Monthly Archives: May 2012

PA Education ‘Reform’ Hurts Poorest Schools

The Philadelphia Inquirer ran a story yesterday about “Voucher Sunday,” when the Philadelphia archdiocese organized students, teachers, and parents to urge their fellow parishioners to lobby the state government to pass school voucher legislation. Putting aside discussions of a spiritual institution acting as a special interest lobbying for state funding, there are serious flaws with the legislation for which the Roman Catholic Church is pushing.

A little background: the legislation in question is Senate Bill 1, which, among other assorted provisions, would provide vouchers for low income children in the 143 lowest-performing schools in Pennsylvania (and since bill numbers are often reserved for specific legislation for symbolic purposes, you can bet SB1 was meant to imply that the Senate Republicans’ main priority was education reform). The bill passed the PA Senate in October (27-22), then moved to the PA House, where it currently sits.

One of the most obvious concerns about SB1 is its constitutionality. The Pennsylvania Constitution expressly prohibits public funding of religious schools in Article III, Section 15:

No money raised for the support of the public schools of the Commonwealth shall be appropriated to or used for the support of any sectarian school.

It would seem obvious that providing families with funds with which to pay tuition at a religious school would violate this prohibition, but the bill nevertheless cleared the Senate. Even without this constitutional ban, one could debate the wisdom of allowing public support of a religious institution — especially in light of the fact that Pennsylvania was originally colonized by religious dissidents seeking asylum from state-sponsored religion.

But putting aside these more basic questions of the proper roles of religion and government in society, SB1 is simply bad public policy. The first indication is that SB1′s funding scheme differs from that of most (if not all) other voucher programs in the country. I explained the problem in a letter to the editor published in the Inquirer in October:

In other states that use voucher schemes, the vouchers are funded out of the state’s general fund. This bill, in contrast, provides no new funds. Instead, it takes money that is already going to schools and ties it to students. So, if a student leaves a school, that school loses the funding associated with that child.

 

Some students may escape their desperate plight, but many others will not. Schools are under no obligation to accept transfer students, and will likely take only a limited number. The vast majority of poor children will then be forced to watch as crucial resources drain away from the cash-strapped, impoverished schools that need it most.

Estimates for the cost of each voucher range between $7,000 and $9,000. The problem is that public schools will not be saving this amount each time a child leaves. Much of a school’s cost is locked in: heat, electricity, water, and the cost of upkeep, for example.

With that in mind, consider also that the bill’s fiscal note assumed that only a tiny portion of eligible students will actually participate. And the bill is structured so that even if many children use vouchers, like advocates claim, the amount of voucher money each child will receive decreases as the number of children participating in the plan increases. That is, the more popular the program becomes, the less it will help children, unless the General Assembly increases funding for it.

But, at the moment, it is doubtful that many kids will participate at all.

There are a number of reasons for this. First of all, there are various costs associated with private schools that would likely rule out some low income children. For instance, the vouchers only cover tuition up until a certain dollar amount, so parents will have to pay for any tuition above that level. Also, no school is under any obligation to accept a voucher student. So, even if we were to ignore estimates of low participation rates and assume that most children would apply for a voucher, many students would be turned away (the Education Law Center estimates only 9 percent of eligible applicants would actually be able to use their voucher). After all, there are only so many desks in a classroom. This, too, would keep the number of students who would potentially benefit from SB1 low.

Additionally, the bill does not bar schools from discriminating in their voucher acceptance policies based on refusal to participate in religious ceremonies or sexual orientation. This would seem to be a large omission for a program that is trumpeted as providing equality of opportunity for all students, and, again, raises questions of whether a government should incentivize specific religious affiliations over others.

Finally, it is worth noting that the children who look likely to benefit the most are those already attending private or religious schools. The Education Law Center estimated that around 60 percent of vouchers would go to children whose families are already paying for them to have a nonpublic education. This directly contradicts the idea that these vouchers represent an ‘opportunity scholarship’ for children who would otherwise be trapped in the public schooling system — indeed, they would be little more than a subsidy for families already in private or religious schools.

