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Sweden, Universal School Choice Vouchers, and the Case for Participation by For-Profit Firms – Pacific Research Institute

Sweden, Universal School Choice Vouchers, and the Case for Participation by For-Profit Firms

SWEDEN, UNIVERSAL SCHOOL-CHOICE VOUCHERS, AND THE CASE FOR PARTICIPATION BY FOR-PROFIT FIRMS
Speech at the Almedalan Week Seminar

Sponsored by
Almega Tjansteforetagen and Friskolornas Riksforbund
At Visby, Sweden

On July 2, 2009

By
Lance T. Izumi, J.D.
Koret Senior Fellow and Senior Director in Education Studies
Pacific Research Institute

Preface: For the past several decades, the Swedish political and policy community has held seminars on a wide variety of topics every summer in the medieval town of Visby on the island of Gotland, off the coast of Sweden in the Baltic Sea. PRI’s Lance Izumi was invited by key Swedish business and education organizations to address one of these seminars. In light of his role in the production of PRI’s recently released film documentary “Not as Good as You Think: The Myth of the Middle Class School,” with its emphasis on the Swedish universal voucher system, he was asked by the seminar’s organizers to discuss the importance of having vouchers available to all parents, regardless of income level, and of allowing for-profit companies to participate in the schooling of children under a universal voucher program.

I am very honored to have been invited to speak at this Almedalen Week seminar. I know how important this gathering is to Swedish policymakers and, ultimately, to the Swedish people, so I am very humbled by the invitation that was extended to me to come back to Sweden and to appear before all of you here today. I would especially like to thank Barbara Bergstrom, the founder of the Internationella Engelska Skolan, who I met in my first visit to Sweden last fall and who initially contacted me about speaking at this seminar. In addition, I would like to thank my fellow panelist, Thomas Idergard of Magnora, for also inviting me, giving me the details of the seminar, and arranging my trip.

Let me also thank Almega and the Swedish Independent School Association for sponsoring this seminar. I would also like to acknowledge my distinguished fellow panelists, who represent some of the most important companies providing schooling in Sweden.

As I mentioned, this is a return visit for me to your wonderful country. In September of last year I, along with my film crew, came to Sweden to film part of a documentary that I was producing. The documentary focuses on the poor performance and inefficiencies of many government-run public schools in middle-class and affluent areas in the United States. Most middle-class American parents, because they carry a huge debt load including expensive home mortgages and because the U.S. has only limited school-choice options, are forced to send their children to the local neighborhood public school, even if those schools do not meet the needs of their sons and daughters. We came to Sweden because we believe that the reforms enacted here in the early 1990s have made the Swedish education system one of the most progressive in the world.

In the United States, we have a few relatively small voucher programs. For example, the voucher program in Washington, DC serves only 1,700 low-income children out of around 70,000 students in the city. In Cleveland, Ohio, a few thousand poor parents are given a voucher amount that is only a fraction of what the public schools receive in per-pupil funding. Thus, not only is there no national universal voucher program in the U.S., those few city-based voucher programs that exist do not even serve all low-income parents. Because school-choice options such as vouchers are not available to them, middle-class parents are forced to pay high prices for homes in areas where they believe that the local public schools are of high quality. However, as I mentioned, many times they are mistaken about how well these schools are actually doing.

In discussing this response of parents to a basically government-monopolized education marketplace, Harvard University law professor Elizabeth Warren and consultant Amelia Warren Tyagi advise: “Any policy that loosens the ironclad relationship between location-location-location and school-school-school would eliminate the need for parents to pay an inflated price for a home just because it happens to lie within the boundaries of a desirable school district. A well-designed voucher program would fit the bill neatly.” They also say that a universally available voucher would “relieve parents from the terrible choice of leaving their kids in lousy schools or bankrupting themselves to escape those schools” by paying a high tuition price for a private school. That is why your system here in Sweden, which makes vouchers available to all parents, regardless of their income, and for an amount equivalent to the per-pupil funding of the municipal schools is so revolutionary.

When we interviewed Stockholm Governor Per Unckel, the former minister of education, who is very familiar to all of you, he said that the Swedish voucher program was made universal because everyone, regardless of income, has the right to choose a school, public or private. In fact, he told us that the universal character of the Swedish program is the key message that he hoped the rest of the world would learn from your experience. Governor Unckel’s point was underscored in the interviews we conducted with Swedish parents who send their children to private independent schools.

One parent who sends her child to an independent school in Stockholm told us that she has friends in New York, and those friends spend so much of their own money to send their children to private school. She said that she thought “it was crazy.” I think she’s right. It is crazy for American parents to pay taxes to support public schools that may not be performing well and then pay high private-school tuitions on top of that if they can afford it.

