Over the last couple weeks, the Thomas B. Fordham Institute has been holding its second annual Wonk-a-thon. In the wake of Nevada enacting a groundbreaking, nearly universal education savings account (ESA) law, Fordham asked practitioners, scholars, and policy analysts what Nevada must “get right in order to provide positive outcomes for kids and taxpayers.”
ESAs have the potential to radically remake the education landscape. Rather than choose just a single school, parents can use ESA funds for a variety of educational goods and services. Students may spend part of a day in a classroom, part on a computer, and part with personal tutors. Someday, students may even learn in “education malls” where they will choose from among numerous education providers for each subject, each with a different approach or focus. Or perhaps there will be explosive growth in full or partial homeschooling or blended learning. Frankly, we cannot predict with any certainty how education will change over the next few decades in a robust market.
In another sense, though, ESAs aren’t radical at all. They only appear so because the K-12 education system is so radically at odds with the rest of American life—a fact that escapes notice only because we are so accustomed to the status quo. No other good or service in American life is so widely subsidized by the government and assigned to citizens based on the location of their homes. The very presence of publicly subsidized schools crowds out the vast majority of providers who would exist in a market system, leaving only niches like religious schools or schools for the elite. ESAs would merely create space for the market that the government has crowded out.
But what should the government’s role be in that market? As I detail at Jay P. Greene’s blog, the Wonk-a-thon participants differ considerably on this question.
Some (myself included) argue the state government should ensure that the taxpayer money is being spent only for eligible expenses, but should refrain from trying to assess the quality of different education providers. There is a legitimate difference of opinion about what should be taught and how it should be taught, so assessing educational quality should be left to private organizations.
Others have argued the state should take a more active role in assessing and even mandating quality. One wonk went so far as to recommend that the state “set a high bar for the quality of services offered by providers” and “eliminate providers who consistently fail to meet the mark.” Another claimed that “no one but the purest Friedmanites think that the magic hand of the market will automatically lead to better outcomes.” Of course, there’s nothing “magic” about the “invisible hand” of the market – it’s just a metaphor Adam Smith used to describe the process of spontaneous order, by which the voluntary actions of disparate individuals organically form a system that is the result of human action, but not human design.
So how does the market “magically” provide quality? Imagine you’re looking for a new dishwasher. As an average consumer, you know nothing about the mechanics involved in making a dishwasher, so the dishwasher manufacturers and retailers have a great advantage over you. Fortunately for you, without any government mandate, numerous organizations took it upon themselves to help you overcome this information asymmetry and ensure product quality. Some, like Underwriters Laboratories, provide private certification for dishwashers that meet their standards. Others, like Consumer Reports, provide expert reviews of hundreds of dishwashers and rate them on five criteria. And still others, like Amazon, offer a platform for consumers to rate and provide feedback about dishwashers based on their personal experience.
In these ways, the market spontaneously channels expert knowledge and user experience to provide would-be consumers with needed information. It’s a messy process but, as scholars from the Mercatus Center at George Mason University show in a recent paper, it works better than having a Ministry of Dishwasher Quality define what makes a “quality” dishwasher and force all manufacturers into compliance:
Regulatory measures such as food labels or product safety warnings may seem like fail-safe mechanisms to correct information-based uncertainty. Regulations, however, are not as effective as market solutions, and may harm consumers instead of helping them. Regulators can be influenced by regulated industries, erecting barriers to keep out new competition, stifling innovation, and imposing higher prices and reduced quality on consumers. By making it more difficult to do business, regulations can have the unintended consequence of entrenching already-established businesses while closing the market to entrepreneurs with innovative ideas.
Still, one might object that just because the market can overcome the information asymmetry problem doesn’t mean it will. Why should we have any confidence that these solutions will emerge? In short, as economist Steve Horwitz explains, overcoming the information asymmetry barrier is in the interest of both buyers and sellers:
Consumers want a way of knowing that they are getting products that won’t explode, mechanics who know their stuff, and scuba instructors who won’t get them killed (not to mention gear that won’t leak). Sellers want to be able to signal to potential buyers that their products and services are of high quality. Solving this problem requires an independent intermediary such as these certification organizations, and sellers are glad to pay to acquire the signal of certification. The certifiers are happy to provide it, and most (though not all) are run as private nonprofits to alleviate any concern about conflicts of interest.
What is also important here is that there is genuine competition via freedom of entry into the certification business. Certification organizations cannot afford to make mistakes since there’s nothing preventing either an existing competitor or new entrant from offering a higher quality alternative. Even if there is no actual competitor at any given time, the threat of competition via new entrants, and consumers’ and sellers’ option to “exit” and use that new firm, keep established certifiers on their toes.
Parents want a way of knowing that their children will receive a high-quality education. Likewise, schools and other education providers want to be able to signal to parents that they are offering a high-quality education. What has been missing until now is robust competition because the fully subsidized government schools have crowded out most would-be competitors. Education savings accounts have the potential to rectify that, if bureaucrats stay out of the way.