Making education a better investment
Is state spending on education an investment or a political payoff? Critics of the North Carolina state budget just approved by Gov. Pat McCrory and the legislature use the term “investment” a lot. But their arguments sound more like cheap politics.
If education spending is an investment, then it can be evaluated with standard criteria such as rate of return and opportunity cost. When investing in new machinery or technology to boost productivity, business competitors don’t try to outbid each other in total money spent. On the contrary, they choose only the capital they think will truly pay off in the future — and then they shop for the best bargain. Similarly, you don’t judge the performance of your retirement portfolio by how much you invest. You judge the portfolio, and the assets or funds within it, on the basis of expense ratio and rate of return.
If, however, education spending is really just a means of redistributing dollars from taxpayers to education employees, then its value is directly related to the amount of spending. The more the state taxes and spends on education, the more money public employees receive, and the more they and their family members will be grateful enough to politicians to work for their reelection.
When the budget emerged, Democrats and liberal groups excoriated it for insufficient funding on education. Although the Republicans correctly pointed out that the budget increases authorized General Fund spending on public schools by 5 percent, roughly double the projected rates of inflation and enrollment growth, critics argued that the spending increase should have been higher because North Carolina ranks low in per-pupil expenditure.
If you are investment-minded about education, this argument is unpersuasive. While North Carolina’s spending per public-school student is lower than the national average, that national average is one of the highest levels of spending in the world. Unfortunately, the average performance of American students is not one of the highest in the world.
In other words, American education is a low-productivity enterprise by international standards. It would be foolish for North Carolina leaders to set a goal of being just as bad an investor in education as the rest of the country is. Our goal should be to raise the rate of return on the tax dollars already spent — which will, in turn, make public education a better investment of tax dollars in the future.
Some states invest more skillfully in education than others. If you peruse the last two decades of academic research on the link between education and economic growth, you will discover that while 57 percent of studies find insignificant or negative effects of education spending on growth, 56 percent of studies find positive economic effects from education attainment, such as test scores or graduation rates. It’s about results, not effort.
In actual dollars, North Carolina public schools already spend an average of about $9,200 per pupil, including operating and capital costs. That is a large amount of money — and significantly higher than it was a generation ago. If North Carolina were a separate country, that would rank us 10th in the world in education spending.
If you think education should be treated as investment, then you would start with that sizable $9,200 per student and try to figure out how to produce more valuable human capital from it. While researchers find no consistent relationship between per-pupil spending and student outcomes, the available empirical evidence does suggest you can improve learning with institutional reforms such as devolving power to local districts and individual schools, hiring and paying teachers according to performance, and giving parents more ability to choose among competing public and private schools.
These are precisely the measures that most state lawmakers voted for this year. They approached education as investors armed with good information. Their critics approached education as if it were little more than a mechanism for buying votes and placating interest groups.
I side with the investment community on this issue.
John Hood is president of the John Locke Foundation.