Thursday, December 16, 2010

Education: Investment Versus Spending

Thousands protested in London last week against a proposal to reduce subsidies to education. The plan, part of the austerity measures by David Cameron’s Conservative government, would raise the cap on university tuition from roughly £3,000 to £9,000, or from about $4,700 to $14,000. The measure passed by a small margin.

Under the new law the maximum tuition a British student attending Cambridge or Oxford would have to pay beginning in 2012 would be about $14,000. By comparison an American student attending Harvard today pays over $35,000 in tuition. (Having recently put a son in college, I can tell you that figure is fairly representative of selective liberal-arts colleges in the United States.)

Human Capital

This is my 25th year as a college professor, but I’m still idealistic about what a college education represents. I’m disappointed when a student, particularly a good one, is motivated to study because she wants to get a good-paying job after graduation. Of course, having a regular income is important for happiness, but as one of my respected colleagues once said to me, “A liberal-arts education gives you something to think about when you’re not working.” Indeed, I try to tell my students, especially the freshmen and sophomores, that they should try as much as possible to study and do things in college that are highly impractical because most of them will have to spend the rest of their lives being very practical. (A friend of mine recently told me of a Stanford MBA who said the most valuable course he took in college was art history.)

At the same time, I recognize that the market for skilled labor, like the market for anything else, is a matter of supply and demand. The choice of whether to major in chemical engineering or Renaissance literature or economics has to take into account not only what you love to do and are good at (these typically overlap), but also what you are willing or not willing to give up to do those things.

As the great Austrian economist, Ludwig von Mises, often pointed out: “There is only one efficacious way toward a rise in real wage rates and an improvement of the standard of living of the wage earners: to increase the per-head quota of capital invested.”

So investing in capital, in this case human capital, is essential to promote one’s material well-being. But, as Mises well knew, the capital invested has to be appropriate to the particular circumstances of time and place.

Appropriate Investment

There are many horror stories of where it wasn’t. Jane Jacobs relates how, for example, in the early 1960s the Rockefeller family tried to build a factory in India to produce “intrauterine loops” for birth control. There were at least two things wrong with the project, however.

First, as Julian Simon tirelessly argued, human intelligence is the “ultimate resource” and the fountainhead material progress. Thus instead of investing in birth control, it might have been better if the Rockefellers had bolstered their investments in things that boost the production of food, housing, and medicine.

Second, and Jacobs’s main point, the Rockefellers tried to build this factory in a rural area. Their intent was to create jobs and alleviate poverty outside the large cities. However, in the countryside such things as the proper tools, electrical and other infrastructure, and the knowhow to repair equipment were hard to find. Many small things went wrong because they lacked the local knowledge of the communities they were trying to help. Eventually, after trying for a year and spending a lot of money, they moved the factory to a large city, where it was up and running in six weeks.

As a largely a private humanitarian venture (although it had the blessing of the Nehru government), it had something that a government program usually doesn’t: a relatively hard budget constraint. Even though the benefactors were Rockefellers, competition for scarce investment capital meant there was a bottom line. Without it, there is no telling how long the factory would have languished in the Indian countryside.

Inappropriate Human Capital

So, returning to our subject, when is investment in education “inappropriate”? Well, one might say when it moves some to acts of violence against the innocent. (I understand, however, most of those protesters in London were less violent.)

But State subsidies, even those that use taxes to cover the difference between tuition and the expense of running a university, are not really investments at all. They are expenditures. And what guides political spending on education or housing or just about anything else is usually expediency. Politicians consider rate of return on investment when making spending decisions about as often as they consider moral principles: rarely.

Some could argue that from an economic point of view, subsidizing education is not as disruptive to the market process as, say, monetary manipulation or price controls. But on this point a recent story from the New York Times caught my eye – “China’s Army of Graduates Struggles for Jobs”:

In 1998, when Jiang Zemin, then the president, announced plans to bolster higher education, Chinese universities and colleges produced 830,000 graduates a year. Last May, that number was more than six million and rising.

Many Chinese parents did make financial sacrifices for their children’s education, so universities are not entirely state subsidized. But was the education appropriate to market demand? There have been unintended consequences:

It is a remarkable achievement, yet for a government fixated on stability such figures are also a cause for concern. The economy, despite its robust growth, does not generate enough good professional jobs to absorb the influx of highly educated young adults.

Graduates migrate to Beijing looking for opportunities that match their aspirations but are increasingly disappointed. Ironically, workers with traditional skills have been doing better:

Between 2003 and 2009, the average starting salary for migrant laborers grew by nearly 80 percent; during the same period, starting pay for college graduates stayed the same, although their wages actually decreased if inflation is taken into account.

Like all other goods, the demand curve for education slopes downward. Artificially lowering the price – in China, the United Kingdom, or the United States – is bound to create an excess demand for a university education now and surpluses of increasingly disappointed graduates in the years ahead. If the violence in London (as well as in some parts of California where students were also protesting tuition hikes) is an indicator, the future is not bright.


Results down to strong discipline and school trips, says head of top British primary school

The head teacher of the top primary school in England today warned against “hot-housing” pupils to pass exams. Pauline Gordon, acting head of Manuden primary in Bishop's Stortford, Essex, said repeatedly drilling children to inflate test results was counterproductive. She suggested pupils learned better with a varied curriculum, a large number of school trips and strong discipline.

