Financing America’s Public Schools Ethically

america's public schools

By: Mark Anderson


America has fallen in rankings in several metrics.  The US healthcare system is the least accessible and efficient, and US citizens the least healthy of any developed nation in the world. We rank 6th in median household income and 10th in per-capita GDP. In this article I look into one of America’s worst failing institutions: its public education system. American students rank 24th in terms of achievement, even though we have the 5th highest rate of per-pupil education spending of any nation in the world [1]. Our society knows the importance of high quality public education programs, and is willing to bear the cost. The issue is that we have not been able to efficiently convert educational funding into academic achievement.

While many of the sociological issues produced by the U.S. public education system, such as minority marginalization and curtailment of social mobility, have riveted public attention, I analyze America’s educational investment policies from a different angle – an economic perspective. The goal is to demonstrate the American public school system is able to produce superior educational outcomes and social returns on investment by simply reallocating funding for public education programs in a more efficient way. In my analysis, I break down the education system into two sections, grade school (Preschool through 12th grade) and higher education programs. For each, I analyze educational human capital policy to answer the question: given a scarce quantity of funds for educational investment, how should money be allocated in order to reach the utilitarian aim of creating the greatest amount of good in America society? I describe how school funding is allocated in the status quo and how these methods deviate from the optimally efficient allocation policies.


Overview of Human Capital Policy and Public School Investment Strategies for Grade School Programs

The foremost question here is whether educational funding is positively correlated with student achievement. If it is, then we must ask why American students have not performed better than their peers abroad despite greater funding. If it is not, we could reduce education spending without adversely affecting student achievement. A research project, which assesses the value of federally funded preschool programs provides a compelling answer.

In 1962, the federal government created the Perry Preschool program to gain a better understanding of the association between educational outcomes of children in low-income communities and the quality of public schooling available to them [2]. The program took a population of three to four year-old children whose intelligence quotients were at least one standard deviation below the mean and showed no signs of mental retardation, and randomly assigned them to either a treatment or control group. Children assigned to the treatment group attended a half-day preschool program and their guardians attended parent-teacher conferences each week for eight months of the year. Thirty years after the program was first launched Steven Barnett of the National Institute for Early Education Research surveyed the participants from the experiment to examine the lasting effects of the Perry Preschool Program: his findings are quite extraordinary. Children from the treatment group attained better results on achievement tests, as well as more desirable educational, occupational, and social outcomes than did members of the control group. 67 percent of the treatment group graduated high school, compared to 49 percent of the control. The program also had an astonishing effect on students’ criminal outcomes: 31 percent of the treatment group had been arrested, compared to 52 percent of control group. According to Barnett, “a remarkable two-thirds of the social benefit derived from Perry…is due to a reduction in crime and associated costs” – a predictable finding given high school graduates are 30 percent less likely to participate in crime than non-graduates, and it costs taxpayers $142,000 to keep someone in jail for the duration of an average sentence [3]. The projects estimated real rate of social return was an astounding 11 percent.

Just how big is an 11 percent ROI relative to other prospective investments? Considerable. To put those figures into perspective, the historical real rate of return on investment in the stock market is 6.3 percent. And thus it seems educational funding (at least when used to pay for preschool programs for students who could not enroll in them otherwise) is not only positively associated with student achievement, but also generate a myriad of favorable externalities – such as the aforementioned crime-reducing effects – which ultimately save our government more than the costs of the programs [4]. The next question I address is, “how can a given quantity of educational funds be allocated amongst public schools to generate the greatest amount of good in American society?”

Which Student Demographics Boast the Highest Social Returns on Educational Investment – Where Does Funding Matter the Most?

Chicago Economist James Heckman summarizes existing literature on grade school programs as human capital policy: “It is clear that returns to education and training are at least as big at the bottom of the income distribution as at the top” [5]. Investments in educational programs for the underprivileged yield higher ROIs for several reasons – reasons underscored by another government project, the Tennessee Student-Teacher Achievement Ratio (STAR) experiment.

