Possible Insight

A number of people responded to my recent post on the California budget. So I thought I’d dig a little deeper into the issue. The three points I’d like to address at the moment are whether spending as a percentage of income is rising, where the extra spending is going, and whether the extra spending is beneficial.

First, let’s look at the issue of spending as a percentage of income.  As Eric Rescorla pointed out to me in a personal communication, one could contend that state and local spending should remain constant as a percentage of income.  Budgeting a fixed share of our resources to state and local projects seems prima facie reasonable. According to this site, per capita income in California was $42,696 in 2008 and $28,374 in 1998. Using our handy-dandy inflation calculator to convert both of those to 2009 dollars, we get  $42,287 for 2008 and $37,119 for 1998.  That’s real growth of 14% over 10 years (yes, a very slightly different 10 years than the budget numbers I have, but close enough).  So real per capita spending grew at 2.7x the rate of real per capita income.

Next, Terence posted in the comments that he had probably tracked down the two largest sources of spending increases: incarceration and education.  His numbers look pretty convincing. Now, I think we can probably agree that incarceration is not a good.  The United States has the highest incarceration rate in the world.  California’s is actually higher than the national average. I don’t think Californians are 5x as anti-social as the British, who have about 1/5th the incarceration rate (but still the highest in the EU).  So I’m pretty sure this is not an efficient use of our money.

That leaves us with education.  Is increased education spending a good? From first principles, it seems like it should be.  Given the large positive role it has played in my life, I hope it would be.  The evidence is that additional years of education produce a positive return.  However, this is somewhat different from the question of whether more public spending leads to better results.  Alas, on this point, the evidence is alarmingly weak.

According to the official state statistics, the California graduation rate in 2007-08 was 79.7% compared to 83.3% in 1997-98.  Going down, not up.  But perhaps it takes time for increased spending to affect the graduation rate. In that case, we might want to look at intermediate metrics.

The standard benchmark here is the National Assesment of Education Progress. These are standardized tests of academic knowledge given in different subjects at different ages.  Reading test data goes back to 1971.  Math test data goes back to 1978. These appear to be the most consistent metrics we have available.  You can visually inspect the California results here.  Unfortunately, they only gave certain tests in certain years so the time periods don’t quite match up with the budget data.

What you will see is that from 1996 to 2007, math scores for Grade 4 rose from 209 to 230 (10.0%) and for Grade 8 rose from 263 to 270 (2.7%). From 1998 to 2007, reading scores for Grade 4 rose from 202 to 209 (3.5%) and for Grade 8 dropped from 252 to 251 (-0.3%). This looks like a rather slight improvement for the amount of money spent.

Of course, visual inspection is not very rigorous.  You want statistical analysis.  Well, it turns out that there is a nice Brookings publication on the topic for the whole United States. The introduction is available via Google and worth reading because it walks through the research history.  The summary is that there has been a lot of academic back and forth on the relationship between education resources and results. My take is that many decades ago, there was a weak yet significant relationship. But it has mostly evaporated as the level of expenditures rose above some threshold level. Perhaps the most interesting bit is about a “natural experiment” where 15 Austin, TX schools had a substantial increase in the resources available to them.  Student performance increased at only 2 of the 15 schools.

I found a more specific 1999 paper on spending and achievement in California. The full text is behind a paywall, but the abstract says, “The evidence indicates that, despite claims to the contrary by many advocates of public education, higher education spending does not raise student achievement. Education spending is also shown to be highest in those counties exhibiting highest monopoly power as measured by the Herfindahl index.” Basically,I think this means that education spending is driven by how powerful the local public school system is.

All in all, not good news.  We’re spending more than we’re making.  The increase is split primarily between a “bad” and a “good”, but even the “good” spending doesn’t seem very effective.  I just don’t feel that I’m getting my money’s worth.