I was very impressed with how the voucher system has been so widely accepted among the Swedish people. I used to think that we in America should start out with small pilot programs for vouchers. Once those programs were established, the positive results would cause the public to support vouchers available to all parents. I have come to conclusion, however, that I was wrong. In the United States, where the school-choice programs are limited, there is, not surprisingly, only relatively limited vocal support for these programs because most people do not have a stake in them. Thus, for example, President Obama and the U.S. Congress have decided to effectively end the small voucher program in Washington, DC, and there has been little widespread outcry. Seeing the support among ordinary Swedes for your country’s universal voucher program has convinced me that when it comes to school choice it is best to think big.

Governor Unckel told us that Sweden is reaching the point where people do not look at schools as public or non-public, but just as different alternatives. The parent who thought it was crazy for people in New York to pay so much for private schools said she couldn’t understand why people don’t just send their children to a school. She was making no distinction between public and non-public because she was now used to simply looking at different alternatives just as Governor Unckel said.

What we learned here in Sweden was so important that we not only profile the Swedish voucher program in our documentary Not as Good as You Think: They Myth of the Middle Class School, which is now out on DVD (the film’s website is www.notasgoodasyouthink.com ), but we also produced a shorter video specifically on your voucher program for the New York Times. Some of you, I know, have already seen it on the Times’ website. If you have not, and are interested, you can view the video by going to www.nytimes.com and typing in “Sweden’s Choice” in the search tool.

While the universal nature of the Swedish voucher program sets it apart from most school-choice programs around the world, there are other key features that were of great interest to us. Perhaps the most noteworthy is the fact that for-profit companies can participate in the program and can establish schools. Although the United States is often considered to be one of the most market-oriented countries in the world, education in America is a much different story.

The government education sector in our country will allow for-profit companies to supply public schools with textbooks, computers, transportation, and food service. However, when it comes to creating schools and providing actual classroom instruction, for-profit companies are, for the most part, not welcome. Once again, Sweden is much more progressive than the United States in this area. Why would a generally pro-free-market country like the U.S. oppose the entry of for-profit firms into the education marketplace? The answer is because many influential people in the U.S. either do not believe that there is such a thing as a marketplace for education or, alternatively, that education is suitable for a marketplace.

Take Henry Levin, for example. Henry Levin is a well-known professor of education at Columbia University in New York. He has been one of the most prominent advocates for education reform in the U.S., and he does support some school-choice programs and options for parents. However, when it comes to for-profit companies establishing schools, he is highly critical.

Professor Levin says: “Education is a highly labor-intensive activity, with wages accounting for 80 percent or more of the school budget. This means that the main cost-cutting opportunities lie in cutting personnel costs by using either cheaper personnel or fewer of them. Thus, for-profit schools may use more part-time personnel, less experienced teachers whose salaries are lower, larger class sizes or shorter school days.” He then makes the connection that because the education services provided by for-profit companies would be affected by these negative factors and incentives, student learning would suffer. The problem with Professor Levin’s analysis is that he seems to understand only half of what makes markets work.

Take a business in another industry, say a fine restaurant. If the owner were only interested in cutting costs, he could use water to dilute the alcoholic drinks he served his patrons. He could use cheaper, less fresh meat. He could employ cheaper untrained chefs and cooks. Yet, for a business in an open marketplace, cutting costs is only one consideration. Putting out a high quality product, especially if there is healthy and widespread competition, is equally important. If the restaurant serves lousy food and watered down drinks, its lower costs may not be enough to save it if its customers are willing to pay for much better food at competing restaurants.

A competitive marketplace, therefore, forces businesses to balance the two goals of lowering costs with the production of a high quality product that people will want to buy. Herbert Walberg, who is a longtime education professor at the University of Illinois at Chicago and one of America’s top experts in international education comparisons, points out: “In a capitalist economy, profits are the reward earned by firms that maximize the quality of services and goods, minimize overhead and bureaucracy, motivate workers to achieve high and consistent levels of productivity, and avoid unnecessary expenditures.” Thus, whereas Professor Levin only sees half the operation of the marketplace, Professor Wallberg sees the whole picture.

In a book he co-authored, entitled Education and Capitalism, Professor Wallberg and co-author Joseph Bast list a number of reasons for relying on markets, not just government, to produce schooling. Here are a just a few of the reasons he listed:

Markets reward efficiency rather than budgetary expansion. Whereas government rewards school administrators according to the size of their staffs and their budgets, the private sector rewards administrators if they satisfy the demands of parents by providing the best educational services at a given tuition price.

Markets emphasize bottom-up accountability. Every parent who has the power to choose a school for his or her child becomes a regulator motivated by self-interest and personal preference to inspect the school’s operations. This forces schools to become more efficient and accountable to parents. This is exactly what Governor Unckel observed when he told us: “The interesting thing when I was part of a school chain working with the vouchers was that we realized how many parents had the ambition of being more active, being a part of the school, taking responsibility for the choice their kids were making. . . . If nothing else would come out of the voucher than parents having to make a responsible decision, that would be enough for me.”

