EDUCATION VOUCHERS WORK

In 1992, Sweden introduced a major education reform whereby the government funds all schools – state and private, non-profit and for-profit – on the same basis.  You can call it an education voucher system, although that adds nothing to understanding it.

(Actually, the initial ‘voucher’ to non-government schools was somewhat less than to schools in the public sector.  Later, however, payments were equalised: as a Swedish minister said at a conference I attended in Stockholm a couple of years ago, “We believe in equality in Sweden!”)

Odd Eiken, the head of the Swedish education ministry at the time of the reforms, visited New Zealand as a guest of the Business Roundtable in the mid-1990s.

The reform has been an enormous success.  It is now supported by all political parties in Sweden except the communists.  Teachers and the teacher unions are also supportive.

The video below from Cato of Peje Emilsson, founder of the for-profit chain Kunskapsskolan, gives an excellent update on Swedish education.

Among the points he makes about the overall system are:

• It is very easy to set up a new school
• Schools cannot pick and choose students
• They cannot charge additional fees but independent schools operate at lower cost than government schools
• Enrolments in independent schools have grown from 1% in 1991 to 11% today.  At the upper secondary level 23% of students are in the independent sector and in parts of Stockholm the figure is as high as 50%
• About 60% of the independent schools are for-profit companies
• The independent schools are achieving better education results.  The results of the for-profit schools are better again
• Competition has improved the performance of public schools
• Kunskapsskolan combines technology and teacher involvement in new ways, putting students at the centre of learning
• All the curriculum is on the computer, so that teachers have 27-30 hours a week with students compared with 20 hours (or sometimes only 10) in public schools
• The company now has 10,000 students enrolled and employs about 800 teachers.  It is achieving about the best results in Sweden.

The Swedish system is not unique – the Netherlands, Denmark and Ireland have similar policies, and there are steadily expanding voucher programmes in the United States.  Australia has a more even playing field than New Zealand as far as independent schools are concerned.  Reports by an Inter-Party Working Group in 2009 recommended similar moves in New Zealand.

The experience of for-profit schools in Sweden is particularly interesting.  I have long thought that for-profit education may be the way of the future in the twenty-first century.  A thriving for-profit sector may hold out the best hope for revitalising teaching as a profession and allowing good teachers the opportunity to earn the rewards they deserve.

FRIDAY GRAPH: THE DEADWEIGHT COST OF TAXATION

The graph below, taken from this Cato Institute Policy Analysis, ‘Congress Should Account for the Excess Burden of Taxation’ (October 13, 2010) illustrates an important economic concept.

Figure 1

The Excess Burden of a Hypothetical Excise Tax on Apples

(click to enlarge)

 

As the paper explains:

 A well established principle of public finance holds that taxes impose costs on society beyond the amount of revenue government collects. When the government taxes Peter to pay Paul, Peter views his tax payment as a loss.  Those tax payments do not represent a net welfare loss from a societal perspective because Paul experiences an offsetting gain. Taxes do impose costs on society at large, however, in that they encourage Peter not to engage in economic activities that would have benefited him and others. The loss of that economic output is what economists call the “excess burden” or “deadweight loss” of taxation. Virtually all taxes impose deadweight losses…

Economists have confirmed empirically what most laymen understand intuitively: “whatever you tax, you get less of.” Taxes on labor, such as income and payroll taxes, tend to reduce the amount people will work. Consumption taxes, like sales, excise, and value-added taxes, reduce the consumption of the taxed items. Capital taxes, such as those on property, dividends, or capital gains, decrease the desirability of investing and reduce the amount of savings available for capital investment. All of these predictable changes in human behavior reduce output (present or future) in some form, thereby reducing the economic welfare of consumers, producers, or both.

Economists measure this loss in terms of reductions in consumer and producer surpluses. In a competitive market, the equilibrium price at which supply matches demand permits many consumers to purchase goods at a cheaper price than they are willing to pay. Imagine you can purchase an apple in the market for 50 cents. If you were willing to pay 50 cents, there would be no net value to you from the transaction: you would give up 50 cents, and receive the equivalent value in the form of an apple. You would be indifferent about keeping your money or buying the apple. But if you were willing to pay 90 cents for the apple, buying an apple for 50 cents increases your net welfare by 40 cents. The amount by which a consumer’s willingness to pay exceeds the price is what economists call the “consumer surplus.” A parallel calculation applies to producers. In a competitive market, some producers may have been willing to supply apples for only 25 cents, but because the price they get in the market is 50 cents, they enjoy a “producer surplus” of 25 cents.

A sales tax of 50 cents on apples will shift the supply curve up by that amount since producers will still have the same cost per apple as under the old supply curve, but will have to remit 50 cents to the government for each apple sold. This shift in supply will result in consumers demanding a smaller quantity of apples, since the new equilibrium price will be higher (say, 80 cents). Consumers who previously had been willing to pay between 51 and 79 cents for an apple will no longer purchase them. Their loss in welfare—the reduction in their consumer surplus—will be the difference between their willingness to pay and the pretax market price. For each apple no longer purchased, there would be a parallel, though not necessarily equal, reduction in producer surplus that arises due to lower sales of apples.

