Government Spending on Education

 


Galbraith gives a compelling defense of government spending in its returns to poverty alleviation, and economic growth. In this post, I will look to see if government spending on education does lead to these aims.

First, education for the individual has a strong effect on income. Psacherapolus, in his 2004 "Returns to investment in education: a further update," estimates of the average returns to a year of education internationally at 10 percent. Psacherapolus, however, points to wide variation in the individual returns to educations across countries, from a high of 28.9 in Jamaica to a low of 2.7 in Italy.

However, returns to education may not all be the result of increased productivity, which, according to the Solow Growth Model, would actually benefit the economy. Some effect may be due to credentialling whereby people are paid more for education, likely due to the signalling effect, even though they do not actually contribute more.

First, the effect of education on cognitive development will be considered. Barnett. in his 1998 article, "Long-Term Cognitive and Academic Effects of Early Childhood Education on Children in Poverty," found that education for children under 5 from poor backgrounds increased IQ by about 8 points or 0.53 standard deviations. (I know that IQ is supposed to be a steady measurement, but that obviously doesn't work, so I am just assuming it is the same as cognitive development that could be measured as part of human capital). Similarly, Morrison, in a 1995 paper entitled "Education and Cognitive Development: A Natural Experiment," found that an extra year of school for poor children between 5 and 7 increased their IQ’s by 7 points. However, for the general, not-poor population, this effect may be smaller. In Devlin's 1997, "Intelligence, Genes, and Success: Scientists Respond to The Bell Curve," he estimates that an additional year of schooling increases IQ by only 2 to 4 points, or about 0.2 standard deviations. Thus, it seems, economic returns to education are greater for poor students.

Increased cognitive development increases incomes. Zagorosky, in his 2007 "Do You Have to Be Smart to Be Rich? The Impact of IQ on Wealth, Income and Financial Distress" found that an increase in IQ of one point increases income by between $234 and $616 per year. Thus, if for poor children get an extra year od education in early childhood, their incomes would increase by between $1638 ($234x7) and $4928 ($616x$8). This seems very significant. On the other hand, if rich kids get an extra year of school, they will get between $468(2x$234) and $2468 ($616x4) extra a year.

This leads to a policy issue. Poorer students may have less extra exposure to education outside of the classroom, and so a lack of quality education would hurt them more. If the government does not spend on education for poor students, they are unlikely to be able to afford as much quality education on their own. Thus, government spending on education, if equitable and efficient, would likely result in higher productivity gains for the whole nation than if education spending was in private hands. To clarify, I will outline this argument.

1. Education has greater economic returns for the poor and therefore would lead to more economic growth than education spending on the rich(premise, demonstrated above)

2. The government can spend on education equitably and with high quality (debatable), discussed quickly below)

3. The government provide should provide public education, with a focus on the poor.

However, translating government spending into increases in years of school completed by students is less easy. If the government adds $100/student to, say a school with a 80% drop out rate, how will this be translated into increased time spent in school? Will a better computer or extra teacher keep kids in school? It is possible, but it is more likely that it wouldn't make a huge difference in drop out rates or school quality. Thus, government's should a aim for better policies, not neccessarily just more spending. Yet, this spending should go significantly to the poor.

In summary, education spending for the poor benefits the economy as a whole and is more efficient. Thus, the government should provide public education, if they can do it well.