Question on the cost of education

On 7 Jun 2010, at 1:35 PM, a friend wrote:

Was trying to do some math: Say a teacher makes $100k per year (gross), which may be well above what they actually make. Teaching 200 days/year, 6 hours per day, 25 kids/class. That translates to cost per kid per hour of $3.33. From a parent perspective this would be $100k/25=$4000 per year. Our tuition is clearly much higher ($18k-$30k) and in public schools, common for state to pay in excess of $12k per student per year. If my math is correct (happy to be corrected here), seems that overhead is huge and actually managed right, charter and private schools could be quite profitable while paying teachers decent salaries.

And I answered:

My town, Brookline, Mass, spends $60 million on 6 thousand kids

That's $10 thousand per kid a year, not much different from neighboring towns. So if we take your figure of $100 thousand / teacher - which is not far from reality, counting overhead like insurance, pensions, benefits, sabbaticals, and so on - you arrive at half of the total, roughly. I would guess schools have 1 extra teaching and non teaching employee per classroom teacher - librarians, substitutes, custodians, cafeteria staff, principal, special education aides, gifted and talented teachers, language, arts, gym, music, and so on, besides the administrators and program coordinators and superintendents. Probably more than 1, but with lower average pay.

So your figures are in the ballpark. Tuition at the top private schools - the ones we'd consider sending our kids to if they didn't enjoy the neighborhood public school - is between $20 and $40 thousand a year, towards the lower end for elementary school but not much cheaper. There are some private schools closing on the $10 thousand range but they tend to be Catholic schools. So public school is kind of a bargain for the taxpaying parent. I believe that the reason is that people who send their kids to public are willing to put up with run-of-the mill facilities - cinderblock buildings, non air conditioned, sports facilities shared with the town, and a fair amount of crowding. Also, teachers know the students and the parents, but besides the teachers themselves there aren't too many college-application consultants and other flashy officers a private school is expected to maintain. There is a belief out there in small classes which private schools may find hard to resist - and small classes are a very expensive way to improve education, good teachers being a much more effective one. Plus governments have a very efficient method of fundraising - no need to entice with an expensive cocktails parties if you can threaten non-contributors with a sleepover in the county jail.

As for whether a private school can earn a profit, that's unsettled. The main source of savings would be to weed out the trouble kids, and in particular the special needs kids, which by federal law public schools are required to educate while private schools are merely not allowed to actively discriminate against. In a neighborhood where a large share of students are underperforming or even troublemakers, offering better education for the best motivated kids just might improve the average outcome. Now of course since those tend to be poorer neighborhoods, they will not be profitable unless without considerable government subsidy.

So it just might be possible to run a profitable private school in a poor district if you can get enough taxpayer money. In better districts it doesn't work - it is an experimental fact that private schools need to remain nonprofits and rely on donations despite the high tuition. Now some would argue that even in poor districts it is not good to funnel tax money through private institutions that will skim off the better students - that basically a private or charter school is only viable if it is able to exploit market failures and legal asymmetries. But there exists a valid argument that in some districts school performance is so bad that anything that shakes the system is preferable. Personally I believe it is a good idea to offer students choice if the local school is failing and they can't afford to pay for something better, but the practical results so far don't seem conclusive.

From the entrepreneur's point of view I believe that the record of for-profit schools in the US has been disappointing. I think that the reason is that there exist very few economies of scale in a labor intensive sector, while centralized for-profit bureaucracies have very definite diseconomies of scale.

Enough for the most successful US education system, Massachusetts. In Brazil, there are parallel systems of K12 education: public (mostly substandard), and private for-profit (ranging from very good to mediocre). In contrast, the higher education system includes some fairly good public universities (by international standards) and mostly atrocious private for-profit universities. (The exceptions such as not-for-profit universities and government technical high schools educate a small fraction of all students, let us leave them aside.)

Not surprisingly, the most desired slots at the top public universities are often taken by students graduating from the more expensive private high school, while poorer students going through a public K12 education fail to enjoy the subsidies given to public universities. The system is a complete failure in terms of efficiency or social equity, although to its credit is does manage to produce a professional elite.

I would not be surprised to hear that California has dropped some of the features that used to make its education outstanding, and which have been retained in the Northeast, and opted for a more Brazil-like approach. I don't know first hand if it is so, but that would explain a lot.