Economic Issues Policy - Jacqueline Murray Brux Education We will transform our schools and...

Economic Issues & Policy- Jacqueline Murray Brux

EducationWe will transform our schools and colleges and universities to meet the demands of a new age.

—President Barak Obama, Inaugural Address, January 19, 2009

1© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

PowerPoint slides prepared by: Andreea Chiritescu

Eastern Illinois University

Education

• Public schools• Operated by the government • Financed by tax revenue

• Private schools• Not operated by the government• Mainly financed by tuition and endowments

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 2

Education’s Spillover Benefits

• Education • Private benefits• Benefits for society• Spillover benefits

• Externalities• The costs or benefits of an economic activity

that spill over onto the rest of society



• Spillover benefit• A positive externality• The benefit that is shifted from the private

market onto society• Spillover cost• A negative externality • The cost that is shifted from the private

market onto society



• Inequity• Unfairness

• Inefficiency• Using resources in such a way as not to

maximize the desired output from them• Externalities • Create inequity and inefficiency



Figure 4-1: Effects of the Spillover Benefits of Education

Because the private market does not reflect the spillover benefits of education, the numberof students enrolled (5 million) is less than the socially optimum number (6 million).


• Spillover benefits• The market under-allocates resources• Justify the government’s:• Provision of K–12 education• Subsidization of college education • Grants and financial aid to students• Public colleges and universities



• Socially optimum amount of education• If the government’s contribution toward the

student’s education • Is just equal to the spillover benefits that

society receives from education



• Spillover benefits of K–12 education• Tremendous• Free primary and secondary education -

justified• Benefits of postsecondary education• Mostly private• Few spillover benefits


Global Comparisons of Educational Spending and Literacy Rates

• Government spending on education• 5.7% of GDP

• Adult literacy rate• An outcome of educational systems

• Inputs into education• Numbers of schools• Dollars spent on education



Table 4-1: Global comparisons of public direct expenditures on education; % of GDP; highest to lowest; selected Western industrialized countries, 2007


Table 4-2: Adult literacy ratesa by gender; selected Western industrialized countries, Eastern industrialized countries, and Developing countries, 2007

Educational Attainment in United States• US Census Bureau• Population age 25 years or older: 196 million • 26 million - less than high school education• 61 million - high school diploma• 34 million –some college but no degree• 17 million - associate’s degree• 38 million - bachelor’s degree• 15 million - master’s degree• 3 million - professional degree• Over 2 million - Ph.D.



Figure 4-2: Highest educational attainment in U.S. among people age 25 or over as a percent of the total, 2008

Kindergarten Through Grade 12 (K–12) Education

• Funding of K–12 education• Academic year 2005–2006, $521 billion• Federal government - very small share• Local and state governments bear the

principal burden for funding primary and secondary education



• Local government spending on K–12 education • Heavily financed by the local property tax

• Tax base• Value of income, earnings, property, sales, or

other variables to which a tax rate is applied• Tax rate• Percentage of the tax base that must be paid

to the government as tax



• Heavy reliance on the local property tax • Inequities• State aid: aid to all, not only poor, school

districts• Low spending• Shoddy facilities, inadequate supplies, and

understaffed classrooms• High dropout rates and functional illiteracy



Figure 4-3: Financing public K–12 education, 2005–2006

The above chart shows the percentages of funds provided by each level of governmentto public elementary and secondary schools in the United States.

Quality of K–12 education

• 1983, A Nation at Risk• Falling test scores, schools were asking less

and less of their students• U.S. pupils - performing worse than their

European counterparts• 1992, Jonathan Kozol• Savage inequalities: children in America’s

schools• Terrible conditions, 6 inner-city school systems


Quality of K–12 education

• Other problems• Fewer teachers specialize • School year – shorter• SAT scores – below 1970 levels• Overcrowding• High school drop-out rates• Differential access to quality schools• Disparities in funding of suburban versus

inner-city schools© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 21


Table 4-3: Global comparisons of primary education pupil per teacher ratios, selected Western industrialized countries, Eastern European countries, and Developing countries, 2007

Proposals for Improving K–12 Education

1. An increase in the competition among schools

2. Reform of the tax system • Through which we support our public schools

3. No Child Left Behind



1. Proposals to increase competition among schools: • Aim to increase choice • Charter schools • Greater autonomy in exchange for

accountability• Magnet schools • Focus on some particular type of curriculum

• Tuition vouchers



2. Proposals for tax reform• To reduce inequity• Property tax reform• Federal and state corrective finding• Issue of poverty • Programs to alleviate poverty are also needed

to improve the academic performance of inner-city students



3. No Child Left Behind • Stronger accountability for results• Greater flexibility for states, school districts,

and schools in the use of federal funds• More choices for parents of children from

disadvantaged backgrounds• Emphasis on teaching methods that have

been demonstrated to work



• President Obama’s proposals• Dramatically expanded early childhood

education and improved its quality• Made college affordable for nearly seven

million more students• Provided resources necessary to prevent

severe cuts and teacher layoffs• Expanded funding for Headstart



• President Obama’s proposals• Future reform• Incentives for teacher performance• Commitment to charter schools• Promise of affordable higher education for

those who are willing to volunteer in their neighborhood or community or to serve their country


