Do expenditures matter?

The significance of the ways in which education differs from other commodities is posed
most starkly by the controversy over whether increased educational expenditures lead to
increased education performance. In the production of a standard commodity, an increase in input
would necessarily lead to an increase in output. Earlier, we noted the low performance of American
students compared to those abroad, as indicated by certain test scores. Figure 16.2 shows clearly
that this is not because the United States is spending less; in fact, on a per pupil basis it is
spending more than almost any other country. Similarly, expenditures per pupil have increased
markedly over the past fifteen years, with only a modicum of effect on test scores. The weak link
between expenditures and performance had been demonstrated earlier, in a classic study by
James Coleman.
Issues and controversies in educational policy
Many economists believe that increased expenditures do make a difference a greater difference
than Colemans earlier study suggested. A set of studies that looked at the performance of
identical twins (so that natural differences were fully accounted for) showed that levels of
education made a systematic difference in earnings. Another study compared states with
different rules for when students could drop out of could school; those who were forced to stay in
school longer (controlling for other variables) seemed to do better.
The problem with interpreting the consequences of differences in expenditure levels is that much
and an increasing proportion of education expenditures in the United States goes to purposes not
directly related to teaching (such as administrative expenses) and to addressing the requirements
of those with special needs. There are only limited data looking at, for instance, the consequences
of smaller class sizes. The most famous experiment occurred in Tennessee, where students were
randomly assigned to different class size; the results of that experiment, while not conclusive,
support the view that smaller class size (entailing greater expenditures) does lead to improved
student performance.
Another set of critiques of Colemans findings argues that the real output of educational
expenditures is not supposed to be higher test scores but higher productivity, leading to higher
wages. Several recent studies have established a clear link between expenditures and earnings.
Those who believe that schools have relatively little impact on earnings believe that home
background is critical. Even in that view, it is still possible that by increasing expenditures on yhe
disadvantaged, public schools can help offset deficiencies in home background. This raises

fundamental questions about the allocation of resources within schools: how much should go to
helping the academically gifted, how much to the average student, and how much to those at the
bottom? The countrys technological leadership depends on having the best scientists in the world,
and this argues for putting resources at the disposal of the scientifically gifted. On the other
hand, without adequate skills, those at the bottom will see their wages fall behind, as they have
been doing in the last two decades. (see figure 16.3). increasing inequality is likely to give rise to
increasing social problems in the decades ahead. Education advocates argue that we should spend
more on both, but given the current overall limitations on expenditures, the issues is, should we
direct more to the top or the bottom. Or do we now have just about the right balance? The
appendix to this chapter presents a framework for thinking about this issue.
School vouchers: choice and competition
Perhaps the most heated recent debate in the political sphere has concerned the question
of school choice. Should parent be given more choice about where their children go to school? The
simplest proposals for providing school choice entail vouchers: each child would be given a coupon
worth, say, $5000 to be used at the school of the parents choice. Public schools would, under this
proposal, have to compete directly with private schools; they would have to raise their revenue by
persuading students to attend, just as private schools do. If parents valued the kinds of programs
provided by the public schools, then the public schools would do well.
Implicit in much of the discussion favoring vouchers is a critique of the role of government
in education: today it both finances education and produces it. Many believe, as we saw in chapter
8, that, for a variety of reasons, the government is not an efficient producer, and that in the
competition between schools, private schools would win out. Moreover, they say when parents
choose their childrens school, they become more committed to that school and more involved in
their childrens education, and this contributes to school performance.
Interestingly, and contrary to the claims of critics, advocates of choice argue that private
schools not only produce a higher quality education at lower costs, but actually promote equality.
In another famous study, the late James Coleman of the University of Chicago and his co-authors
argued that Americas public schools were actually more segregated, both racially and
socioeconomically, than were it is private schools. The segregation results because the public
school system, especially at the primary level, is based on neighborhood schools, and
neighborhoods are in effect segregated. They also argue that private schools are more effective
in educating disadvantaged students (for instance, as measured by test scores)

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Finally, advocates of vouchers argue that America already has a system of choice, but constrained
choice. Those with enough resources can choose to move to the suburbs or put their kids in
private school. It is the poor that the current system deprives of choice. There is competition,
but only for the children of the affluent, not for the poor. America believes in competition. It may
be natural for those in any industry to argue that competition in their sector would be less
desirable, and the postulates of perfect competition may not be satisfied perfectly. Still, as a
country we believe that the advantages of competition outweigh the disadvantages. Why should
education by any different?

