What (Other) Economists Think About Democrats’ Education Plans

A recent NPR article, titled “What Economists Think About Democrats’ New Education Proposals,” caught my eye. FEE, after all, is an economic education organization that looks at how free markets and individual liberty lead to more progress, greater prosperity, and better outcomes for all than any other social or economic system ever created. I was curious what these NPR-interviewed economists might say about the Democratic presidential candidates’ education plans, which involve funneling more money into a government system of mass compulsory schooling.

What’s the Plan?

According to the article, Democratic presidential hopeful Kamala Harris wants to spend $315 billion of taxpayer money to lift teacher salaries. Joe Biden wants to increase federal spending to low-income schools with teacher pay hikes. Bernie Sanders wants to impose price controls for teacher salaries, imposing a pay floor of $60,000 for incoming teachers. To its credit, the NPR article explains that by both domestic and international standards, American teachers are already well compensated and enjoy above-average employee benefits.

But that’s not enough, according to one of the economists interviewed. Eric Hanushek of Stanford says: “I think teachers are way underpaid.” Hanushek and others argue that teachers who are able to increase student test scores can improve both a student’s lifetime earnings and contribute positively to society at large.

The NPR reporter, Greg Rosalsky, concludes: “While being a good teacher means huge economic benefits for the people they teach and society at large, teachers don’t get to fully share in all the benefits they create. In economic terms, that’s a positive externality, and it’s a big reason why we should pay them more.”

Duquesne University economist Antony Davies disagrees. Davies, the Milton Friedman Distinguished Fellow at FEE, explains that the media often misunderstands and misuses the term “externality,” as NPR did here. “Failing to share fully in the benefits one creates is not an externality,” says Davies. He continues:

The phenomenon is called “consumer surplus.” Not only does it exist in every transaction, it’s the reason we exchange with each other at all. Consider a car purchase. When a car dealer charges me $30,000 for a car for which I would have been willing to pay $35,000, the dealer does not benefit fully from the exchange. I walk away from the exchange $5,000 better off. But that doesn’t mean the dealer doesn’t benefit also. If the dealer charges me $30,000 but would have been willing to take $27,000, then the exchange makes the dealer $3,000 better off. For the exchange to occur, neither I nor the dealer can fully benefit from the exchange. Instead, we share the benefit. How we share the benefit is determined by the price to which we agree.

If teachers benefited fully from the value they create, there would be no point in obtaining an education because the entire value of the students’ educations would go to the teachers. Similarly, if students fully benefited from the value that teachers impart, there would be no point in teaching because the entire value of the students’ educations would go to the students. Instead, teachers and students share the value they create, and both walk away from the exchange better off than they were.

Davies points out a central problem with the Democratic presidential candidates’ education proposals, arguing that creating salary floors or offering universal pay increases do not address the root of the problem. He says:

The problem with teacher pay isn’t that teachers are paid too much, nor is it that they are paid too little. The problem with teacher pay is that it is largely divorced from teacher performance. Because pay schedules are usually set by the school district, principals don’t have the ability to reward outstanding teachers with greater pay nor to punish poor teachers with less.

Angela Dills, professor of economics at Western Carolina University, concurs. “I agree that better teachers should receive higher pay and that that’s more effective than across the board pay increases,” she says.

The inability to differentiate teacher quality and pay teachers accordingly limits the opportunity to reward top teachers and urge weaker teachers to improve. School leaders are not the only ones without the discretion to signal good and bad performance. Parents are also unable to offer these signals, with most required to keep their child in an assigned district school whether they like it or not. According to Davies: “Parents don’t have the ability to reward outstanding public schools and punish failing schools by diverting their tax dollars to the schools of their choice.”

A Better Alternative

Education choice mechanisms, like Education Savings Accounts (ESAs), tax-credit scholarship programs, and vouchers, allow parents to signal quality by opting out of inadequate schools and into higher quality learning spaces that work better for their children. Davies explains:

Voucher opponents claim that vouchers diminish the quality of public education by siphoning tax dollars away from public schools. But regardless of whether the quality argument is correct, the siphoning can easily be avoided. Allowing parents to send their children to any public school they choose and have the tax dollars follow the student—essentially, a voucher program restricted to public schools—would restore the link between pay and performance without removing any dollars from the public school system.

