October 21, 2010

Economics for Edu-pundits Part III

(Part II is here)

Fixing the problems we see in the present public education system is easy, but in the short term highly disruptive.  But, that’s only because the present system is so screwed up and the interests within the system have gotten so comfortably entrenched and skilled at gaming the political forces by which the system is controlled.

The solution is simple – the system needs an injection of both profits AND losses.  The losses part is the critical component.

Businesses are only interested only in the profit half. If they can avoid losses by getting government subsidies, tariffs and other restrictions against imports, or domestic laws that stifle competition, they will do so. Losses, however, are essential to the process that shifts resources to those who are providing what consumers want at the lowest prices—and away from those who are not.

Here’s a good example of profits and losses in action in the airline industry from Thomas Sowell’s Basic Ecomonics from which I’m stealing a large part of this discussion.  (I’m not providing proper quotations for readability purposes; just assume the well-written parts are his and the poorly written ones are mine)

Between the last year of federal regulation in 1977 and twenty years later in 1997, the average air fare dropped by 40 percent and the average percentage of seats filled on planes rose from 56 percent to 69 percent, while more passengers than ever were carried more safely than ever. Meanwhile, many airlines went bankrupt. That was the cost of greater efficiency. It has been estimated that, during the era of federal regulation, government intervention in the market had caused costs and fares to be 50 percent higher than they would have been in a free market. When the protection of federal regulation was removed, those airlines which could not survive with lower fares and rising fuel costs went out of business.

In 2010, the inefficiencies are still being sucked out of the system and it remains a painful process, especially for inefficient airlines.  we haven’t reached airline travel mecca yet, but consumers have it better than ever.  Bad airlines still remain and you fly with them at your peril.  The situation is the same with bad charter schools.  But, the system as a whole is far better off.

People often have a knee-jerk reaction to “profits.” They think it is a valid criticism that business are “just in business to make profits.”  Schools  shouldn’t be in it for profit, but for more altruistic reasons.  By this kind of reasoning, it could be argued that teachers are just working to earn their pay.  What matters is not the motivation but the results.

To understand why profits and losses are so important, we need to examine what is needed for a business, such as a school, to turn a profit.

One precondition is that profit-seeking businesses cannot squander scarce resources like schools currently do. Businesses operating in a market economy have to pay for all their inputs—whether labor, raw materials, or electricity—and they have to pay as much as others are willing to bid for them. Then they have to sell their own end product or service at a price as low as their competitors are charging. If they fail to do both, they fail to make a profit. And if they keep on failing to make a profit, either the management will be replaced or the whole business will be replaced by some competitor who is more efficient.

In this case failure is a good thing.  if you don’t want children attending bad schools, you have to let them fail and allow the resources to shift to better schools.

Some people, like Downes, charge is made that profits are short-run gains, with implication that they come at the expense of longer-term considerations. Sowell deals with this argument handily:

But future values are reflected in the present value of a business' assets. A factory that runs full blast to make a profit today, while neglecting the maintenance and repair of its machinery will immediately see a decline in the value of property and of its stockholders' stock. It is in the absence of a profit-and-loss economy that there are few incentives to maintain the long-run productivity of an industrial enterprise or a collective farm, as in the Soviet Union.  What happens to the enterprise after the current management's tenure is over is of little concern in a system where there are no profits and no present values to influence decisions.

Ever notice how decrepit inner city schools are.  This explains why. It certainly isn’t for lack of funding.

Couldn’t we achieve the same results by running schools as non-profits?  We’ll see the problems of non-profits in the next post.


Unknown said...

Just to be clear, you agree that government has a role to play in ensuring that all children are able to access an education, right? I think one of the past problems with the way that people have advocated devolving functions to the private sector is that it's been done in a hard-hearted "let them eat cake" way. I personally have no problem with expanding choice as long as government remains involved through some sort of voucher or subsidy program so that low-income kids don't get shut out of opportunities. Government can also play an important role in incentivizing providers to take on difficult cases, such as special needs kids.

Interestingly, I think the Obama administration has done a good job promoting this in the space program where NASA is turning over the business of putting astronauts into low earth orbit to the private sector and focusing their attention and resources on exploration and new discoveries.

KDeRosa said...

Yes, I think that is a legitimate function of government. Government actively regulates most sectors, sometimes well, sometimes poorly, so I don't think we should them to be completely hands off in education. After all, they are supposed to be looking out for the public interest.

I don't even have a problem with government running schools as long as they do so fairly in a competitive market environment. The system would greatly benefit just by shifting education funding to parents instead of directly to schools. Giving parents control over education resources would go a long way to starting a market.

Dick Schutz said...

Ken, if airlines were crashing planes and killing passengers in the process, would a "free market" resolve the matter?

Both District Schools and Charter Schools are publicly financed and neither compete in terms of costs for benefits provided.

Both District and Charter Schools are crashing kids at about an equal rate. Look at the stats for AZ, the state leader in Chartering:

Number of Schools:

* Total number of Charters in US = over 4,000
* Total number of Charters in AZ = 509
* Total number of schools in AZ = 1915
* Charters as a percent of public schools in AZ = 25%

The average charter school passed 74% of its 4th graders in Reading compared to 68% in district
The average charter school passed 67% of its 8th graders in Reading compared to 63% in district

Charter and district schools both passed 74% of its 4th graders in Math
Charters were close to districts for 8th graders in Math – 55% for charters and 57% for districts

The average charter school passed 58% of its 4th graders in Science, compared to 52% in district schools
The average charter school passed 48% of its 8th graders in Science, compared to 45% in district schools

Schools are not airlines and Thomas Sowell is a highly ideological economist.

