Yes, "Real Socialism" has been Tried—And It has Failed 17




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Who Reaps the Profits of Socialism?

But consumers are not the only interest group that is able to game the system under the socialist model of providing goods and services. As

Other People's Money: Socialist Education and the Problem of Incentives

strong as highly motivated consumers' incentives may be, there is another group of people with an even stronger set of incentives: the central plan­ners themselves, i.e. the government employees who staff the socialist bureaucracies. Again, the American public-school system provides a telling example of how these incentives play out.

Though the United States is a broadly capitalist country, primary-secondary education is conducted under an almost exclusively social­ist model. Indeed, the U.S. school system is more deeply socialized than Soviet agriculture was under Stalin. About 90 percent of U.S. stu­dents attend government schools for primary and secondary education, and practically 100 percent of taxpayers pay into the system. The Sovi­ets, for all their effort, never managed to achieve 90 percent socializa­tion of agriculture.

This comparison is not a facetious one; just as Soviet apparatchiks used their positions of influence to command better wages, better food, better housing, and other privileges not accorded to the vast proletariat on whose behalf they alleged to labor, American government workers— and government-school workers in particular—enjoy far higher wages, better healthcare benefits, more job security, guaranteed pensions, gener­ous paid vacations, and other benefits not dreamt of by the working peo­ple on whose behalf they allegedly engage in "public service." And the economics of the U.S. public-school system would be readily familiar to any student of the Soviet economy.

The economist Paul Craig Roberts tells a relevant anecdote about the shortcomings of Soviet economic planning: when the output of a nail fac­tory was measured in total units of production, the managers of the fac­tory decided to produce great quantities of small, thin nails. When the measure of output was changed to gross tonnage, the managers switched to making big, heavy nails. In both cases, the producers produced what the measurers measured, regardless of whether the economy actually needed lots of small nails or a fewer number of heavy nails.

The Politically Incorrect Guide to Socialism

The socialist economics of the U.S. public-school system operates in precisely the same way: when schools were measured by their gradua­tion rates, they lowered standards and graduated more students. When they were measured by standardized-test scores, they neglected general education to focus on the subjects covered by the tests and lobbied to have the tests designed in such a way as to maximize their students' scores. (In some instances, educators organized their students to system­atically cheat on standardized tests.) When extra money became available for "special needs" students, educators began to classify more and more of their students as "special needs." While reporting on school budgets in a school district outside Philadelphia, I found one school district went so far as to classify its gifted-and-talented program as a "special needs" program, thereby maximizing both its funding and its measured success in educating special-needs students.

Of course, the best way for managers to meet the goals set for them by the central planners is to take over the process of writing the central plan themselves. Studying Soviet industrial production, Professor Roberts observed,

When I first examined this system, it was clear to me that sig­nals interpreted by managers constituted the main difference between the Soviet economy and a normal market economy. In a normal market, managers organize production by interpret­ing price and profit signals. In the Soviet economy, managers interpreted gross output indicators. The critical difference is that gross output indicators are irrational from the standpoint of economic efficiency. Soviet managers were as autonomous as their market counterparts. They set their own plan targets by disguising their productive capacity and overstating their resource needs. Soviet planners served primarily as supply agents for enterprises, endeavoring to supply the enterprises

Other People's Money: Socialist Education and the Problem of Incentives

with sufficient inputs to fulfill their gross output targets. The system of material supply could seldom perform this task, and Soviet factory managers made barter arrangements with one another and produced their own inputs. This activity led me to the conclusion that the Soviet economy, like a market, was organized polycentrically and not hierarchically as a planning system. The "central plan" was little more than the summation of the factory managers' individual plans.1 '

The New York City public schools formulated a five-year plan in 2008, and they conducted their business in much the same way as the Soviet factory managers did: their collective five-year plan was simply a sum­mation of the pre-existing preferences of the "factory managers," in this case the teachers, as represented through their unions, along with the principals and other administrators. In fact, the teachers so dominated the process that the five-year plan was focused on a single central desire of the education-factory managers: reducing class sizes.

The educational-achievement literature shows little connection between class size and student achievement. But smaller classes mean much less work for educators—but not less pay—so reducing classroom headcounts has long been a key goal for educators and the education bureaucracies. Likewise, the teachers' unions have long fought for the requirement of advanced degrees for many teachers, or for significantly higher pay for teachers who hold masters' degrees or better. The research shows no relationship between teachers' holding advanced degrees and student performance. But more advanced degrees mean higher aggregate salaries for educators—as well as for administrators—and, perhaps more important, significantly higher pension benefits, because pensions are directly related to salaries during the last years of a teacher's career.

