K-12 Spending and Children with Special Needs

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Education Realist writes,

dive into “special education”, the mother of all ed spending sinkholes.

… research hasn’t revealed any promising practices to give those with mild learning disabilities higher test scores or better engagement. And that’s just where academic improvement might be possible. In many cases, expensive services are provided with no expectation of academic improvement.

Read the whole post. A couple of comments from me.

1. The special-ed phenomenon supports a Hansonian theory of education spending, which is that it is about “showing that we care.” Who can be against spending money on children with special needs?

2. In California, lawyers have a great gig. It turns out that taxpayers will pay you $350 an hour to advocate for parents of special-needs children against the taxpayer-run schools.

James Pethokoukis and Joel Kotkin

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No, it’s not a love match, just an interview. Kotkin says,

the valley that I used to cover back in the 80s, and even 90s, was filled with people who had been boat people, who had started PC board companies. You know, kind of somewhat people being able to make a career for themselves in the tech industry even if they didn’t, let’s say have a PhD or an MBA from an elite school. That’s just not the case anymore. I mean, you have a much more hierarchal order in Silicon Valley than you used to have and that is really reflected throughout most of this economy. I mean, what you see particularly here in California is wealthy, older property owners who are in pretty good shape because their property up, but young people can’t possibly buy a house.

He calls this “neo-feudalism” because it creates an order that is stable, but stagnant. I would argue that it is due mostly to natural forces, but there are policies at work as well. Read the whole interview.

The natural forces are the four forces that I often talk about.

1. The New Commanding Heights, as demand rises faster than productivity in education and health care.
2. Assortative mating and bifurcated family patterns.
3. Factor-price equalization (globalization).
4. The Internet and other new technology, which complements some skills and substitutes for others.

The policy forces at work include:

1. Credential requirements, which protect some workers by excluding others.
2. Subsidizing demand and restricting supply in health care and education. Credentialism does both, in that it adds to the demand for credential-providing schools and while restricting supply.
3. Subsidizing demand and restricting supply in housing markets. Environmental and other building restrictions in high-demand areas help to hold down supply and enable young professionals to outbid others for housing in places like San Francisco and Brooklyn.
4. The system of public education, which creates neighorhoods with “good schools” (meaning schools that have a lot of affluent students attending), leading people to bid up prices for those neighborhoods. If you had vouchers instead, parents probably would still bid up the prices of schools that attract affluent students (that is what happens in colleges–it is what the competition to get into “elite” colleges is all about), but at least this would not be linked as tightly to housing.
5. Various policies that redistribute income upward, particularly to the affluent elderly. Social security, Medicare, and public-sector pensions come to mind.

What I Believe About Education

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This is in response to comments on some previous posts about teachers’ unions and other matters.

1. The U.S. leads the world in health care spending per person, but not in health care outcomes. Many people look at that and say that health care costs too much in the U.S., and we should be able to get the same our better outcomes by sending less. Maybe that is correct, maybe not. That is not the point here. But–

2. the U.S. leads the world in K-12 education spending per student, but not in student outcomes. Yet nobody, says that education costs too much and that we should spend less. Except–

3. me. I believe that we spend way too much on K-12 education.

4. We spend as much as we do on education in part because it is a sacred cow. We want to show that we care about children. (Yes, “showing that you care” is also Robin Hanson’s explanation for health care spending.)

5. We also spend as much as we do because of teachers’ unions. They engage in featherbedding, adding all sorts of non-teaching staff to school payrolls (and adding more union members in the process). In Montgomery`County, last time I looked, there was one person on the payroll for every 6 students, but there were more than 25 students per classroom teacher. That is why I do not think that cost disease, as discussed recently by Scott Alexander, is the full story. It’s not just that it’s hard to raise productivity in teaching. It’s that teachers’ unions cut down on productivity by continually getting schools to add non-teaching staff.

6. If I could have my way, the government would get out of the schooling business.

7. If we wish to subsidize education, we should do it through vouchers. Note that this could be done on a progressive basis, with the size of the voucher a declining function of parent’s income.

8. I do not expect educational outcomes to be any better under a voucher system. That is because I believe in the Null Hypothesis, which is that educational interventions do not make a difference.

9. However, a competitive market in education would drive down costs, so that the U.S. would get the same outcomes with much less spending.

