The economics of private schools

By Felix Salmon
August 27, 2009
spectacularly good comment on my blog entry about the charitable status of private schools which would more than deserve elevation as an entry of its own were it not for the fact that (s)he has gone into even more detail here and here. The main insight is that the "top" schools tend to advertise themselves and compete on the basis of how well their pupils do in exams, what universities they get into, that kind of thing. And that they can boost those numbers substantially by giving scholarships and bursaries to super-smart poorer kid

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Pockets has a spectacularly good comment on my blog entry about the charitable status of private schools which would more than deserve elevation as an entry of its own were it not for the fact that (s)he has gone into even more detail here and here. The main insight is that the “top” schools tend to advertise themselves and compete on the basis of how well their pupils do in exams, what universities they get into, that kind of thing. And that they can boost those numbers substantially by giving scholarships and bursaries to super-smart poorer kids:

UK private schools are among the best schools on the planet, and I was lucky enough to attend one. Saying that they maximise profits isn’t saying that they’re manipulative or evil or bad (I wonder if this is what’s annoying people?). They’re staffed with many lovely, caring individuals (like lots of other profit-maximising companies!), and through scholarships/bursaries they offer a great trade to smart poor kids – we’ll give you an amazing education, if you allow us to charge other kids to sit next to you.

Given that the schools would do this even if they didn’t have charitable status, it’s not clear why we’re giving it to them. As Pockets writes:

If you wanted to convince me of a private school which is acting charitably, not profit-maximising, then you’d have to describe a system where pupils take the entrance exam – and then the low-scoring poor children are offered bursaries. That’s a school which is gambling on its ability to raise standards among disadvantaged kids. But no private school does that, and with excellent reason: the cost could be lower league table results for the school.

Matt Yglesias also makes a point about private schools which I should have made initially:

They’re certainly not charities. And as best one can tell, their main impact on the common weal is negative, drawing parents with resources and social capital out of the public school system and contributing to its neglect.

You’d have to believe that New York City’s public schools would be both better funded and free of this kind of nonsense if a larger portion of the city’s elite were sending their kids to them.

There’s an analogy here to the studies showing the beneficial effects of homeownership. The problem is that two effects get mixed up: on the one hand, people who own their own homes do tend to live better lives. But on the other hand, those are the kind of people who would probably live better lives anyway, and by moving away from rental neighborhoods they effectively ghettoize those left behind. Similarly with private schools, especially in areas where a high percentage of local kids gets educated privately (like where I grew up, in Dulwich): the local public schools can be very bad indeed, despite the huge number of rich and highly-educated parents in their catchment area. To put it in economist-speak, private schools inflict a negative externality on the quality of education in the neighboring state-run schools.

Incidentally, pace another comment in the original thread, Greenpeace is not a registered charity in the UK — at least the headline organization which most people think of when they think of Greenpeace, Greenpeace Ltd, is not a charity. Not everybody in the non-profit space is a charity, and there’s no particularly good reason why all private schools should be charities, either.

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Comments
22 comments so far

“Similarly with private schools, especially in areas where a high percentage of local kids gets educated privately (like where I grew up, in Dulwich): the local public schools can be very bad indeed, despite the huge number of rich and highly-educated parents in their catchment area.”

You sure you’ve got causation the right way around there? Shitty state schools might, after all, lead to more people opting to go private.

Even if that negative externality were indeed true, you also need to offset it against the positive one. Those 10% of parents paying for their children to go private are not taking the tax money that the state sector uses. This has actually arisen as a matter of concern: the recession is leading to people abandoning private schooling and the state school budgets are strained as a result. 10% of the education budget is a large number, after all.

Finally, the real problem with what Labour is doing to the charitable status of the schools is that they’re changing the long established norms. And giving up charitable status is not even remotely feasible. You cannot take assets like buildings which currently belong to a charity and simply transfer them to another form of legal structure.

So teh wschools are entirely stuffed. They cannot give up their charitable status even if they wanted to.

Felix,

How do you know that UK public schools are amongst the best in the planet? That you are happy with your private school experience doesn’t necessarily say anything about the quality of the experience.

