Applying Financial "Innovations" To Public Education

Via Barry Ritholtz at The Big Picture, here are six lessons from the collapse of the economy in 2008-2009 that Economics Nobel Laureate Joseph E. Stiglitz says we haven't learned yet:

1. Markets are not self-correcting, and without adequate regulation, they are prone to excess.

2. There are many reasons for market failures. Too-big-to-fail financial institutions had perverse incentives: Privatized gains, socialized losses.

3. When information is imperfect, markets often do not work well – and information imperfections are central in finance.

4. Keynesian policies do work. Countries, like Australia, that implemented large, well-designed stimulus programs early emerged from the crisis faster

5. There is more to monetary policy than just fighting inflation. Excessive focus on inflation meant that some central banks ignored what was happening to their financial markets. The costs of mild inflation are miniscule compared to the costs imposed on economies when central banks allow asset bubbles to grow unchecked.

6. Not all innovation leads to a more efficient and productive economy – let alone a better society. Private incentives matter, and if they are not properly aligned, the result can be excessive risk taking, excessively shortsighted behavior, and distorted innovation.

Notice number six on the list. Stiglitz elaborates:

While the benefits of many of the financial-engineering innovations of recent years are hard to prove, let alone quantify, the costs associated with them - both economic and social - are apparent and enormous.

Indeed, financial engineering did not create products that would help ordinary citizens manage the simple risk of home ownership - with the consequence that millions have lost their homes, and millions more are likely to do so. Instead, innovation was directed at perfecting the exploitation of those who are less educated, and at circumventing the regulations and accounting standards that were designed to make markets more efficient and stable. As a result, financial markets, which are supposed to manage risk and allocate capital efficiently, created risk and misallocated wildly.

President Obama and Mayor Bloomberg are helping to bring the kinds of financial "innovations" Stiglitz is talking about above to public education.

Neo-liberals like Obama and Bloomberg privilege the "free-market" and want to bring "free-market principles" like merit pay, standardized test tracking and the Race to the Top zero sum competition for funds (12 states win, 48 states lose) to public education in order to shake things up and force what they see as entrenched schools and educators to innovate.

But as Stiglitz notes about the financial markets, if unregulated, they bring short-sighted action and greedy behavior that is harmful to individuals and society as a whole. That's the kind of action we're seeing in public education these days as cities and states try all kinds of unproven innovations, like closing whole swaths of schools in cities like Chicago and New York and reopening them as charter schools.

Mayor Bloomberg has closed over 50 public schools in the last three years. He says more closures are to come in the next four years of his third term. He closes these schools for low test scores and low graduation rates as measured by the Department of Education (some schools with lower scores and rates remain open, however, so the process is not very transparent.) President Obama likes that school closure policy and has institutionalized it as part of his Race to the Top zero sum/winner take all education funds competition.

Leaving aside how some of the most recently closed schools in New York City used to have higher test scores and higher graduation rates before hundreds of at-risk students from other schools were dumped on them, let's note that fear of closure will have all kinds of harmful effects on how schools and educators operate.

You can be sure this year's Regents exams will get extra special attention from the graders when grading time comes. You can also be sure that teachers will feel the pressure from assistant principals and principals. For the ELA Regents exam, essays that should be graded a "2" will get a "3" and perhaps even a "4" if a student is right under a 65 score for the test. With the stakes so high, grade inflation will be rife throughout the system. And merit pay creates the same kind of grade inflation/cheating environment that the school closure policy does, only on the individual level for teachers.

Public education needs to be a collaborative enterprise where teachers help each other and schools work together to educate children. But with the Obama/Bloomberg school closure policies, schools will compete to enroll students who are either at or above grade level while finagling to get at-risk students, ELL students, or support services students off their enrollment lists. Why should a school take a chance having test scores and graduation rates drop and have Mayor Bloomberg order them closed when they can simply exclude "problem" students (as so many of the charter schools do)? On the individual level, why should teachers take on "at-risk" students in their classrooms and risk low test scores when their pay is contingent upon the scores? Even worse, why should teachers take on at-risk students if the safety of their jobs is contingent upon scores, as both Obama and Bloomberg want to do by tying standardized test tracking to teacher evaluations?

As for the data being used to evaluate students and teachers, that too is suspect. Stiglitz notes that "When information is imperfect, markets often do not work well – and information imperfections are central in finance." Well, the same can be said for education. Test scores can be a part of the picture of how a student or a teacher is performing, but they are certainly not the whole part. And considering how easily manipulated the current battery of state tests are, I'm not sure they are even a part of the picture at all. Even Secretary of Education Arne Duncan admits that the tests as currently constructed are imperfect and not a terribly good measure of student or teacher performance. But he also says they're the best we have, so we have to use them. The data fetish itself is a troubling thing these days, but the fact that the data fetishists insist upon using the data even though they admit it is suspect is even more troubling.

Finally, paying students merit pay for test scores seems designed to perpetuate the Wall Street mentality that nothing counts as progress unless it goes up every quarter and pays you a bonus. And I think that's the idea behind all these hedge fund managers and financial wizards getting into the public education sphere. It's simply another revenue grab by the robber barons who already own this country, have already been bailed out by middle and working class taxpayers and make ridiculous amounts of money for the task of moving paper around at the nation's most expensive casino on Wall Street.

You would think that after the hedge fund managers and financial wizards created the worst economic crisis since the Great Depression, they would be shunned from public policy discussions instead of being given a seat at the education reform discussion table and given another taxpayer-provided punch bowl to devour.