Tag: competition

Is School Choice Worth Celebrating? A Look at the Evidence

In honor of School Choice Week, I’ll be answering questions on Facebook tomorrow (4:00pm, Eastern) about the evidence regarding free education markets. When I began studying education policy back in the early 1990s, parent-driven education markets were generally thought of as a new, radical and speculative adventure—uncharted waters where, heaven help us, “thar be monstars.” That was a mistaken view then, and it’s positively absurd now.

As I wrote in Market Education, The Unknown History, the education market of classical Athens, in the 5th century BC, was the first time and place on Earth in which education reached beyond a tiny ruling elite. There was no government participation in education. Teachers competed in the town square to attract paying customers, families called the shots, and the city ended up building a thriving economy and the highest literacy rate in the ancient world. During their heyday, the Athenians invented democracy, most forms of Western literature, and some pretty enduring art and philosophy. Simultaneously, 100 miles away, Sparta established a highly organized system of public boarding schools. It’s legacy? One decent action movie and a name for high school football teams.

Over the next 2,500 years, markets continued to outshine state-run school systems in their ability to serve the needs of families, and they also reduced the social tensions created by state schooling. Near-universal literacy and elementary enrollment among the free population were achieved in the United States by the mid-19th century—before the rise of state school systems—chiefly through private and home schools financed by a combination of parent fees and philanthropy. Even the semi-public “district” schools of the early 19th century charged most parents fees, reserving free and subsidized places for the poor.

Granted, historical evidence is subject to interpretation and charges of selectivity, and so it might not be universally persuasive. But, since 1990, scores of within-country scientific studies have compared education systems ranging from state-run monopolies such as our public schools, to state-funded and regulated private schools, to truly market-like systems in which regulation is minimal and parents choose their schools, as well as paying at least some of the cost directly themselves. I reviewed that body of research a few years ago for the Journal of School Choice and found that it shows private schools tend to outperform state-run schools. More specifically, it shows that the freest and most market-like education systems have the most consistent advantage over state schooling.

There is no credible case against this body of research. I could not find a single study that found a public school system to be more efficient than a market system in terms of student achievement per dollar spent. There weren’t even any insignificant findings for this comparison. Every single study that looked at the efficiency question found statistically significant results favoring education markets over state schooling. It’s rare to see such clear results in the social sciences, but perhaps that’s because there are few areas of life that are still under the thrall of state-run monopolies.

Education markets, when coupled with a mechanism to ensure universal access (such as education tax credits) are a better way to serve our individual needs and to advance our shared ideals. Compulsion and state provision are not only unnecessary, they are counterproductive to our most cherished educational ideals.

Another Newspaper Attempts Suicide

Last Friday, the often-respectable newspaper Education Week published a blog post that seems designed to destroy its credibility. The piece makes a claim so egregiously false that it could have been caught by a motivated 10-year-old using a second-rate search engine:

A growing number of countries are surpassing the United States in student performance and are spending less per student than the United States.  Not one has used choice and market incentives to do it.

In fact, according to the latest PISA international test results, the Netherlands, Belgium, Australia, and Canada all significantly outperform the United States in every subject tested. They also all spend less than the United States per pupil, and make use of choice and market incentives such as competition between schools, to varying degrees. The Netherlands, for example, has had a universal public and private school choice program for the last 95 years, which, according to the National Center on Education and the Economy is “one of the [Dutch] education system’s primary strengths.”

Could the author of the Education Week commentary possibly be ignorant of the Dutch and other examples that flatly contradict his claim? That seems unlikely since he is the president of the National Center for Education and the Economy.

In addition to its central falsehood, the piece also relies on an oversimplified and flawed understanding of how to draw lessons from foreign educational experiences. It fails to consider the very different cultural, demographic, and economic conditions prevailing in different countries and therefore offers no basis for apportioning responsibility for a nation’s educational outcomes between environmental factors and the design of its school system.

That is an unforced error, because there is a reliable way of learning from the educational experiences of other nations: within-country comparisons of different education systems. Many nations have two or more education systems operating side-by-side, sometimes in similar communities and sometimes in the same communities. By comparing the relative performance of these systems within countries (taking into account any differences in student/family background across sectors) it is possible to avoid the confounding variables that plague between-country comparisons.

