In one of my previous posts on Oregon’s troubled education system, I pointed out how the state of Utah outperforms most states in high school graduation rates even though they spend around the third/fourth least on education (when adjusted for cost of living and not adjusted). I mentioned in that article that there are many confounding variables. The causes of the difference in educational outcomes was left unanswered, but the disparity between states is clear. US students as a whole perform poorly in educational studies. In 2015, the U.S. ranked 30th in math and 19th in science in PISA testing [Pew]. Is there something systemically wrong with our public education system? There are many economists that believe the public education system is a failure, and argue for privatization [EconTalk]. Why is our education system primarily ran by the government? Are there any other solutions? This article explores these ideas and suggests ways for improvement.

Economists tend to believe the free market is better than government controlled (non-market) production for a number of reasons. I explored those in another one of my previous articles found here. The exception to this belief is in cases of market failure. Primary and secondary education is an example of a market failure. What is a market failure? In a free market, a business would tend to search for the most profitable use of its resources. A for profit school would maximize their return on investment. One effective way to do this is to find those students that are easiest to teach and for which they can charge the most money. Inevitably, there will be students less affordable to teach. They are disruptive or have learning deficiencies which require more resources such as: teacher’s aides, behavioral therapists, lower student-to-teacher ratios, etc. Unlike public schools, private schools have the right to not admit those students. Some students will have no alternative except to go back to the public school. Over time, this causes public schools to have a higher concentration of these high needs students. Because of this, poor students that cannot afford to go to the private school end up in classes with higher student-to-teacher ratios, and are more likely to have disruptive/high needs students in their classes. The teacher will require more time and effort to develop and teach material for the high needs students, and more time dealing with behavioral issues. This detrimentally affects the learning experience of the lower needs/less disruptive students.

In cases of market failure, sometimes government sets laws, competes within the market, or may even remove the market altogether attempting to solve the market failure. In the case of primary and secondary education, the US primarily administers education through public schools. In a free market, there would be pressure on the schools, teachers, and administrators to improve (and make more money for doing so), or be put out of business. In the public education system, there is pressure to improve, but sometimes the incentives are in the opposite direction. If a state is under-performing, we tend to ask for more spending rather than figure out what states (like Utah) are doing to keep their costs low and performance high. I am not arguing the extra spending is not warranted. That argument can be found elsewhere. I am pointing out there is little competition for the students’ “business”, so this mechanism that creates such great value in free markets is mostly absent in public schools. The state’s only competition is with private schools, but the two options are difficult to compare. The metrics to which we judge the performance of our public schools versus private schools is unfair since the students are still not the same: 1) Private schools will try to admit students that will be more successful, 2) It is likely that students with wealthy parents that are willing to spend their money on private school would tend to be more engaged with their child’s education which will help the student’s success, 3) As mentioned earlier, students without high needs/behavioral issues will suffer from being in the same class or they will have less resources. A private school could actually be worse than their public school competition, but have students that perform better since they get to pick the students attending their school.

Some problems with unions
I live in Beaverton Oregon (the state’s third largest district) where my wife is a public elementary school teacher. The district was predicting layoffs this past year until the state wide teacher walk out and subsequent increase in funding. Layoffs or the possibility of layoffs have loomed over the heads of teachers two of the five years we have lived here. This was particularly anxiety inducing as my wife did not have tenure. When Beaverton had layoffs in 2012, they did it by lottery with the probationary one and two teachers being first to go. It is typical in many unions to lay off by seniority and not based on merit. Not only does this deter new teachers from getting into public education, but also the state would get more for their money by laying off the more senior teachers that have amassed higher salaries over their years of service. Tenure makes this nearly impossible. *Note: I say nearly because, contrary to common knowledge, contracts between unions and school districts in no way forbid the firing of tenured teachers. It simply ensures a teacher is given due process before being fired. Many private organizations also have termination processes [NEA].

Secondly, how many non-union businesses have pensions these days? Answer: very few. As of 2017, only 16 percent of Fortune 500 companies offered pensions. Most are moving toward 401k’s that provide retirement income based off the performance of the investment. This avoids the risk of the retirement investments producing less than the promised compensation. The state of Oregon is paying too much in PERS which is the major cause for the lack of funding. In 2000, starting pensions were averaging 100 percent of a worker’s final salary [OregonLive]. That is obviously unsustainable. The state’s PERS budget deficit is around $26B and increasing. Most private companies could claim bankruptcy when they find they made bad business decisions that they cannot afford, but unlike private companies, the state cannot claim bankruptcy and the Oregon Supreme Court ruled it unconstitutional to lower PERS benefits.

Attempts at solutions
Some schools have attempted to adopt incentives similar to private industry by making salary/bonuses tied to standardized test results, but that creates a new set of problems. Some complain this results in teachers teaching to the test. At some level, this is desirable since you are ensuring teachers are teaching the material that is important. There is also a risk of losing classes not included in the standardized tests, and the metrics fail to ensure life long learners, neglect play, empathy, and happiness. Also, the tests have been found to have little correlation with teacher performance and more to do with the background of the student [Darling-Hammond, et al., 2012; Baker, 2013; ASA, 2014].