A few additional notes:

10. When parents seek out schools with good reputations, they are going after schools where most of the students come from affluent families. The schools themselves do not do much.

11. Even within income-diverse school districts, affluent parents figure out a way to keep their kids from being surrounded by poor children.

12. I have grown increasingly uncomfortable with the leftist ideology preached in government schools.

Tariffs and Trade Balances

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In response to a comment, here is some textbook international economics.

1. A 10 percent tariff has the same effect on the relative cost of imports as a 10 percent depreciation of our currency.

2. The macroeconomic theory of the trade balance is that it is determined by the difference between domestic saving and domestic investment:

(private saving minus private investment) plus (government surplus) = (trade surplus)

3. If a tariff does not change anything on the left-hand side, it cannot change anything on the right-hand side. That requires an offsetting appreciation of the exchange rate.

4. Thus, textbook international economics predicts that a tariff (or a tariff combined with an export subsidy) will have no effect on the trade balance, but instead it will cause the domestic currency to strengthen.

5. The border-adjustment tax is analyzed as if it were an import tariff and an export subsidy. Ergo, its effect is on the exchange rate, not on the trade balance.

Why American Cities Cannot Compete on Cost

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Handle comments,

if a company can move some operations even 50 miles away from a high price place, then why not move them to the cheapest feasible place?

…If a job doesn’t have such distance-limitations regarding interactions with other humans, it will immediately be outsourced from high wage counties to the cheapest place.

If your company needs to plug into a specific talent pool, you want that talent pool close by. If your company can use just anyone, then the lowest-cost place to locate is not a cheap American city but an even-cheaper foreign city.

Timothy Taylor on Capital Allocation

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He writes,

I’m not opposed to spending more money on fixing up roads and bridges and other physical infrastructure–indeed, it’s often an investment fully justified by cost-benefit analysis–but I am dubious that 21st century economic growth is going to be based on fewer potholes. When talking about investment to drive economic growth, I’d like to see more focus on expansion of research and development spending.

I will go a step further and say that I am opposed to more infrastructure spending as carried out by the Federal government. Politicians are fond of allocating capital to themselves, and my guess is that as flawed as the private sector may be, it will spend an additional dollar more wisely than the politicians.

So when the infrastructure bandwagon rolls through town, leave me off.

Montgomery County (Md) Politics

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A commenter asks,

You’ve mentioned many times that Montgomery is owned part and parcel by the teacher’s unions. . .what aspects of county government do they control, and how?

Don’t take my word for it. Take theirs.

“It was the Unions that put Duchy in office n it was the Unions that took her out. Justice served!” read a text message forwarded at 1:24 a.m. Wednesday by John Sparks, head of Montgomery’s firefighters union.

Trachtenberg netted support from public employee unions four years ago but later challenged what she considers unsustainable compensation packages. The cost of government salaries and benefits have soared over the past decade in Montgomery and are a key driver of ongoing budget problems in the wealthy county.

That was 2010 and it was the firefighters’ union that threw her out. But four years earlier, it was the teachers’ union that put her in.

Political observers say the incumbents could be facing tough reelection battles. Four — Floreen, Subin, Phil Andrews (D-Gaithersburg-Rockville) and Marilyn Praisner (D-Eastern County) — failed to capture endorsement from the county’s influential teachers union.

The candidates backed by the teachers’ union won, leading someone an observer to comment.

MCEA was upset that Floreen and Subin had supported delaying a 2003 cost-of-living increase that was due to teachers under their contract because of budget problems. As a result, Leventhal and challengers Elrich and Trachtenberg made the Apple Ballot, while incumbents Floreen and Subin were excluded. The Apple candidates won the top three slots, while Floreen earned the fourth seat and Subin lost. Subin’s loss was particularly notable because he was a 20-year council veteran and the long-time head of the council’s education committee.

The author concludes,

So what does the Teachers’ emergence as Montgomery County’s dominant political force mean for the future? With property tax growth slowing down, the next county council will face tough budgetary decisions. Public schools account for half of the county’s budget and would be an obvious location for cuts. But don’t expect any action there: the county’s politicians have learned that those who cross the Teachers Union once are unlikely to be given a second opportunity.

An increasing share of that budget is going to pensions and non-teaching staff who are union members. Actual classroom teachers are badly over-worked.

