Building a Competitive Education Industry
A Weekly Column by Myron Lieberman

Dear Reader:

Terry M. Moe's new book entitled Schools, Vouchers, and the American Public characterizes the Milwaukee voucher project as a historic event that resolved the issue of whether vouchers should be means tested - in favor of means testing. Everyone interested in school choice should read Terry's new book, but I don't share his conviction that the issue has been resolved for the next ten years or so. In fact, the following article explains why the point of view Terry espouses in 2001 was one of my concerns in 1992. What do you think?

Myron Lieberman

Just prior to the November 1992 elections, the Carnegie Foundation for the Advancement of Teaching released draft copies of a report entitled "School Choice" (Advocates React Angrily to Study Questioning Merits of Choice, Nov. 4, 1992). The report purports to be an empirical study of existing choice plans, with implications for educational policymakers. The study was limited to programs "that seek to promote school improvement through a competitive educational model in which parents select the school their children will attend." Later, it is asserted that "school choice is built on the marketplace, competitive model, yet often overlooked is the fact that schools vary greatly in their capacity to compete."

Inasmuch as the conclusions of "School Choice" are mainly critical of school choice, supporters of it have criticized the report as a hatchet job intended to damage the school choice movement in the 1992 elections. Unlike other supporters of school choice, however, I agree generally with the conclusions of "School Choice" insofar as they are limited to existing choice plans. When, however, the report discusses school choice in general, or tries to draw policy implications from existing plans, or is cited for this purpose, it is an intellectual fiasco.

To illustrate the latter point, let me discuss the Milwaukee choice plan, which receives considerable attention in the report. As enacted by the Wisconsin legislature, the Milwaukee plan included the following provisions:

• Participation in the voucher plan is restricted to 1 percent of the enrollment in the Milwaukee Public Schools. Accordingly, maximum potential participation in 1990-91 was limited to 936 pupils in grades K-12.
• Pupils who participate must be from families whose income does not exceed 175 percent of the poverty level.
• Voucher students must not exceed 49 percent of the students in any school that accepts such students.
Schools for profit and denominational schools are ineligible to participate.
• Voucher schools must accept all voucher-carrying students as long as space is available.
• If voucher student exceed the space available, applicants must be selected by lot.
• The Milwaukee school district is required to provide transportation as it would for public school students.
• The amount of the voucher was set at 53 percent of the average amount spent per pupil in the Milwaukee public schools in 1990-91 (approximately $2,500).
• Participating schools do not receive additional funds for learning disabled or emotionally disturbed pupils, as do the public schools.
• The Milwaukee public schools are protected against the loss of state aid when pupils transfer to voucher schools.

The above limitations preclude the emergence of a competitive market in education. Here are some of the reasons why:

1. The scale is too small to justify investment in new facilities or in R&D. In addition, the small scale renders it impossible to achieve economies of scale in employment, purchasing, promotion, and other basic operations.
2. The requirement that voucher students not exceed 49 percent of the enrollment in a participating school precludes expansion above a minimum level. New schools can't be established primarily to serve voucher students, and the capacity of existing schools to serve them is severely restricted.
3. Since schools for profit are excluded, educational entrepreneurs have no incentive to participate. This restriction alone would disqualify the plan as a test of a competitive market system of education.
4. The fact that schools cannot charge voucher students more than the voucher is a major deficiency. Even if the schools and parents agree that certain changes are worth the additional charges, the changes cannot be made. The automobile industry would hardly be competitive if manufacturers could not add improvements no matter how much customers were willing to pay for them.
5. The provision that the Milwaukee public schools not be weakened financially is obviously anti-competitive. The public schools have no incentive to change as long as this provision is operative. In fact there is no evidence that they did change since the voucher plan became operative.

In addition to the anti-market provisions in the plan itself, the uncertainties regarding its continuation adversely affects its usefulness as a market paradigm. For example, it is more difficult to recruit and keep good teachers as long as their funding might be discontinued by the legislature at any time.

Several private schools in the Milwaukee area enroll students under contract from the Milwaukee public schools. These private schools receive 80 percent of the average school-system expenditure per pupil, compared with only 50 percent received by schools under the choice program. Some private schools lobbied against the choice plan because they feared that it would weaken the contract program. Obviously, such private school opposition also weakened the effectiveness of a choice plan that was a basket case at its inception.

Under the Milwaukee plan, the public schools are better, not worse off when pupils transfer to voucher schools. In that case, the school district is protected amidst loss of state aid but has fewer pupils to educate. This is only one of several reasons why no self-respecting economist would categorize the Milwaukee plan as one that applies competitive market principles to education. Conceptually as well as practically, the plan is characterized by the absence, not the presence, of competition in an educational market.

Similarly, " School Choice" bases its policy recommendations on several choice plans restricted to public schools. The idea that such plans tell us anything about competition in the school industry is ludicrous; one might as well contend that the choice of cars offered by Soviet carmakers was a test of competition in the car industry.

Unfortunately, this is the level of policy analysis in "School Choice." It is the latest chapter in a policy debacle of mindboggling proportions. Proponents of school choice embraced every proposal that came down the pike labeled "school choice" as introducing marketplace competition to public education. Prestigious media, such as The New York Times and The Washington Post added to the confusion by making the same assumption. Understandably, opponents of competition in the education industry viewed the ineffectiveness of these choice plans as failures of a market system of education, which they never were. Significantly, not a sentence in "School Choice" indicates that its sponsors or authors have the slightest understanding of the requirements of a market system, and there is a great deal of evidence in it that they do not. At any rate, when the plans turned out to be ineffective because they did not foster competition, the public school interests could hardly be criticized for asserting that a market system does not work in education. An Aristophanes could hardly do justice to this comedy of errors.

Myron Lieberman is the author of Privatization and Educational Choice (St. Martin's Press, 1989, now available on line at http://www.educationpolicy.org/files/privbook/index.htm and Public School Choice (Technomic Publishing Company, 1990).