When, as an aging math geek, it was time to look for schools for my darling preschoolers I assumed that private must be best. I contacted the 20 year coach for the US Math Olympiad team and asked, “Which NYC schools have provided students who participated in the Math Olympiad competitions?” He gave me a list of five schools – all of them large, competitive entry public schools like Bronx Science or Stuyvesant. “What about the top tier private schools?” I asked
“Not so far” was his response.

I loved the feel of the NYC private schools that I visited. But most of them lacked the academic rigor that I remembered from (public) schools in the UK and Australia.

Now there are plenty of flaws in the NYC school system but one thing is clear: in NYC, the strongest schools with the most rigorous curriculum and the smartest students are all public schools.

Unfortunately 95% of public school children don’t get to attend one of these exceptional schools. But they do exist. There is nothing as inspiring as sitting on a school bus and hearing a second grader explain for 20 minutes, without drawing breath, “the Aaron Burr / ALexander Hamilton duel was misunderstood and really
wasn’t caused by their personal dislike but rather inevitable consequence of the rivalry between the Federalists and the Republicans, funny huh that Aaron Burr
would refer to himself as Republican but his Democratic-Republican party went on to become today’s Democratic Party ..”

Posted by Peter Booth | Report as abusive

Felix,
While I understand you’re making a policy argument, it’s worth noting that, in the U.S. at least, tax-exempt status is not limited to charitable institutions; as a matter of fact, they’re only one of the listed types of entities in 501(c)(3). An organization organized for, among other things, charitable, religious, or educational purposes or, for that matter, for the promotion of amateur athletics, is eligible for exemption from tax here, provided essentially that the money is plowed back into its endeavors rather than going to shareholders.

That is to say, in the U.S. at least, charitable institutions are only one type of tax-exempt institution, and private schools don’t have to be charitable in order to be exempt. Whether private schools should be exempt from tax is clearly up for debate, but the central issue (again, in the U.S.) is not whether private schools are charitable but rather whether they are the type of institution that should be tax-exempt.

Posted by Sam B. | Report as abusive

It’s very confusing to me why in the post you italicize ‘low-scoring’ to get across the point of ‘disadvantaged’. I’m fairly certain that the ‘poor’ part translates even more directly to disadvantaged.

Posted by Vincent L. | Report as abusive

Private schools have better scores because they can keep kids who don’t perform well out. If you are only accepting the best students, your scores will always be high. Public schools have to accept everyone, so their scores will always be low. If private schools are that wonderful, they should not be selecting who gets in. If the selection process was the same as a public school, they would have the same problems.

Posted by BB | Report as abusive

A few points here:
1) NYC schools are funded through our (quite onerous and progressive) State and City taxes (income and property), as well as Federal funding which is based on student attendance. The decision to remain in Manhattan as your kid advances to school age (upper incomes here) is a decision to continue to fund the public system through your taxes at all levels while ALSO paying 30k/year+ to AVOID using that system. (Note, this is where some among us would like to take health care.)
2) Yes, you could go ahead and ban (either by fiat or further taxation) private schools in the City, which will result in resumption of the so-called “white flight” of the 70s and 80s, as anyone who can afford it will move to the burbs. Good luck funding the City’s budget once that movie replays.

Posted by Eric B | Report as abusive

Your negative externality argument largely goes away under a voucher system. With vouchers, all parents pay taxes to support education and all get “rebates” either in the form of public schools or vouchers for other schools. So, are vouchers your answer?

Actually, there’s another group–nonprents–who presumably would oppose all school taxes, and they usually have more limited tolerance for school taxes.

Posted by Eric | Report as abusive

Yiminy.

1) that voucher argument is incoherent enough I can’t bring myself to engage it. please reread Felix’s discussion instead.
2) this isn’t so much a case of causal arrows pointing either direction as of an ecology that breeds vicious/virtuous cycles
3) public ‘private’ schools like Bronx Science in NYC or Lowell in SF have the exact same negative externalities as private private schools. that is what makes this discussion interesting. as a policy matter, since they are cheap, they also provide a smaller, positive externality.
4) the existence of charitable deductions is another very interesting topic, though to my mind a little broad for this comments thread to contain. me, I’d axe 100% of charitable deductions tomorrow if appointed benevolent dictator.
5) ‘white flight’ (in which, full disclosure, my parents participated) was not spurred by schools and its reversal would not change if in some weird counterfactual reality you banned private schools. in the real world, of course, such a ban will never, ever happen.