Programs like these can put parents back in charge of their children’s educations and can trigger true educational change. But the current crop of Democratic presidential candidates appears more interested in expanding the government’s ability to impose decisions on us. Empowering people to make their own choices is not in their education plans.

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Monetize Your Anger

Critics of the economics profession often accuse us of “knowing the price of everything and the value of nothing.”  But economists also often antagonize a far larger group – ordinary people who barely realize our profession even exists.  How?  By asking about Willingness To Pay (WTP).  How much extra would you have to earn to add 20 minutes to your daily commute?  How large of a fare discount would be required to get you and your husband to sit separately on an airplane?  Part of the complaint is that questions about WTP are dehumanizing.  The main complaint, though, is that monetizing emotions creates conflict.  Social ties are so important that it’s best not to price human feelings.

Perhaps.  But I can’t help but notice a wide range of cases where thinking in terms of WTP smooths social relations and defuses conflict.  Consider: In a typical day, events occur that make you angry – and angry people are unpleasant company.  When angry, many of us “take it out” on whoever’s around.  Even if you don’t, you’re probably no fun to be around when you’re angry.

What does this have to do with WTP?  Simple: Most of the daily indignities that make us angry are worth next to nothing in dollar terms.  Someone cuts in front of you in line at the supermarket.  Well, what’s your WTP to wait for an extra two minutes?  The milk goes bad.  Well, how much does a gallon of milk cost?  You don’t feel like changing the oil on your car.  Well, what does Jiffy Lube charge?  Commercials aggravate you.  Well, how much does the premium version cost?  I can’t tell you how many times I’ve seen wealthy individuals rage over $2 problems.

If you respond, “There’s a disconnect between how we feel and WTP,” I completely agree.  My point: If you value social harmony, you should try to bring your anger into line with your WTP.  Especially over the long-run, this is a choice.  When problems arise, you can train yourself to monetize them.  Strive to replace thick description of an outrage (“This jerk in a Mercedes cut me off right before the light turned red, so I was stuck at the Route 50 intersection until the light changed again – and you know how long that takes!”) with a thin price tag (“I lost $1 of time”).  This won’t instantly calm you, but with practice you will gain perspective.

Why monetize your anger?  In slogan form: Because $2 problems just aren’t worth getting angry about. Say it, believe it, and eventually you will (kind of) feel it.  It may seem Vulcan, but it will make you a better human being.

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Walter Block: Defending the Dishonest Cop (15m)

This episode features an audio essay written by economics professor and Austro-libertarian Walter Block from 1976, and which comprises Chapter 13 of Defending the UndefendablePurchase books by Walter Block on Amazon here.

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Donald Boudreaux: Cleaned by Capitalism (49m)

This episode features a presentation by economics professor Donald Boudreaux from 2013. Legend has it that capitalism might deliver lots of convenient and wonderful material goods and services, but that one of the costs of these benefits is a more polluted and less agreeable environment. This legend is false. Capitalism is history’s greatest anti-pollutant — in ways that most of us take for granted. Purchase books by Donald Boudreaux on Amazon here.

Listen To This Episode (49m, mp3, 64kbps)

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Los Angeles: Homelessness Meets Economics 101

“We can’t arrest our way out of this. We can’t shelter our way out of this. We have to house our way out of this,” Los Angeles Mayor Eric Garcetti said last year while campaigning for a measure to spend $1.2 billion in taxpayer money over ten years on housing for his city’s homeless population.

Los Angeles County Supervisor Mark Ridley-Thomas, who backed a $355 million county sales tax initiative to provide services to the homeless in the county, calls it “the height of contradiction” that homelessness is growing in a prosperous state.

The results? “The stunning increase in homelessness announced in Los Angeles this week — up 16% over last year citywide,” reports CNN, “was an almost incomprehensible conundrum given the nation’s booming economy and the hundreds of millions of dollars that city, county and state officials have directed toward the problem.”

There’s nothing “stunning” or “incomprehensible” about it.

Eric Garcetti, Mark Ridley-Thomas, meet Ronald Reagan: “If you want more of something, subsidize it.”

Los Angeles is already an inherently attractive destination for the homeless for several reasons ranging from climate (homelessness in, say, the midwest can mean freezing to death if you can’t find a shelter bed) to jobs (large metro with lots of employers) to transportation (mass transit for those without cars) to an already larger concentration than rural areas of both private charities and government services aimed at their problems.