Professor Roberts had a difficult time assembling meaningful economic data for his studies of Soviet industrial production. Happily for students

The Politically Incorrect Guide to Socialism

of mixed-economy socialism, we have much better data about the eco­nomics of American public education, and they mirror the trends in socialist production across industries and nations. Inputs are misaligned and resources are misallocated; consumers' interests are not served but the apparatchik's interests' are. In short, real spending (which is to say, inflation-adjusted spending) on education in the United States has skyrocketed—and not just over recent decades. Real spending on school­ing in the United States has grown an average of 3.5 percent above and beyond the rate of inflation for a century, as reported by Eric A. Hanushek and Dale W. Jorgensen in their National Research Council study, "Improv­ing America's Schools."2 While real expenditures have been climbing, real educational achievement has flatlined in most cases, but in many cases has declined, and in some cases has declined radically. More spending for less output—that's a good working definition of socialist economic outcomes.

The spending on U.S. education, Hanushek and Jorgensen find, has been driven by three factors: educators' salaries, reductions in classroom size, and spending on non-instructional expenses. That lattermost cate­gory includes things like administrative costs and the salaries of non-educator personnel such as counselors, assistants, nurses, and the like. But it also hides a good deal of money directed into the pockets of teach­ers. Retirees' expenses, for instance—the generous pensions and lavishly funded healthcare benefits that teachers' unions demand from taxpayers— are classified as non-instructional costs, since they go to retired educa­tors instead of active classroom teachers. Taken together, these three factors add up to a program of paying teachers much more to do much less work, without any concomitant demand that they get better results from their reduced workloads. As Hanushek and Jorgensen put it:

Matched against the growth in spending, student perform­ance has, at best, stayed constant and may have fallen. While

Other People's Money: Socialist Education and the Problem of Incentives

aggregate performance measures are somewhat imprecise, all point to no gains in student performance over the past two

decades____While there has been slight movement, the overall

picture is one of stagnating performance.

Perhaps the most dramatic finding of analyses of schools is that smaller class sizes usually have had no general impact on student performance, even though they have obvious implica­tions for school costs. Moreover, the basic econometric evi­dence is supported by experimental evidence, making it one of the clearest results from an extensively researched topic. Although some specific instruction may be enhanced by smaller classes, student performance in most classes is unaf­fected by variations in class size in standard operations of, say, 15 to 40 students. Nevertheless, even in the face of high costs that yield no apparent performance benefits, the overall policy of states and local districts has been to reduce class sizes in order to try to increase quality.

A second, almost equally dramatic, example is that obtain­ing an advanced degree does little to ensure that teachers do a better job in the classroom. It is just as likely that a teacher with a bachelor's degree would elicit high performance from students as would a teacher with a master's degree. Again, since a teacher's salary invariably increases with the comple­tion of a master's degree, this is another example of increased expenditures yielding no gains in student performance.

These resource effects are important for two reasons. First, variations in instructional expenditures across classrooms are largely determined by the pupil-teacher ratio and the salary of the teacher, which, in turn, is largely determined by the teacher's degree and experience. If these factors have no system­atic influence on student performance—which the evidence

The Politically Incorrect Guide to Socialism

*************

The Lure of Other People's Money

"There are four ways in which you can spend money. You can spend your own money on yourself. When you do that, why then you really watch out what you're doing, and you try to get the most for your money. Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I'm not so careful about the content of the present, but I'm very careful about the cost. Then, I can spend somebody else's money on myself. And if I spend somebody else's money on myself, then I'm sure going to have a good lunch! Finally, I can spend somebody else's money on somebody else. And if i spend somebody else's money on some­body else, I'm not concerned about how much it is, and I'm not concerned about what I get. And that's government. And that's close to 40 percent of our national income."

Milton Friedman, Fox News interview, 2004

shows they do not—expansion of resources in the ways of the past are unlikely to improve performance. Second, either explicitly or implicitly schools have pursued a program of adding these specific resources.... Schools currently have record-low pupil-teacher ratios, record-high numbers for com­pletion of master's degrees, and more experienced teachers than at any time at least since 1960. These factors are the result of many specific programs that have contributed to the rapid growth in per-pupil spending but have not led to improve­ments in student performance. Schools do not try to ensure that increased student performance flows from increased expenditures.3

Other People's Money: Socialist Education and the Problem of Incentives

That last sentence is particularly telling: educators do not try to ensure that increased student performance flows from increased expenditures. But why? For the people who run the schools, increased expenditures are a net benefit in and of themselves, regardless of whether they produce superior results; the bigger the budget, the bigger the salary of the admin­istrator charged with managing it. The more money in the system, the more will be paid out in salaries and benefits.

