ECO 481: Public Choice Theory Week 10: Government Exploitation & Schools Dr. Dennis Foster

Exploitation “Purposive political or rent-seeking efforts [that] increase one’s wealth or income at the expense of others.” In private sector, profit = social gain. In public sector, profit (rent) = misallocation. What is the most powerful entity in society? The Government!!!

Exploitation - Taxation State sets the rules, but there are limits. Tax Revenue Tax Rate SR LR T* 100% Laffer Curve: tax rates & tax revenues Will rate revenues? Long run vs. short run. T’ Minn. 13.95% inc. tax! Illinois Increasing to 5%.

Exploitation - Bureaucracy $ Quantity Econ: Find where MB=MC Bureaucracy: Find where TB = TC. Asymmetric information issue. [Niskanen] Voting with our feet is costly. Wage issue Higher/benefits Overpaid? Not if XS S. MB MC Q* Q’ “The public bureaucracy is overstaffed, overpaid, overqualified, and well protected.”

Exploitation: Manipulating Median Voters Public preference = X Bureau preference = Xb If Xr = revision budget … voters will accept Xb BOAPW - Set Xr = 0!!! Do median voters know what is efficient? Small incremental tax hikes hardly muster opposition. Public Private Text Error X Xr Xb

Manipulating Voters Sean Rachael Lucas X* Pub Pri X* Pub Pri X* Pub Xr’ Xr’ Xr’ Xr Xr Xr No! No! No! Yes! Yes! Yes! By choosing the optimal revision budget, the school district can entice voters to pass it’s preferred budget, X*.

Exploitation - Education K-12: violating consumer sovereignty Is it really free? School, curriculum, teachers, pedagogy Elitism? Why is monopoly good? What’s wrong with vouchers? Universal pre-K? What’s next? Homeschooling & charter schools.

Exploitation - Education The University – a riddle wrapped … “Following … Buchanan … one might say that [the university] combines students as consumers who do not buy with faculties or producers who do not sell and taxpayers or owners who do not control.” Faculty – min. workload & tenure & income Controllable – research, admissions, peers Elitism & Rhetorical extremism. Administration – growth & income Bloat data

Exploitation - Education “Most organizations achieve economies of scale over time. As the enterprise serves more customers or produces more goods, it becomes more efficient, requiring fewer people and less money for each customer served or good produced. Achieving larger scale, often with the assistance of technology, has been central to productivity increases and improvements in human welfare for centuries. However, the exact opposite is happening in American universities.” From 1993 to 2007 (per 100 students): 39% growth in full time administrators 18% growth in employees engaged in instruction + ASU: 94% increase in administrators ASU: -2% in employees engaged in instruction +

Exploitation - Education Some observations from NAU +/- Workloads can be varied, but … Research requirements, Professional qualifications, Service requirements. Accreditation as oversight. Standards suspect “Our job is to graduate students” vs. reputation. AZ - post tenure review; ASU-West. Individual college differ FCB & CEFNS vs. Ed.

Limits on Exploitation Consumers will move over time. Demographic map. Sprawl beyond Flagstaff city limits. Charter schools. More competition with on-line universities. Straining budgets are bursting.

Percent change in residential population, 2000-2010

ECO 481: Public Choice Theory Week 10: Government Exploitation & Schools Dr. Dennis Foster