Public Finance Research Paper December 8th, 2011

Charter Schools and the Three Essential Elements of School Choice

Education is the single largest expenditure item in the United States for states and local governments, but compared to other nations who spend less, U.S. students perform average or even worse. There is widespread agreement on the problematic state of education, but not so much agreement on how to remedy the situation. One particular educational woe is underperforming schools. Caroline Hoxby, a labor and public economist, suggests and advocates for three essential elements in school choice in the context of charter schools as a potential solution. While Hoxbys three elements offer very agreeable advice on how to improve schools, simultaneously, her views are biased. Using a similar argument, we can see that Hoxby omits certain implications such as the political environment, feasibility, and weaknesses of charter schools in her framework. In the U.S., most students are enrolled in public schools because there are many failures in the private education market, such that government intervention is necessary. The problem lies in the fact that education is not a pure public good, but a rival good. For instance, having more students in a classroom may lower the quality of classroom instruction. Hoxby focuses on education as a form of human capital investment and states the capital market for financing education is highly imperfect. Firstly, children have insufficient knowledge, judgment, and ability to commit themselves to the amount they want to invest in their education. As a result parents are left with the responsibility, but they too are uncertain about the appropriate level of human capital investment, which creates market failures. There is no guarantee that parents will spend the appropriate amount on education or that parents could even afford to send their children to school if not for government intervention. Furthermore, Hoxby states that human capital cannot be used as collateral (without slavery), and an individuals investment in human capital is undiversified and insuring people against risks leads to serious problems of moral hazard. There is clearly a role for government intervention in the financing of education investments; otherwise, many students would be penalized for decisions made by their parents. Hoxby analyzes school choice from a charter school perspective, because they are an alternative form of public school. Charter schools are similar to public schools in that they participate in state-wide testing and receive public funds. But unlike public schools, charters are not bound by the management structure of public schools and can freely allocate their funds as they see fit. Charter schools are fee based and funds follow the students. However charters only

get 75% of what regular public schools receive so they must be efficient with their funds. Successful charter schools are re-chartered every few years and may submit an application to expand their campus. If the charter school does not perform up to standard, the school is closed. Charter schools possess what Hoxby calls, the three essential elements in a school choice program. According to Hoxby, in order for general improvement in education investments to occur there needs to be three essential elements in a school choice program. The three elements she advocates are: 1) supply flexibility, 2) money that follows students, and 3) independent management of schools. Supply flexibility refers to that schools must be able to open, expand, and contract with demand. Hoxby argues that many governments think they are supplying school choice when they set out a certain number of public schools in fixed places and students are free to choose. However, this system poses a problem because oversubscribed public schools do not grow and cannot provide equilibrium improvements in education because there is no reward or expansion for a successful school. The second element, money must follow students, refers to the fact that should there be sufficient demand to add full classrooms or add a campus, the student fees should be sufficient to make that possible. Hoxby points out that without the money following the students, supply flexibility cannot be established. For example, some school plans in the United States only allow a small fraction of a students funding (roughly 25 or 30 percent) to follow the student when they choose an alternative public school. This situation gives schools no incentives to attract students because of inadequate funding, but also gives schools the perverse incentive to drive students away. The third element, independent management of schools, means that schools must be able to innovate with regard to pedagogy, staff compensation, organization of work, and the allocation of the budget. Hoxby cites instances where charter schools use technology to diagnose individuals learning problems or provide parents with updates on their childrens education. Because public schools lack this independence and innovation, they are unable to raise test scores like a charter school. While Hoxbys three essential elements brings awareness to public school problems and how charter schools successfully solves these problems, her paper does not address the feasibility of her essential elements or shortcomings of charter schools. Charter schools, for example, face incentives to satisfy customers (i.e., parents and students) or risk losing their place in the market (Cannata and Engel, 4). In terms of supply flexibility, Hoxby does not address the time dimension associated with opening a new school or the difficulties in closing/opening a new school. For example in Washington D.C., one charter school, KIPP, was looking to expand their campus ideally by leasing space in a closed or under-enrolled school building. However, in the end, KIPP decides to use public funds to purchase private land because negotiating with the school system was too much red tape, too time-consuming (Haynes and Labbe, 4). The KIPP example raises the question of the practicality of the expansion as well as the types of costs and resources associated with expansion, which Hoxby also does not address.