The school, which has fewer than 100 children, was the only primary in the country to ensure all pupils exceeded the standard expected for their age group. All 11-year-olds reached the level pupils are supposed to meet in the first few years of secondary education in both English and maths, it was disclosed.

Mrs Gordon, who has led Manuden primary since September, insisted the school’s high results were down to a varied curriculum rather than “teaching to the test”. "I don't believe in hot-housing children for the tests," she said. "Teachers have very high expectations of the children, and we offer a very wide and varied curriculum, we spend lots of time on school visits."

Only 13 pupils sat exams at the small primary this summer and figures showed no children had high levels of special educational needs. All pupils reached Level 5 - one above the standard expected for their age - in English and maths.

This year's 10 and 11-year-olds were "particularly able", Mrs Gordon said, "which does make a difference". "The majority of children are fairly confident, and take it (the tests) in their stride," she said. "We have very strong expectations of how they should behave, and if we feel a child can do more we will tell them."

Starks Field primary in Enfield, north London, was officially the worst performing school as no pupils reached Level 4 in English and maths. A third of children at the school have special needs and more than seven per cent of lesson time was lost in the last academic year due to pupil absence.

Achilleas Georgiou, deputy leader of Enfield council, said the results did not reflect the quality of the school. "As the only children in the school taking Sats were 13 children that had joined the school just five months earlier, their league table position is a false one and does not reflect the quality of teaching in the school, which has been praised by Ofsted," he said.


The British version of Head Start hasn't worked either

More than £25 billion spent on early education under Labour has failed to improve children’s language and numeracy, according to a landmark study published today.

A raft of reforms introduced by the last Government – including a new curriculum for pre-school children and a generation of Sure Start centres – have had no impact on five-year-olds’ understanding of the basics.

An analysis of more than 117,000 children over an eight year period showed pupils’ early reading and picture recognition ability had actually declined slightly in the last decade.

The report by Durham University suggested that failure to develop key skills at a young age could hold children back throughout compulsory education and in later life. It suggests that the primary focus of Labour’s education policy since 1997 – boosting standards in the early years – has failed to deliver tangible improvements.

The findings will raise serious question marks over the last Government's flagship reforms designed to give the youngest children a better start. It includes the opening of some 3,500 Sure Start centres set up to deliver early education, childcare, health advice and family support in deprived communities.

Researchers said it suggested that the poorest families were still not getting enough help. It follows claims from David Cameron that the “sharp-elbowed middle-classes” often made better use of Sure Start than people from disadvantaged backgrounds.

Dr Christine Merrell, primary director of Durham’s Centre for Evaluation and Monitoring, which led the research, said: “Given the resources put into early years’ initiatives, we expected to see a rise in literacy and numeracy scores in schools, so it’s disappointing that there’s been no improvement.

“Our findings reinforce the concern that the poorest families in our society are not accessing the full range of educational opportunities and resources designed to help them. “Sure Start and other early years’ initiatives have valuable aims but we must evaluate what works and doesn’t work in a rigorous and scientific way.”

A Government source said: “Another study highlights Labour’s record of failing the poor. We will ensure that Sure Start is targeted at those who need it most."

The findings represent the latest in a series of bitter blows to the last Government’s education record. Primary school league tables being published later today are expected to show as many as one-in-10 English schools are failing to hit official benchmarks in the three-Rs. And a major international study last week found standards in secondary schools had plummeted below nations such as Poland and Estonia in recent years.

In the latest report, academics analysed the results of independent tests sat by children in 472 state primaries between 2001 and 2008. The simple 20-minute assessment – taken six weeks into the first full year of school – covered early reading, including identifying upper and lower case letters, multiple choice word recognition and reading simple sentences.

Numeracy exercises tested children’s understanding of the difference between “biggest” and “smallest”, counting four objects and simple addition and subtraction. The test, which was sat by around 15,000 children each year, also covered picture and shape identification.

An analysis of results showed a “statistically significant decrease” in children’s reading and shape recognition over eight years and a corresponding rise in maths results. However, in both cases academics insisted differences were small and not “educationally significant”.

The report, published in the Oxford Review of Education, said a range of “major initiatives… had been implemented on a wide scale during the years preceding and during the time investigated in this study”.

Academics admitted the analysis failed to cover children's personal, social or emotional development but concluded that "one might expect that these initiatives would have resulted in measurable changes”.

According to Government data, Labour spent £25bn in early years and childcare services between 1997 and 2009. Annual spending on Sure Start alone topped £1bn last year, providing access to services for more than 2.4m children and their families.

In 2003, Labour also introduced the Early Years Foundation Stage – a “nappy curriculum” for children to follow up to the age of five – and all three and four-year-olds have been given access to 15 hours a week of free childcare.

A spokesman for the Department for Education said: "We recognise that while Sure Start has had a positive impact on many families, there is much more work to be done to better reach those most in need.

"Sure Start is at the heart of our vision for early intervention - that’s why we are reforming it so that children’s centres focus more on reaching the most vulnerable, and use approaches that are backed by evidence."


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