Figure 1 illustrates these ideas. The pre-tax supply curve intersects the demand curve at point A, where apples sell for 50 cents. An excise tax of 50 cents shifts the supply curve upward to a new equilibrium point B that is 50 cents higher than point C on the pre-tax supply curve. The shaded rectangle shows the amount of tax revenue collected by the government, while triangles D and E respectively show the lost consumer and producer surplus resulting from the tax.

The conventional way of measuring excess burdens is to compare them to the amount of taxes raised. In Figure 1, these losses are approximately one third of total taxes collected. Note that the amount of these welfare losses is smaller than the full market value of whatever production is lost to taxation. This amount is the average excess burden for the hypothetical excise tax.

… a far useful concept for assessing the welfare losses associated with increased taxes is the marginal excess burden (MEB). In Figure 1, suppose we increased the 50-cent excise tax to 60 cents. As one moves higher up the demand curve, the ratio of the additional deadweight loss to the additional tax revenue collected will be higher than the previous ratio, which represents the average deadweight loss. Using the average ratio of deadweight losses to tax revenue will therefore understate the actual welfare loss associated with that tax increase. The MEB is thus the more accurate and appropriate measure.

The marginal excess burden of many taxes is large.  A 1994 Business Roundtable study found that it was around 18 cents for the marginal dollar of labour taxation and around 14 percent for the marginal dollar of consumption tax.  More recently, the Treasury has recommended an MEB of 20 percent for cost benefit analysis of government projects.

In the context of financing the reconstruction of Christchurch, a recent New Zealand Herald editorial advocated higher taxes on the grounds that they would not harm the economy unless they reduced the budget deficit (a Keynesian idea).  This is incorrect: any feasible tax is harmful to growth.  Some taxes are more harmful than others, and the higher the taxes the greater the economic harm.  For income taxes, deadweight costs rise more than proportionately as the rate of tax increases.  For example, if the rate of tax doubles, deadweight costs quadruple.  Taxation should be viewed as a scarce resource, and there needs to be a high pay-off (taking deadweight costs into account) from tax-financed government spending.

Going beyond national standards

Last year I wrote this article, ‘Two Cheers for National Standards’ (Otago Daily Times, 17 July 2009).

I supported the government’s move to introduce standards for literacy and numeracy at primary and intermediate schools, saying:

Such a move is long overdue.  In 1998, the Education Forum, comprising educationists and business sector representatives, published a report Policy Directions for Assessment at the Primary School Level, authored by Professor Alan Smithers, a distinguished British education adviser.

The Forum stated that “it is strongly in favour of national assessment in primary schools.  It fully recognises that accurate information and feedback have a major part to play in improving education performance.”

In effect, the state school system is an enormous government monopoly (which would benefit from competition).   We can’t expect it to perform well without objective performance data.

The article went on to talk about ‘league tables’, judging schools as opposed to students, the flawed outcomes-based curriculum, and the problem of consistent assessment of standards.

I concluded by saying:

Finally, standards are no silver bullet for upgrading education.

Perhaps the most important reform would be moves towards greater parental choice and competition in the system, and greater school autonomy.

Teacher quality (including teacher training, professional development and certification) is also vital, as is how better teachers are rewarded and under-performing teachers dealt with.

But the government’s national standards initiative deserves two cheers.

A recent video from the Cato Institute in Washington helped extend my thinking (the section I’m referring to starts from 5 minutes 30 seconds into the clip).

It was a talk on national education standards by former high school teacher Rep. Rob Bishop (the section I’m referring to starts from about 5 minutes 30 seconds into the clip).

He began by talking about the endless series of education initiatives aimed at dealing with America’s under-performing public schools – the War on Poverty, A Nation at Risk, No Child Left Behind, and now the Obama administration’s Race to the Top.

As with so many fads and fashions in education, none has worked, or worked well.  As Bishop says, the most common reaction of any public school teacher is to think, “This too shall pass”.

He goes on to emphasise the limitations of standards and testing: “education is a subjective area, it is not an objective area.”  Moreover:

You cannot define a good school, you cannot define a good teacher, you cannot define a good education, but you know when you see it.  And as long as parents are satisfied, that ought to be the concept.

Bishop comes down on the side of parental choice – giving parents the freedom to decide where they want to send their children and rewarding schools and teachers accordingly.

He recounts a familiar objection to school choice raised by a state legislator in Georgia:

He said this idea of empowering parents may work but it won’t work in my district because the parents are too dumb.  I thought, but I did not have the guts to say, ‘they elected you didn’t they?’  I am totally opposed to that premise.  Parents are not too dumb.  Parents do care about their kids.  And even if you accepted the premise that parents are too dumb to make these decisions, the state is a poor replacement for the parent.

As far as I’m concerned those are killer arguments.

Going beyond national standards and introducing school choice – funding schools at the different levels (primary, intermediate, secondary) on the same basis according to enrolments – is the next logical education reform.  Two reports by an Inter-Party Working Group released early this year advocated such a move.

It’s not much use parents learning that their children are not achieving national standards if all they can do about it is complain to the school or stand for the board of trustees.

The real way to empower them is to provide them with the option of ‘exit’ as well as ‘voice’: to send their child to another school.  Isn’t that the option people as consumers have in practically every other area of their life?