1. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter 25 Education

2. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter Outline INVESTMENTS IN HUMAN CAPITAL SHOULD WE SPEND MORE? SCHOOL REFORM ISSUES COLLEGE AND UNIVERSITY EDUCATION

3. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Investments in Human Capital Human Capital: the ability of a person to create goods and services An education is an investment like any other. –You incur costs early –You reap rewards later Any investment only makes economic sense if the net present value (the present value of the benefits minus the present value of the costs) is positive.

4. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Why “Free” Public Schools are not “Free” Taxpayers pay $389 billion in taxes to support the system. Some states and school districts have fees (such as textbook rental) that parents must pay.

5. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Analyzing the Education Decision If parents had to pay the entire cost of K-12 education and chose not to send their children to school they would still incur daycare costs for their smaller children. Parents would then compare the present value of benefits to the present value of the tuition costs minus daycare costs.

6. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Why “Free” Public School Makes Economic Sense The external benefits (the benefits to the rest of society that result from a child being educated) are such that the efficient price is zero. External benefits include –the social stability that is enhanced by providing opportunity for all to succeed. –the more intelligent voting population. –the greater tax base associated with higher incomes.

7. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Modeling External Benefits Social BenefitExternal Benefits 0 Enrolled Students D S Tuition T* S* T’ S’ What Schools Get What Parents Pay

8. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Should We Spend More? What we get for our $300 billion in tax money –More real spending per student –Lower student-teacher ratios –Flat to declining SATs –Increasing high school graduation rates

9. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. More Per Student Spending 1996 Dollars

10. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Lower Student-Teacher Ratios

11. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Flat to Declining SATs

12. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Higher High School Graduation Rates

13. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Cautions Against Quick Conclusions Much of the increased spending has gone for –Noninstructional spending (e.g.Janitors, secretaries, administration) –Special education spending (more than 10% of students now qualify for special services) Some of the decline in SATs comes from more (and less academically prepared) students taking the exams. Some of the increase is graduation rates comes from GEDs, and social promotion.

14. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. The Economic Literature on Education Spending Economists have studied the relationship between student success and spending. The majority show little relationship. –Measures of success Graduation rates, standardized test scores –Inputs Student-teacher ratios Teacher degree attainment Teacher salaries

15. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. The Education Production Function Test Scores Teacher Quality/Quantity Education Production Function The flat of the curve. The argument is that in this range more spending does not increase scores.

16. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. School Reform Issues The public school as a monopoly –Lack of competition makes all monopolies less cost- and quality-conscious. The existence of tenure (the job protection for teachers with experience) and the lack of merit pay –Tenured teachers can not be fired for poor teaching and good teachers are rarely paid more than poor ones. Private vs. Public Education and Vouchers –Creating competition would stimulate cost and quality consciousness. Evidence is mixed.

17. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. College and University Education Costs are higher than K-12 –Teachers spend less time in the classroom 6 to 12 hours per week Spend time on research, committees, keeping up with the latest in their fields. –Equipment and lab costs are substantially higher.

18. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. More College Graduates

19. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. What is a College Degree Worth Present Value of Costs –Opportunity costs of lost work time –Tuition –(not living expenses…you have to eat) Present Value of Benefits –Increased expected earnings over a lifetime Net Present Value –Estimates vary between $300,000 and $500,000 for the positive net present value