So just how much higher is the real social ROI for educational programs for underprivileged youth? The STAR experiment, which randomly assigned 11,600 students to “small” and “regular-sized” classes to measure the association between class size and academic performance, provides a compelling answer. Ignoring externalities like crime reduction effects of educating the poor (which are substantial, as mentioned in the previous section) and looking solely at returns attributed to changes in future earnings, Alan Krueger reports the internal real ROI on placing students in smaller classes was 6 percent for all students overall, but 8 percent for African American students who are disproportionately impoverished (48.5 percent of African American students live in poverty nationally, compared to 14.5 percent of Caucasian children) [6]. Additionally, the real ROI in educational programs for students who received “free-lunch” vouchers (for the sake of analysis, I use enrollment in free-lunch programs as a proxy for poverty) is higher than that for all students combined, but lower than that for African American students. In sum, the STAR experiment affirms the ROI for educational investment in poorer students is higher than that for wealthier students, even when positive external effects of educating the poor are not taken into account.

These findings are statistically significant, consistent with the existing literature on educational human capital policy, and affirm that our society would benefit from investing in the educations of impoverished and marginalized students. These findings are most easily explained by the economic concept of diminishing returns. Students from wealthier families with more educated parents have a myriad of resources available to them that are conducive to educational development to which their poorer peers do not have access. These resources include parents who have free capital to invest in their children’s education, are able to spend more hours at home with their children, and provide both household and community environments that place greater emphasis on education. Since wealthier students have such a vast array of educational resources available to them from birth, subsequent investments in their education will improve their performance less than they would for their less privileged peers.

Efficiently Producing Academic Achievement – How Can Individual Public Schools Make the Most of Their Money?

Although the U.S. spends the 5th most amount of money of any country per-pupil, American students rank 24th in achievement [7]. Considering educational funding certainly correlates with student achievement across American public schools, we must ask, why is it educational investments do not increase American students’ achievement as effectively as they do for peers in other nations?

One answer is the American public education system places little emphasis on the most important classroom resource of all – its teachers. We spend more than is required to run a world class education system, we just have a hard time putting our money where it counts. Finland and South Korea have the most efficient education systems in the world and take the first two spots for student performance [8]. Aside from efficiency and excellence, the two nations have another factor in common: both regard quality of instruction with utmost importance. South Korean teachers receive higher compensation than teachers anywhere else in the world, are recruited from the top five percent of their high school graduating classes, and are selected based on their performance on a highly competitive teachers examination [9]. In Finland, teacher education programs also are highly selective, with a mere ten percent of applicants being accepted into teacher education programs. Once accepted to a program, teachers must earn their master’s degree, major in education, and minor in two primary school curriculum related subject areas. Though teachers in Finland receive higher compensation than American teachers, the Finnish government also pays for them to attend teaching programs, and has them work an average of 600 hours a year, compared to the 1100 hours American teachers work annually [10]. South Korea and Finland both attribute their high levels of academic success to their emphasis on teacher quality, and the statistics back them up. In an interview with President Barack Obama, economist Joseph Friedman revealed that replacing an average teacher with a “top 5 percent” instructor in a single class increases lifelong earnings of class students by an average of 1.5 million dollars – a return that greatly exceeds the cost of teacher training programs [11].

While students in Finland and South Korea perform better than American students, both countries spend less money per-student than the United States. The remedy is simple: allocate more educational funding towards teacher training programs as well as teacher salaries and job perks which will make teaching positions more desirable and competitive, and less towards sources that do not seem to affect academic performance like football programs which cost schools an average of $230,000 each year, and costly building renovations [12].

America’s Existing Human Capital Policies and Public School Investment Strategies: How is Money Allocated Amongst Public Schools in the Status Quo?

Though investments in underprivileged children’s education boast higher social returns than investments in wealthier children’s education, unfortunately “schools with higher percentages of students from poverty receive lower per-pupil funding” [13]. This sub-optimal allocation is occurs at the state and district levels. In the status quo, state and municipal governments provide 50 and 41 percent of school funds, respectively [14]. Municipal government agencies also determine how funding is allocated amongst the state’s districts, and amongst the schools within those districts. Eduardo Porter of the New York Times writes, “The inequity of education finance in the United States is a feature of the system, not a bug, stemming from its great degree of decentralization and its reliance on local property taxes” [15]. As long as educational funding is apportioned according to schools’ geographic location, the value of local real estate, and other factors unrelated to students’ projected returns on educational investment, America’s public education system will continue to produce inefficient outcomes, and sub-optimal returns on investment. It is no wonder the United States ranks below more than 20 other countries in terms of education quality, despite spending more money per-student than any other nation in the world.