To be sure, many children are trapped in underfunded, failing schools. But this bill would not remedy that. Instead, it would take public dollars away from the poorest public schools in order to subsidize children in nonpublic schools. Furthermore, it would actually keep children trapped children in those poorer schools as it drains them of resources.

All of this adds up to a situation in which an extremely small number of students benefit while the vast majority of their peers bear the cost. There are many educational reforms worth pursuing, such as those that aim to elevate the teaching profession and lure the best and the brightest into the classroom, while handing control back to schools and teachers. Unfortunately, SB1 — which defunds schools at the expense of the many, for the benefit of a few — is not one such reform.

SUGGESTED READING

U.S. v. the world in education reform,” Christopher Moraff.

Reforming education: The great schools revolution,” Economist.

Tough Choices or Tough Times,” National Center on Education and the Economy.

Voucher Proposal Raises Many Questions,” PA State Senator Daylin Leach (D-17).

PISA [Program for International Student Assessment] 2009 at a Glance,” Organization of Economic Co-operation and Development (OECD).

Measuring Inequity in School Funding,” Center for American Progress.

The Education Law Center’s Position on Senate Bill 1,” The Education Law Center.


Further Reading on Fiscal and Monetary Policy

The last post (on austerity and budget-cutting in America and Europe) got a little bit long, so I decided to post my sources and suggested readings in a separate post.

The Bundesbank will stamp out this rally,” MarketWatch.

Interactions between Monetary and Fiscal Policy in the Current Situation,” Donald L. Kohn

Did Low Interest Rates Cause the Great Housing Convulsion?” Economix

Economists’ Views on Interest Rates and the Housing Bubble,” Wall Street Journal

Unrest in peace,” Economist

Austerity Is So Wrong!” Paul Krugman

Bernanke says low interest rates didn’t make housing bubble,” Bloomberg.

What Caused the Housing Bubble?” Economist’s View

A theory of fiscal policy: self-sustaining stimulus,” Economist

Will It Hurt? Macroeconomic Effects of Fiscal Consolidation,” IMF

Euro Area Spending Imbalance and the Sovereign Debt Crisis,” Liberty Street Economics

Monetary Policy and the Housing Bubble,” Ben Bernanke.

The great divide: Why American house prices have corrected more than those in Europe,” Economist

Austerity is a pain. So is tight money,” Economist (Free Exchange)

Expansionary Austerity: New International Evidence,” IMF

April showers on the euro,” Economist

Austerity bites,” Economist (Free Exchange)

Britain’s stuttering economy: Double dip trouble,” Economist

In housing, even hindsight isn’t 20-20,” Economix

What fundamental issues has Europe solved?” Economist (Free Exchange)

The euro crisis: A three-headed beast,” Economist (Free Exchange)

The Euro’s Three Crises,” Jay Shambaugh

Who killed the euro zone?” Economist (Free Exchange)

Lessons of the 1930s: There could be trouble ahead,” Economist

Fiscal consolidations for debt-to-GDP ratio containment? Maybe… but with much care,” Vox.

Europe’s economic suicide,” Paul Krugman

Whatever happened to Ireland?” Vox

Low Interest Rates Have Benefits… And Costs,” St. Louis Fed

Blame it on the bubble,” Guardian

He had the power,” Economist

The global housing boom: In come the waves,” Economist

The Spanish Financial Crisis,” University of Iowa

 


The Republicans’ European Dream

Often, when a Republican politician uses the phrase “European-style,” you can generally assume it is not a compliment. It is usually used pejoratively in a sweeping dismissal of federal social programs, especially Obamacare (though the more popular Medicare and Social Security programs generally escape such criticism). Yet there are two significant areas in which the Grand Old Party aspire to be just like Europe: budget-cutting and monetary policy.

