Rationalizing School Spending: Efficiency, Externalities and Equity, and their Connection to Rising Costs

The analytical base for much of the current education discussion is built on school attainment simple years of school completed. This choice is convenient for both theoretical and empirical discussions and is undeniably useful in many contexts. Nevertheless, the central focus of current policy deliberation is quality of schooling, not quantity, and the arguments and analysis pertaining to quantity do not readily transfer to quality. The central thesis of this paper is straightforward. Much of the policy discussion about education is built on a poor understanding of the underlying structure of education and schools, but the ambiguities and uncertainties lead to systematic biases toward increased spending on schools. Evidence on high rates of return to investment in quantity of schooling are translated into increased spending aimed at improving quality, yet with little assurance of actual improvement. Similarly, concerns about equity and about externalities from schooling push spending up without satisfying these objectives. A related issue, addressed at the end of the paper, is how citizens view spending in the context of their local districts. Preliminary analysis of voting on school budgets in New York State suggests no systematic relationship between performance of schools (measured in terms of student achievement) and willingness to support proposed budgets.