It is worth noting that much of the spending classified as "non-instructional costs" ends up enriching school-system employees through pension and medical-benefit programs. When there is no link between payment and performance, prices inevitably rise and quality decreases, which is precisely what has happened in American public schools. But because the price is hidden through a byzantine system of taxes and sub­sidies, rather than being explicit, as in the form of an annual tuition check, the consumers of those services do not directly experience the eco­nomic dysfunction of the system.

Calling Gordon Gekko

Compare this model of providing goods and services with practically any product provided through the competitive marketplace. Government-education advocates such as Barack Obama give passionate speeches about the need for education, about the critical role it plays in our soci­ety, but they continue to advocate what is—let us remember—a nineteenth-century Prussian approach to education.

The United States in the twenty-first century is not very much like nineteenth-century Prussia (Prussia today isn't much like Prussia then, either), but we still use its educational methods. We would never think of using its transportation methods (horsepower was literally horse­power), its communication methods (telegraphs), or its military technol­ogy (muzzle-loaders and bayonets). But government-run systems have a

The Politically Incorrect Guide to Socialism

way of preserving themselves well past any rational point, which is why the United States still maintains the helium reserve it established for dir­igible warfare—presumably to fight those nineteenth-century Prussians.

Compare our failing public schools with our cellular phones. Cell phones and cell-phone service are enormously competitive industries in which innovation and capital from around the world are channeled— with no five-year plan, amazingly enough—to serve the needs of con­sumers. They have improved immeasurably over a short period of time. In 2010, movie-goers watching the trailer for the Oliver Stone film Wall Street: Money Never Sleeps got a big laugh out of the 1985-vintage cell phone that white-collar criminal Gordon Gekko reclaims from the prop­erty room as he is released from prison. It's a great gag—the thing is as big as a cinderblock. But there's more to the joke than the clunky aesthetic of Reagan-era technology. Gordon Gekko's cell phone, the Motorola DynaTac, cost the equivalent of just under $10,000 in 2010 dollars. Monthly service fees ran into hundreds of dollars. Basic features of 2010 cell phones, like text-messaging and e-mail, were unheard of—even a Wall Street titan like Gordon Gekko couldn't download a song from the iTunes store. In 2010, you couldn't give Gordon Gekko's cell phone—his prized status symbol, his most conspicuous indicator of wealth and sophistication—to a kid in a housing project in the South Bronx.

But that same South Bronx kid who has access to some of the best com­munication technology in the history of mankind is stuck with a failing public school—a third-rate version of a nineteenth-century Prussian model that at its best probably would not serve his interests. The differ­ence is that the socialist model of education is not designed to serve his interests, while the private enterprise model, which must compete for customers and their money, has no choice but to serve its customers' interests. The free-market model has its shortcomings, too, but in most cases a bad product or defective service is driven out of the marketplace by competition. Under a socialist model, there is no competition to drive

Other People's Money: Socialist Education and the Problem of Incentives

out bad products and rotten services, which is why a visitor from 1929 would recognize your public schools but would be amazed by the cell phones they give away for free at your local mall.

What is worth noting—and what must be most amazing to the true-believers among the central-planning authorities—is that something as miraculous as the cellular-phone network, which has brought technology that was once the stuff of Buck Rogers comics into the hands of ordinary people, including poor people, lacked any coordinated national or global plan to do so. In fact, is it precisely the absence of a central plan that has allowed the industry to thrive and to innovate.

If we had structured the provision of cellular-phone service the way we have education, the incentives would have been radically different: the guy selling the 1985 DynaTac would make the same profit as the guy selling the iPhone; consumers would have no choice between Verizon's good network and AT&T's spotty one, and would simply be assigned a network based on which street they live on. Because everybody would be taxed to provide cell phones for everybody else, only the wealthy would have enough money left over to enter the private cell-phone market, so innovation would be stifled. With no competition, there would be no incentive to drive down prices—in fact, there would be every incentive to drive up prices.

Given the inherent defects of the socialist model of providing goods and services, one has to wonder: why would anybody choose socialism in the first place? There are lots of possible answers to that question: class resentment, socio-economic envy, risk-aversion, irrational distrust of profit-seeking entrepreneurs, etc. The best answer, however, may surprise many people: Sweden.

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