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The New Frontier for School Choice

January 1, 2016 - 12:57pm CST

Nevada’s new school choice program is getting national attention because it’s the first in the nation to provide universal school choice. However, that’s not all that’s new about it. It’s also an Education Savings Account (ESA) program, which is the new frontier in school choice programs.

Five states have adopted this improved model so far. If Oklahoma is looking for a way to improve education without spending any extra money in the midst of a looming budget shortfall, it couldn’t do better than creating ESAs.
At first, all school choice programs—and even all school choice proposals—were vouchers. These programs provide parents with a voucher they can redeem for tuition at a private school, up to a fixed maximum amount. Maine and Vermont have had this system in small towns since the late 19th century; they’re called “town tuitioning” programs but they’re identical in design with what we call “vouchers” today.

Proposals for school choice systems in the works of John Stuart Mill and Thomas Paine are also recognizably vouchers. Mill defended his voucher proposal in On Liberty on these grounds: “A general state education is a mere contrivance for molding people to be exactly like one another: and as the mold in which it casts them is that which pleases the predominant power in the government . . . it establishes a despotism over the mind.” Paine, by contrast, saw vouchers as a way of righting the historic injustices of aristocracy, giving the lower classes more opportunity to rise and better themselves.

The first modern school choice programs, enacted in Milwaukee and Cleveland, were also school vouchers. Vouchers in their modern form were designed by Milton Friedman, whom I was honored to work for in the last couple years of his life. He proposed school vouchers in a 1955 article and was a leader in the modern school choice movement as they began to be enacted.

But vouchers have a hitch. They create a perverse incentive for private schools to jack up tuition to the maximum voucher amount. While they create a marketplace for education, they take out half the equation of any good marketplace. With vouchers, schools compete to attract students, but they compete only on quality, not on price.

That may sound good if you have romantic notions about money having no place in education. But, as Milton Friedman would be the first to tell you, prices are a critical source of information that we need to be good stewards of our resources. They tell us about the scarcity of things relative to the demand for them. High prices cry out to providers, “devote more resources to providing this service!” Low prices say, “this isn’t needed as much.”

Removing the price system from the allocation of any economic good or service always leads to bad stewardship. In private schools, vouchers encourage wasteful bureaucratic bloat. Money that could have been spent on valuable educational services, or something else, goes to buy things students don’t need. Of course, the schools still aren’t nearly as wasteful as the government education monopoly—but that’s a pretty low standard to set.

The recent invention of ESAs proves that there’s a better way to let families spend their school funding, so they get the most educational bang for their buck. ESAs don’t give parents a voucher that they can redeem only once—creating a perverse incentive to spend all the money on that one thing. They put the money in a savings account, from which parents can spend on any educational services. After paying for tuition they can use leftover funds to pay for tutoring, supplemental curricula, or special education services. Money left over after graduating high school can be applied to college.

Like vouchers, ESAs don’t cost extra money; they only redirect funding that the state was going to spend on education anyway. That’s always good to know, but with Oklahoma’s 2016 budget troubles it’s especially relevant. Funding levels on an ESA can be set in such a way that the program is revenue neutral or even saves state money. And local schools benefit financially; because the state funding they lose is not all of their funding (it’s only 49% in Oklahoma), their reduced costs from not having to educate the students who leave are greater than their reduced revenues.

It’s not every day someone outsmarts Milton Friedman; indeed, people tangled with his brains at their peril. When he argued against mandatory peacetime military service in a public hearing, he was confronted by a general who said, “I don’t want to command an army of mercenaries.” Quick as a wink, Milton replied, “Would you prefer to command an army of slaves?”

That general’s experience was not unique—in fact, it was the opposite experience that was literally unique. When Milton’s wife, Rose Friedman, died, we at the Friedman Foundation included the following sentence in our list of her accomplishments: “She is the only person ever known to have won an argument with Milton Friedman.” Rose was a formidable economist in her own right, but we all considered this her most impressive achievement.

Milton was even smart enough to invent one of the worst features of modern political life. Working for the U.S. Treasury Department during World War II, he was on the team of economists who first devised income tax withholding. We have paid the price in liberty ever since. Let’s give thanks that it wasn’t long before he turned his intellect toward expanding freedom rather than contracting it!

Nevertheless, he was also smart enough to insist that he didn’t have all the answers. I think he would have been the first to admit that Education Savings Accounts are a big improvement over the school vouchers he designed.