Some argue for changes in funding. On average, 8% of revenues are federal, 47% from the state, and 45% locally-sourced [McFarland]. Low-income districts tend to have lower property and income taxes, and therefore lower funding. Some have argued for equal funding for all students, but that isn’t simple because it neglects the difference in cost of living. Does spending more increase student achievement? The answer is unsurprisingly complicated: yes and no. It probably depends on how you spend the funds.

Is there a way to solve this market failure without public administration of education?
I propose the following rules be put in place to enable the benefits of private industry while solving the market failures described above. Allow private schools to take public funds, but require:
1) The school should be free to all students, i.e., not requiring additional funds thus allowing students from low income families to go to the same schools as those from high income families.
2) The school must be open to all students whether they be disruptive or high needs, and must have the same expulsion/suspension rules as a public school.
3) The school should be frequently audited to ensure all students are being served equitably.
4) Funds should be equal for all students with additional funds for cost of living adjustment, special education, etc.
5) Schools must submit standardized test scores with positive results. This ensures schools are actually schools and not some other entity masquerading as a school (such as a religious institution).
6) If a religious institution or non-profit does open a school accepting these funds, they must be separate entities with the school not receiving tax exempt status and rent of school properties to be at a determined minimum “going rate”. This ensures religious/non-profit schools do not receive an unfair advantage over other non-religious/for profit schools, and schools do not masquerade as religious/non-profit institutions as a way to skirt paying their fair share of taxes.

Conclusion
There is an incentive to spend less resources on high needs/disruptive students both in the private and public school systems, but that incentive is greater for private schools since: better metrics attracts families willing to pay higher tuition, they are not required to accept high needs/disruptive students, and because they set many of their own rules. Private schools can be incentivized through public funding to serve all students equitably. In parallel, they can be given the oversight to operate more similarly to a public school in hopes to stymie the temptation to under-serve select students. Private schools would still have the freedom to choose their own: school/classroom size, student-teacher ratio, hiring/firing practices, curriculum, teacher credentials, support staff, administrators, compensation, hours of operation, services provided, etc. At the same time, parents would choose which school their child attends as long as they are willing to cover any extra transportation costs, and provided the school is not over capacity. By taking away the monopoly of public schools, private schools would be able to create competition which tends to improve the quality of products/services and spur innovation. There would also be the incentive to save money/spend money in the most efficient/effective ways.

As for unions, they could still be formed in my plan, but they would not be as big since schools would most likely be owned by entities smaller than their state’s current public school system. Smaller unions would likely not be as powerful, so practices around hiring, firing, and compensation would be left more to the owners and administrators, and likely determined by merits and not tenure. The owners could also claim bankruptcy if needed; a disincentive for unions to form agreements that result in insolvency such as what Oregon’s PERS is facing. Also, if there is insolvency, it would be smaller in magnitude and less likely to cause a statewide crisis.

This post is only meant as a starting point. It leaves many details undetermined. If such a plan was adopted, there’s no telling what schools will look like. I predict a variety of schools for our variety of students and entrepreneurs. Maybe there will be schools with large classes with one teacher supplemented with instructional assistants, maybe teachers will have micro-degrees and on-the-job training instead of expensive bachelor’s/master’s degrees, maybe schools will have online instruction. The possibilities are endless.

Update 1/2/2020:
This post has lead to great discussions, and I have changed my mind on privatizing our education system. We are at a time of great political divide in our country. Public schools are a key place for students with diverse backgrounds and ideologies to challenge and learn from each other. It has become more apparent to me the danger of private entities teaching to their own agenda, furthering the divide at best or simply spreading lies at worst. Public schools are governed by their community that votes for their school board, so the community essentially sets the school’s agenda.

The proposed changes also didn’t address parent involvement which may be the most important factor in the academic success of their child. Considering students only spend 13.36 percent of waking hours in school by age 18, one should put a great deal of attention outside the classroom. If students are being impacted outside the classroom (with lack of sleep and nutrition, abuse, homelessness, poverty, trauma, etc.), it often manifests itself as bad behavior in the classroom. Investing in early childhood education including parent education and parent resources is essential.

We must also consider what effect market pruning would have on students. In theory, the free market succeeds in finding the best businesses by allowing businesses to fail. Indeed, a majority of businesses do not last more than five years. Good businesses react to the market feedback to improve. Should a school be allowed to fail if it is not performing? A school failing would most assuredly be detrimental to the students at the school, and that simply cannot be tolerated.

Update 9/23: For those that would prefer charter schools, here is a recent EconTalk episode from author and historian Diane Ravitch of New York University talks about her book, Slaying Goliath. Ravitch argues that the charter school movement is a failure and that it drains needed money from public schools. The charter schools, similar to private schools, also cherry pick high-achieving/low-resource expenditure students to boost their numbers, and also suffer from little oversight.

Also, consider this: If we concede that there are many other factors causing poor outcomes in student education, how would you know if the education system is to blame? Maybe it has improved, but the other factors are causing the low PISA scores. How would you know?