(Lanham MD: Scarecrow Education Press, 2001 forthcoming)

August 16, 2000

The two main points of the book are: 1.) Most of what is said about 'parental choice' wouldn't apply if genuine competition were present. Since choice advocates often claim market forces are present when they are not, much of what they say about parental choice is wrong or misleading. 2.) In 'a nation at risk', the differences between the widely debated, very limited parental choice options, and the largely ignored options that would establish genuine competition are very important. Because of that, a lot that choice advocates say about parental choice is irrelevant. Wrong, misleading, and irrelevant claims about parental choice make it seem like a much less attractive K-12 education reform option.

After describing the critical requirements of genuine competition, the book identifies the analytical errors, fallacies, and inappropriate perspectives that underlie the parental choice controversies. That includes, in particular, the misleading use of the term 'experiment', problems discerning relevant evidence from hype, and mis-statements about cost, church-state legal issues, diversity, and equity. The final chapter on political strategy and implementation issues follows a chapter that explains why K-12 schools governed by market forces would be much more attractive to teachers than the status quo.

• Research Associate, Education Policy Institute and Associate Professor of Economics, University of Texas - SA, COB - Downtown, 501 W Durango Blvd., San Antonio, TX 78207 (210) 458-2519, Jmerrifield@utsa.edu

PREFACE 

Because system transformation is what 'a nation at risk' needs, much of what is said to advocate and oppose parental choice is wrong, misleading, or irrelevant. Assertions to the contrary notwithstanding, very few of the prominent parental choice proposals can change the system. Most of the public debate is about policies that can only move a few children within a virtually unchanged system. This book aims to discuss choice advocates policy and political strategy mistakes, suggest corrections, and describe the key elements of the school choice wars, including the views of non-experts. In my opinion, what the American people believe about parental choice will determine the nature of K-12 reform, and the future of our country.

This book defines and argues for a particular view of parental choice as a reform catalyst. In the process, the book is highly critical of strategies, tactics, processes, assumptions, constraints, and incentive systems. Since parental choice advocates have accomplished a lot, I want to apologize for the unavoidable linkage between names and criticisms.

I hope that my perspectives from behind the front line will re-orient America's most important movement, not alienate it's key field generals and foot soldiers. After all, regardless of this book's impact, the parental choice advocates of the recent past will be the most prominent advocates for the foreseeable future. The same thing is true of educators. Any reformed system will depend on most of the educators who are now collectively producing unacceptable results. I wrote this book because I believe that it can help current parental choice advocates and educators produce much better results, and that the future will be much brighter if they do.

This book evolved from Dr. Myron Lieberman's realization that the specific parental choice programs supported and analyzed by choice advocates hardly ever had any relevance to their professed goal of reforming K-12 education. Likewise, there was much talk about competition, but little apparent understanding of what competition entailed, or what could be expected from it. Dr. Lieberman, Senior Research Scholar at the Social Philosophy and Policy Center and Chairman of the Education Policy Institute, first raised those issues in his book, Public Education: An Autopsy (Harvard University Press, 1993), and subsequently in "The School Choice Fiasco," (The Public Interest [Winter, 1994]: 17-34). Meanwhile, although I was quite new to the issues of K-12 reform and parental choice, I was reaching some of the same conclusions as Dr. Lieberman. That's where things stood in March, 1997 when similar critiques of alleged experiments caused Dr. Lieberman and I to appear together in a School Reform News article. A letter I wrote to Dr. Lieberman eventually produced an invitation to join him at an October, 1997 conference at the Dallas Federal Reserve Bank Headquarters. That meeting kicked off the work that became this book.

Initially, the book was to be co-authored, but it eventually became clear that Dr. Lieberman's schedule would not permit that level of work-sharing. Still, he did much more than emphasize the need for a book on the issues that concerned both of us. He provided many helpful suggestions, materials, and contacts, and commented on each chapter draft at least once. In short, Dr. Lieberman's help was invaluable, and he deserves much of the credit for whatever impact the book eventually has. Of course, he is not responsible for the shortcomings that survived his critical comments. I did all of the research, and made all of the final judgements about content and style.

