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Think. Discuss. Act. Education Reform

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Review: Schoolhouses, Courthouses, and Statehouses

Eric Hanushek and Alfred Lindseth (2009). Schoolhouses, Courthouses, and Statehouses. Princeton: Princeton University Press, 432pp.


Eric Hanushek, an economics professor at Stanford’s Hoover Institution, is one of the more prominent advocates of a free-market approach to school reform. His research has been cited in policy debates for decades, particularly in court cases investigating school financing policies. His recent book, Schoolhouses, Courthouses, and Statehouses, describes his plan for how to fix the struggling American public school system.

Hanushek admits very frankly that he is not an educator. He does not claim to know the best way to teach reading to a first grader or algebra to a high schooler. Hanushek is an economist; his area of expertise is the operations of markets and how people respond to financial incentives. His method of school reform is strictly economic: he thinks the public schools are currently not organized very efficiently and wants to create financial incentives to encourage more efficient behavior.

Traditionally, the debate over school reform in America has divided into two camps. For the most part, the conservative position tries to find a way to make public schools function more like the private sector, in one way or another. The typical liberal response says that a free market would undermine the public schools’ commitment to universal equal education. Their method is to try to organize the schools as efficiently as possible without changing the current incentive structures. But these battle lines have become more fluid in recent years and aspects of the free market argument have become more popular in more liberal circles. As the debate continues to change, it becomes more and more important to understand each side’s arguments and what they’re trying to achieve.

Equality and Inefficiency

Hanushek’s first argument is to show just how inefficient the American education system really is. According to the National Assessment of Educational Progress (the NAEP, often called the “nation’s report card”), the achievement of the country’s students has stayed pretty constant over the last fifty years or so. At the same time, public spending on education has more than tripled. The United States now spends more on education per pupil than almost any country in the world, but our student outcomes are below the average for developed countries.

Hanushek gives the example of his own alma mater, “a rural school in the upper Midwest” (p. 47). In 1962, when he graduated, the school had 190 students and 9 full-time staff. In 2007 it had 106 students, 18 full-time staff and 6 part-time staff. As he describes it:

The problem, we stress, is not that education spending has significantly increased. The world is a more complex and technical place than it was forty years ago…The problem is that we are not getting much in return for our massive financial commitment. While adults in the system may have seen more and improved employment opportunities, children have not been obvious beneficiaries…Sadly, our students are still performing at 1960 and 1970 levels, which is surely not what the nation bargained for in return for its huge investment (p. 48).

In schools across the country, class sizes are now smaller than they used to be, and teachers are better educated and more experienced. Adjusting for inflation, the US spent $2,606 per student in 1960, whereas in 2005 we spent $9,910, but the increase in spending has not led to any improvement in student achievement.

The same pattern can be found at the local level. There have been several examples of court cases where state and local governments have been ordered to dramatically increase funding in order to equalize outcomes for disadvantaged students (the most notable was in Kansas City in 1986), and the funding increases have notoriously failed to achieve anything at all. A simple study of the variations in funding between different US states shows that more funding is not correlated with improved student outcomes.

School funding has equalized considerably in the past few generations. The critical issue of funding equality is that schools have historically gotten their revenue from local property taxes. Under such a system, very rich school districts will have much more to spend on their schools than very poor districts. Ever since the 1920s, though, state governments have been intervening to provide additional funding for poorer areas. Currently, only 40% of the money spent on public education is raised by local government.

Even so, school districts with the poorest students often have much higher tax revenues that one might expect. For example, large urban areas typically have a lot of commercial and industrial wealth, even if residential housing prices are low, and these contribute to property taxes. In fact, when school districts are measured by the wealth of the people who live there, the poorest districts spend just as much on education as the richest districts, with middle-class areas spending somewhat less.

Therefore, Hanushek argues, there is no way to claim that our schools aren’t getting enough money. “Nevertheless,” he says, “it remains a common misperception that school districts with large numbers of poor children have significantly less money per pupil spent on them than other districts” (p. 68). When the media talks about urban education, he says, they typically talk about budget cuts forcing schools to lay off staff and give up basic services. The policy debate, he says, is dominated by calls for funding increases, smaller class sizes, more teachers and other expensive measures.

Free Markets and Efficiency

Instead, Hanushek wants to see public schools spend the money they have more efficiently. The question is how that should be achieved. Hanushek’s argument is that the standard way to create a more efficient organization is to expose it to free market forces. America’s public schools are very highly regulated and also very inefficient—he says this should not be surprising.

While it’s admittedly difficult to impose free market incentives on an inherently not-for-profit sector like public education, Hanushek has a clear plan. In fact, his recommendations have been the conservative status-quo for education reform for several decades, and they are becoming increasingly popular.