Vouchers programs have been attacked on several grounds. Some economists argue that the
conditions that make competition work in conventional markets do not exist in education. Parents,
particularly less well educated parents, often are not well informed; they are ill prepared to judge
the effectiveness of schools in providing key skills. Indeed, this information problem is a key
rationale for the establishment of national standards.
Moreover, in many areas, the number of schools is limited; many parents inclined to choose
schools on the basis of convenience rather than educational excellence. Competition is further
limited by the fact that once children are enrolled in a school, transferring is likely to be difficult;
and the less standardized the curriculum, the more difficult adjustment will be.
Critics of choice argue that the alleged superior performance of private schools is a mirage.
Part of the seemingly superior performance arises from a selection effect: those who chose to
send their children to private schools are more committed to education, and it is this commitment,
rather than what the schools do, which accounts for any measured differences in performance.
Secondly, there is a discipline effect: private schools reject or expel those who are disruptive or
who in other ways fail to perform adequately. Public schools cannot do this. While it may be true
that today performance in private schools exceeds that of public schools for individuals of
seemingly similar backgrounds, this would not be the case if there were a major expansion of

private schools, especially if they were required to take all students, including those with
discipline problems.
Moreover, say many critics of vouchers, the scheme would lead to a more socially and
economically stratified society, with children of wealthy and well-educated parents going to one
set of schools and children of poor and less well educated parents going to another. Though
regulations to prevent racial discrimination might be easily enforced, regulations to ensure the
absence of socioeconomic stratification would be difficult to implement.
Vouchers schemes remain very much on the political agenda. In part this reflects the
widespread dissatisfaction with American elementary and secondary education though curiously,
while most parents are critical of the state of education overall, they believe their own children
are receiving a good education. The concerns over quality are especially strong in Americas inner
cities, which have high dropout rates.
In the 1996 election, the Republican presidential candidate, Robert Dole, proposed a
national voucher plan, but budgetary constraints required it to be of limited scope. Teachers
unions have strongly opposed even a limited form of vouchers. While they Marshall all the
arguments given earlier for public education, and warn that vouchers will drain resources out of
public schools, critics of the unions say their real motives are less public spirited: the unions have
a stranglehold on public schools, and are weak or nonexistent in private schools; like any monopoly,
these resist competition, fearing that it will weaken their bargaining power, in the same way that
unions in other competitive sectors have been weakened.
Meanwhile, those seeking to introduce innovation and more competition within public schools
have looked to alternatives to vouchers. One is contracting out: the school district contracts
outside managers to run their schools. The competition between management teams will, advocates
claim, lead to higher performance. School districts can make more informed decisions concerning
management teams than many parents can concerning schools.
Several school districts are currently experimenting with such arrangements, and initial results
look positive. In particular, the contracting firms have been willing to engage in heavy up front
investments, for instance in training and development of teaching materials, that public schools
would have found hard to finance themselves.
Still another initiative involves charter schools. Schools which are self- managed or
managed directly by the childrens parents, rather than by a larger school district.

There is now a large number of such schools, and parents of children attending them generally are
highly supportive. Supporters of the charter schools hope that their innovations will be imitated
elsewhere, and that they will thereby spur an overall improvement in educational quality. But
critics are more skeptical. Currently, charter schools, like private schools, cater to those most
committed to education, those most desirous of an alternative to the current public school system.
But without wider scope for school choice, how will their impact be felt on public education more
broadly? And there is concern that, should they become more widespread, unions will attempt to
impose the same restrictions on them that face public schools more generally. In some places such
attempts are already under way.
Other reforms emphasize the broader role of incentives, such as merit pay for teachers.
How effective such incentives can be depends to a large extent on how well teacher performance
can be measured.

School decentralization
A widely discussed school reform, school decentralization aims to address problems associated
with the control of schools by large educational bureaucracies. Decentralization has been an issue
in large urban school districts, where such bureaucracies have been seen as unresponsive to
parents. The effect of decentralization is to shift authority to individual schools and their
principals, giving greater influence to individual parents. Advocates argue that school
decentralization creates stronger incentives for parents to monitor teachers and schools, to the
benefit of school performance. Teachers too, the argument goes, have stronger incentives to
perform better because they have greater influence in the educational process at their schools.
Criticisms of decentralization have been far more muted than those of the voucher programs, and
a number of important decentralization initiatives are already in place, including those in the
countrys two largest cities, New York and Chicago. However, there is concern that unless union
rules and attitudes are changed, little headway will be made in fundamental reform. Another worry
is that if there is too much discretion at the level of schools, too much inequality will be
generated: some schools will be far better than others, and this seems unfair. Supporters of
decentralization point out that this, of course, is already true. Thus, any attempt to improve
quality will entail some temporary inequality, until the poorer schools are lifted to the level of the
better schools. But it makes little sense to keep the best schools down simply to avoid a disparity.