When I surveyed this within-country scientific literature for the Journal of School Choice I found 150 separate statistical findings reported by 65 papers. The results not only favored private over government provision of schooling, they revealed that the most market-like, least regulated school systems have the biggest advantage over state school monopolies such as are the norm in the United States.

It is disappointing to see Education Week publish such obviously false and confused twaddle. If it wishes to remain a serious publication it should establish some minimal standards for the veracity and coherence of its commentary and enforce them with at least a cursory editorial review.

The Irony of the President’s STEM Initiatives

The media tide of the past two days has carried in a great flood of stories on science, technology, engineering and math (STEM) education. ABC, NBC, AP, Reuters, the Christian Science Monitor, Politico, the Detroit News, and others joined in. This torrent of attention is due to a White House science fair at which the president announced several initiatives to boost student achievement in those fields. Details are scant, but based on the administration’s press release it seems that $100 million or so would go to encourage particular kinds of teacher’s college programs. Various extracurricular STEM programs funded by non-profit foundations were also touted in the release.

The obvious irony in the president’s plan to tweak teachers’ college programs is that those programs are themselves a key part of the problem. The nation’s state school monopolies typically require most or all of their teachers to either have a degree from a government-approved college of education or to be pursuing such a degree during evenings and weekends. Few of those studying or working in STEM fields are willing to sit through a teachers’ college program—with good reason. Not only are these programs often pointless according to their own graduates, they are not associated with improved student performance. They are a requirement without a function–at least without a function that benefits students. The one thing they do accomplish is to erect a barrier to entry that protects incumbent teachers from competition, allows the specter of “teacher shortages” to be floated at regular intervals, and thus to justify above market wages [state school teachers receive compensation that is roughly $17,000 per year higher than their private sector counterparts].

As a result, many of the most promising teaching candidates in these fields are weeded out from the start. President Obama’s plans to “improve” this barrier to entry into the profession amounts to reupholstering the deck chairs on the sunken Titanic.

But how to ensure that only effective teachers lead the nation’s classrooms given that the government certification process is not just useless but counterproductive? Here, again, there is irony. Somehow, in the thousands of different fields in which scientists and engineers work every day, the competent are distinguished from the incompetent. And somehow, those who underperform are either helped to improve or cut loose to seek work in a field (or with an employer) to which their talents are better suited. It is ludicrous to suggest that managers can effectively evaluate the work of the scientists and engineers they employ in every field _except_ education.

The media would do us all a favor if they would look past the Obama administration’s marshmallow launcher for a moment and contemplate the effect that our massive barrier to entry into the teaching profession has on recruiting scientists and engineers.

People Think of Something as Their Business When It Is Their Business

A WSJ interview with Bill Gates includes this pivotal observation:

“I believe in innovation and that the way you get innovation is you fund research and you learn the basic facts.” Compared with R&D spending in the pharmaceutical or information-technology sectors, he says, next to nothing is spent on education research. “That’s partly because of the problem of who would do it. Who thinks of it as their business? The 50 states don’t think of it that way, and schools of education are not about research. So we come into this thinking that we should fund the research.”

While it’s true that public school districts don’t spend a lot on R&D, a vast army of academics has been cranking out research in this field for generations. The Education Resources Information Center, a database of education studies dating back to 1966, boasts 1.3 million entries. So the problem is not a lack of research, but rather that most of the research is useless and that the rare exceptions have been ignored by the public schools.

Why? Because, as Bill Gates correctly observes, hardly anyone thinks of education as their business. And how do you get masses of brilliant entrepreneurs to think of education as their business? You make it easy for them to make it their business. When and where education is allowed to participate in the free enterprise system, entrepreneurs enter that field just as they do any other–and excellence is identified and scales up. It is a process that happens automatically due to the freedoms and incentives inherent in that system. More than that, it is the only system in the history of humanity that has ever led to the routine identification and mass replication of excellent products and services.

So what happens if you want market outcomes but reject the market system that creates them? You are left to re-invent the wheel… without the only value of pi that makes a circle.

Yet More U.S. Trade Policy Incoherence

In hailing this week’s ruling by a World Trade Organization dispute settlement panel that certain Chinese government restrictions on raw material exports violate China’s WTO commitments, U.S. Trade Representative Ron Kirk made the point that such restrictions hurt U.S. manufacturers who rely on those imported raw materials.