How about using the banking industry rather than the airlines industry for an analog. Those yayhoos can't even keep their paperwork straight.

An argument could be made that US public schools are too big to fail. But the Fed-Corp Cartel doesn't fail them or strengthen them; it just keeping bashing them.

Lecture III isn't much about economics. It's cherry picking one economist to pitch the ideology of your choice.

How many more lectures in the Course?

Unknown said...

I don't know much about Arizona, do charter and regular public schools receive equivalent operating and capital funding? Do the student populations differ much by SES, ethnicity, etc, or are they roughly equivalent?

Roger Sweeny said...

How about using the banking industry rather than the airlines industry for an analog. Those yayhoos can't even keep their paperwork straight.

Banking and finance are heavily regulated. That's why members of the relevant congressional committees get such large contributions from the industry. And why politicians and staff go to work in the industry after they leave Congress.

If you are a highly ideological small-government economist like Thomas Sowell, you consider their failure a failure of government rather than capitalism. Of course, if you're a highly ideological big-government economist like Paul Krugman, you think the opposite.

KDeRosa said...

Dick isn't a better analogy if doctor's weren't able, and never were able anytime in history, hadn't yet found a cure for a disease afflicting certain patients, would the free market resolve the matter. The answer seems to be that it would eventually. And in the meantime doctors are doing what they can to treat the symptoms.

Also, as Nick points at re your stats, you need to disaggregate for SES and race when looking at these numbers. And whatever happened to "these tests aren't sensitive to instruction?"

K-8 education is a nine year process, a fair number of charters schools haven't been in existence for nine years and much of these scores wouldn't even be considered their first cohort through.

All economists are ideological. If Sowell is blinded by his ideology, you should have no trouble pointing out the flaws in his analysis.But then again, this is not exactly a controversial area of economics. What's your counter theory -- some flavor of marxism?

KDeRosa said...

Roger is at least partially right. To Krugman (the columnists, not the former economists), it is a failure of capitalism. However, to Sowell, it's not just a failure of government. It's a combined failure of government AND capitalists.

Dick Schutz said...

My source was the AZ Charter School Association--the Protective Trade Group for this "Free Market."


AZ Charters have been going on since 1994. They haven't exactly been a dynamo of "change."

The Association is a booster group, and their claims have to be taken with a block of salt, but their demographic info looks accurate. Charters get the same public funding that District schools get. The Association doesn't bitch about facilities, so I don't believe that's a factor.

The AZ charters run small, very small. But their SES characteristics as measured by "School Lunch" are about the same.

Since the AZ Charters are small, and the proponents are activists of some sort that are either a nuisance or a sweetheart to Authorizers, it's an easy way to ease steam or do favors.

Some 10% of Charters have failed, voluntarily or involuntarily. This makes Ken happy, but the "failures" have no impact either on other Charters or on District schools.

The thing that makes el-hi different than other sectors that Ken uses as analogies is that the elements of the system are "loosely coupled" to put it technically and charitably. What happens in one class, school, or district, doesn't have any consequence for other units. So "failure" and "success" don't function in the same way.

On the other hand, within the bounds of variability, all the elements are pretty much alike, and they haven't changed a whole lot for hundreds, if not thousands of years.

What changes is rhetoric and ideology.

Dick Schutz said...

Dick isn't a better analogy if doctor's weren't able, and never were able anytime in history, hadn't yet found a cure for a disease afflicting certain patients, would the free market resolve the matter. The answer seems to be that it would eventually

It's science and technology that produces cures for diseases, not a stinkin market. Eventually to borrow from Keynes (who I would put up against Sowell in an econ gladiator ring) we'll all be dead.

The same holds for instruction. The R&D that has been conducted in education to date is weak and puny, but it has produced products/protocols that do "fix" education "Problems" such as reliably teaching kids how to read.

Your product/protocol of choice, DI is an example of one such architecture. 3RsPlus READ is another. Several programs, termed Synthetic Phonics in the UK constitute another.

These are not the ultimate, because thee is never an ultimate scientifically/technically. But they are sufficient for the government of the UK to commit to using them to teach all little Brits how to read by Year (Grade) 2.

Meanwhile, here at the ranch, the US is racing to the top and you're dreaming of a free market that you admit doesn't exist anywhere in the real world.

Tracy W said...

It's science and technology that produces cures for diseases, not a stinkin market.

This implies a false dichotomy. Take antibiotics, which have saved my life. Antibiotics required scientific advances to develop and test, but, for them to save my life, a dose had to be produced by someone and get to me. That required the cooperation of a large number of people, not only the original scientists and their assistants, but the technicians at the pharmceutical company who made the actual dose I consumed, the people at the pharmceutical company who hired those technicians, and sorted out their paycheques, the people who transported the supplies from the factory to the chemist where I picked them up, the people who made the trucks and supplied the fuel and what-not that transported my supplies, the people who did the admin work for those people who transported the supplies and made the trucks and what not, and etc. And then there's the people who made the storage systems that the local chemist used to make the medicine. And there's the doctor who prescibed it to me, and the people who trained the doctor, and the recepitionist who made the appointment for me to see the doctor, and etc. Without those people, I wouldn't have gotten the antibiotics. They are as necessary as the basic scientific research.