Education Next in Line for Deregulation

Published June 1, 2002

Would quality rise or fall if K-12 education were deregulated and opened to choice and competition? The question is at the forefront of the school choice debate.

Similar concerns about the effects of choice and competition occupied the attention of policymakers before monopolies were ended in other critical American public service industries, such as surface freight transportation, long-distance telecommunications, and the airlines.

After reviewing what’s happened with those industries and the early results from school choice, two Federal Trade Commission economists have concluded K-12 education reacts in much the same way as other key public services when confronted with competition: Performance improves and quality rises, both for those who choose alternative schools and for those who remain in the public schools.

Since the early school choice results are consistent with the hypothesis that competition improves quality, then “it is quite likely that education could be competition’s next big ‘success story,'” suggest Jerry Ellig, a fellow at the Mercatus Center of George Mason University, and Kenneth Kelly.

Ellig and Kelly’s study, published in the Spring 2002 issue of Texas Review of Law & Politics, takes note of competing claims in the school choice debate. One side says choice will elevate the quality of education as a result of competition, while the other contends choice will destroy public education as money and motivated students leave the system.

“In economist’s language,” the authors write, “the school choice debate asks whether opening up a monopoly or cartel to competition can be expected to increase or decrease quality.”

Reviewing the Record

During the past two decades, similar debates raged over deregulating public service monopolies. Proponents contended competition would increase quality as the former cartels and monopolies struggled to keep their customers. Opponents warned of dire reductions in quality as companies were forced to cut costs, and some even raised the same spectre of “cream-skimming” so often voiced by school choice foes. They warned competition would lower quality for those who remained with the former monopolist as new enterprises “skimmed the cream”—that is, took away the most profitable customers.

Ellig and Kelly review the record, concluding the experience of deregulated industries clearly indicates competition “tends to increase quality for virtually all customers, including customers who choose to remain with the incumbent suppliers.”

In support of that conclusion, they note:

  • With long-distance telecommunications, competition pressured AT&T “to deploy fiber optic cable and digital switches, both of which significantly increased call clarity and quality.”
  • Deregulation brought about improvement in truck service that was worth $2.4 billion a year to shippers, and gains in rail-service time worth $13.7 billion annually to shippers.
  • While some aspects of airline service deteriorated under deregulation, other measures of quality improved. Weighing quality improvements against reductions, the economists found a net improvement for passengers of about $11.5 billion annually.

As for “cream-skimming,” there was none in interstate trucking because there were no unprofitable customers. In the case of airlines and telecommunications, policymakers simply subsidized the unprofitable customers “at a fraction of the cost created by the old regulatory system.”

Similar Pattern for Education

Ellig and Kelly next review studies of public voucher and private scholarship programs to determine if education follows the same pattern—i.e., academic quality rising for students who choose to leave traditional public schools as well as for those who choose to stay. They found the data “largely confirm” that expectation. Specifically:

  • Three different university-based research teams found Milwaukee’s voucher program, which has been in effect more than 10 years, “either improved or had no effect” on pupils’ academic performance. None found vouchers had reduced the academic achievement of voucher students.
  • A study by Harvard University economist Caroline Minter Hoxby established that over a three-year period fourth-graders’ test scores increased more than twice as much in Milwaukee public schools that faced significant competition as in the schools that faced no competition.
  • With the Cleveland voucher program—the subject of a pending U.S. Supreme Court decision that could be a landmark in the choice movement—Indiana University researchers found vouchers had little or no impact on academic performance, while Harvard University researchers found voucher students showed significant improvement.
  • In Florida, the public schools that have showed the greatest year-to-year improvement have been those facing competition from a new state program that offers vouchers to students stuck in chronically failing public schools.
  • An evaluation of a program of privately financed vouchers in Washington, New York City, and Dayton, Ohio found that African-American students who received vouchers scored 6.3 percentile points higher on the Iowa Test of Basic Skills than their peers who applied for but did not receive vouchers. The largest gains were in Washington, DC, where 93 percent of voucher students were African-Americans. Those students’ test scores were 8 percentile points higher in reading and 10 percentile points higher in math than the scores of the demographically similar control group of students who sought vouchers but did not receive them.

The FTC economists, writing on their own and not on behalf of the agency, conclude “there is substantial evidence that school choice benefits the students who receive vouchers” and “no evidence that school choice harms the students who remain in public schools.”

Even the research teams most critical of vouchers found “at worst, no impact on the public schools.”

“The central premise of the critics of school choice—that it will ‘destroy’ the public schools—is supported by no data whatsoever,” Ellig and Kelly conclude. In fact, the record suggests choice benefits students remaining in the regular public schools, because the competition forces their schools to improve.

Boosting School Productivity

The economists also found vouchers increase schools’ productivity, which they defined as “educational outcome per dollar spent.”

In 1999-2000, Ohio spent just $1,832 for each student in Cleveland’s voucher program, as opposed to $4,910 per student in the city’s traditional public schools. Wisconsin spent $5,106 for each Milwaukee voucher student, as opposed to $6,011 per student in the traditional public schools. Because the conventional public schools receive additional subsidies from local coffers and the federal government, the actual spending disparity is far higher.

“Given that voucher schools have achieved at least the same, if not significantly better, results with substantially less money,” conclude Ellig and Kelly, “the inference arises that, if voucher schools were given the same per-pupil funding as public schools, student achievement might increase by an even greater degree.”

Robert Holland is a senior fellow at the Lexington Institute, a public policy think tank in Arlington, Virginia. His e-mail address is [email protected].

For more information …

The paper by Jerry Ellig and Kenneth Kelly, “Competition and Quality in Deregulated Industries: Lessons for the Education Debate,” is published in the Spring 2002 issue of Texas Review of Law & Politics. The paper also is available online at