While Dr. Lieberman deserves by far the largest 'Thank You,' several other people made significant contributions to the final product. Again, they deserve credit for some of the book's virtues, but none of the blame for its shortcomings. Vincent DiMartino, my colleague at the University of Texas at San Antonio, commented on all fifteen chapters. His suggestions prompted many essential clarifications. Darcy Olsen of the Cato Institute read the entire manuscript and provided some helpful comments; one in particular, greatly improved Chapter Fifteen. RosaLynda 'Gina' Vormelker did the copy editing that allowed this to become publisher-friendly enough to see the light of day. None of the hundreds of students that has seen a semester's worth of my exams and assignments would list copy editing as one of my strengths.

1. Introduction
2. Elements of a Competitive Education Industry 
3. Experiments
4. Real Evidence About Competition

1. Liberal/Conservative Role Reversal 
2. Fallacies About School Choice
3. Government Regulation Issues
4. The Neglect of Costs
5. Fund Children or Institutions?
6. Equity and Equality
7. Diversity Issues

CHAPTER ONE 

"When you’re fighting from the trenches . . . your point of view

is distorted by the fog of war."

- Ken Elias

This book was written because the vagueness of the term 'school choice' has led to widespread confusion about the desirability of parental choice as public policy. Parental choice plans differ with respect to grade level coverage, whether they include private schools, the financing method, how many children can participate, and the payment process (direct payment, vouchers, tax credits, etc). The list of potential variations is endless. All such plans are labeled 'school choice' plans, so the public is understandably confused.

This book is partisan in that it strongly favors parental choice. Since it argues for specific versions of parental choice, it rejects much of the alleged evidence and common arguments responsible for the confusing school choice wars. The nearly universal failure to distinguish different versions of parental choice is a major problem because generalizations are drawn from claims and evidence that are relevant only to some versions. Outcomes of 'choice' under some conditions do not demonstrate that parental choice is a good (or bad) idea under all conditions. Naturally, both sides emphasize the outcomes that support their point of view.

The mistaken inferences that effects of non-competitive situations – often mistakenly alleged to be competitive - are good indicators of the effects of competitive situations reduce the political feasibility of parental choice plans that would establish a competitive education industry. This book focuses on the competitive education industry version because it:

• Forces others to clearly define what they mean when they support or criticize 'school choice' or 'parental choice'.
• Makes it possible to analyze the issues from a consistently held concept of choice.
• Allows assessment of the single most critical argument for parental choice; that the benefits of a competitive education industry outweigh the transition costs.

There are many versions of parental choice in part because there are several reasons why choice advocates think society will benefit. Each reason places different demands on the specifics of a choice policy. The strategy of doing whatever is politically feasible in the short run also underlies parental choice variety and the confusion about what parental choice entails.

In 1955 and 1962, Milton Friedman proposed universal choice through vouchers so that competition would invigorate the delivery of K-12 education services. Unfortunately, early voucher programs were not universal, and they only slightly reduced the public funding bias against private school users. That's still true of most choice proposals. Only allow a tiny fraction of families can participate, and always with much less public funding per child than public school users. Choice advocates' practice of not publicly protesting major restrictions helped choice opponents convince people that vouchers divert public funds to benefit a few children at the expense of the vast majority that must stay in public schools. 'Voucher' became "the V word;" the scarlet letter of the school choice wars. Most choice advocates reacted to the stigma by replacing 'voucher' with the general terms 'school choice' and 'parental choice.' Choice opponents reintroduced the term 'voucher' as much as possible. The multiple electoral defeats of 'voucher' proposals also lowered expectations and produced the incrementalism strategy. Some choice advocates are "frustrated by the piecemeal nature of the moves that have been made toward increasing choice," but incrementalism is the accepted practice.

Many choice advocates switched to the term 'scholarship.' They apparently agree with John Miller's remark that "scholarship sounds so much more appealing than voucher." Unfortunately, 'scholarship' is a bad label. Universal choice is a key element of a competitive education industry, but a universal scholarship program is a contradiction. The 'scholarship' label reinforces the perception that only a relatively few students will qualify. Scholarship programs available to, even targeted at, low achievers are likewise, contradictions. Use of 'scholarship' in place of 'voucher' deters potential applicants that expect the eligibility criteria to include a strong academic background.

Concern for religious freedom is the dominant motivating factor of many parental choice advocates. According to that rationale, parents that cannot afford private school tuition must send their children to public schools that do not give religious instruction, and that promote concepts like evolution that some parents regard as anti-religious. Low-income families don't like having to send their children to schools that contradict their family values. Forcing them to do so contradicts our education traditions, and it creates social tensions and political hostilities.