Because spending per student is by far the highest in the state, the WaPo constantly refers to Montgomery County as a high quality school system. However, the average outcomes in the County schools are mediocre. Students from the wealthiest parts of the County (three high schools in particular) produce good test scores, and the rest do not. Other school districts in Maryland get similar outcomes with students of similar backgrounds while spending much less money per student.

I know relatively little about Education Secretary Betsy DeVos. But I see the teachers’ union as an enemy, and they see her as an enemy. Ergo, I am inclined to view her in friendly terms.

Average is Over for regional job creation

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Janet Adamy writes,

in the mid-1980s, 29 metropolitan areas that contained 45% of the country’s jobs were home to half of the national increase in companies after an earlier recession.

Now look at what happened after the painful 2007-09 economic downturn. The aforementioned five metro areas [New York, Miami, Los Angeles, Houston, and Dallas] housed half of the nation’s net increase in new firms and accounted for 17% of employment between 2010 and 2014. Left behind are thousands of small towns and rural areas that stitch together much of America.

She cites a new report, Dynamism in Retreat. I recommend checking out the report, and in particular the section “How did we get here?”

I think it is important to keep in mind that this is a global phenomenon. Commenter Handle has convinced me to consider a scenario in which wealth becomes more highly concentrated in a few key cities.

In traditional economic terms, think of an economy consisting of three sectors. One sector is monopolistically competitive. A second sector is protected somewhat from competition by licensing rules. The third sector consists of new natural monopolies.

Monopolistic competition is what you see as you drive along a road with strip malls. The nail salons, restaurants, and small financial services firms operate on low profit margins, because entry is easy.

The license-protected sector is where you find medical professionals, teachers, and others where credentials are required. If you can obtain a license and you are willing to work long hours, you can make a lot of money in some of these occupations. But nothing spectacular.

The spectacular profits come from the natural monopolies. These are the software-driven firms that exploit network scale advantages.

For a would-be natural monopolist, the difference between success and failure is so dramatic that the savings that might come from setting up in a low-cost area seem trivial. Better to locate in one of the high-growth cities where the best talent can be found.

As the seekers of natural monopoly gravitate toward big cities, the licensed professionals and the monopolistic competitors follow, because that is where spending on services is high. Tax revenue is high there also, which helps to generate government jobs.

The difference between the few winning cities and the loser regions is widened by self-selection. Talented, achievement-oriented people move to the big cities, and they leave the loser regions.

The Economics of a Border-Adjustment Tax

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Timothy Taylor writes,

Most countries around the world and all high-income countries other than the United States have “border adjustments” in their tax code, but a key point to recognize is that border adjustments are typically part of a value-added tax–not the corporate income tax.

. . .the Trump administration proposal for revising the corporate income tax is actually a first-cousin-once-removed of a value-added tax.

Taylor cites scholars of various political persuasions in support of this analysis. Greg Mankiw makes a similar point. If you prefer taxing consumption to taxing saving and labor, then you should get to know the economics of the border-adjustment tax in the context of a shift from taxing corporate profits to taxing corporate net revenue.

But John Cochrane points out

a tax system in which you tax $100 of sales, but offer $99 of deductions (costs, wages, earnings retained for investment), then tax only the last $1, then tax that $1 again as personal income, would seem to offer lots of room for shenanigans on just what gets deducted. Along with interesting financial engineering to “invest” more earnings and pay less dividends and interest.

The more radically you reform taxes, the more you risk creating new distortions, both foreseen and unforeseen.

Tyler Cowen has a point about politics.

I say anything complicated they will just screw up, and the lack of transparency in the plan means eventually it will lead to a tax hike and furthermore a good deal of favoritism and rent-seeking along the way. Best hope is simply that they cut the corporate tax rate and don’t do much else on that front.

It is true that lowering the corporate tax rate would reduce the malincentive effects of loopholes in the tax. Lowering the stakes involved would lower the rent-seeking. Also, simply lowering the rate seems less risky (see John Cochrane’s whole post.

The economic theory of how a border-adjustment tax should work is worth knowing. However, theory tends to apply to concepts in the abstract. In practice, a lot of tax policy turns on what gets defined as taxable and what does not. And those regulatory and legislative decisions are where the rent-seeking and the distortions kick in.