Markets ensure that the interests of a greater number of citizens are met. Government schools are often criticized for instituting a one-size-fits-all model of schooling. A market that gives parents choice will foster the creation of a variety of schools that will compete for children and will specialize in meeting the needs and desires of parents and their children. This competition will also give incentive for the government schools to also improve. As Governor Unckel mentioned to us, “You also get the positive reaction from the public schools where headmasters tend to say that if they [meaning the independent schools] can do it, we can.” And I know that there is research showing that the Swedish voucher system has resulted in a general rise in the performance of all students.

By empowering the general public, markets overcome the organizational advantage held by well-organized interest groups. Education interest groups mobilize their members, raise funds, and lobby government officials to advance the interests of their members. Giving parents choice reduces the reward for this kind of activity by moving it beyond the reach of politics. I think that the continued growth of the private independent school sector under different governments here in Sweden is testimony to the truth of this observation.

Professor Wallberg and his co-author conclude by saying that “market production of schooling would tend to be more efficient and responsive to consumer demands” than a government school monopoly. When I filmed our documentary here in Sweden I visited independent schools that had very different teaching philosophies, but what they had in common was the fact that they were meeting the needs and demands of their customers – the parents and their children.

If education is suited for a real marketplace for schooling, then for-profit companies have a significant role to play in that marketplace, which is another reason why Sweden is so advanced in the provision of education services. Even though American education is marked by the almost complete absence of for-profit firms providing schooling, that does not mean that key American thinkers aren’t aware of the important advantages that characterize such firms.

For example, Frederick Hess, director of education studies at the American Enterprise Institute, one of the top public policy think tanks in Washington, DC, has noted that profit-seeking enterprises in education have unique strengths. According to Hess: “For-profits seek to earn competitive returns for investors, allowing them to attract investors and tap the private equity markets. For-profit management also has the imperative to minimize expenses by seeking and adopting cost efficiencies that non-profits might find excuses to reject. Given more self-interested reasons to expand more rapidly than non-profits, for-profits are quicker to respond to increasing demand by entering a field or expanding their services.”

John Chubb, the chief education officer at the Edison Schools, one of the few for-profit school companies in the United States, and the co-author of Politics, Markets and America’s Schools, one of the most influential books for the school-choice movement in America, says that for-profit school companies bring to education the twin engines that drive innovation, quality and value in the private sector: profit and scale. We’ve already touched on the importance of the profit motive. With regard to the issue of scale, Chubb says: “As long as the mission of a for-profit organization is to provide services as widely as possible . . . a for-profit organization wants to reach scale. With scale come operating efficiencies, additional revenues, and greater profits – in absolute terms and as a percentage of revenues. For-profit organizations seek to maximize profit and thereby scale.” Chubb, however, then makes a key point, a point which people like Professor Levin fail to understand.

“In a proper market,” says Chubb, for-profit organizations “must compete with other organizations for customers – a process that rewards quality and drives profits down.” With regard to how the for-profit process would apply to schools, he goes on to say: “Schools would receive the best service that scale can offer and at the lowest price. If a for-profit operator tried to skimp on quality to increase profit, it would lose business to operators who did not reduce quality and kept the same price.”

While all of this reasoning comports with market economic theory, what about how it works in practice? Chubb points out that “economies of scale may permit an organization supporting many schools to provide more and better services than any school could secure on its own.” If this is true, one may then ask what effect does the participation of for-profit companies in providing schooling actually have on students, especially the achievement of students? An answer to this question is provided by a recent Harvard University study by Paul Peterson and Matthew Chingos of the school system in Philadelphia, Pennsylvania.

As I have mentioned, for-profit companies in America are limited in providing elementary and secondary schooling for children. However, a federal law does give states the option of turning over the management of failing public schools to either for-profit or non-profit management organizations. In 2002, the state of Pennsylvania requested that the school district in Philadelphia contract with both for-profit and non-profit management organizations to manage a total of 46 failing public schools. The for-profits were contracted to manage 30 schools and the non-profits were contracted to manage 16. The Harvard study, which was released earlier this year, compared the performance of the schools managed by the for-profit organizations versus those managed by the non-profits. It is noteworthy that of those schools that were to be managed by non-profit organizations, several were to be managed by two prestigious local universities, the University of Pennsylvania and Temple University.

The Harvard study acknowledged the criticism of for-profit-run schools. The authors note that critics argue that “for-profit firms are likely to cut costs and thereby shortchange students in order to benefit the firm’s owners and shareholders.” For this reason, these critics argue that government or non-profit management of schools is preferred. The study tests this hypothesis by looking at the comparative performance of schools managed by these different entities.

