Next year will be the 50th anniversary of economist Milton Friedman’s seminal essay "The Role of Government in Education." Friedman argued that state-owned and state-operated public schools are not the best way for governments to guarantee universal access to a quality education. Instead, he suggested that governments allow a competitive education marketplace to develop and then ensure that all families had the means to participate in it.

Friedman’s thesis has spawned countless education reform proposals over the past half-century — education vouchers, tuition tax credits, education savings accounts — but thus far no consensus has been reached on the most effective approach. There is still no detailed agreement on the necessary conditions for stable, effective education markets.

Last Tuesday, I joined a group of economists, education policy analysts and school-choice advocates at the Cato Institute in Washington, D.C., to begin working toward such an agreement. When the panelists were asked to list the requirements for a competitive education industry, there was considerable overlap among their answers:

  • unfettered parental choice of schools;

  • minimal regulation of private schools, particularly in the area of curriculum;

  • financial nondiscrimination (state finance and tax policies should not favor government schools over nongovernment schools);

  • the use of profit-and-loss to determine the expansion of effective schools and the curtailing of ineffective schools; and

  • the ready availability of information on the relative merits of schools.

Several requirements were mentioned by some panelists and not others. Some of the economists stressed that education markets cannot function properly unless prices are determined by supply and demand. They made this case based on the widely accepted economic theory that market-determined prices are the best measure of consumers’ desires, giving producers an incentive to supply more of what consumers want, and less of what they do not.

This concern has particular relevance for voucher programs like the one in Milwaukee, where private schools must accept the state government’s voucher as full payment (and hence have no control over their prices).

My own presentation suggested a mathematical metric for rating school-choice proposals on their likely ability to create an effective education market. I drew particular attention to two of the market features measured by my metric that are potentially controversial: the expected share of education spending that comes directly from parents, and the expected level of regulatory encroachment concomitant with government spending and tax credits.

The first issue often flies under the radar. One of the most universal assumptions in education policy today is that it makes no difference whose money is spent on a child’s education. Each dollar of government spending is assumed to be equivalent in its effectiveness to a dollar of parental spending.

If that were true, it would make education policy decisions far easier. It is not.

Both internationally and historically, education systems in which parents have directly paid some or all of the cost of their own children’s education have been significantly more responsive, efficient and effective than those in which education costs have been entirely borne by the state or by some other party. The evidence for the benefits of direct parental funding is extensive and overwhelming.

The second controversial issue in my metric — regulatory encroachment due to government spending or tax credits — is more widely recognized. Everyone is familiar with the adage, "He who pays the piper calls the tune." The international and historical evidence strongly support the conclusion that school systems that are largely funded by the state eventually become largely controlled by the state. The controversial observation I made during my presentation, and which I have made previously at greater length, is that school choice based on nonrefundable tax credits may have all the benefits of vouchers (such as ensuring universal access to the education marketplace), while reducing the extent of regulatory encroachment.

Although this view is still a legitimate matter for debate and is subject to new developments, I identified two reasons for holding it. First, none of the existing tax‑credit programs has yet been forced by a court to exclude religious schools, whereas this has already happened to voucher programs in Vermont and Florida (the Florida case is being appealed). Second, an examination of existing school-choice programs in the United States reveals that a substantially less intrusive regulatory burden is being imposed on private schools under tax credits than under vouchers. These points are elaborated on in the study to which I alluded above.

The Cato conference revealed that there is much common ground among scholars on the best way to create Friedman’s "education marketplace," but that we still have some distance to go before reaching a consensus. Most importantly, we are finally making a concerted effort to reach an agreement.

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Andrew J. Coulson is Senior Fellow in Education Policy at the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.