The remaining 9 percent of funding is provided by the Federal government, which actually does allocate more money to schools with higher concentrations of students from low-income families, in accordance with its Title 1 policy. Unfortunately though, state monitored tax levy and operating funds disproportionately favor schools with students from wealthier families heavily enough for aggregate school funding to favor schools with fewer underprivileged children. In fact, 40% of low-income schools don’t even get the funding they are legally entitled to by Title 1 policy [16].

While inefficient allocation policies produce rampant inequalities amongst a state’s districts, and then amongst a district’s schools, the same sub-optimal allocations also are manifest on a state-by-state basis. Harvard professor Jennifer L. Hochschild explains how the amount of public funds invested in a student’s education is largely based on which state they happen to live in. Furthermore, Hochschild writes that students in states that provide greater per-pupil funding have higher propensities to succeed than their peers in states that provide less funding:

“It begins with states. Children in Iowa, New Jersey, Massachusetts, and North Dakota have more than a 50 percent likelihood of enrolling in college by age nineteen, but children in Florida, Arizona, Alaska, and Nevada have less than a 30 percent chance. Fewer than three percent of students in Wisconsin, North Dakota, and Iowa drop out of school; more than seven percent do in Louisiana, Arizona, Georgia, New Mexico and Nevada. Overall, about a third of the variation in students’ achievement is determined by what state they live in” [17].

The methods of allocating public education funds exercised in the status quo are determined on a state-by-state, district-by-district basis that encourages narrow-minded allocation methods that breed inefficiency and inequality. The obvious and simple resolution to this problem is to impose regulations for school funding at the federal level which demand more equitable and efficient allocation. This specifically entails higher per-pupil funding in schools with more impoverished students, and provisions that endow students the same quality of education and opportunities, regardless of their geographic location.

America hasn’t been faring well in terms of teacher quality either. If teachers decide to enroll in educational training programs, they are forced to pay for them. American teachers also are forced to work almost twice as many hours each year than their peers in Finland, despite being paid less. Put bluntly, being a teacher in America is a pretty bad gig and, consequently, landing a teaching job is uncompetitive. In 2011, 43 percent of American teachers had a master’s degree in education, compared to 100 percent of teachers in South Korea and Finland [18].

The Center on International Educational Benchmarking summarizes the shortcomings of America’s educational investment policies for grade schools quite nicely

“The top-performing countries spend more on the hardest to educate students, while the U.S., alone amongst the industrialized nations, provides the most money for the students who have the most advantages. And they spend less than we do on fancy school buildings, glossy four-color textbooks and intramural sports, and more on paying and training teachers well. That is why they get more for their money than the U.S. does [19].”


Overview of Human Capital Policy and Public School Investment Strategies for Higher Education Programs and Labor Market Implications of Imperfect Educational Investment Policies

In this section, I address strategies that could eliminate two major sources of labor market inefficiency: (1) policies that prepare students for higher education based on factors unrelated to the students’ prospective labor market potential or ability to perform in high-skill occupations, and (2) short-run credit constrains which disproportionately affect students from poorer families who enroll in college and university programs.

We must acknowledge perfectly competitive and efficient labor market conditions cannot be achieved unless students from all demographics have the same propensity to achieve in school, enroll in higher education programs, and attain desirable or “prestigious” labor market outcomes. Think of a basic free market model. The most competitive firms prosper and are gently lifted to the top by the invisible hand of the market. Now imagine that instead, firms are granted government subsidies based on parental wealth and the location in which they were born. Subsidies in place, less efficient firms that were granted larger subsidies gain an edge over more competitive firms with smaller ones. The best firms no longer rise to the top – the market has become inefficient.

America’s public education system produces analogous labor market outcomes. Like the market of subsidized firms, the education system stifles competition and prevents the free market from guiding people towards positions in the labor market that most appropriately reflect their abilities. Only when all individuals are granted equal opportunities to succeed will the most talented students be placed in the most skill-intensive occupations. We will know we have appropriately reallocated once this becomes the case.

Enrollment in Higher Education Programs: the Role of Short Run Credit Constraints

There is a strong relationship between family income and college enrollment. Kruger attributes this to the fact that students from wealthier families are less deterred by the cost of enrolling in higher education programs, and also have access to both higher quality grade school programs and better environments that foster cognitive and noncognitivetive skills, than their less-wealthy peers [20]. While the second cause can be remedied with investment policies that allocate more funds towards poorer students’ education and close the gap in educational opportunity, the problem posed by short-run credit constraints can only be solved by restructuring the way students are selected for higher education programs.