Equity concerns are another widely cited justification of parental choice. Economically disadvantaged families cannot afford to live near the better public schools, or send their children to private schools. From that perspective, parental choice reduces the advantages of affluence. Equity benefits will probably prove to be the biggest political asset of competitive education industry versions of parental choice. Some analysts cite the equity rationale to argue for means testing public support; a position opposed in Chapter 10.

The confusion does not end with politically driven substitutions like 'scholarship' for 'voucher'. It begins with the basics. 'Public education' and 'public school system' mean the same thing to most people even though the former is a goal, and the latter is a delivery system. For example, Frederick Wirt and Michael Kirst's politics of education text equates a demise of public schools with "an end of American commitment to public education" even though a public commitment to schooling doesn't require that the government operate schools, or the denial of public funds to families that prefer the education services of private entities. Jack Kemp, 1996 Republican vice presidential nominee, and Erskine Bowles, former Clinton Administration chief of staff, put it very nicely: "the current model - a noncompetitive monopoly - is not the only way to deliver public education." Not nearly enough people make the distinction between the goal and the delivery mechanism.

Except when quoting people that use 'public education' to refer to the public school delivery system - a practice that inhibits communication and clear thinking - this book uses the term 'public education' only in Chapter Nine's more detailed discussion of this source of confusion. This book's opposition to the public school monopoly on public funding is perfectly consistent with its support for the public education goal of universal education opportunity and shared core values. This book argues that a competitive education industry is the best way to deliver education services. 'School system' will refer to the entire K-12 education system, including the private sector.

The terms 'public school' and 'private school' are also somewhat misleading. The former adequately conveys the public ownership of education facilities, but the exclusive attendance zones of most public schools make them among the least public of government facilities. 'Private' sounds very exclusive, but private schools do not have formal attendance zones. Many private schools have their own significant enrollment barriers, in particular high tuition for students that don't qualify for scholarships, and entrance requirements, but many private schools are more widely accessible (more public) than public schools.

Since the public school system is a government agency - funded by taxpayers, staffed by government employees, and accountable to politicians - 'government' school is more accurate than 'public' school. Indeed, "one of the truly remarkable features of the education literature is that schools are rarely treated as the government agencies they are." Usage of 'government' school is growing, and truth in labeling is a major guiding principle of this book, but the familiarity of the term 'public school' trumps the more accurate 'government school'. 'Public' school in single quotes will remind the reader of the relative exclusivity of each school, and that attendance zones make 'public' schools the least public of government facilities.

Widespread dissatisfaction with K-12 academic gains is a major reason why this book was written. The causes of dissatisfaction include low test scores, 'public' and private school differences, comparisons with students in other countries, differences between school districts, and the skill deficits of entry-level job applicants. Those deficiencies get your attention, but none of the causes establish an appropriate standard. Many of the countries that top the USA in the international comparisons are deeply dissatisfied with their schools. Suburban 'public' schools and private schools generally have higher test scores than urban 'public' schools, but none of the groups perform acceptably. For example, former Assistant Secretary of Education Chester Finn said that the states with the best test scores "are at the top of the cellar stairs." Virtually everywhere, a large share of the students score below the basic skills level, and a majority are below proficient.

Promises to spread the best existing practices, match the performance of schools in other places, or regain past achievements are not the reasons to implement a competitive education industry. A business that said that its ultimate goal was to match the competition, or match past achievements, would probably vanish quickly, and deservedly so.

Shocking academic deficiencies raise interest in reform, but the case for a competitive education industry does not hinge on attention-getting evidence of student shortcomings. The case for a competitive education industry rests on the choiceworthiness imperative. In a competitive setting, producers must specialize and relentlessly pursue improvement to survive. The contrast between competitive markets and other delivery systems is overwhelming evidence that market systems - though not perfect - are superior to politically driven delivery systems. K-12 education is not an exception to that generalization. A competitive education industry should generate better services at a lower cost than any alternative including foreign systems that rank above the current U.S. school system in widely publicized international comparisons. It is true that hardly anyone cares about competition per se, but the marketable objectives like equity, academic improvement, and social harmony won't be realized without it.