Today’s panel report represents a significant victory for manufacturers and workers in the United States and the rest of the world. The panel’s findings are also an important confirmation of fundamental principles underlying the global trading system. All WTO Members – whether developed or developing – need non-discriminatory access to raw material supplies in order to grow and thrive.

And, simultaneously, by artificially increasing domestic supply, the same export restrictions advantage Chinese manufacturing consumers of those materials.

China’s extensive use of export restraints for protectionist economic gain is deeply troubling. China’s policies provide substantial competitive advantages for downstream Chinese industries at the expense of non-Chinese users of these materials.

And here’s how the USTR website described the central issues of the case:

China maintains a number of measures that restrain exports of raw material inputs for which it is the top, or near top, world producer. These measures skew the playing field against the United States and other countries by creating substantial competitive benefits for downstream Chinese producers that use the inputs in the production and export of numerous processed steel, aluminum and chemical products and a wide range of further processed products…These raw material inputs are used to make many processed products in a number of primary manufacturing industries, including steel, aluminum and various chemical industries. These products, in turn become essential components in even more numerous downstream products.

I agree.

But what you won’t find in the USTR’s statements is any acknowledgement that the U.S. government, in defiance of Ambassador Kirk’s logic, maintains import restrictions on three of the nine raw materials at issue in the China WTO case. That’s right! While arguing correctly that Chinese restrictions on exports of magnesium, silicon metal, and coke raise production costs and subsequently reduce U.S. manufacturing competitiveness, the U.S. government maintains antidumping restrictions on the same inputs, which raises U.S. production costs and reduces U.S. manufacturing competitiveness. (See pages 14-17 of this new Cato paper to learn what happened to certain U.S. industrial consumers of these raw materials)

How can such dissonance persist, you ask? Under the U.S. antidumping law, manufacturing consumers of subject imports have no legal standing to participate in the proceedings. In fact, the U.S. administering agencies are forbidden by statute from even considering the impact of antidumping duties on the downstream, consuming industries. Nor is an assessment of the costs of prospective antidumping restrictions on the broader economy permitted to carry any weight under the statute.

Instead, in the present case, those producers hurt by our own import restrictions had to take the circuitous route of enlisting the support of the USTR to pursue a WTO case to secure – what will eventually be – only a half-a-loaf solution. Even if and when China relents with respect to its export restrictions, the U.S. antidumping restrictions on imported raw materials will persist because the law effectively insulates the patrons of antidumping measures from competition.

It should be embarrassing to the administration that it rigorously pursues a WTO case to end an economic injustice committed by another country that we gleefully inflict upon ourselves. We are committing economic self-flagellation by ignoring antidumping reform in this country, where 80 percent of all antidumping measures in place restrict crucial manufacturing inputs. And it’s not like President Obama doesn’t understand the relationship between manufacturing competitiveness and access to manufacturing inputs. Here’s what the president said less than one year ago, when he signed into law a tariff liberalization bill:

The Manufacturing Enhancement Act of 2010 will create jobs, help American companies compete, and strengthen manufacturing as a key driver of our economic recovery. And here’s how it works. To make their products, manufacturers—some of whom are represented here today—often have to import certain materials from other countries and pay tariffs on those materials. This legislation will reduce or eliminate some of those tariffs, which will significantly lower costs for American companies across the manufacturing landscape—from cars to chemicals; medical devices to sporting goods. And that will boost output, support good jobs here at home, and lower prices for American consumers.

But, then, at some point, that logic no longer resonates with this administration.

Antidumping reform is an essential ingredient of U.S. manufacturing competitiveness. Anyone inclined to celebrate the U.S. WTO “victory” in the Chinese export restrictions case should understand the rest of that story.

Are U.S. Corporate Taxes Low?

In a new column, Bruce Bartlett argues that U.S. corporate taxes are the lowest in the OECD, and therefore there is no need to reduce them. As usual, Bruce frames the debate as between sensible center-left economists like himself vs. crackpot Republicans. Yet on this issue, the great majority of serious tax scholars agree that a corporate tax rate cut is long overdue. Indeed, there is such broad agreement among experts that even the Obama White House is considering a corporate rate cut.

