Economic Issues & Policy - Jacqueline Murray Brux Education We will transform our schools and colleges and universities to meet the demands of a new age. —President Barak Obama, Inaugural Address, January 19, © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. PowerPoint slides prepared by: Andreea Chiritescu Eastern Illinois University

Education Public schools Operated by the government Financed by tax revenue Private schools Not operated by the government Mainly financed by tuition and endowments © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 2

Education’s Spillover Benefits Education Private benefits Benefits for society Spillover benefits Externalities The costs or benefits of an economic activity that spill over onto the rest of society © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 3

Education’s Spillover Benefits Spillover benefit A positive externality The benefit that is shifted from the private market onto society Spillover cost A negative externality The cost that is shifted from the private market onto society © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 4

Education’s Spillover Benefits Inequity Unfairness Inefficiency Using resources in such a way as not to maximize the desired output from them Externalities Create inequity and inefficiency © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 5

6 Figure 4-1: Effects of the Spillover Benefits of Education Because the private market does not reflect the spillover benefits of education, the number of students enrolled (5 million) is less than the socially optimum number (6 million).

Education’s Spillover Benefits Spillover benefits The market under-allocates resources Justify the government’s: Provision of K–12 education Subsidization of college education Grants and financial aid to students Public colleges and universities © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 7

Education’s Spillover Benefits Socially optimum amount of education If the government’s contribution toward the student’s education Is just equal to the spillover benefits that society receives from education © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 8

Education’s Spillover Benefits Spillover benefits of K–12 education Tremendous Free primary and secondary education - justified Benefits of postsecondary education Mostly private Few spillover benefits © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 9

Global Comparisons of Educational Spending and Literacy Rates Government spending on education 5.7% of GDP Adult literacy rate An outcome of educational systems Inputs into education Numbers of schools Dollars spent on education © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 10

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 11 Table 4-1: Global comparisons of public direct expenditures on education; % of GDP; highest to lowest; selected Western industrialized countries, 2007

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 12 Table 4-2: Adult literacy rates a by gender; selected Western industrialized countries, Eastern industrialized countries, and Developing countries, 2007

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 13 Table 4-2: Adult literacy rates a by gender; selected Western industrialized countries, Eastern industrialized countries, and Developing countries, 2007

Educational Attainment in United States US Census Bureau Population age 25 years or older: 196 million 26 million - less than high school education 61 million - high school diploma 34 million –some college but no degree 17 million - associate’s degree 38 million - bachelor’s degree 15 million - master’s degree 3 million - professional degree Over 2 million - Ph.D. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 14

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 15 Figure 4-2: Highest educational attainment in U.S. among people age 25 or over as a percent of the total, 2008

Kindergarten Through Grade 12 (K–12) Education Funding of K–12 education Academic year 2005–2006, $521 billion Federal government - very small share Local and state governments bear the principal burden for funding primary and secondary education © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 16

Kindergarten Through Grade 12 (K–12) Education Local government spending on K–12 education Heavily financed by the local property tax Tax base Value of income, earnings, property, sales, or other variables to which a tax rate is applied Tax rate Percentage of the tax base that must be paid to the government as tax © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 17

Kindergarten Through Grade 12 (K–12) Education Heavy reliance on the local property tax Inequities State aid: aid to all, not only poor, school districts Low spending Shoddy facilities, inadequate supplies, and understaffed classrooms High dropout rates and functional illiteracy © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 18

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 19 Figure 4-3: Financing public K–12 education, 2005–2006 The above chart shows the percentages of funds provided by each level of government to public elementary and secondary schools in the United States.

Quality of K–12 education 1983, A Nation at Risk Falling test scores, schools were asking less and less of their students U.S. pupils - performing worse than their European counterparts 1992, Jonathan Kozol Savage inequalities: children in America’s schools Terrible conditions, 6 inner-city school systems © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 20

Quality of K–12 education Other problems Fewer teachers specialize School year – shorter SAT scores – below 1970 levels Overcrowding High school drop-out rates Differential access to quality schools Disparities in funding of suburban versus inner-city schools © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 21

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 22 Table 4-3: Global comparisons of primary education pupil per teacher ratios, selected Western industrialized countries, Eastern European countries, and Developing countries, 2007

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 23 Table 4-3: Global comparisons of primary education pupil per teacher ratios, selected Western industrialized countries, Eastern European countries, and Developing countries, 2007

Proposals for Improving K–12 Education 1.An increase in the competition among schools 2.Reform of the tax system Through which we support our public schools 3.No Child Left Behind © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 24

Proposals for Improving K–12 Education 1.Proposals to increase competition among schools: Aim to increase choice Charter schools Greater autonomy in exchange for accountability Magnet schools Focus on some particular type of curriculum Tuition vouchers © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 25

Proposals for Improving K–12 Education 2.Proposals for tax reform To reduce inequity Property tax reform Federal and state corrective finding Issue of poverty Programs to alleviate poverty are also needed to improve the academic performance of inner-city students © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 26