There are many good reasons to believe that a competitive education industry will perform better than most markets. Traditional sources of market problems - poorly informed buyers (mistakes and fraud), society or negative neighborhood effects (often called 'negative externalities' or 'spillover costs'), not enough competition - are likely to be rare. Political control is not required to realize the spillover benefits of K-12 education. The recurrent, expensive nature of education purchases promotes consumer informedness, and it raises the value of a good reputation. Producers cannot rely on deceptive practices to maintain long-term relationships with well-informed parents. They must offer substantive alternatives to all parents, even though not all parents choose carefully. The low value of education resources (physical assets and the skills of education professionals) in non-education uses also strengthens educators' incentives to pursue continuous improvement, and develop long-term customer relationships. Those factors minimize the fast-buck potential that underlies the fraudulent behavior and shoddy service that exists in some industries.

Chapter 2 defines 'competitive education industry.' The competitive education industry discussion follows a brief discussion of 'monopoly' and the applicability of that term to our current school system. Chapter 3 shows that much of the widely cited evidence and research - favorable as well as unfavorable - is essentially irrelevant to the merits of a competitive education industry. Chapter 4 discusses the evidence that does help us evaluate the desirability of a competitive education industry.

Chapter 5 shows that supporters and opponents of parental choice rely on arguments they reject in other contexts. Although no policy conclusions are drawn from those inconsistencies, they help illustrate the confused state of the school choice wars, governing and funding systems' resistance to change, and the importance of improved parental choice analyses. Chapter 6 describes the fallacies that pervade the school choice wars, especially arguments that don't apply to a competitive education industry. Chapters 7-11 discuss regulation and cost issues, confusion between education goals and procedures, equity and equality issues, and diversity and unity issues. The discussion of those issues is in the context of a competitive education industry, and there are frequent comparisons with existing parental choice analyses.

The third section of the book deals with strategic and tactical issues. Chapter 12 discusses strategic/tactical fallacies. Many of them parallel the substantive fallacies discussed in Chapter 6. Chapter 13 is an analysis of the private voucher movement and its implications for a competitive education industry. That chapter explains how privately funded vouchers might lead to a major political breakthrough, but it concludes that it is too early to tell if private vouchers will help or hinder the emergence of a competitive education industry.

Chapter 14 compares the current school system, very limited versions of parental choice, and a competitive education industry from teachers' perspective. Even though market forces contain a large dose of unpredictability, there are still numerous reasons to believe that many teachers will prefer a competitive education industry to the current system, and to the very limited versions of parental choice adamantly opposed by teacher unions. Identifying gainers and losers is much more complicated than defining good and bad teachers. Chapter 15 summarizes the outlook for a competitive education industry, including ways to overcome significant political roadblocks, and the key policy issues that will arise.

The main objective of this chapter is to clarify the concept of a competitive education industry. However, the chapter begins with a discussion of monopoly. A direct comparison with monopoly - the existing situation in K-12 education everywhere in the United States - gives the key elements of a competitive education industry more meaning.

Whenever competitiveness is an issue, market area is a key issue. The market for some goods and services is local, while it is regional, national, or international for others. Plumbing repair is a locally-provided service. It may be supplied competitively in some areas, but not in others. Automaking is a global business. The number of auto producers worldwide is quite important. The number in specific places is nearly irrelevant. The reverse is true of plumbing repair. A one plumber town is a monopoly, even if there are many plumbers elsewhere. By itself, however, the one-plumber situation is not a major problem. If the plumber performs poorly, charges extraordinary rates, or just can't keep up with the demand, the monopoly will probably vanish. Migration and training programs can deliver new plumbers. Except for natural monopolies (defined below), monopolies survive only if shielded by high entry barriers.

Some commentators claim that the 'public' school system is not a monopoly because there are nearly 15,000 diverse school districts. Because education markets are local, the large number of districts nationwide is as irrelevant to the competitiveness of a K-12 service area as the number of independent water purveyors (often monopolies), nationwide.

Though the single provider feature seems quite clear cut - 'monopoly' literally means 'single seller' - practically speaking, monopoly is a matter of degree. The government has an 88 percent market share of K-12 education. That market share is much closer to the single seller case than virtually every alleged monopoly; 88 percent far exceeds the level that usually triggers a U.S. Justice Department anti-trust lawsuit.

