The Next Step in School Choice
Education Policy, The Heritage Foundation
In their classic work, Free to Choose, Milton and Rose Friedman described four basic ways of spending money. People can either spend their own money or someone else’s money, and they can either spend it on themselves or on someone else. The Friedmans argued that people generally have a stronger incentive to economize when spending their own money than when spending someone else’s money. Likewise, people generally have a stronger incentive to maximize value when spending money on themselves than when spending on someone else.
The lack of incentive to reduce costs or maximize value is particularly acute when the spender does not know whose money he is spending or on whom he is spending it. For instance, a person is more likely to purchase a lavish dinner with a corporate expense account than when a close friend is paying. Likewise, someone is less likely to maximize value when buying a gift for the office holiday gift exchange than when buying a gift for a significant other. In the latter scenario, the spender’s knowledge of what would provide the greatest value is also considerably higher when he knows the recipient well.
Public-school officials, like all government bureaucrats, primarily engage in the worst kind of spending: They spend other people’s money on children who are not their own. As competent and well-meaning as they may be, their incentives to economize and maximize value are simply not as strong as those of parents spending their own money on their own children…
If traditional public-school systems work by spending someone else’s money on someone else’s children, taxpayer-funded vouchers allow parents to spend taxpayer money on their own children. Parents have a strong incentive to maximize the educational value that their children receive from the voucher, but since a traditional voucher must be spent in a lump sum, there is no incentive to economize below the value of the voucher.
Though Education Savings Accounts are still taxpayer funded, the way they are structured makes for a dynamic closer to the one involved in spending your own money on your own children: Parents still insist on the best quality education but have more incentive to find a bargain. ESAs are not the equivalent of cash because the funds are restricted to approved categories of educational expenses, but they do provide families with much greater flexibility in how to spend (or save) the funds than vouchers do. As a result, parents have the ability and incentive to economize in a manner that more closely resembles their spending of their own money — with both economy and value in mind — which in turn fosters the development of a real education market
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