The United States acted aggressively to counteract the Great Recession in textbook fashion: fiscal stimulus (increasing government spending) and loose monetary policy (expanding the money supply and keeping interest rates low). And, despite backlash against these measures from the right, it has so far been able to maintain both. The Fed, not directly subject to the politics of Congress, kept interest rates low. The Congress, with little stated appetite for more stimulus, has nevertheless provided it with unemployment extensions, food stamps, and extended tax cuts and credits.

Thus, the government propped up demand through a period of rapid private sector deleveraging. Household debt fell as families paid off their loans (or were foreclosed upon), while government debt rose to make up for part of the demand that was lost when people took money they would normally spend and used it to pay down their debts.

The result is that the Great Recession in America was shallower than it otherwise would have been, and the economy is again growing, albeit slowly. Yet to hear many prominent Republicans tell it, the fiscal stimulus and monetary easing have been abject failures.

I’ve already discussed the theoretical reasons why too much austerity (cutting spending and/or raising taxes in order to balance the budget) too soon (before the recovery is fully in hand) is a bad idea here. I also discussed the drag that state-level austerity had on economic recovery here.

But perhaps it would be prudent to also look at some of the policies Republicans have been ardently advocating in action. Fortunately, Europe provides us with just such an opportunity. There, expansionary policy in the immediate wake of the economic downturn gave way to insistence (by Germany, especially) that Eurozone countries balance their budgets. Countries, like Greece, that needed bailing out were (rightly) subjected to preconditions for assistance, but the focus on heavy austerity in the short term (and in the absence of an offsetting monetary loosening) worsened both their economies and their budgetary outlook.

So what does that mean?

Well, let’s pick it apart, piece by piece. The Great Recession has put enormous stress on public finances. Spending on welfare programs generally increases during economic downturns (higher unemployment means more people drawing on unemployment benefits, for example), and the Great Recession was especially deep. The housing crash at the heart of the downturn also forced governments to prop up their heavily exposed banking systems, causing public debt to rise even higher. At the same time, tax revenues cratered (low wage growth and high unemployment means less taxes flowing into government coffers).

In this way, government debt is (generally) an effect, not a cause, of Europe’s recessionary woes — though, admittedly, the two often bleed into each other because higher government debt makes investors warier, leading them to demand higher interest rates on government bonds, which in turn makes borrowing more expensive, worsening government budgetary outlooks, and so on.

The American right, however, has painted Europe’s plight as one of profligate governments now suffering the consequences of their free-spending ways. Because of this, much has been said about Greece, which had high debt-to-GDP levels even before the crisis. But consider Ireland and Spain. Both had very low government debt levels before the Great Recession — lower even than Germany’s (see chart).

Government Debt-to-GDP Ratios, Europe (Google)

Government Debt-to-GDP Ratios, Europe (Google)

The main issue for both Spain and Ireland were huge property bubbles. The banking systems of both countries, heavily exposed to the real estate market, had to be rescued from imminent collapse by their governments when the bubble burst, sending government debt skyrocketing. At the same time, high unemployment numbers and a tanking economy led to increased social spending, further adding to government debt.

Their worsening economic outlook and accompanying rapid rise in government spending worried markets, causing fear that governments may default on their debts. This fear, in turn, causes interest rates on government debt to rise, which actually makes it even harder for governments to pay back their debts. To counter this, governments move to cut their budget deficits, to demonstrate that they are a safe investment and thus lower interest rates on government bonds.

But passing austerity packages to cut budget deficits (cutting spending and/or raising taxes) hits demand. The public sector lays off workers and cuts pay, while also taking more money out of the private sector via decreased social spending and increased taxes. Moreover, public sector layoffs lead to private sector ones as well. As public sector workers are laid off, they consume less from the private sector, which then likewise cuts back in response. The economy shrinks as a result of all this, decreasing tax revenues, and making deficit reduction harder.

Markets, seeing both a worsening economy and worsening public finances, worry that slow economic growth will hinder government’s ability to pay its debts, and drive interest rates up higher, continuing the cycle.

