negative consequences • Although there may be positive externalities with college education, there is another consequence • Increased income inequality • Subsidized education results in the rich getting richer, leading to increased income inequality • With increase in income inequality, social instability can occur

11. Government provision of education • It appears that the government is justified in subsidizing education • How should education be provided? • Public • Private • Some public and some private

12. Public provision of education • Assume a simple model of education • Each student goes to public or private school (but not both) • Parents try to maximize utility • Public school quantity is fixed • Public school price is free • Per-hour quality of public and private school is equal • This assumption will be relaxed later on • Total taxes collected on each family does not change with publicly-provided education

13. Does Government Intervention Crowd Out Private Education? Example 1 A x Quantity of all other goods ii Private School quantity of education Public schooling “crowds out” education i B ep eo Quantity of Education

14. Reality check on education • In reality, most people maximize utility by sending their kids to public school • If desired education level is above ep, parents can supplement education with after-school and weekend activities • Music lessons • Learning a second language • Private tutoring

15. Does Government Intervention Crowd Out Private Education? Example 2 A x Quantity of all other goods ii i Public schooling increases quantity of education B eo ep Quantity of Education

16. Does Government Intervention Crowd Out Private Education? Example 3 Once again, some parents may send their kids to public school and supplement education with private activities A x Quantity of all other goods Public schooling does not increase quantity of education ii i B ep eo Quantity of Education

17. Quality of public education • Quality of education is hard to quantify • Besides the obvious aspects of class size and total spending, there are different criteria that affect education • Unionization of teachers • Parents’ choices of their kids’ curriculum • Size of school • School-sponsored sports and activities

18. Unionization of teachers • Many public school districts have unionized teachers • Pro • Keep standards of educators high • Cons • Higher wages than in competitive market • Less money for other spending • Layoff order • Usually based on seniority, not quality, of educator

19. Parents’ choices of their kids’ curriculum • Parents are heterogeneous in the wants for their kids’ education • Private schools often provide more specialized choices • Religion • Montessori • More challenging curriculum than public school (in some cases) • Charter schools (more on this later)

20. Parents’ choices of their kids’ curriculum • Pros of private school • More choices • No big bureaucracy to deal with • Cons of private school • Less public oversight • Additional cost

21. Size of school • Pros of big schools • Lower administrative cost per student • Ability to offer more classes • Example: Tagalog class in a school with a significant Filipino population • Fewer school sites needed • Cons of big schools • Some students have longer distances to travel • “Getting lost in the crowd”

22. School-sponsored sports and activities • Pros of big schools • More sports and activities offered • Higher quality for spectators • Cons of big schools • Fewer students “make the team” • Competition to make the team can be fierce • Wanda Holloway • Daughter tried out for cheerleading at age 13 • Asked brother-in-law to kill another girl’s mother • Convicted of solicitation of capital murder

23. Total spending • The United States is near the top of per-pupil spending • Test scores of US students is not near the top in many internationally-administered tests

24. Does Government Spending Improve Educational Outcomes? More recently, the US has past the Swiss in spending

25. Class size and total spending • A common assumption is that as more money is spent, school quality goes up • Is this always the case?

26. Class size and total spending • Example: Increased spending to reduce class size • Pro • Fewer students per teacher • Con • New teachers  Lower average quality than current teachers

27. Class size and total spending • Does increased spending actually lead to higher school quality? • Evidence is mixed • Some programs in some schools appear to use additional resources well • There is evidence that some schools may not use additional resources well

28. Empirical work on education • Be careful while reading through the “Empirical Evidence” subsections in the textbook • Make sure that you understand the difference between correlation and causation • Refer to Chapter 2, if needed

29. Example of empirical work • How much does education increase earnings? • Recall diminishing marginal returns • Greatest returns to disadvantaged children in early years • Justification for programs like First 5 California and Head Start • Low returns from increased K-12 educational spending on the margin • Each year of schooling increases earnings by an estimated 5-11 percent

30. Cost-benefit analysis of spending • We can calculate the direct costs and benefits of additional school spending • Card and Krueger (1996) estimate that a 10 percent reduction in class size results in increased earnings between 0.4-1.1 percent • Peltzman (1997) uses Card and Krueger’s results to do a cost-benefit analysis • Various assumptions made • 3 percent and 7 percent discount rates used

31. Results from Peltzman (1997) • Net present value of costs are higher than the benefits • Are there other benefits that are not measured here? • Only increased earnings are accounted for below

32. How are schools changing? • By many measures, public school quality in the US is decreasing • Three ways to try to reverse this trend • Charter schools • School vouchers • School accountability

33. Charter schools • Increased independence in spending and hiring • Allows for competition between charter and regular public schools • Some evidence shows that the introduction of charter schools increases quality of ALL public schools

34. School vouchers • Each parent or guardian of a child receives a voucher • The voucher is redeemed by the school in exchange for providing education

35. School vouchers • Pro • Competition • Poor public schools  Improve or go out of business • Cons • Information gathering of schools is costly • Reduction of positive externalities of education • Rich families may use vouchers more than poor families • Some poor families may not be able to afford private school with vouchers • Vouchers effectively increase income of middle-class and rich families that already send their kids to private schools

36. School vouchers • Replies to cons • Vouchers can be geared toward low-income students • Private schools would still need to meet curriculum guidelines  Positive externalities • Current research will help shape the debate on vouchers • The main question: Who benefits and who loses from school vouchers?

37. School accountability • Schools are monitored • No Child Left Behind (2001) • Some schools get “report cards” evaluating their performance • Some schools have financial incentives linked to test outcomes

38. School accountability • Pros • Reduction in bureaucracy • Increased focus on core learning • Gives easy access of each school’s performance to the entire population

39. School accountability • Cons • No incentive for certain types of learning • Art, music, physical education, emotional development • “Teaching to the test” • Arbitrary mandates make some good schools look bad • Gaming the system • Increased suspensions • Increased use of special education • Cheating

40. Education and employment • There are different theories about the direct effectiveness of education • Direct learning • Screening • Employers need to try to determine how much of education is direct learning, and how much is screening

41. Education and employment • Various messages are sent to employers by finishing a certain level of education • “I have learned everything needed to finish this level of education” • “I am intelligent enough to finish this education, which probably means I am smarter than somebody without my level of education” • “I am using this level of education to send a signal that I have other good qualities that you are looking for; others that do not finish this level of education can say the same thing”

42. Education and employment • Many jobs require a minimum level of education to be considered for a job • M.D. degree to be hired as a medical doctor • License for many specialized fields • Real estate • Pilot • High school or college diploma for many entry-level jobs

43. Summary: Publicly-provided education • There are arguments in favor of providing basic education to all children free of charge • Crowding out predicted for some families • Public spending on education has increased in recent decades, but some indications of student performance have decreased • Recent proposals for reform try to increase public school performance • Financial incentives and competition

44. Timeline • This concludes Unit 2 • Remaining time today • Problems and questions • Monday: Test 1 • Wednesday: Begin Unit 3 • The role of insurance in health care, part 1 • Read pages 180-196

45. Good luck on Test 1