Government spending Publicly-financed education

1. Government spending Publicly-financed education Today: Why government grew so much in the 20th century; Effects of publicly-financed education

2. 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

3. 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?

4. Explaining Government Growth • Five theories of government growth • Citizen preferences • Marxist view • Chance events • Changes in social attitudes • Income redistribution

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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 Change bureaucratic incentives See Figure 6.4, p. 120

13. 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

14. Institute constitutional limits • If Congress cannot regulate its own spending, should there be a constitutional amendment that does limit spending? • Most economists believe “no”

15. 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?

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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

29. 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)

30. 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

31. 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”

32. 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

33. 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

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

35. 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

36. 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

37. 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

38. 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

39. 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

40. 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

41. 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

42. 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

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

44. 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

45. 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?

46. 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

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

48. 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

49. 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

50. 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”