In terms of her second element, money that follows the students, Hoxby does not address the political environment surrounding the public school and sending district, the location where the student would have otherwise attended. Charter schools divert students, teachers, and tax dollars away from existing schools. For example, in Washington State, the fiscal effects of charter schools are not as apparent, but in general sending districts lose revenues under a charter policy. In an area like Washington where school finance is highly centralized, charter schools will have weaker voter support in areas with greater local resources at risk (Corcoran and Stoddard, 6). As for her third element, independent of management, Hoxby fails to mention the established cultures of the public school system, the political power of teacher unions, and the downfalls of management independence such as accountability. With regards to hiring, charter schools are often exempt from collective bargaining rules that govern teacher hiring in traditional school districts. Unions have been found to be effective in blocking or weakening state charter laws. Teachers in traditional schools may perceive school choice as a threat, and are often found to vote against policies relating to charter schools (Corcoran and Stoddard, 6). In exchange for independence of management, charter schools face a stronger sense of accountability. This accountability is twofold: charter authorizers have the option of revoking charters and charter schools need to attract students and their parents. If charter schools do not achieve satisfactory results, the authorizer may revoke the charter (Cannata and Engel, 4). Hoxby strongly advocates for charter schools because she believes that charter schools address the achievement gap, but there is not enough compelling evidence to solidify her viewpoint. Many studies show that brand new charters tend to have lower student learning gains than the average traditional public school. However, of much greater importance is the long-run performance of charter schools. Economists Hanushek, Kain and Rivkin, analyze individual student achievement gains for four cohorts of Texas students in grades 4-7 during the years 1996 through 2001. Their results show that student achievement gains in both math and reading are lower in first-year charters than the average traditional public school. However, these negative effects diminish rapidly as the charters mature. For students in charters that have existed three years or more there are no statistically significant differences in reading or math achievement gains relative to peers attending traditional public schools (Sass, 3). Bifulco and Ladd (2006) analyze achievement data for students in North Carolina over the period 1996-2002. Their dataset tracks 5 cohorts of students from grade 3-8. They find that students attending brand-new charters have lower test-score gains in both reading and math than students in the average traditional public school. Similarly, they find the negative charter effects tend to diminish as charters mature. However, unlike Hanushek, Kain and Rivkin's results for Texas, Bifulco and Ladd find that in North Carolina the negative impact of charter schools on student achievement gains is statistically significant. Sass (2006) analyzes achievement data for students in Florida from grades 3-10 over the period 1997-2002. He finds that by the second year of operation Florida charter schools are found to reach a par with traditional public schools in reading. In mathematics, charter schools that are four years old and older have achievement test scores

equivalent to the average traditional public school. The gains in terms of closing the achievement gaps is positive, but was not statistically significant. In conclusion, there are many shortcomings to Hoxbys three essential elements. Her three elements certainly address some of the inefficiencies in the school system, but at the same time these elements bring up new sets of problems within the education system. Using public schools as a control group, charter schools have produced mixed results in terms of addressing the achievement gap. Currently, the data available is not uniform enough to sufficiently represent the effect of charter schools in the U.S. Perhaps the effects of charter schools and the validity of the three essential elements of school choices will become more evident in the future. Moving forward, examination of similar education programs in other countries can be highly beneficial in improving the inefficiencies within education spending.

References

Bifulco, Robert, and Helen Ladd. "The Impacts of Charter schools on Student Achievement: Evidence from North Carolina ." MIT Press. 1.1 (2006): 50-90. Print. <http://nepc.colorado.edu/files/EPRU-0412-76-OWI[1].pdf>.

Cannata, Marisa, and Mimi Engel. "Does Charter Status Determine Preferences? Comparing the Hiring Preferences of Charter and Traditional Public School Principals." (2011): n. page. Web. 8 Dec. 2011. <http://www.aefp.cc/sites/default/files/webform/AEFP%20Cannata%20Engel%2003%2014%20 11.pdf>.

Haynes, V. Dion, and Theola Labbe. "A Boom for D.C. Charter Schools." Washington Post [Washington, D.C.] 25 04 2007, n. pag. Web. 8 Dec. 2011. <http://www.buildinghope.org/pdf/2007_04_25_dcboom.pdf>.

Hoxby, Caroline, School Choice: The Three Essential Elements and Several Policy Options, Education Forum, Wellington, New Zealand, August 2006

Sass, Tim R. "Charter schools and student achievement in Florida.." Education Finance and Policy . 1.1 (2006): 91-122. Web. 8 Dec. 2011. <http://www.aeaweb.org/assa/2005/0109_0800_0301.pdf>.