There are four kinds of barriers to market entry:

• Government policy
• Economies of scale – Unit production costs are sometimes much lower for larger firms.
• Patents – temporary rights to an exclusive franchise
• Control over resources required to make a product

Only the first two are relevant to K-12 education. Government policy is the most important cause of the 'public' school monopoly. The most critical barrier is that a government- provided K-12 education is available to families at no additional charge beyond the taxes they must pay. The 'public' school system has an almost airtight monopoly on public funding. In addition, state governments typically regulate the physical facilities, teacher qualifications, pupil age limits, the curriculum, the school day and the school year, pupil transportation standards, and a host of other matters. Entrepreneurs are theoretically free to enter the market for K-12 services, but it is very difficult to beat a zero-tuition competitor.

Economies of scale exist in sparsely populated areas. There, K-12 education is a natural monopoly. Low enrollments would make it too expensive to operate tiny competing schools, in place of one larger one. Some areas are so sparsely settled that there are no schools. Children go to schools in larger, nearby communities. Parts of Maine and Vermont have longstanding examples of that practice. Outside sparsely populated areas, K-12 is not a natural monopoly.

Monopolies lack direct, intense competition, which leads to higher prices and inefficiencies, and the 'public' school monopoly does charge taxpayers a high and ever-rising sum. The 'public' school system's administrative overhead is one example of inefficiency. According to an international comparison by the Organization for Economic Co-operation and Development (OECD), the U.S. is the only country with fewer teachers than non-teaching staff (a 3:4 ratio compared to a 5:2 average ratio for the other countries in the OECD study).

Dynamic inefficiency - insufficient improvement - is evident in the school system's failure to systematically pursue research and development, and implement innovations. In addition, while change in 'public' schools is undeniable, technological backwardness is the norm, and there is complacency about success and failure. There is no discernible propensity to identify and spread effective practices, or to root out unproductive practices and practitioners. According to a Dale Ballou and Michael Podgursky study, 'public' schools give little weight to the quality of teachers’ credentials. Unproductive teachers are only rarely terminated.

Chapter 1 pointed out that parental or school choice doesn't mean the same thing to everyone, and that the absence of a commonly accepted definition causes widespread confusion over its desirability. A clear definition will not eliminate controversies, but it might prevent the ones that would result from failure to clarify what is meant by parental or school choice.

A parental choice policy produces a ‘competitive education industry,’ if it contains four key elements. A general description of the four key elements of a competitive industry precedes a discussion of each in the context of K-12 education, along with some closely related issues.

The four key elements are:

1. Free entry and exit in the long run.

On the supply side of the market, the long run is the time it takes to set up a competing business. In the long-run, the number of sellers changes in response to changes in profitability. Increased profitability attracts additional sellers, and thus makes the market more competitive, and decreased profitability does the opposite. Therefore, changes in the number of sellers keep the profitability of competitive industries comparable. On the demand side, the long run is the time it takes to become a new purchaser of a product. Population is the primary determinant of the number of buyers. However, the number of buyers also changes in the long run if the price trend differs (holding quality constant) significantly from the overall rate of inflation.

Since universally tiny market shares - so small that no one can influence the market price on their own - maximize the benefits of competition, economics texts consistently list "many buyers and sellers" as a key feature of a competitive industry. When consumers have more options, sellers cannot survive complacency, inefficiency, and inattention to constantly changing consumer desires as easily. Unpopular sellers lose resources, and must improve or perish. However, a large number of sellers is not an indispensable factor. Contestability - new firms can easily contest market share - is the critical element. Economists have shown that contestability with only a few sellers at any one time, though not as good as many buyers and sellers, still produces reasonably competitive behavior.

2. Another key feature - though usually somewhat overstated - is that buyers and sellers are well-informed, and the buyers are mobile. Actually, competitive industries can include many poorly informed, low mobility buyers. Competitive pressures are adequate - that is, they establish producer accountability to consumers - when there are enough mobile, well-informed buyers to affect the financial viability of the sellers. Financial viability is the key consequence that establishes accountability. A relatively small number of informed and mobile buyers is often enough. High fixed cost industries require very few mobile, well-informed buyers. For example, consider the airline industry; a high fixed cost industry because of the money tied up in aircraft, and because depreciation and administrative costs vary little with ticket sales. American Airlines once earned a significant profit equal to just one passenger per flight. Since ticket prices must reflect airlines' large fixed costs, but the number of passengers per flight has little impact on costs, a small change in the number of passengers has a large effect on airlines' net revenues. Schools also have high fixed costs, so their financial condition is also quite sensitive to small enrollment changes.

