Monday, October 29, 2007

Property taxes and the optimal student-teacher ratio 

Being an economist in a smaller place, and particularly one willing to speak on public policy, means you get lots of calls for commentary. One such call showed up Thursday night while I was driving back from watching the World Series: an 8am appearance on Hot Talk to talk about the school levy in the St. Cloud school district. I got all of about three minutes in, just enough time to say something I thought was relatively non-controversial -- increasing property taxes tends to push down house prices, which around here (and damn near anywhere else in America) don't need any more pushing.

I guess it was controversial to one of the other people on the show, school board president Jerry von Korff. I received Friday night an exhaustive email suggesting that I am incorrect on this basic point. So I spent a little time thinking before returning his email -- indeed, I get to be wrong every day here on Scholars -- and then sent the following back to him (personal notes edited out):
I think there are two points on which we have some disagreement. First, that property values include some prospective valuation of both tax and government service flows and, second, that the cost of 7% of 742's income would be catastrophic. While I think it would hurt, I don't think it's nearly so calamitous, except to the employment prospects of some teachers.

One of the points you did not make in the part of Barnett's show that I heard was that the property tax paid by 742 residents if the tax did not pass would fall, and not by a little bit. Had I had enough time, I would have read the data from your own FAQ. So a no vote is in essence a vote for property tax owners to receive a tax cut. People have a right to make that choice. The possibility of that choice means that the expected value of taxes to be paid on a house are lower right now than they will be if the levy passes. (That doesn't mean, by the way, that I think the levy will fail; in fact I'll be surprised if it does. But that would not invalidate this analysis.)

The value of that tax cut has an immediate benefit, in the form of lower taxes, and a second benefit in the form of lowering the PITI -- principal, interest, taxes and insurance -- on a house in the district. (Added here later, not in letter: The district has a tax calculator that says on a $150k valued house you would only pay a net increase of $1.50 a month, but what the top line really says that if the levy expires you get a tax cut, which I estimate to be about $9.80 a month. On net, then, the vote is costing you $11.30 a month.) That means that more buyers would qualify for a mortgage to buy that house, and certainly that means house prices could be sustained. Surely you are aware of this from your work with appraisers, and I apologize for boring you with things you already know, but this was the basis of my comment. I'd expect any economist to agree that if the number of people who can afford to be a house falls, demand declines leading to a drop in price, all other things equal.

Now to the second point, which you probably are thinking right now: The reduction in services in the district would be a negative for potential homeowners with children. Laying off teachers means increased class sizes, and you may wish to argue that this will lead to parents wanting to move to Sartell or SRR [Sauk Rapids-Rice] districts. This would make those houses even less desirable! you might claim.

Parents might believe this. But they would find that smaller class sizes really are not that helpful to student learning. The evidence from Project STAR in Tennessee done by economists like Eric Hanushek or Caroline Minter Hoxby are pretty clear that there are many better ways of spending money than by keeping class sizes at, say, 20 rather than 25. Hanushek has a meta-study that looks at evidence from a hundred or so separate pieces of research and there's just no evidence that 742's students would be helped by maintaining class sizes two students less than they would be if the levy went down. (Two is my very quick-and-dirty estimate from the MDE's statistics. If it's much more, you should show me why that's true.) In STAR, Hanushek found that a 10% reduction in classroom size cost about $850 a student but raised student achievement only 0.02 standard deviations. Surely you could find a better way to spend the money.

I have a great deal of sympathy for your point on the unfunded mandate of NCLB and if the district made accountability the key of its pitch, arguing that to do so it needed money for online testing, I might be willing to support something here. But if you can only argue that the loss is in classroom size and extra-curriculars, I have a hard time with the argument that these will offset the loss in demand for houses by pricing out the lower-income families who can't qualify the PITI for their mortgages. I have less sympathy for the outcry over the state's funding formula, but that's really not the point here. I'm indifferent whether the state charges me more taxes and transfers them to you or the school district issue a bond and ask me to pay for it. If anything was to tip the scale, it would be that the bond implies local control. Given your comment on NCLB, I'd think you'd be for that.
Many school districts and legislators use this comment on class sizes as the trump card -- you wouldn't want your child in a larger class, she'd get less attention that way. So here's the question: At what point is the class small enough? Go ahead, ask your teacher or your school board this question. If 20 is better than 25, is 15 better than 20? If so, then is 10 better than 15? Should we have one for every student? I mean, if money wasn't an object, at what point do the gains become so small that the district and its teachers would decide to do something else with the money?

And when they tell you they want to hold class sizes down, ask if they've got enough rooms for those kids. Are they planning to come back and ask for another building levy to house those extra -- but smaller! better! -- classes? Ask them as well, as Hanushek did to Congress nine years ago, whether they are aware that between 1950 and 1995, pupil-teacher ratios fell by 35% ... without much of any change in performance?

One also needs to talk to parents and get information out about the cost of reducing class sizes compared to the benefits. Many school officials believe the voters will react negatively to increasing class sizes by voting with their feet. They may be right. To the extent that you can reduce that reaction, you might help a school board move in the right direction.

I have had a fairly long exchange with von Korff since writing this, and without either of us conceding much he and I have found a way to talk about teacher productivity. It's what we really want to know: How can we make teaching and teachers more effective? There's no doubt that much of what happens in the classroom is outside the teacher's control, and that a simple look at test scores without including environmental factors matters. We won't necessarily agree on what the right set of environmental factors are, and maybe we never will. But what also matters -- and on this I think we have some agreement -- is that teachers need to be incentivized to use the best methods. In his view, that requires smaller classes. In mine, that's a huge opportunity to discuss whether we could find a better delivery method that might mean larger classes. If the focus is on output rather than input, on production rather than class size, therein lies the possibility of real changes that matter.

In short, what's the optimal student-teacher ratio? The economic research I mentioned above suggests there's a very flat range of achievement scores for classes between about fifteen and thirty students. Where's your school? Again, I beg you to look up your own district's data. It's not hard to find, and it's not hard to understand.

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