Both the for-profits and non-profits had to operate under the existing school-employee union contracts. Also, both groups of organizations had to use the school district’s calendar and teacher and student codes of conduct.

After analyzing six years of test-score results on Pennsylvania’s standardized exams, the Harvard study found that the effect of for-profit management was generally positive. For instance, at the schools under for-profit management, the math scores of students increased significantly in each of the six years of intervention. According to the Harvard researchers, “The estimated impact each year was roughly 60 percent of a year’s worth of learning, a large, statistically significant impact.” These increased math scores were higher than could have been expected had the schools remained under the management of the government school district. Although not technically statistically significant, in reading the study found that the estimated impact each year was 36 percent of a year’s worth of learning.

The results for the schools managed by the non-profit organizations were not very positive. At these schools math scores fell. The study found that students learned half-a-year less each year. In reading, students learned about a third-of-a-year less each year. The students learned less under the management of the non-profit organizations than had those schools been managed by the government school district.

Directly comparing the performance of the schools under for-profit and non-profit management, the Harvard researchers found a huge difference in the impact between the for-profit and non-profit schools. Students in schools under for-profit management gained between 70 percent and more than a full year’s worth of learning in math each year than they would have had the schools been under non-profit management. In reading, students learned approximately two-thirds of a year more in a for-profit school per year than they would have had the school been under non-profit management.

The Harvard researchers concluded: “Our analysis provides compelling evidence that schools do much better under for-profit than under non-profit management. Year after year, students learned substantially more in reading and math if they attended a school under for-profit management rather than one under non-profit management.”

Of course, it is important to point out that this result is specific to Philadelphia, and it does not necessarily mean that all non-profits perform worse than for-profits in running schools. John Chubb, who I quoted earlier, has written that, “Generally speaking, the academic track records of for-profits and non-profits are similar to each other,” and they are both “superior to state averages.” However, Chubb notes, “The concern that for-profit managers would trade short-term profits for achievement gains is not supported by the data.” The results of the Harvard study certainly prove this point.

From talking with Thomas Idergard and our moderator Anna Olin, I know that even here in Sweden there is debate about the continued participation of for-profit firms in the schools marketplace. I believe that that this recent research from Harvard, however, demonstrates that for-profit companies can have a significantly positive impact on the learning and achievement of students. Not allowing for-profit firms to participate would eliminate from the marketplace organizations motivated by efficiency and effectiveness, reduce choices for parents, and negatively impact student performance. I hope, therefore, that such talk remains just talk.

Finally, let me address a point brought up by Anna Olin when we talked on the telephone before I arrived here in Sweden. Some people, she said, may believe that for-profit firms should be allowed to provide schooling under Sweden’s voucher program, but they also believe that the profits of the firms should be limited to a relatively low amount. Professor Herbert Wallberg, who I cited earlier, deals with this argument by pointing out that the incentive and hope of earning large profits is critical in a marketplace, including an education marketplace.

He and Joseph Bast say: “The hope of earning large profits, not just average profits, inspires countless acts of risk-taking and experimentation that otherwise would not occur.” Confiscating or restricting those profits would mean less risk taking and, therefore, fewer innovations that could improve the quality of education for students. They says that profits are a small price to pay for the benefits entrepreneurship brings to consumers, in this case, parents and their children.

I have cited many Americans in my talk this afternoon, but let me point out that the positive view of for-profit firms in schooling is not restricted to Europe or North America. In a column for the public Australian Broadcasting Corporation, writer Jennifer Buckingham criticizes Australia’s prohibition against for-profit participation in the marketplace for schools. She says: “In fact, profits are dependent on quality. No one is forced to attend a for-profit school so it must justify its existence. If the education provided is unsatisfactory, there will be no students and therefore no profit.”

In conclusion, let me say once again that I believe that Sweden’s school-choice voucher system, which is universal for all parents regardless of income level and which allows the participation of non-profit and for-profit organizations, is a model for the rest of the world, especially including the United States. One of my favorite quotes from our film interview with Governor Unckel came when he said: “I was a part of setting up a school chain myself and we started to build schools. Some of the local communities were angry because they had to close schools. We said to them that if kids will not come to your schools it’s a bigger catastrophe if you force them to go to your schools than if you have to close a school that they don’t like.” That, in a nutshell, spells out the benefits of competition for students and why you are so fortunate in Sweden to have the system that you have established.

In the finale of our film, our narrator says that barring a Swedish-style revolution it is hard to see how American education will ever meet the needs and demands of parents and their children. And given the strength of the interest groups opposed to school-choice systems like vouchers, it is difficult to envision a Swedish revolution coming to the U.S. However, we end by saying that that doesn’t mean that a revolution isn’t worth fighting for. I would therefore like to thank Sweden and its visionary policymakers for giving education reformers in America and around the globe inspiration and hope that we can create a better education system for all our children.

Thanks you very much again for inviting me here today.

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