THE ROLE OF GOVERNMENT IN EDUCATION (Milton Friedman)

Economics and the Public Interest ^ | 1955 | Milton Friedman

[spunkets]

"non-redeemable (but tradable) bonds "

I don't see why anyone would spend 97% and get nothing tangible in return. It amounts to a donation scheme that has a possibility of someone donating back to the original donor at a later date.

[Remember_Salamis]

"ROIs that are not too obvious or not too quick like theoretical astrophysics - the market approach would shut that down."

-- Well, you're falling into a trap that government funds ALL education, when in fact tons of private money flows in as well, like scholarships. In reality, federal funding of education is only a tiny fraction of overall education funding.

"Not really. His chair is base-funded so it is the taxpayer's money that pays for it."

-- I didn't know Cambridge he was taxpayer-funded; I thought it was private like American Ivy League Schools. Hawkin's equivelant in a US Ivy league school would fit my description of an edquate ROI, however.

[Remember_Salamis]

No, it is not a donation scheme. If you own a bond, you can sell it to somebody else wishing top buy it. Let's say you bought a $10,000 EduBond. You collect dividends on it for 5 years, $1,500. After 5 years, you decide to sell it, not for the $10k you paid for it, but $11k. So, from your $10k investment, you made $2,500. A $2,500 return on a $10,000 investment. That's a 25% return in 5 years! pretty darned good. For an investor to lose money in a 5-year period, the price of the bond would have to fall 15%.

Do you trade stocks? If so, this will make sense. Often, companies issue new shares in addition to the ones already in circulation; Usually this is done by selling shares to an "institutional investor" that can buy a large chunk of shares. If you own a share in the company and wish to sell it, you don't go to the company and hand it in; you have to find somebody to buy it. If you can't find somebody to buy it, you have to drop your "ask" price until you find a buyer. EduBonds will work in the same way.

Actually, it would make the EduBond market more fluid if we "split" the EduBonds into smaller units, perhaps $100 apiece; that sounds better. $100 EduBond shares will be pretty easy to trade.

So you see, it IS NOT a "donation scheme". If it were a donation scheme, you would also be donating your money to the stock market every time you bought a share of a company. Any questions???

[Remember_Salamis]

Here's how attractive it would be to investors if we assume a constant 3% dividend rate and 3% appreciation in bond price every year:

Year 1: 100.00 x .03 = $3.00 dividend
Year 2: 103.00 x .03 = $3.09 dividend
Year 3: 106.09 x .03 = $3.18 dividend
Year 4: 109.27 x .03 = $3.28 dividend
Year 5: 112.55 x .03 = $3.38 dividend
Sell at 112.55

---

$15.93 (dividends) + 12.55 (sell profit) = $28.48 profit

$28.48 profit/$100 investment = 28% ROI!
Annualized ROI = 5.7%!

Here's how it would be if we assumed the same dividend, but the bond dropped 3% every year:

Year 1: 100.00 x .03 = $3
Year 2: 97.00 x .03 = $2.91
Year 3: 91.26 x .03 = $2.74
Year 4: 88.52 x .03 = $2.66
Year 5: 85.87 x .03 = $2.58
Sell at 85.87

---

$13.89 (dividends) – 14.13 (sell loss) = $0.24 loss

$0.24 loss/$100 investment = -0.24% ROI
Annualized ROI = -0.048%


So you see, even with a 14% drop in price, the investor is still breaking even. That's the beauty of dividends. In the stock market, dividends behave slightly different, with dividends being a defined amount, not a defined percentage.

[spunkets]

The money for those dividends comes out of the original payment and tax money. I'll be back later to finish reading the article. Night.

[Remember_Salamis]

Yes, the government pays the dividends. And the government will also "match" the dividends going to investors with funds going to education for that particular field.

So, the government is only paying the interest. But, much more is actually going towards education. For every $6 that the GOVERNMENT spends on education, $103 would go to education ($3 government dollars to the investor, $3 back to the education in matching funds). That's a 1,716% return on the Government's investment in year 1. That ROI will go down over time, and I'm crunching the math on a possible program to "buy back" these EduBonds.

[LowCountryJoe]

...I'm in the military. And in the military the government makes targeted investments in education. The military will pay for you to go to school, get a degree and then get a commission (ROTC), but they will only pay (in most cases) if you choose a degree path chosen by the military, such as engineering, aeronautics, physics, political science, nursing, or area studies (like middle eastern culture). Why? Because that's what is needed. And there's no reason why the Government shouldn't do the same things for civilians...

Whoa! The military is still small enough for planners to get together and decide the proper allocation of skilled people. Also, everyone is paid equally based on their grade and time in service. As a serviceman (or woman), one is being trained for their short contracted periods (assumption being the non-lifer) for the specific benefit of the military. The skills that one obtains through military training just happen to be just one of several positive externalities that benefit society.

But, in general society there is no need for a planner nor is it practical. The market place takes care of compensating for scarce skills and skills of value and it doesn't reward skills that serve little or no purpose of production. THE MOST a government should do in the planning of education for a whole economy is to provide incentives (or even disincentives) to persuade people to acquire (or not acquire) desirable (or undesirable) skills; and even this argument can and SHOULD be picked apart. You do see where planning the education of an economy is freedom limiting, don't you?

[Luke]

"Education is today largely paid for and almost entirely administered by governmental bodies or non-profit institutions.

Reallllly!!!! And just where does the taxpayer fit into this picture?

The paper was written in 1955."

Well I suppose that is as good as any excuse. This simply shows that back during 1955 (I was six years old) our parents and grandparents were being indoctrinated to believe that all good things come from government. The public school system continues that policy today with our children and grandchildren. Otherwise a very good post, thanks.