Studies of austerity programs bear this conclusion out. A recent International Monetary Fund (IMF) paper that look at austerity concluded that:

fiscal consolidations typically have the short-run effect of reducing incomes and raising unemployment. A fiscal consolidation of 1 percent of GDP reduces inflation-adjusted incomes by about 0.6 percent and raises the unemployment rate by almost 0.5 percentage point (see Chart 2) within two years, with some recovery thereafter. Spending by households and firms also declines, with little evidence of a hand­over from public to private sector demand. In economists’ jargon, fiscal consolidations are contractionary, not expansionary.

Source: International Monetary Fund

And that is just looking at a consolidation of 1 percent of GDP. As the Washington Post notes, Spain had an austerity package worth 3.1 percent of GDP, with England and Italy a little bit lower, at 2 percent and 1.8 percent respectively. Greece’s clocked in at just over one-tenth of their entire economy.

Disturbingly, the IMF also notes that austerity has long-term effects, as well. Three years after austerity takes place, the temporary rise in short-term unemployment caused by said austerity generally ends. But long-term unemployment lingers, and is still higher than normal five years later.

Now, all of this is not an indictment of all austerity in every single circumstance. There are conditions under which austerity is both justifiable and desirable (or, at least, acceptable). But I do think it is fairly compelling evidence against immediate austerity in today’s economic climate, for several reasons.

First, the economic recovery is still fragile, and unemployment still quite high. Forcing through a harsh austerity plan would undermine the recovery and drive unemployment higher still, which would pose acute political problems. For one, civil unrest almost always accompanies austerity programs.

Additionally, fiscal consolidations often make it paradoxically more difficult for ruling parties to carry out their programs to their conclusions. Voters in France, Greece, and the Netherlands have all, in the past few weeks, rejected austerity measures and ousted their ruling parties. Yet the implications extend far beyond national politics — they represent a huge turning point in the Eurozone.

Take France’s newly elected François Hollande, its first Socialist president in 17 years. Mr. Hollande rightly wants to focus the Eurozone on more growth-oriented policies, but he also appears hostile to structural reforms in France that would cut expenditures in the medium- to long-term. He has yet to govern, but should he be unwilling to accept structural reforms of the bloated French state, it may endanger the entire Eurozone. After all, some of the most needed fixes for the currency union (such as mutualized debt in the form of ‘eurobonds’) are unpalatable to the Germans — and if France will not hold their nose and take their medicine, why, then, should the Germans?

Another reason why fiscal consolidation is a bad idea in today’s economic climate is timing. Simultaneous budget-cutting by numerous governments across the developed world will deliver a harsh hit to global demand, especially if the world’s largest economy (the United States) embarks on an austerity program as well.

Also, the effect of monetary policy (how the central bank grows or constricts the money supply, and influences interest rates) cannot be ignored. Fiscal policy (government spending) does not occur in a vacuum but, rather, within the context of monetary policy.

Because of this, fiscal stimulus under normal circumstance is usually a wash. The Economist explains:

When the economy is near full employment, deficits crowd out private spending and investment. In a recession the central bank will respond to fiscal stimulus by keeping interest rates higher than they would otherwise be. Both effects mean that in normal times the fiscal “multiplier”—the amount by which output rises for each dollar of government spending or tax cuts—is probably close to zero.

 

Such constraints are not present now. Investment and demand are deeply depressed and the central bank, having cut interest rates to zero, is not about to raise them. The multiplier is higher than usual as a result.

Consider America’s economic recovery for a moment. It has been fairly anemic due to weak demand. That demand hole could be filled by either fiscal or monetary policy actions. In the case of the former, it is filled by direct government spending. In the latter, it is filled by the government keeping interest rates down so individuals are encouraged to spend.

Today, however, interest rates are already close to zero, meaning that a contractionary fiscal policy cannot be offset by lower rates much further. On the other hand, fiscal stimulus offers more ‘bang for the buck’ under current economic circumstances than it does normally, because interest rates are already near zero, and will not be raised to offset the fiscal expansion.