Higher Education

• Economic problems• Costs have risen• State governments - decreased their support

in real terms• Federal support has stagnated• Deduction for tuition - eliminated in 2006 for

the federal personal income tax• Local governments contribute very little


Higher Education

• Economic problems• Higher tuition in public institutions• Endowments of private institutions – reduced• Financial aid rules - changed• Value of Pell grants – declined

• Endowments• Income-earning investments of a school or

other institution


Higher Education

• U.S. postsecondary (higher) education• Colleges• Universities• Community (junior) colleges• Technical-vocational schools

• Private schools• Not operated by the government


Higher Education

• Public schools • Run by state governments and occasionally by

municipalities• Costs • $13,424 for public schools• $30,393 for private schools• Public schools – lower tuition than private

schools because state governments subsidize the public universities


Higher Education

• Subsidize• The payment of some of the costs of an

economic• Education • Investment in human capital• Spending designed to improve the productivity

of people


Higher Education

• Median• The value that is exactly in the middle of a list

of all values of some variable, such as earnings, when ranked from highest to lowest

• Mean• Average



Table 4-4: Median annual earnings by highest educational attainment of full-time, year-round workers, 25 years and older, by gender, 2007

Higher Education

• Educational investment• Expected benefits• Increased earnings after graduation

• Expected costs• Direct cost• Actual paid expenses• Tuition & fees, books & supplies

• Indirect cost: opportunity cost of forgone alternatives (earnings)



Figure 4-4: The decision to invest in college education

The investment will be made only if the increase in lifetime earnings justifies the direct and indirect costs of education.

Higher Education

• Cost-benefit analysis• Compares the costs and benefits of a policy or

program• Rate of return• The “benefit rate” • Divide the net benefit by the amount invested


Higher Education

• Government support of public higher education• Justifications:• Spillover benefits (positive externalities)• Equal access to education• Most of the students we are subsidizing are not

from poor families• Decreasing federal and state support


Higher Education

• Raising Tuition• To make up the missing funds• Average public university tuition has more

than doubled since 1990• Students – need greater financial aid• Students who feel the negative effects most • Are from low- and middle-income families


Higher Education

• Enrollment Caps• Maximum limit on the number of students

allowed to enroll in a school• Rationing of openings: increase admission

standards- eliminate students:• Poor risks for completion of college• “late bloomers” • Of low-income and/or diverse backgrounds• Received poor quality K–12 education


Higher Education

• Differential Tuition• Charge different tuition for different programs

to increase efficiency• Surpluses or shortages of class sections• Charge higher tuition for very popular, growing

majors• Charge lower tuition for declining majors



Figure 4-5: Improving resource allocation by charging different tuition for different programs

At uniform tuition ($6,000), there will be a shortage for pre-law students and a surplus for philosophy students. Different tuition ($8,000 and $4,000) eliminates the shortage and surplus and improves resource allocation.

Higher Education

• Financial Aid• Scholarships and fellowships• Employer assistance • Veterans’ assistance• College work study, Loans• Pell grants• Low-income students

• Financial assistance isn’t targeted to the most needy students


Higher Education

• Affirmative Action• K–12 educational attainment and quality • Varies considerably by race and ethnicity

• Higher educational attainment • Varies considerably by race and ethnicity

• Disparities in financial aid levels• To different categories of college students



Table 4-5: Highest educational attainment, by racea and ethnicity, share of total group (%), age 18 years and over, 2008

Conservative versus Liberal

Liberal economists• Tax reform; redistribution of

tax dollars from rich to poor districts

• Widespread use of school vouchers would endanger our public school system• Transferring funds away

from the poor schools • Expanded state and federal

spending for K–12 education

Conservative economists• Policies to increase

competition in public K–12 system

• School voucher systems• Give parents and students

more choices of schools and curricula

• More competition among schools • Private schools, charter

schools, and magnet schools


Conservative versus Liberal

Liberal economists• Expanded financial aid to low-

income students• Tax credits for educational

purposes• Remedies for inequity in

education for racial and ethnic minority students, including affirmative action

Conservative economists• Spending on K–12 education

by local governments • Do not favor extensive tuition

subsidies or financial aid for students in higher education• Unless spillover benefits

can be shown to result from this postsecondary education


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