Personally, I am pissed that public schools in my city (SF) suck so bad. I like it here, but I have a toddler. Luckily other folks here are pissed, too, so we are starting to get good programs (e.g., Mandarin immersion) at previously terrible schools (that one is at the elementary school across the street from the local projects) which have worked wonders in keeping engaged parents sending their kids there.

The benefit to the society does not necessarily mean charity.

You take a poor bright kid, give them brilliant education, so that they can become a great engineer, or an outstanding doctor, or an influential scientist.

(Ok, geniuses might find the way, but very good basic education is what sometimes acts as the shortcut taking you to the next level. And even worse – it might consistently save you time and efforts in the future)

You take a poor mediocre kid and they might become an ordinary engineer, an average doctor or a lab assistant.

Which is the case of the money well spent?

Posted by Veronica | Report as abusive

“… To put it in economist-speak, private schools inflict a negative externality on the quality of education in the neighboring state-run schools.”

This is an abuse of the term “negative externality”. Good people make things better for the people around them. This is a positive externality. Bad people make things worse for the people around them. This is a negative externality. If good people move away and stop providing a positive externality this is not the same thing as a negative externality.

An economic externality is a secondary or unintended consequence, full stop. The existence of generic private schools (i.e., Bronx included) worsens public schools as both a secondary and an unintended consequence. I don’t think you’re ever going to get closer to the dictionary denotation than this example. Ever. Honestly, what were you thinking here?

As for the ‘poor, bright kid,’ he almost certainly never gets a scholarship and never gets into Lowell. The population from which these schools skim is that of bright, engaged, committed kids with engaged, committed, and highly price-sensitive parents. This population of kids in the aggregate does just fine even in our deeply flawed public school system. The net positive externality of private-school scholarships and Stuyvesant is to subsidize their parents for being engaged, committed, and highly price-sensitive. To the extent these subsidies change parental behavior on the margins, they are laudable. To the extent they fail, and my intuition tells me they have zero effect, the societal expenditure is entirely wasted. What does the literature say?

What little I have read indicates that if you want to educate poor kids, you need to reach their parents and engage their communities early. Early as in, before birth. By the time a bright, poor kid is two it can be, again not at the individual level but in the aggregate, substantially too late if his caregivers have done a poor job.

An economic externality is a secondary or unintended consequence, full stop. The existence of generic private schools (i.e., Bronx included) worsens public schools as both a secondary and an unintended consequence. I don’t think you’re ever going to get closer to the dictionary denotation than this example. Ever. Honestly, what were you thinking here.

You are wrong. Economic externalities are costs or benefits that are not reflected in prices.

In the case of schools good kids benefit the other children in a class, bad kids harm the other children in a class. So in a mixed class the good kids are subsidizing the bad kids. This subsidy can be removed by putting the good kids and bad kids in separate classes. Or you can charge the bad kids higher tuition than the good kids. This is removing externalities not creating them.

Vouchers should be abolished. Blacks should be forced into private schools so those private schools are abolished. They are the degenerating effect on “state schools”, whether nobody wants to admit it or not.

Private schools are a threat to America’s national security. They outright are pumping money out of the country, much like healthcare and defense.

Frauds they all are.

Posted by The Rage | Report as abusive

In the USSA, we must pay large taxes to the public school system whether our kids go there or not. If I choose to send my kids to private school, I still support public education. If I need to for financial reasons, I’ll switch my kids from private to public, and get some of my money’s worth. But I’d rather not . . .

Posted by Savage | Report as abusive

I second Sam B.: charitable purpose is not a requirement for 501(c)(3) tax-exempt status in the US. What is required is that the entity be “organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition …, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation …”.

An argument to deny private schools tax exemption in the US needs to advance some argument different from their not being charities or behaving like charities.