What did Ridley-Thomas and Garcetti EXPECT to happen when they announced their plans to stack hundreds of millions of dollars in new government assistance on top of those inherent attractions?

If I was homeless in the western United States, I’d make a beeline for LA. You probably would too.

Garcetti is correct that housing is key to reducing homelessness. But  “free” or subsidized housing attracts people who want to live in it faster than it can be built.

If Garcetti and Ridley-Thomas want to address homelessness with housing, they should get to work reducing tax and regulatory burdens — everything from zoning regulations to permit requirements to rent control ordinances  —  that make it more expensive, difficult, and time-consuming, and less profitable, to build new housing in Los Angeles than it should be.

Unfortunately, however good their intentions, politicians hate giving up any amount of power and control over any activity. LA’s politicians will probably just continue pouring gasoline on the fire and wondering why it gets hotter instead of burning out.

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Trade, Tariffs, and some Basic Economics

Why does trade occur? Fundamentally, trade takes place in order to better the lives of those participating in the trade. You trade money for food because you are hungry and money doesn’t taste very good. Each party values what they are trading away less than what they are receiving in return. That is why the trade occurs.

Another way to look at trade is that it increases efficiency. As people (and companies) trade, they move closer toward an optimized equilibrium. There is an economic principle known as marginal utility. The idea is that the more of a thing one consumes, the less valuable each subsequent unit of the thing becomes. If you are hungry, a hamburger may be very valuable to you. You might even be so hungry that a second burger sounds good too. But how about a third or a fourth burger?

If you were willing to pay $10 for the first burger, does that mean that you would also be willing to pay $100 for ten burgers? Of course not. The utility of the tenth burger is far below that of the first. The reason this is relevant to efficiency is because trade allows people who have more of something than they need to transfer it to someone who values it more highly. You were willing to pay $10 for a burger. Presumably so are others. You aren’t willing to pay $100 for ten burgers. What about $50 for ten burgers? It’s a better deal on a per-burger basis, but you still aren’t hungry enough to consume ten (or even five) burgers.

What to do with all those extra burgers? Trade, of course. At $5 per burger, you can now trade them to people who want them enough to pay $10 a burger and make a nice profit in the process. By the time the trading is complete, everyone in the room will have had a burger and everyone will be (presumably) more satisfied than they were before the trades occurred.

Another important economic principle here is the subjectivity of value. Value is not an intrinsic quality of a good. It is an externally ascribed quality that is unique to each individual. A burger is not objectively ‘worth’ $10. It is ‘worth’ only what someone will pay for it. If you are willing to pay $10 for a burger, that means you value that burger at a minimum of $10. Someone else might value a burger at $8. This means they would pay $8 for a burger, but no more.

So what does all of this have to do with tariffs? As we already discussed, trade increases efficiency. It allows people to balance their subjective values and surplus goods as the economy (which really just means all the people in the economy) moves ever closer to that optimized equilibrium. It never reaches 100 percent optimization, of course, because people’s wants and needs are always changing.

Government intervention in the economy reduces efficiency. Every tax (and a tariff is just a tax) and regulation serves to decrease the efficiency of trade. Remember the $5 burger you sold for $10? Now imagine a 10 percent sales tax being added to it. Now you either have to sell the burger for $11 to get the same $5 profit or you can still sell it for $10, but only receive $4.09 in profit. Either way, efficiency is lost because some of what is being traded is removed from the equation. In the next trade, either you or your customer (or both) will have less to spend.

In a free market, the more trades the better because even trades that only increase efficiency slightly are worthwhile. In a market saddled with government intervention, the loss added to every transaction makes some previously beneficial transactions impractical. The more taxes or tariffs that are added to transactions, the fewer transactions occur and the less efficient life becomes.

Some people who advocate tariffs believe in a concept called protectionism. This is the idea that if the inefficiencies of high taxes are added only to some goods (or to certain suppliers) of these goods, it will protect other goods or suppliers. Imagine that the 10 percent tax added to the burgers only applied to beef. Turkey burgers could be sold tax-free. This might seem to benefit sellers of turkey burgers as some consumers would see turkey as an acceptable substitute good for beef.