The first step is to be able to measure student performance. For an organization to efficiently achieve its goals, it’s necessary to have a clear understanding of what those goals are. This was the centerpiece of George W. Bush’s No Child Left Behind Act of 2001, and it was very successful: every state in the country now has some kind of standardized test to measure how much students are learning.

The next step is to measure how effective teachers are at teaching. If that can be achieved, school districts could pay more for better teachers, creating an open market for good teaching and a strong financial incentive for teachers to improve. However, it’s not as simple as merely raising the salaries of the teachers whose students score the highest. Students bring with them their own advantages and disadvantages. Instead, it’s important to measure how much a student has improved due to a teacher’s influence, what is called the teacher’s “value-added” score.

Teachers should be paid based on how much they improve their students’ test scores, says Hanushek, and additionally, whole schools and school districts should be allocated funding based on how well they improve scores. This will create incentives for improved performance across the whole system:

The school finance system should be an integral part of motivating schools, teachers, and administrators to do a better job at raising the achievement of their students. Teachers who succeed in significantly improving the achievement of their students should receive higher pay or bonuses along with other career awards….The schools themselves should receive increased funding that can be used for the benefit of all their students, perhaps in ways that directly motivate students to do better on state test, such as additional field trips to places that children would find exciting (p. 235).

A system-wide policy of incentive-based funding would have to be very carefully implemented in order to be effective, Hanushek admits. For example, an ineffective school can’t be allowed to have its funding continually reduced until it goes out of business. Hanushek advocates imposing a sort of “price floor”: a minimum level of funding that a school can be reduced to, calculated based on the number of students and the percentage of disadvantaged students (such as English language learners or special education students) in the school. However, he admits that a consistently failing school must suffer some consequences, such as takeover by state or local government. There is currently not sufficient data, he says, as to the most effective way to rehabilitate a failing school.

Another method for creating incentives is to give parents choices as to where they send their students. A public school district is a monopoly on free education. Alternatively, the government could fund other school options but keep them separate from the public schools in order to encourage competition. If the independent schools do better, then more parents will want to send their children there, and this will force the public schools to stay competitive.

Controversy: Hanushek’s Opponents

Hanushek says that if all these reforms were to be enacted, then we would see real market-driven competition in the public schools, which would enforce efficiency and continuing improvement in the system. Hanushek’s argument is one side of the current debate on school reform: his opponents argue that none of these policies will be effective, and many of them will actually harm the system.

For example, critics say that standardized measures of student performance, such as the statewide tests required by No Child Left Behind, are not very good indicators of how much a child is learning. How can you measure something like love of learning, or the influence of an inspiring teacher? In a similar vein, much of the expansion in school personnel hiring has been in electives: art and music and other hard-to-quantify subjects. It’s good to spend money to teach such things, these critics argue, even if they don’t show up in standardized reading and math scores.

Additionally, it’s quite common even in the private sector for workers to be paid at a standard rate, rather than by how effective they are. A barista at a coffee shop, for example, is usually paid based on how much experience they have and not by how much coffee they sell in a given day. There are strong non-financial incentives to do a good job, especially in teaching. Critics say that adding additional financial incentives will not create any more motivation to teach well and will only foster mistrust and envy among teachers.

More importantly, the critics say, a free-market public school system always comes back to the question of what happens when a school fails. If a coffee shop goes out of business, all the neighboring coffee shops will pick up its old customers, but it’s not easy to shut down a school and send all the students to other schools. One method is to fire all the teachers and administrators and hire a completely new staff, but even then there’s no reason to expect the new organization to perform any better. The inevitable problem is that someone has to be taught by the least-competitive schools. In the free market, a successful business can charge more for its services, forcing more budget-conscious consumers to buy a cheaper, inferior product elsewhere. But in a public school system everybody pays the same amount: nothing. If the top-performing schools get to attract more funding and better teachers, then how do you decide who has to go to the worst-performing schools?

The very mission of a public school system, according to these critics, is incompatible with the free market. In their eyes, reformers like Hanushek simply don’t understand what public schools are trying to do. It’s quite possible that Hanushek (and conservatives in general) have a very different idea of what public education ought to be. If Hanushek would prefer to see a system of heavily subsidized private education, then that’s a very different thing from the conventional idea of universal public education.

Questions for Reflections and Discussion

1. Why do you think some people trust free market incentives so much, and other people trust them so little?

2. What’s your opinion of the role of the free market in education? What do you think of the reforms Hanushek is advocating: vouchers, charter schools and merit-based pay? Do you think a highly-regulated public school system can be efficiently run without a free market?

3. In your mind, what’s the difference between public education and a subsidy for private education?


1. Public schools have become increasingly well-funded in recent decades, despite unimproved test scores and growing cries for reform of how that money gets spent.

2. One solution is for public schools to be operated more like the private sector, which is held up as a model of efficiency.

3. These solutions are very controversial, and the debate over reform is one of the characteristic divisions in American society.

Peter Bass
© 2018 CYS

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