Monetary policy also ties into the argument that austerity is expansionary — because it can be, but, again, not in today’s economic climate. Austerity is expansionary when the central bank loosens monetary policy to offset the fiscal consolidation. (Interestingly, this usually happens when spending cuts are the dominant form of austerity, instead of tax increases. Indeed, review of successful austerity programs over the years shows that the most successful budget-cutting endeavors lean more heavily on spending cuts.)

The problem, for our purposes today, is that further monetary loosening to offset austerity is not really an option — not with interest rates already extraordinarily low. The situation in Europe is different, but with similar effects. There, the European Central Bank (ECB) sets monetary policy.

This means that individual nations do not have control over their monetary policy, and could not loosen it to offset austerity. (And, even when the ECB finally injected money into the European economy, the influential Bundesbank (Germany’s central bank) undercut it over fears of inflation.) The effect, in both the American and European cases, would be (and in the latter, is) contractionary, as described in detail above.

Finally, I should address the argument that the Great Recession was caused by unnaturally low interest rates and that today’s loose monetary policy is accordingly inappropriate. There’s something to that, but it is much more complicated than simple cause-and-effect. The subject deserves a post of its own (if not several), but in short, the Great Recession was the result of a crash in the housing market (other factors, like heavily indebted households, have contributed to a more sluggish recovery).

Austrian economists maintain that low interest rates are almost wholly to blame for the housing bubble, by providing easy money. While low interest rates did contribute to the crisis, they are certainly not the only (and likely not even the main) factor — existing alongside the deterioration of lending standards, the creation of exotic mortgages, and the government encouraging the extension of mortgage lending, among others.

The fact of the matter is, the crash was far too large to be explained solely by interest rates alone. Harvard economist Edward Glaeser, on the New York TimesEconomix blog, writes that:

So theory and data both predict that the 1.2 percentage point drop in real interest rates that American experienced between 1996 and 2006 should cause a price increase of somewhat less than 10 percent, yet prices actually rose over this period by more than 40 percent.

Some people have thus made the argument that low interest rates today may cause an asset bubble in the future, and so must rise to head off that possibility. This, of course, ignores the reality that a rise in interest rates would cause both a more immediate contraction in demand and rising unemployment (which then feeds upon itself and undermines public finances through the the falling tax revenues that result).

The costs of raising interest rates and undermining economic recovery while unemployment is still high greatly outweigh the more uncertain benefit of potentially heading off an asset bubble at some vague point in the future — especially when there are no real signs of an asset bubble yet forming.

All of this should tell us that the appropriate policies to pursue under current economic conditions are short-term fiscal stimulus investments that can deliver long-term returns (think infrastructure spending that will result in productivity gains), loose monetary policy, and a credible medium- and long-term package of structural reforms.

Taken as a whole, a package containing both short-term fiscal stimulus and medium- to long-term structural reforms would demonstrate to markets that the government is both determined to pursue a pro-growth strategy while also keeping its fiscal house in order. Of course, such a package would be politically difficult, because any credible package would have to reform popular entitlements. Social Security and the three federal health insurance programs (Medicare, Medicaid, and the Children’s Health Insurance Program), at 41 percent of the federal budget, could not be spared reform.

And yet, despite all of the evidence pointing toward a responsible, pro-growth policy, Republicans are steadfastly pushing for the immediate austerity packages and higher interest rates that have treated Europe so poorly.

Whereas America is expected to grow at 2.1 percent this year, Europe (with widespread budget cuts hitting demand and Germany’s overblown inflation fears keeping the Eurozone’s monetary policy tighter than it should) could actually shrink. Britain is projected to grow a 0.8 percent, ahead of Germany’s projected 0.6 percent.

Source: IMF

We could also benefit by taking a look at our own history. After all, the Great Depression in America in the 1930s was made deeper by the same policies now being employed in Europe: fiscal and monetary tightening. And we relapsed into recession in 1937 when policymakers tried to implement them yet again.

This time around, America has managed to avoid the mistakes of the Great Depression, despite continued Republican calls for European-style fiscal and monetary policies.

I think I’ll stick with American policy on this one.

(For sources and further reading, click here)