In an optimally efficient secondary education system, it must be the case that short-run credit constraints do not disproportionately burden individuals in poorer families. Otherwise, some more employable members of credit-constrained families will become less likely to enroll in educational programs than other, less employable members of well-endowed families. The only way to sever the link between parental wealth and a student’s educational investment is by restructuring the American education system into a purely public institution that grants opportunity solely based on merit. In other words, an efficient higher education system cannot admit students based, in part, on their ability to pay tuition. This, of course, only holds in an educational system that grants all individuals equal educational opportunities up to the point when they apply for enrollment in higher education programs.

Instead, an efficient education system would place the most “employable” students in higher education programs – employable being operationally defined as a function of both cognitive skills and noncognitive skills like persistence, social skills, creativity, self-control, and other attributes that improve a person’s ability to contribute in societal contexts [21]. To articulate, a first-best method must invest in individuals training for high-skilled occupations based on their ability to perform in high-skilled occupations since “the annual return to college is higher for persons with greater ability”, and giving more students an opportunity to compete for enrollment in higher education will cause a more talented group of students to be placed in these positons [22]. Though these policies allocate funds more efficiently, they necessarily entail that we will invest less in more privileged students educations because these students’ life chances and labor market outcomes correlate less with their schools’ endowments. They also require the American public invest fewer education funds towards students who are most likely to be employed in low-skill occupations, as additional schooling will not improve their ability to contribute to the work force.

Though many will find these policies dark and unsavory, their efficacy is clearly affirmed when we consider the alternative funding allocation policies exercised in the status quo: basing the amount of money invested in a student’s education, and her eligibility for enrollment in higher education on 1) the state in which she happens to live, and 2) how wealthy of a community she lives in. Both methods advocate our government invest more money in some students’ educations than others. However, the ones proposed in this paper base investment decisions on students’ prospective returns on educational investment. By the policies upheld in the status quo, many students destined to eventually work in high-skilled occupations will receive worse academic training than other students destined to work in low-skill occupations, simply because the high-skill destined student is poorer or lives in a state which places less value in educational programs.

Enrollment in Higher Education Programs: Methods Exercised in the Status Quo

American Colleges and Universities admit students based on their cognitive and noncognitive abilities. Because of rampant inequalities in our grade school system though, these evaluations reflect the quality of education our American government has provided a student more than anything. To articulate, the United States government determines how the quality of cognitive and noncognitive training a student will receive, and then universities admit students based on their abilities, which primarily reflect which educational program to which they were assigned. It is no wonder minority students are unrepresented in higher education when mostly non-white schools receive $773 or 16.3% less funding per-student than predominantly white schools do [23].

Once granted admission to a college or university, American students must decide if attending college is worth the costs of attendance. Several problems can be attributed to this pay-to-attend system, some more obvious than others. First, higher education is a more risky and significantly more costly investment for poorer students. “Seven percent of college graduates earn ex post negative returns” meaning that for these students, enrolling in college ends up being a financial error [24]. For students from poorer families, the financial risk associated with educational investment is higher because tuition payments require a larger proportion of their families’ incomes, and therefore pose ta greater financial burden. Thus, as it is less sensible for a financially strained household to invest thousands of dollars per year in some promising financial asset, it is also less sensible for them to invest in a college education. Eight percent of American students are unable to enroll in higher education due to financial limitations [25].

Moral Analysis of American Educational Investment Policies

The most palpable consequences of public school inequality manifest as sociological issues. Poor children are relegated to second rate schools as the government effectively condemns them to lives of underachievement and poverty because of the circumstances into which they were born. Simultaneously, wealthier families are motivated to steer clear of poorer communities in order to save their own children from the same cruel fate. Is a system that perpetuates intergenerational wealth and provides children with opportunities based on what family they happen to be born in really different than the feudal systems of old? And is a system that, in practice, places 96 percent of black students in predominantly non-white schools which receive less per-student funding than their predominantly white counterparts fundamentally different than the disavowed “separate but equal” policies our nation sought to abolish some 60 years ago [26]? Especially considering that American public schools are currently more segregated than they were 40 years ago [27]? I think not. There is no reason a society with a deontological commitment to social equality and providing all people the ability to succeed and prosper might believe otherwise.