Posted by rkillings | Report as abusive

“Private schools have better scores because they can keep kids who don’t perform well out. If you are only accepting the best students, your scores will always be high. Public schools have to accept everyone, so their scores will always be low. If private schools are that wonderful, they should not be selecting who gets in. If the selection process was the same as a public school, they would have the same problems.”

Think about what you’re implying here. You are saying that private schools are identical in quality to public schools, with the only difference being that they only accept good students. You give no weight at all to the possibility that the school may be better. The logical conclusion from your thought process is that all schools and teachers are the same.

Why do some people find it so difficult to believe that a market-based system works for education? Regardless of the charity status of schools it should be evident to everyone that competition between schools for students is a net positive.

Posted by Vincent L. | Report as abusive

Vincent, check out my earlier blog entries here and here. I think that there’s really no “market” in schools at all.

Posted by Felix Salmon | Report as abusive

Public schools fail because of how they are operated, not because of who attends or how much they spend. Forcing people to attend or fleecing private schools will make no difference in public school performance.

Our children attended public school for a couple of years, but we now send them to private school. Why? many reasons. The public school administration was arrogant and secretive, the teachers were poor performers. The school spent up to half the time on social causes rather than education. Disruptive children were not disciplined and allowed to negatively impact the educational environment.

In summary, it was chaos, plus our kids were top of their classes and getting bored. If we didn’t get them out of there, they were going to be brought down to mediocre performance like the others. In the private school the kids are disciplined, the teachers and the administration are energetic and involved. Politics is not in the school, it is focused on core education with outstanding specialty classes around real educational related subjects. It is how I remember my public school.

The public school spent more money per pupil than the private, had a lot of parental involvement (though they limited it), significant additional donations, and great facilities. But none of that mattered because of how it was operated and the amount of mushy social topics that took time from core educational items. We had zero influence in how it was operated so we left it.

Therefore, it was easy to conclude public education is a broken model. The oversized power and resource drain of the centralized education bureaucracy pushing its social agenda needs to be removed and put in the hands of education consumers. The only real solution is to provide vouchers and let parents decide the schools and programs best for their children. Here on the ground it is obvious anything else will result in another failed leftist program, with children as the victims.

The big question is why do people really want to force children into broken public schools and not let them choose much better solutions? Seriously, why?

Posted by ray | Report as abusive

It is so arrogant and ignorant to say that “UK private schools are among the best schools on the planet, and I was lucky enough to attend one”. How on earth do you know that?

Take a look outside of the UK and see how rigid and how lacking in “rigor” the UK system is and how little creativity and innovation has come from ‘the best school on the planet”

Take a good look at yourself.

Lots of points made here, many good, a few (IMHO) misguided. I’ll third, or fourth or whatever we are up to, the point about charitable status not equaling qualifying for tax-exempt status in the US. (Many of our private schools have a religious affiliation, which could be tax-exempt without necessarily being charitable.)

It’s too bad that so many seem to think that we pay taxes today to make public school available to our personal kids, and then get grumpy if we don’t actually have kids or if our kids aren’t in public school. I think of it as paying back the debt I incurred for the public school education that was made available to me as a kid (even though I didn’t always go to public school).

There are a lot of good reasons vouchers didn’t catch on in the Reagan administration, let alone now. One of them is that a lot of the best schools aren’t likely to accept them. These schools already make financial aid available, have endowments and don’t want to come under more government oversight than they already have or set up the paperwork to deal with vouchers from (dozens? hundreds?) of school districts. If you don’t believe me, call up Andover and ask the admissions office what they think about getting paid in vouchers.

Posted by SelenesMom | Report as abusive

This is a great example of someone who has received a better than average education. Although public schools provide the opportunity, the motivation and the broader aspects of a whole approach is often left to the parents. Such things as sporting, music, the arts are all added extras in the public system. Social diplomacy is also another area that is not explored to its fullest potential in the public schools. Province schools pay for the expectation that students learn social behaviors, are confident and also skilled in many activities outside of the class room. Our ABC although important, are not the single factor that ensures a stand out success for the individual.
Claire
http://www.schoolstickers.co.uk/

Posted by clairehodges | Report as abusive
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