The two remaining key elements are often taken for granted, but they are absent from ‘public’ school systems and many choice proposals.

3. Producers’ survival depends on their ability to satisfy the consumers of their services.
4. Prices must change to reflect market pressures.

Nobel Prize winner Frederich Hayek summarized the critical features as follows:

It was the main point of Hayek's extremely influential The Road to Serfdom. The title of Hayek's book aptly describes what happens to societies when they eliminate those market features, or miss opportunities to create them. 

The foregoing discussion means that the following features will characterize a competitive education industry.

1. No significant barriers to the entry or exit of education producers. Such barriers are absent only if: a.) parents are free to enroll their children in another school without any change in the publicly funded tuition subsidy they receive, if any; and b.) families can enter the education market by relocating, or by ending/starting home schooling, without suffering significant financial penalties.
2. The survival of each school will depend on it's ability to attract enough parents willing to pay a price that will enable the school to stay in business.
3. The number of parents willing and able to transfer their children to another school is large enough to affect the financial viability of schools.
4. Schools charge whatever they want without jeopardizing the parents' eligibility for direct government support, or indirect support through vouchers or tax credits.
5. Schools can refuse to serve someone if they don’t violate anti-discrimination laws. Government regulation predominantly addresses the health, safety, and fraud issues that apply to all businesses and non-profit producers.

The best possible situation from a competitive perspective is a large number of independent competitors - parents as buyers and independent producers as educators – with no one large enough to affect the market price on their own. The number of producers is the number of independent school owners, such as the government, individual business firms, and religious organizations, not the number of schools. For example, if a region has 200 ‘public’ schools, twenty Catholic Schools, and ten private, non-denominational schools operated by one company, the region has 230 schools, but just three education producers. If the school board decides to privatize management of some schools by contracting it out to a private firm, the number of producers stays the same. The region may have another school manager, but the attendance area boundaries keep children from gaining any additional options.

Differences between private management of a 'public' school and private ownership create other problems. Managers face uncertainty about contract renewal, which creates the temptation to maximize short-run profits by cutting corners, and under-investment because the management contract might not survive long enough to recover investment outlays. While the profit motive enhances competitive forces considerably, it can be counter-productive in the absence of competition; a privately-managed 'public' school is still a local monopoly.

Free entry also demands a high degree of certainty about underlying authority and demand. Entrepreneurs are much less likely to enter an education market if the political support for the key elements of the market is shaky, or if key policies face a credible legal challenge. Pilot voucher programs, and some privately funded voucher programs, will not stimulate major new investments. For example, a ten-year, privately funded full tuition voucher program located in the Edgewood District of San Antonio, Texas filled up existing space in private schools, but it has not led to significant new construction, or any major expansions. Shaky or explicitly temporary programs also diminish parental participation. Parents value continuity. They are less likely to choose a new school if its survival could depend on political decisions that have no relationship to school quality or parent preferences.

The ideal 'many buyer,' 'many seller' case is the most likely outcome in most places. In places that can support only one school, free entry and exit will still create competitive pressure by making markets contestable. Examples created by actual rivalry in large markets will increase the pressure to behave competitively in the small markets.

Tuition increases attract competition, so free entry and exit will keep tuition levels low. Even if there are entry barriers or fixed prices, rivalry will at least partially dissipate above normal profits through service upgrades, and by creating excess capacity. The pre-deregulation airline industry was a good example of that profit dissipation process. Before deregulation of airline fares, most of the fares set by the Civil Aeronautics Board (CAB) were very attractive to the airlines. The CAB protected the regulated airlines from competition from new airlines, so the rivalry for passengers among the existing airlines occurred through promises of better service, including more attractive flight attendants, better meals, and more frequent flights.

Service upgrade rivalry and excess capacity will arise to the extent policymakers over-react to the efficiency or fairness rationales with excessive education subsidies. The efficiency argument is that the profitable level of education is below the efficient level because members of society other than children benefit when children learn more. For example, society benefits when children learn citizenship skills, but some parents may only shop for vocational education. Some low income families cannot even afford that. In both cases, the efficiency argument is that the tuition subsidy necessary to rectify those deficiencies costs society less than the deficiencies. There is also the fairness argument. Society will probably continue to insist on guaranteeing some access to education for every child.

