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Thinking Outside the Box
Alice in Wonderland Economics
Dr. Chuck Ormsby
(06/05/07)


Alice in Wonderland Economics   I went shopping last month for some meat to grill on Memorial Day and was not surprised to find that prices varied from around $2 per pound for the lowest grade of hamburger to well over $10 per pound for filet mignon. I guess you get what you pay for.

The same was true a couple years ago when I went shopping for a new SUV. I picked out one for about $25,000 but had choices ranging from $18,000 to well over $50,000. Sizes, features, and qualities varied, but again, the prices seemed to generally reflect the overall value received.

Whether you are looking for a new cell phone, a large-screen TV, a house, or a leather couch, you are routinely faced with a well-ordered price-value pattern.
OK Alice, are you ready to jump down the rabbit hole of public monopolies?

With such common sense pricing all around us, it is not surprising that advocates of greater spending in our public schools rely on the public’s presumption that “you get what you pay for” when they advocate increased taxes. It seems to be a potent argument … until you look at the facts.

At the end of this article I provide data that definitively shows there is no relationship between the dollars spent per pupil in our public schools and the academic outcomes that result from this spending. In every case, whether you compare countries, states or towns, academic outcomes are unaffected by per-pupil spending.

This result seems to defy logic. Is this the work of the Mad Hatter, or can we make sense of it?

 I first investigated the relationship between spending and academic outcomes in 2002. The data generated from all school districts in Massachusetts clearly indicated that there was no correlation. Since then, I have publicly challenged those who continually advocate for increased spending to provide contrary evidence. It has been five years and no-one has responded to the challenge. Too bad we can’t, like the Queen of Hearts, just say, “Off with their heads!”

So, what is the explanation for this apparent disconnect between how much we pay for public education and what we get?

The answer is surprisingly simple. The relationship between price and value is forged by competition. Without competition there is no necessity for value to increase as price is increased.

Consider two companies that both sell donuts, Frosty’s and Crunchy’s. Assume that Frosty’s donuts are always tasty, fresh and inexpensive while Crunchy’s donuts are always dull, stale, and very expensive.

Of course you would prefer to buy Frosty’s donuts, since they are better than Crunchy’s donuts and you can save money at the same time. Unfortunately for you, Frosty’s donuts are sold exclusively to residents of an adjoining town and only Crunchy’s donuts are available to residents of your town. You are stuck with a bad deal.

What if you complain to Crunchy’s that you are receiving an inferior product at a higher price and ask its management to improve quality and lower the price? Since you have no recourse, they smile and dismiss your complaint. They have little incentive to improve.

If we considered a large number of towns, each with its own monopoly donut company, it is not surprising that you would just end up with a random scattering of donut prices and quality with no consistent relationship between the two. This is exactly the situation we see in public education.

So how would competition re-establish a normal price-value relationship? Consider ten towns in a region that exhibit just such a random pattern of public school performance and prices. What if, all of a sudden, students in these towns were allowed to go to any of the ten public schools – making up or saving the difference in cost depending on their choice?

Of course, students would all rush to the schools offering the best value for their available dollars. Schools that provided poor quality at a high price would have to change or go out of business. Magically, after some time for schools to adjust, the expected relationship between price and value would emerge.

So, should you vote for the upcoming tax override in North Andover? What happens if you vote to raise your taxes and give more money to your local public school? Do the union and the school administration have any incentive to use the additional funds to improve quality? With union negotiations just around the corner, how long will it take for your extra tax dollars to be flushed down the rabbit hole?

Come to think of it, this might be a great time to send a message to the Mad Hatter.

Does Spending Impact Academic Results? Here is the Data, You Decide.

Figure 1 is a comparison across industrialized countries of per-pupil spending and math scores (Figure taken from “Impacts of State Accountability on Student Performance,” by Eric A. Hanushek and Margaret E. Raymond, January 2005; data is from TIMSS: the 2003 Trends in International Mathematics and Science Study). The countries are ranked from left to right with the countries having the highest performing math students on the left. If spending were correlated with achievement, one would expect the bars to be higher on the left and lower on the right. Do you see a pattern?

Figure 2 shows a scatter plot of composite state SAT scores versus per-pupil spending. Did higher spending increase scores? Do you see any relationship?

If you want to see spending/academic output plots for communities similar to North Andover (no correlation) or scatter plots of academic outcomes vs. teacher salaries (no correlation) or other similar plots (some showing a positive correlation) go to www.ValleyPatriot.com.

Based on all this data, why does anyone think that spending more money will have any effect on improving academic results? It would be a miracle if it did!   Dr. Ormsby is a member of the N. Andover School Committee. He’s a graduate of Cornell and has a doctorate from MIT. You can contact Dr. Ormsby via email: ccormsby@comcast.net





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The June 2007 Edition of the Valley Patriot
The Valley Patriot is a Monthly Publication.
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