Proposals for Improving K–12 Education 3.No Child Left Behind Stronger accountability for results Greater flexibility for states, school districts, and schools in the use of federal funds More choices for parents of children from disadvantaged backgrounds Emphasis on teaching methods that have been demonstrated to work © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 27

Proposals for Improving K–12 Education President Obama’s proposals Dramatically expanded early childhood education and improved its quality Made college affordable for nearly seven million more students Provided resources necessary to prevent severe cuts and teacher layoffs Expanded funding for Headstart © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 28

Proposals for Improving K–12 Education President Obama’s proposals Future reform Incentives for teacher performance Commitment to charter schools Promise of affordable higher education for those who are willing to volunteer in their neighborhood or community or to serve their country © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 29

Higher Education Economic problems Costs have risen State governments - decreased their support in real terms Federal support has stagnated Deduction for tuition - eliminated in 2006 for the federal personal income tax Local governments contribute very little © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 30

Higher Education Economic problems Higher tuition in public institutions Endowments of private institutions – reduced Financial aid rules - changed Value of Pell grants – declined Endowments Income-earning investments of a school or other institution © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 31

Higher Education U.S. postsecondary (higher) education Colleges Universities Community (junior) colleges Technical-vocational schools Private schools Not operated by the government © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 32

Higher Education Public schools Run by state governments and occasionally by municipalities Costs $13,424 for public schools $30,393 for private schools Public schools – lower tuition than private schools because state governments subsidize the public universities © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 33

Higher Education Subsidize The payment of some of the costs of an economic Education Investment in human capital Spending designed to improve the productivity of people © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 34

Higher Education Median The value that is exactly in the middle of a list of all values of some variable, such as earnings, when ranked from highest to lowest Mean Average © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 35

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 36 Table 4-4: Median annual earnings by highest educational attainment of full-time, year-round workers, 25 years and older, by gender, 2007

Higher Education Educational investment Expected benefits Increased earnings after graduation Expected costs Direct cost Actual paid expenses Tuition & fees, books & supplies Indirect cost: opportunity cost of forgone alternatives (earnings) © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 37

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 38 Figure 4-4: The decision to invest in college education The investment will be made only if the increase in lifetime earnings justifies the direct and indirect costs of education.

Higher Education Cost-benefit analysis Compares the costs and benefits of a policy or program Rate of return The “benefit rate” Divide the net benefit by the amount invested © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 39

Higher Education Government support of public higher education Justifications: Spillover benefits (positive externalities) Equal access to education Most of the students we are subsidizing are not from poor families Decreasing federal and state support © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 40

Higher Education Raising Tuition To make up the missing funds Average public university tuition has more than doubled since 1990 Students – need greater financial aid Students who feel the negative effects most Are from low- and middle-income families © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 41

Higher Education Enrollment Caps Maximum limit on the number of students allowed to enroll in a school Rationing of openings: increase admission standards- eliminate students: Poor risks for completion of college “late bloomers” Of low-income and/or diverse backgrounds Received poor quality K–12 education © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 42

Higher Education Differential Tuition Charge different tuition for different programs to increase efficiency Surpluses or shortages of class sections Charge higher tuition for very popular, growing majors Charge lower tuition for declining majors © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 43

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 44 Figure 4-5: Improving resource allocation by charging different tuition for different programs At uniform tuition ($6,000), there will be a shortage for pre-law students and a surplus for philosophy students. Different tuition ($8,000 and $4,000) eliminates the shortage and surplus and improves resource allocation.

Higher Education Financial Aid Scholarships and fellowships Employer assistance Veterans’ assistance College work study, Loans Pell grants Low-income students Financial assistance isn’t targeted to the most needy students © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 45

Higher Education Affirmative Action K–12 educational attainment and quality Varies considerably by race and ethnicity Higher educational attainment Varies considerably by race and ethnicity Disparities in financial aid levels To different categories of college students © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 46

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 47 Table 4-5: Highest educational attainment, by race a and ethnicity, share of total group (%), age 18 years and over, 2008

Conservative versus Liberal Liberal economists Tax reform; redistribution of tax dollars from rich to poor districts Widespread use of school vouchers would endanger our public school system Transferring funds away from the poor schools Expanded state and federal spending for K–12 education Conservative economists Policies to increase competition in public K–12 system School voucher systems Give parents and students more choices of schools and curricula More competition among schools Private schools, charter schools, and magnet schools © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 48

Conservative versus Liberal Liberal economists Expanded financial aid to low- income students Tax credits for educational purposes Remedies for inequity in education for racial and ethnic minority students, including affirmative action Conservative economists Spending on K–12 education by local governments Do not favor extensive tuition subsidies or financial aid for students in higher education Unless spillover benefits can be shown to result from this postsecondary education © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 49