Free entry and exit does not exist if parents suffer a significant financial penalty when they transfer a child to another school. Because of the status quo's large penalty for choosing a private school, the status quo is quite hostile to them. It is very difficult to compete with free services. Private schools must charge parents a significantly higher price for a service that is usually more cheaply made than what 'public' schools offer. The difficulty of that feat is what keeps private schools’ market share extremely low. That any non-elite, non-sectarian private schools can survive is quite remarkable. Consequently, free entry and exit means equal or nearly equal government funding of mainstream students; no differences in the government support of 'public' and private school students.

Free entry and exit will also act as a primary agent of the geographic expansion of a competitive education industry. Consider the situation of an area with a competitive education industry surrounded by areas without one. Parents suffer no penalty for moving there, and if they prefer private schools, they realize a large financial gain, or large losses if they leave the area. Those rewards and penalties exist even in the absence of convincing ‘evidence’ that competitive pressures improve educational outcomes. The development of such evidence will attract parents that prefer government-run schools. Local governments compete for residents and tax base, so the authorities in adjacent areas will probably react. Many responses are possible, including a direct, in-kind response like their own competitive education industry.

While free entry does mean some imitation of successful sellers, it does not mean greater homogeneity. Markets involve individual decisions, so competition reduces the differences between sellers only when buyers become more similar. For example, higher profit margins for Chinese restaurants would increase their size and numbers, but specialization within the restaurant industry would remain the same.

Specialization is a critical element of markets and the entry-exit process. Since buyers are usually quite diverse, sellers must specialize to capture a share of the market. Specialization increases productivity because then each educator concentrates on what they do best. Educators will specialize in different subject matters, aptitude levels, and teaching styles, including use of technology. Contrast that to the status quo. We stifle specialization by assigning the diverse children of each attendance area to neighborhood 'public' schools. In the absence of free entry and specialization, educators must struggle to be "all things to all people." That means one size fits all for required classes, and lots of elective courses and extra-curricular programs. Within the severe constraints of the current system, specialization is already a common denominator of success. Principals in high-performing, high poverty schools "design their curriculum around the unique strengths and expertise of their staff."

2. Survival

In a competitive industry, customer preferences determine the difference between financial trouble, and eventual extinction through liquidation or bankruptcy, and success. The survival of each school depends on it's ability to recruit students.

The likely demise of slow-to-change, unpopular schools raises the issue of bankruptcy; a political liability without some careful explanation. Bankruptcy is an easily monitored, relatively objective indicator of failure, and the possibility of bankruptcy strengthens the incentive to pay attention to customers, and make decisions carefully. Bankruptcy is rare in the public sector, which is a major reason why there are so many allegedly obsolete government programs. In the private sector, bankruptcy performs the critical task of shifting resources from obsolete and inefficient producers to new and growing businesses.

Bankruptcy does not always force a change in the ownership of school assets. The Legal Information Institute points out that: "Under Chapters 11, 12, and 13 [of the Federal Bankruptcy Law], a bankruptcy proceeding involves the rehabilitation of the debtor to allow him to use his future earnings to pay off his creditors." Debtors get time to restructure. Customers may not notice changes.

In a competitive education industry, bankruptcies would probably not cause many abrupt shutdowns. Children would move to a new school on short notice only in the most extreme circumstances. Bankruptcies that require more than restructuring would still usually only shift the physical assets of the school to new managers. Ownership changes, even sudden mid-year changes, will not necessarily disrupt classrooms. New owners have strong incentives to cater to the existing student body's capabilities and desires. That means that new owners are unlikely to abandon the existing faculty and staff, or subject and methodological specialty areas, except where there is an obvious link to the cause of the bankruptcy problem.

The public can establish safeguards against abrupt mid-year shutdowns. Parents will avoid financially shaky schools if the authorities publish critical financial data. An analog to bank deposit insurance is another option. The authorities can protect parents and children from mid-year shutdowns by requiring schools to post a bond or buy insurance sufficient to run the school until the school year ends. Insurance companies would audit schools, and signal which schools are risky through refusal to issue a policy or by demanding high premiums.

Unhappy parents do not yet threaten the survival of 'public' schools. Most stay because moving children to another school is costly, and alternatives are often scarce, unattractive (religion mismatch), or expensive. Furthermore, when children leave 'public' schools, the school only loses the state government allocation. Since the tax money raised locally is not lost, departures raise a district's per pupil funding, and they can help growing districts avoid new construction. Districts suffer only if the state’s payment exceeds the cost avoided by having fewer students. If there is population growth anywhere in the district, district authorities can avoid budget cuts at any school by reconfiguring the district's attendance areas.

