July 25, 2014 10:13AM

Does Sweden’s Voucher Program Need Stricter Regulation?

Slate recently published a badly misinformed piece about Sweden's voucher program, which I addressed here. One of the other responses to the Slate piece was written by Swedish economist Tino Sanandaji for NRO. Sanandaji did an excellent job of showing that the voucher program cannot plausibly explain Sweden’s test score decline and usefully explored some of the more likely causes.

Though I agree with much of what Sanandaji wrote, his piece occasionally endorses heavier regulation of the program for reasons that are either not apparent or inconsistent with the evidence. For instance, he rightly observes that the Swedish government requires universities to accept high school grades as a key admissions criterion but does not permit them to take into account differential grading practices across high schools. This, he notes, puts significant external pressure on high schools to inflate grades. But despite acknowledging this, he later refers to “other problems caused by the [voucher/school choice] reform … such as grade inflation,” implying that this “corruption” is “caused by the lack of [state] control.”

And yet the evidence he presents points to the opposite conclusion: that grade inflation is particularly problematic in Sweden because of imprudent government intrusion into university admissions policy. Consider as a contrast the case of the United States, where universities are free to take high schools’ grading practices into account during admissions. We still have differential grade inflation across high schools, but it is less of a concern because universities can adjust for it. As the head of admissions at Brandeis University has observed, “It’s really not that hard [for colleges] to evaluate a school bearing in mind the differences in grading and weighting processes they employ.” In the absence of government meddling, high schools cannot secure admission to good colleges for their students simply by giving them all A’s.

Still more puzzling is Sanandaji’s criticism that “some private schools broke the rules to cherry-pick students.” This is curious because Sanandaji defends free markets on a number of other occasions, and a hallmark of free markets is that they rely on mutually voluntary exchange. So, naturally, schools in a relatively free marketplace want to enroll students they think they can successfully serve, just as families seek schools they believe can successfully serve them.

This does not mean that all private schools in a relatively free market will seek to serve only high-scoring or well-behaved students. In the United States, where the vast majority of private schools are free to admit students based on any criteria they like, many exist specifically to serve difficult-to-educate students that the typical public school is not well-equipped to teach. A study conducted in the mid-1990s found that public school districts were sending hundreds of thousands of students to the private sector for just that reason. Do some other private schools focus on serving high-performing students? Of course. But the largest share seem to place little or no emphasis on students’ prior academic performance, based on survey data from Arizona that I analyzed several years ago.

The same result can be seen in the for-profit Korean after-school tutoring market, which has complete autonomy over admissions and in which admission is hardly ever selective. Tutoring firms administer tests to their applicants, but they use those tests merely to identify the right classes for them, not to determine admission. When left to themselves, education markets do not focus exclusively on high performing students, well-behaved students, or indeed on any single subgroup of students. They respond to market demand.

What makes the “cherry-picking” criticism of Swedish schools even more strange is that the government actually requires high schools to accept students based on their elementary school grades. Thus, again, to the extent there is a systematic problem in this area, it is actually caused by the state, not by the schools.

Next Sanandaji acknowledges that a poorly managed for-profit school chain went bankrupt, closed down, and its students had to find new schools. Perhaps I misunderstand him, but he seems to present this as an example of market failure, adding that “some of this abuse has been stopped [by tighter regulation].” It is hard to reconcile this characterization with Sanandaji’s otherwise sound exposition of how markets work. The failure and exit of poorly managed businesses is not a bug in the software of capitalism, it is a feature. No economic system guarantees that all service providers are effective and efficient in perpetuity.

The same applies to systems of education. Having studied school systems around the world and across time back to Athens and Sparta in the 5th century B.C., I have never come across one that achieved perfection. The best that an education system can do is to provide incentives for effective and efficient operation, and to reliably force the exit of schools that fail to respond to those incentives.

So, in Sweden, a large, ill-managed school network went out of business in a few years, and its students are now enrolled in other schools that are at least well-enough managed to still be operating. Contrast this with how failure is dealt with in a system with many layers of government oversight and ostensible quality control: U.S. public schooling. In most of the nation’s big cities, performance has generally been regarded as ranging from mediocre to abysmal for at least several generations, despite high and rising real per-pupil spending. Schools and districts deemed “dropout factories” continue to operate indefinitely. This, it should be obvious, is an inferior way to deal with educational failure—allowing it to continue decade after decade, afflicting an endless stream of children, instead of bringing it summarily to a halt after just a few years.

But Sanandaji, in other contexts, understands all this. He can undoubtedly cite Schumpeter chapter-and-verse on the process of “creative destruction” that drives progress in free markets. It’s not clear why he doesn’t apply this knowledge here.

And lest readers assume that the above analysis is nothing more than economic theory, I encourage them to review the empirical research on within-country comparisons of different school systems. I surveyed that research for a 2009 paper and found that the least regulated, most market-like school systems—those in which parents pay at least some part of their own children’s tuition directly—are consistently the best at serving families’ needs across all outcomes that have been studied. In practice, in the real world, additional government “control” (i.e., regulation) of education markets is not associated with better outcomes. If anything, the reverse appears to be true.

Finally, Sanandaji reports poll results indicating that “Swedes have turned sour on for-profits’ running schools generally.” That people would offer this answer to pollsters is not at all surprising given the often confused and misleading media coverage of the subject. But, in talking to people in Sweden and Chile (another country with a national school choice program that allows for-profit schools), I’ve found that parents are often unaware which private schools are for-profit and which aren’t, and so cannot be placing much weight on that factor in choosing schools for their children. That is perhaps why two of the biggest school chains in Sweden, Kunskapsskolan and International English Schools (IES), are both operated for profit and both highly regarded. Indeed IES is perhaps the fastest growing chain in the country. Despite growing as fast as it is able, opening several new schools each year, it had a waiting list of 60,000 students as of last year. The minister of education himself sends one of his children to an IES school.

So while badly managed chains are failing, well-managed ones are growing. That is how markets work, and it is in the best long term interest of consumers.

All of the above said, there are certainly defects in the Swedish voucher program, centered on counterproductive regulations and the total reliance on third party government funding. I will be writing about those problems, but will have to leave that for another day.