Bruce offers only weak and deceptive data in support of his views:

One would not know from the Republican document that corporate taxes are expected to raise just 1.3 percent of GDP in revenue this year, about a third of what it was in the 1950s.

This statistic does not show what Bruce pretends it shows. Corporate income taxes are paid by a subset of businesses called “C” corporations. But the share of total U.S. business income reported by C corporations has plunged in recent decades with the rise in other business structures, particularly LLCs and S corporations.

In a 2007 article in Tax Notes, PwC economist Peter Merrill showed that the share of total U.S. business income reported by C corporations fell from 71 percent in 1987 to just 49 percent by 2004. C corporations are less important business structures than they used to be, so it is to be expected that corporate taxes as a share of GDP has fallen.

Another way to see the relative decline in C corporations is to look at the ratio of C corporation revenues to GDP. In 1980, for example, C corporation revenues were more than two times larger than GDP ($6.1 trillion to $2.8 billion), but by 2008 C corporation revenues were only about 1.5 times larger than GDP ($22 trillion to $14 trillion). (Revenues from the IRS corporate report for those two years).

Bruce’s centerpiece is a table showing that U.S. corporate taxes as a share of GDP were 1.8 percent in 2008, a lower share than in other OECD countries. But the rise in LLCs and S corporations in the United States makes this table almost useless in furthering Bruce’s argument. C corporations may simply represent a smaller share of the overall economy in the United States than in other countries. To make his point, Bruce would need to show that taxes as a share of corporate profits are lower in the United States than elsewhere.

If taxes are low historically and in comparison with our global competitors, how are Republicans able to maintain that taxes are excessively high? They do so by ignoring the effective tax rate and concentrating solely on the statutory tax rate.

The effective tax rate Bruce refers to is the average effective rate, which is the rate he calculates in the faulty manner of taxes as a share of GDP. However, marginal effective rates are generally considered to be more important for international competitiveness. When Toyota is considering expanding its North American production at one of its U.S. or Canadian locations, it will look at the marginal effective tax rate in the two countries. And when it comes to marginal effective corporate tax rates, the United States has one of the highest rates in the world, according to a Cato study by tax scholars Jack Mintz and Duanjie Chen.

The economic importance of statutory tax rates is blown far out of proportion by Republicans looking for ways to make taxes look high when they are quite low.

Actually, statutory corporate tax rates are extremely important in the modern global economy because of the high mobility of corporate profits. In general, marginal effective tax rates drive real investment flows, but statutory corporate rates drive cross-border movements of reported income. Politicians frequently express their outrage at corporations pushing their profits offshore through transfer pricing and other techniques, but they could fix the problem anytime they wanted by slashing the uniquely high U.S. statutory corporate rate.   

This brings us back again to Bruce’s statistic that U.S. corporate taxes as a share of GDP are low at just 1.8 percent. Another reason that figure is low is that the high U.S. statutory rate is pushing reported income offshore through avoidance and evasion. If we cut the statutory corporate rate, the apparent low burden that Bruce points to would increase. This chart shows the inverse relationship between statutory corporate taxes and corporate taxes as a share of GDP.

By the way, if the importance of statutory corporate rates were “blown far out of proportion” as Bruce says, then why has every other advanced economy put so much effort into reducing its statutory rate over the last two decades? The answer is that liberal, centrist, and conservative governments around the world have understood that a country imposing a high statutory corporate rate shoots itself in the foot in today’s competitive world economy.

To sum up:

  • The U.S. has a low average effective corporate rate when measured incorrectly as a share of GDP, as Bruce does. The low rate results from the relative decline in C corporation business activity, the high U.S. statutory rate driving profits offshore, and the high U.S. marginal effective rate suppressing real investment.
  • The U.S. has one of the highest statutory corporate tax rates in the world. The high statutory rate drives reported income offshore, and it is also an important component of the marginal effective tax rate faced by companies.
  • The U.S. has one of the highest marginal effective corporate tax rates in the world according to some calculations, which likely reduces U.S. capital investment substantially. After all, “corporate taxes are the most harmful type of tax for economic growth,” according to the OECD.

 For more, see Global Tax Revolution.

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