February 04, 1999
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The Economics of Education

Education economist Caroline Hoxby says school reform begins at home

By Sally Baker

Assistant Director, News Office

Caroline Hoxby, an education economist. Photo by Kris Snibbe.

President Bill Clinton's budget proposal for fiscal year 2000 contains a variety of provisions aimed at improving education in the United States. But despite the considerable public relations value of every high-level statement on the topic, neither Clinton nor Congress wields much of a stick when it comes to how children learn.

"There is a dirty secret about federal spending on education that no one likes to talk about, especially federal officials," says Morris Kahn Associate Professor of Economics Caroline Hoxby '88. "And that is that the federal government just doesn't spend very much on education."

Of all the money spent on K-12 public education, she says, only 7 percent comes from Washington. And the bulk of that federal money goes to school lunch subsidies and long-established remedial and bilingual education programs. The programs most frequently discussed by federal officials -- such as class size reductions and rewards for innovative schools -- typically absorb less than 1 percent of American spending on public schools.

The real power lies at the state and local levels. "People who care about education really should pay attention to what their state legislature is doing," Hoxby says. "States have dramatically changed education over the past 30 years, and each state is making different changes."

Hoxby, who earned an M.Phil. from Oxford and a Ph.D. from M.I.T., is among the most highly regarded education economists in the nation. Her theories on school choice, the rise in costs of higher education, and the use of incentives to improve student achievement are cited in numerous publications, and she is the author of seminal studies on these issues.

She says that with so many states puzzling over school reforms, "it's nice to be an economist doing education." Traditionally, she notes, "economists have had little involvement in education policy," partly because they were not asked to be involved, and partly because economists themselves hewed to two questions when it came to education: how are schools administered and how much money do people earn when they complete various levels of education.

Hoxby's work is different. "I treat schools and colleges as actors, not as 'black boxes' where you feed in students and they pop out at the other end," Hoxby says. "I recognize that schools contain people, just like companies contain people, and the people make decisions about how much to charge, how much money to spend, and how to spend the money. These are the decisions that make schools either work well or fail to work well for society.

"Economics gives us two important insights: school decision-makers obey incentives, and market forces constrain the options open to them." She points to California, where the legislature told cities and towns to send property tax proceeds to the state. The revenues were distributed equally among all districts, and that meant disaster for California's once-superior public schools.

"All schools were equal but poor," Hoxby says. Homeowners whose premium property taxes had once supported the public schools in their towns now saw no incentive to pay high taxes, and tax rates plummeted along with home values. Worse, Hoxby says, many parents in those areas -- previously active in local schools -- either sent their children to private schools or privatized the arts, sports, and other programs that made their schools so desirable. And in the process, they became uninvested in public education. A better option, Hoxby says, is to set a reasonable per child spending rate and then allow individual districts to invest more.

But money is no panacea, Hoxby maintains. School officials need incentives to use funds for maximum benefit. For instance, she says, everyone seems to agree that reducing class size is a good thing -- but it is not an end in itself. "If my class were to go from 75 students to 20, I could obviously spend much more time with each student," she says. "But if there was no incentive for me to give each student more attention, I might decide, 'Well, I'm just going to have an easier life.' " Hoxby believes that money aimed at reducing class sizes -- and, similarly, at increasing teachers' compensation -- ought to be tied to student achievement: "Parents and legislators ought to send the message: 'Show that you can do something with the money or the money goes away,' " she says.

Hoxby says school choice may be a good, low-cost way to raise standards across the board. "If we put a system of school choice in place right now, the parents who would be most affected are those who are unhappy where they are but don't currently have a choice, or parents who don't think about their choices right now but would be forced to think about them. School choice would nudge parents to be more active consumers." In Cambridge, she notes, an intra-district school choice program has made parents much more interested in comparing schools.

Higher education in the United States may be the most sophisticated example of how school choice succeeds. Those who focus only on the rising cost of college miss the richness of higher education as an economic model.

"What's happened in the United States is not so much that prices have gone up but that college offerings have become much more diverse over time," Hoxby says. "Colleges that have raised tuition more have added more to the package of education, advice, activities, and housing they offer. There are still colleges that are very cheap -- in fact, [at some colleges] tuition has risen more slowly than the rate of inflation." The diversity among colleges is "not a bad thing," Hoxby says. "It allows the United States to send many, many more students to college than other countries do."


Copyright 1999 President and Fellows of Harvard College