A utilitarian analysis is more pertinent to the points made in this article, but equally condemning. Using money as a proxy for utility, our current education system does not create the greatest amount of good for our society: it doesn’t even try. Rather, the current system is one that willingly reduces overall social utility in order to provide greater opportunities to the most privileged members of our society at the expense of the impoverished.





[1] Sherman, Amy. “Does the United States Spend More Per Student Than Most Countries?” Politifact, April 21, 2015. Web.

[2] Currie, Janet. “Early Childhood Educational Programs.” Journal of Economic Perspectives 15.2, (Spring 2008): 213 – 238. Web.

[3] Jacobson, Michael. “The High Cost of Prisons: Using Scarce Resources Wisely.” The Crime Report, February 12, 2012. Web.

[4] Lochner, Lance. “Education, Work, and Crime: Theory and Evidence.” Rochester Center for Economic Research Working Paper No. 465, University of Rochester, October 1999. Web.

[5] Heckman, James J., Alan B. Krueger, and Benjamin M. Friedman. Inequality in America: What Role for Human Capital Policies? Cambridge, MA: MIT, 2003. Print.

[6] “Fact Sheet – Poverty.” The State of Working America. Economic Policy Institute, n.d. Web. /fact-sheets/poverty/

[7] “PISA 2012 Results” OECD. OECD, n.d. Web.

[8] “New School Values.” Economist, September 13, 2014. Web.

[9] “South Korea.” Center on International Education Benchmarking. Center on International Education Benchmarking, n.d. Web.

[10] “Finland.” Center on International Education Benchmarking. Center on International Education Benchmarking, n.d. Web.

[11] “Is America’s Education Problem Really Just a Teacher Problem? Full Transcript.” Freakanomics. Freakanomics, November 27, 2014. Web.

[12] “Poll: Does Your Town’s School District Spend Too Much on Football?”, October 21, 2014.Web.

[13] Schwartz, Amy Ellen, Ross Rubenstein, Leanna Stiefel. “Why Do Some Schools Get More and Others Less? An Examination of School-Level Funding in New York City.” Institute for Education and Social Policy. New York University, November 18, 2009. Web.

[14] Morial, Marc. “Public School Funding: Separate and Skewed.” Common Dreams. Common Dreams, December 6, 2010. Web.

[15] Porter, Eduardo. “In Public Education, Edge Still Goes to Rich.” The New York Times, November 5, 2013. Web.

[16] “More Than 40% of Low-Income Schools Don’t Get a Fair Share of State and Local Funds, Department of Education Research Finds.” U.S. Department of Education, November 30, 2011. Web.

[17] Hochschild, Jennifer L. “Social Class in Public Schools.” Journal of Social Issues. Harvard University, November, 2003. Web.


[19] “Ten Myths About Education in the U.S. and What It Will Take to Fix Our Schools.” Center on International Education Benchmarking. Center on International Education Benchmarking n.d. Web.

[20] Heckman, James J., Alan B. Krueger, and Benjamin M. Friedman. Inequality in America: What Role for Human Capital Policies? Cambridge, MA: MIT, 2003. Print.

[21] Garcia, Emma. “The Need to Address Noncognitive Skills in the Education Policy Agenda.” Briefing Paper #386. Economic Policy Institute, December 2, 2014. Web.

[22] Heckman, James J., Alan B. Krueger, and Benjamin M. Friedman. Inequality in America: What Role for Human Capital Policies? Cambridge, MA: MIT, 2003. Print.

[23] “Students of Color Still Receiving Unequal Education.” Center for American Progress. Center for American Progress, August 22, 2012. Web.

[24] Heckman, James J., Alan B. Krueger, and Benjamin M. Friedman. Inequality in America: What Role for Human Capital Policies? Cambridge, MA: MIT, 2003. Print.

[25] Heckman, James J., Alan B. Krueger, and Benjamin M. Friedman. Inequality in America: What Role for Human Capital Policies? Cambridge, MA: MIT, 2003. Print.

[26] Jordon, Reed. “America’s Public Schools Remain Highly Segregated.” Urban Wire. Urban Institute. Urban Institute, August 27, 2014. Web.

[27] Strauss, Valerie. “Report: Public Schools More Segregated Now than 40 Years Ago.” The Washington Post, August 29, 2013. Web.


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