On May 27, 2015, the Upjohn Institute released a report on Michigan’s school finance system and how to reform it to improve student performance in Michigan, and lessen disparities among children in various income groups.  The lead author of the report is my colleague Kevin Hollenbeck, and I am one of the co-authors, along with Randy Eberts, Brad Hershbein, and Michelle Miller-Adams.

Although the report is obviously focused on Michigan, the report’s lessons are more generally applicable to school finance reform and school reform throughout the U.S. Our report argues that money does matter to educational performance. More resources will improve student achievement, and can reduce test score gaps between disadvantaged students and more advantaged students. But solving educational problems through increasing spending across the board is expensive enough that in many cases it may not be politically feasible. A more feasible route to educational improvement is to increase resources in a targeted manner: increase spending on educational interventions known to have a high benefit-cost ratio. Such interventions include early childhood educational interventions. For example, high-quality child care and high-quality pre-K programs have been shown by rigorous evaluation to have a large effect on improving future prospects per dollar spent. But other educational interventions also have been shown to increase student achievement by a large amount per dollar spent. These include reduced class size in early elementary school, high-quality summer school for elementary students who are behind, longer school year for high-poverty schools, small group tutoring for high school students who are behind, and high school career academies for students interested in a more career-focused high school education.

It is sometimes argued that money doesn’t matter to educational performance. Michigan’s experience shows that this argument is wrong. Michigan dramatically changed its school finance system with passage of Proposal A in 1994. Proposal A essentially shifted most schools from locally-controlled spending per pupil to a more uniform system of state-controlled funding per pupil. The result was a natural experiment: some low-spending districts, mainly in rural areas, ended up with higher funding per student, whereas other school districts did not. As shown in studies by Leslie Papke and Joydeep Roy, and as confirmed in our report, the districts that experienced higher funding per student showed  improvements in student achievement relative to school districts that did not (Figure 2-1 on page 8 of our report).

However, the influence of money on student achievement is of a magnitude such that reaching educational goals through across-the-board spending increases will often be politically difficult. For example, these estimates of money’s influence suggest that for Michigan to match a leading state such as Massachusetts in student achievement would take an extra $10,000 in annual spending per pupil. To eliminate the achievement gap between low-income students and other students would require spending an extra $19,000 per pupil on low-income students. (Similar results would occur for achievement gaps across income groups in other states.) While one could make a case that such spending boosts would have benefits greater than costs, obviously the costs are large enough that the political feasibility of such funding boosts is doubtful.

However, there are educational policies that improve student achievement and adult outcomes by far larger amounts per dollar spent than across-the-board spending increases. Early-age interventions frequently have higher benefit cost ratios, presumably because younger brains are more malleable, and early learning tends to build on itself and create future learning. Such early interventions include high-quality child care and pre-K, and lower class size in early elementary school. Later-age interventions can also be cost-effective if they are highly targeted on the particular learning needs of students. For example, targeted tutoring or extended school years can work for students who are academically behind, and career-oriented education can help students attracted by that approach to education.

If one asks what boost to the present value of future earnings is brought about by an educational policy, more cost-effective educational policies frequently have benefit/cost ratios in the range of 2 to 1 up to 13 to 1. Such interventions can be over ten times as effective in improving student outcomes as is true for across-the-board spending increases.

The below table is taken from our Michigan report (see Table 5-1, page 44; the version below is slightly rearranged). It shows the increase in present value of future earnings per child for a given educational intervention, compared with the cost of that educational intervention per child. Our report provides references to the research behind these numbers.

Relative Costs and Future Economic Benefits of Various Educational Policies

As shown in the table, simply increasing educational spending per pupil by $11,000 would be estimated to increase the present value of future earnings per student by a little more than half that spending increase. Education of course has other benefits than increased earnings, such as lower crime, higher civic involvement, etc. With these other benefits, it is quite plausible that dramatic across-the-board increases in educational spending could be justified as having benefits exceeding costs.  Still, across-the-board increases in spending are not the most cost-effective educational policy for boosting future prospects, as shown in the table. Other policies have benefit cost ratios of up to 13 to 1.

In this blog and my recent writings, I have extensively argued for early childhood programs as a way to promote the economic development of the U.S. economy, or for particular states to promote their own economic development. This is not because early childhood programs have the absolutely highest benefit-cost ratios, but rather because these policies combine very high benefit-cost ratios with other advantages.

The policies with the highest benefit-cost ratios are actually later policies that are targeted in some way, either at students who are academically behind, at high-poverty schools, or at students with particular career interests. What is particularly attractive about universal pre-K as an educational policy is that it is perhaps the most cost-effective intervention that is relevant for all students, not just targeted groups of students. This means that universal pre-K can be more easily scaled up to have truly large effects on the overall quality of the labor force of a state or of the nation, and thereby to have truly large effects on overall economic development. (Lower class size in early elementary school also helps improve achievement for all students, but is not nearly as cost-effective as universal pre-K.)

High-quality child care from birth to age 5, similar to the Educare program, is attractive because among all these interventions, it has perhaps the highest estimated gross benefits per individual student. If we want to dramatically affect the life prospects of a student from a high-poverty background, this intervention does the most. Its benefit-cost ratio is lower because its costs per child are so high. However, educational policy is not solely concerned with benefit-cost ratios, but with also achieving large effects per child.

Based on these findings, our report ends up recommending that Michigan increase school funding, but do so in a way that encourages more resources to be devoted to more cost-effective educational policies.  Given the difficulty of increasing taxes to finance public spending increases, a similar policy course may also make sense for other states.