Government spending Publicly-financed education

Today: Why government grew so much in the 20th century; Effects of publicly-financed education

Today

We finish Chapter 6 Examination of the growth of government

spending in the 20th century We finish Unit 2 by looking at Chapter 7

Topics in education

Growth of government spending Many western countries have had significant

growth in government spending since 1900 How is this growth justified?

Many theories examined No single theory fully explains the growth

Can government growth be controlled?

Explaining Government Growth Five theories of government growth

Citizen preferences Marxist view Chance events Changes in social attitudes Income redistribution

Citizen preferences

Take median voter’s preferences of public sector goods and services G = f(P, I)

G represents the median voter’s demand for public sector goods and services

P is the relative price of public sector goods and services

I is income

Citizen preferences

Assume median voter theorem is true When income increases, if income elasticity of

demand is greater than one for the median voter, increased public services would be provided

Growth of the middle class may explain why government spending has grown so much

This theory predicts that voters get what they want

Marxist view

A Marxist model would argue that the private sector overproduces Government must expand expenditures to correct this

Worker discontent is curbed by social service spending

Some argue that this is not sustainable, since expenditures will eventually outpace tax revenue capacity See Figure 18.6, p. 423, for more on tax revenue capacity

Government shocks

Chance events lead to shocks on the government

These shocks require the government to increase spending substantially Examples: The Great Depression and the world

wars Inertia increased spending sticks

Changes in social attitudes

Are people making bigger demands on government? Maybe Similar idea to median voter theorem

Costs and benefits may also be incorrectly perceived by the public

Income redistribution

Two views Government grows to help low-income voters

Some politicians can promise redistribution to median income and below

Incomes above the median get taxed to pay for income redistribution

Government grows to help the middle class Appeals to voters near median income With this view, the upper- and lower-income classes pay

for the benefit of the middle class

Controlling government growth Some people believe that government is not

too big Others disagree If the government is too big, how can we

make it smaller? Change bureaucratic incentives Change fiscal institutions Institute constitutional limitations

Change bureaucratic incentives Recall Niskanen’s model of

bureaucracy Bureaucrat often worries about size of

department, not what is efficient Financial incentives for cost-cutting

could backfire, however Q could be below Q*

Private provision may be more efficient

See Figure 6.4, p. 120

Change fiscal institutions

Is the budget-making process undisciplined? Many people believe so Congress-imposed solution: Budget Enforcement

Act (BEA) of 1990 Spending and revenue targets are set The cap can be exceeded when an elaborate set of

parliamentary rules are followed Problems with BEA

Some “emergency” spending is known in advance 2000 census

Institute constitutional limits

If Congress cannot regulate its own spending, should there be a constitutional amendment that does limit spending?

Most economists believe “no”

Why not to impose constitutional limits Revenue and spending is usually uncertain until it

happens If tax revenue was overestimated, severe spending cuts

would have to occur mid-year Spending could be forced on states instead

States could be mandated to provide part of Social Security What would the consequences be if Congress

circumvents the law? Judicially-imposed budget? Will Congress members be punished?

Summary: Growth of gov’t spending Although political models have appeal on

government spending, they do not fully explain how governments behave

Many people believe that government spending needs more control BEA and current incentive structure ineffective No constitutional amendment for balanced budget

Probably goes too far

Publicly-provided education Real annual spending per

pupil on elementary and secondary schooling has increased by 68% from 1980 to 2004

Why is this so? Citizen preferences? Positive externalities of

education? Generates more taxes

as adults Socialization reasons

School Year Real expenditure per pupil (2004 dollars)

1980 $4,917

1985 $5,687

1990 $6,746

1995 $6,849

2000 $7,574

2003 $8,242

2004 $8,248

Source: Computed from US Census Bureau, Statistical Abstract of the United States 2006. Washington, DC 2006, p. 155

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

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

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

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

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

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

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

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

See Figure 7.1, p. 139, to graphically analyze crowding out

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

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

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

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)

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

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”

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

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

See Figure 7.2, p. 140, to see how the United States compares with other countries’ education spending

Class size and total spending

A common assumption is that as more money is spent, school quality goes up

Is this always the case?

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

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

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

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

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

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

See Table 8.3, p. 170, for Peltzman’s cost-benefit analysis

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

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

School vouchers

Each parent or guardian of a child receives a voucher

The voucher is redeemed by the school in exchange for providing education

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

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?

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

School accountability

Pros Reduction in bureaucracy Increased focus on core learning Gives easy access of each school’s performance

to the entire population

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

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

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”

Education and employment

Many jobs require a minimum level of education to be considered for a job M.D. to be hired as a doctor License for many specialized fields

Real estate Pilot

High school or college diploma for many entry-level jobs

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