Why is this a bad idea? There are several reasons. The first is that the burger market with the tax on beef is still less efficient than the burger market with no taxes at all. The second is that the consumers who opt for turkey instead of beef just to avoid the tax are not as satisfied as if they had their first choice. A third reason is that the artificial advantage given to sellers of turkey burgers will discourage them from seeking out greater efficiencies or improving their quality or customer service. They don’t need to make these improvements, as their products are already cheaper thanks to the protectionist tax system.

Prosperity is maximized when efficiency in the market is maximized. Your dollars go further, your trades are more beneficial, and your options are expanded. On the other hand, wellbeing is reduced as government intervention increases. Every obstacle which is erected in the path of trade reduces the efficiency that promotes prosperity.

Regulations are another form of mandated inefficiency that governments may inject into an economy. Imagine a new law which requires that every burger be sold with a bib. Who would want such a thing? The bib industry, of course. They would love this idea. Such a mandate might be justified as “saving thousands of jobs in the bib industry,” but would that actually improve the economy?

At first glance, it might appear so, but what is seen is often dwarfed by what is unseen. All the money spent buying unwanted bibs would be diverted from other uses. Every dollar that is spent requires forgoing other options. These rejected alternatives are the opportunity cost of your decision. A dollar spent buying a useless bib can’t be spent on something else that is more desirable or productive. These lost opportunities make the bib mandate a net negative for the economy, diverting resources that would have otherwise been used more efficiently.

There are more problems with the bib mandate, however. A protected industry has little reason to innovate or seek out greater efficiency. The bib industry protected by our hypothetical mandate would have no reason to improve their unneeded product or to adapt their industry in response to consumer demand. Those employed in it would not learn new skills or make any meaningful contribution to human wellbeing.

What of trade deficits? Advocates of tariffs often cite a supposed trade deficit as a justification for intervention in the economy. In short, a trade deficit is the amount by which a country’s imports (typically from one country) exceed its exports (to that country.) The idea that a trade deficit justifies a tariff is incredibly flawed, however. Think about it like this: You buy gas for your vehicle from a gas station. What does the gas station buy from you? According to the theory of a trade deficit, the total amount you spend at the gas station represents a “trade deficit” because the gas station (in all likelihood) isn’t buying anything from you. If you are like most people, the same is true of the grocery store, movie theater, and most other places you frequent.

Is this a bad thing? Not at all. On the contrary, attempting to balance your trade with every trading partner would lead to massive inefficiencies and impose all manner of hardship as you sought to trade your particular skills directly to suppliers of the goods and services required to keep you alive.

Instead, you trade your skills to those who need them, accept money in return as an intermediary, and then trade that money to sellers of the goods and services you actually desire. In this way, you maximize your earning potential by focusing on what you do best and obtain the things you need from those whose areas of expertise are different from your own. This idea is known as comparative advantage. If you are good at painting houses and not very good at sewing clothing, it makes sense to spend your time painting houses and using the money you receive for your painting to buy clothing from someone who is better at sewing. This is another way in which a free market increases efficiency.

Imagine if you had to make everything you consumed. Imagine trying to grow your own food, sew your own clothing (from cotton you grew yourself), and build your own house (from trees you cut down). Yes, people did that for centuries, but now imagine trying to do everything required for a comfortable life in the modern age. Can you make a car? A computer? A smartphone? Can you build an air conditioner or perform surgery on yourself?

Why is it that you can enjoy all of these things without knowing how to make or perform most or any of them? The answer is simple. Trade makes all of this possible. Thanks to trade, you can focus on the one thing at which you are the most skilled while still enjoying thousands of other goods and services provided by other people acting according to their comparative advantage.

Economics can be a complicated subject and many people don’t really understand why the economy works the way it does. That’s okay, but learning about economics and economic principles can also be very rewarding because it helps to explain so much about our world and about human behavior. Learning about economics also tends to make one recognize the foolishness of government intervention and central planning. Such interference not only does not improve human wellbeing, it quite literally cannot do so. The efficiency of the free market cannot be improved through taxation or regulation. The imposition of tariffs or mandates cannot get humanity closer to the equilibrium which all of our trades are chasing. The free market may not be perfect (which is ultimately a subjective opinion), but I truly believe it is as close as mankind will ever get to perfection.

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