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

2. Today We finish Chapter 6  Examination of the growth of government spending in the 20 th 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. 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

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 School YearReal 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

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{educ i }  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 e p, 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”

51. 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

52. 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