The connection between customer satisfaction and funding level is also minimal when funding comes from sources other than clients; for example, endowment funds, legislative appropriations, or from management contracts. In the current system, parents can reward good service, or punish poor service, only through an organized political movement. Educators frequently ignore calls for change unless parents first convince their representatives - the people who actually fund educators' paychecks - that parent demands are politically significant.

Since K-12 education entails significant fixed costs, a few active, mobile parents can greatly impact school finances. The parents that are unaware of school differences, or indifferent to them, will benefit from the efforts to please the informed, mobile parents. For example, all car buyers benefit from safety features that appeal to safety conscious buyers. The benefits of competition do not depend on most parents being motivated, and able to choose the best school for their children.

 4. No Price Controls - Flexible Prices

Price movement is a primary source of information and incentives. Price movement is an indispensable component of market forces. Price changes are the main reason for net exit or entry. Customers signal increased demand by driving up prices, which increases industry profitability, and motivates entry. As more services become available, prices drop, the output of the industry stabilizes, and inefficient producers go out of business. Only the best firms continue to earn above normal profits. That process performs the crucial function of allocating resources to competing uses, and it helps motivate continuous service improvement. Each resource is put to its most valuable use when market prices are flexible and comprehensive and, therefore, quickly reflect changes in market conditions. Prices are comprehensive when they reflect all of the costs of producing and consuming a product.

Comprehensive, market-determined, flexible prices do not exist in the current system, or in public school choice programs, including charter schools. 'Public' school tuition stays at zero even after major changes in key underlying demand and supply factors. The political process drives the resource allocation decisions and performance evaluations. Most voucher and tax credit programs would not establish market-determined prices either. The programs are too small, and some prohibit private schools from charging more than the voucher amount.

Requiring private schools to accept the voucher amount as full payment (banning privately funded 'add-ons') will greatly narrow the school choices. Except that expensive, elite private schools would survive, a universal program with a ban on add-ons would have the same effect as a price ceiling at the voucher amount. Participation limits like those present in Florida and Milwaukee wouldn't lessen the price ceiling effect very much. To see that, consider the following example. Say a voucher is worth $3000. Then, a $3000/year private school would cost families only the school taxes they pay. However, if 'add-ons' are banned, families cannot use the voucher to help pay tuition of $3001. An extra $1 worth of services would cost them $3001. Few families will pay thousands more for a few dollars worth of additional services. A $3000 voucher combined with a ban on 'add-ons' would eliminate school choices costing somewhat more than $3000, and greatly reduce the demand for school choices costing significantly more than $3000. For example, there probably wouldn't be any $4000 services, and very few $7000 services. Many of the families that would be willing to buy the $7000 services by supplementing the $3000 voucher with $4000 of their own money would probably not pay the full $7000 themselves if add-ons were not allowed. Instead of paying an extra $7000 for an additional $4000 worth of schooling, many parents would use the voucher at a school that would accept it as full payment, and then pursue additional education informally by investing in tutoring, summer programs, and home education tools like games and software.

 5. Regulation Issues

Though competitive pressures create accountability (consequences proportional to service quality), people that don't trust the market may seek regulation of factors like tuition, discipline policies, input (including personnel) characteristics, and subject matter content. Such regulation limits the scope of specialization, the potential avenues of innovation, and it can become an entry barrier. Therefore, only the regulations that apply nearly uniformly throughout the economy (health, safety, fraud, discrimination by race, creed, gender, or national origin) should apply to the producers of K-12 education.

A modest minimum size restriction will probably preclude the establishment of extremist schools at taxpayer expense. Note, however, that such a restriction is just insurance against an extremely unlikely event. There is no evidence that private school students are more likely to engage in extremist behavior.

Since the critical elements discussed in this chapter are widely neglected, the school choice wars have yet to tell us much about the desirability of a competitive education industry. Only a few parental choice policies that would nearly establish a competitive education industry have even been on a political radar screen. Getting the key participants in the school choice wars, and the public, to link choice, competition, and the critical elements discussed in this chapter must begin with an assessment of the alleged evidence. The next chapter critiques the development and commonplace usage of inappropriate assumptions, misleading studies, and misinterpretations of facts.