Exaggerating the benefits of adult community education
This is a “sister post” to a discussion on the adult community education market over at the Education Directions blog. Dave Guerin has substantially more knowledgeable about the industry then I do, and his comments are well worth reading. I offered to do a small post discussing the “benefits of ACE” which have been bandied about.
Eric Crampton also takes the report to task here.
The post
In a report the is often used to justify ACE spending, the net benefit of adult community education (for 409,000) was stated to be between $4.8bn and $6.3bn annually – giving a total return of $54-$72 per $1 invested (see page 48). Wow, really – if I could get that sort of return I would be investing in adult community education for sure.
Of course, if we were to view the report in this way would provide the wrong conclusions.
So lets ignore the weaknesses in their survey (self-reported mental health? not clearly defining the “counterfactual” for those they surveyed – some would have had work or other changes in their life without the course), the use of the highest estimates of variables from arbitrary foreign sources to define the possible benefits of this spending, and the fact that they ignore the opportunity cost of GETTING the tax to spend on these schemes in the first place. Instead of all these weakness (which are still important mind you) I will focus on one issue: what is policy relevant.
Why look at this? Well the report is often used to justify a high level ACE spending. The numbers can only be used to justify spending if they are “policy relevant” – namely if they can define true “social costs and benefits” that aren’t taken into account in the market for ACE.
Now the factors that are policy relevant are NOT private benefits – these help determine the market price. They are benefits that stem from some third party, uninvolved in the transaction, gaining some benefit from the individual taking an adult community course. And they are not “fiscal externalities” (ht Offsetting Behaviour). So the policy relevant factors are:
- Increase in direct income: No
- Savings in government benefits: No
- Marginal increase in individual income: No
- Increase in income from self-confidence: No
- Reduction in family violence: No
- Savings for health: No
- Savings from crime reduction: Potentially, partially
- Increased community involvement by individual: No
- Higher income taxes: No
So some part of $171m-$254m can be seen as a positive externality, a pretty indirect one but lets be generous.
Taking the “possibly policy relevant” factors, and accepting the seemingly artificially inflated numbers (they state that it HALVES the chance of these 400,000 odd people being involved in a crime over their lifetime – see page 57), then the average return per dollar invested is about $2. Furthermore, that is an average not a “marginal” amount (contrary to the claims of the report mind you – see page 5). The marginal return (the amount of social return we will get if we increase spending by a small amount) is likely to be well below $1 per dollar.
Given what I feel has been a generous interpretation of the marginal social benefit, the suggestion would be that we should cut back on public funding for adult community education.
Conclusion
These numbers should not be used to justify policy, as they don’t provide directly policy relevant information. Anyone who uses the numbers to justify policy and is aware of these flaws should have nothing to do with policy anymore.
To be fair on the authors, they are asked to provide the “value” that is created, not talk about corresponding costs. However, the bit where they state “giving a total return of $54-$72 per $1 invested” is misleading for that very reason.
My criticism is not of the report per see, although I have no doubt we could all argue about some variables and valuations. My criticism is of the use of the above figure to justify policy – it is inappropriate, and we must be very careful.
Ok, so now I add another one to my list of “with work this shonky, everything they do is suspect” economic consultancy firms. Egads.
It is frankly disgusting how some outfits will sell reputation in this way. If you’re in the market for a really big number, there are at least two firms that will give you a really big number.
A >50:1 return ratio. The sheer brazenness of it! Treasury’s guidelines for CB analysis are very nice: I remember something to the effect of “If you’re getting 10:1 benefit ratios, you probably should be asking yourself why $20 bills are lying around”.
Of course, a thorough take-down will take you better than a month of reverse engineering all of their figures.
Some of the background numbers are pretty poor – for instance they assume the cost of tertiary education can be calculated by the average student loan balance, which assumes that (a) there are no opportunity costs to studying rather than working (b) all costs are covered by a stduent loan and (c) everyone is average, regardless of qualification length, fee costs, etc. And I think they’ve excluded the cost of government subsidies.
I had a look at how they justified the crime number. My gawd. Hit it over at Offsetting.
Great Article. I totally agree with you sir! 😀
I haven’t read the report, and I agree some wonky economics is often used to justify poor policy but on your article, I’m not sure why some of these are excluded from your analysis when society does recieve some additional benefit
” * Increase in direct income: No – Agreed
* Savings in government benefits: No – (not sure)
* Marginal increase in individual income: No – Agreed
* Increase in income from self-confidence: No – Agreed
* Reduction in family violence: No – (partial? surely there is a social benefit for partners/children)
* Savings for health: No – Agreed
* Savings from crime reduction: Potentially, partially – Agreed
* Increased community involvement by individual: No – (why not at least partial?)
* Higher income taxes: No” (again, shouldn’t this be partial?)
Could you comment why or why not on the above? in particular on higher income taxes, if the govt pays for a share of additional community education the person should choose a higher ammount of education, creating additional income and taxes, over and above what the person would choose themselves. I would have thought that it should be at least partially included.
Also on benefits, govt pays for education, and never has to pay a benefit again – its the same as crime reduction, govt pays for education and is less likely to have to pay for that persons prison sentence and other costs from crime.
@steve
Three things with these sorts of fiscal externalities (tax and benefits)
First, the type of criticism Eric Crampton has given of them here:
http://offsettingbehaviour.blogspot.com/2009/05/smoking-fiscal-externalities-and-harm.html
Second – if we are going to include “saved tax/benefit money” we simultaneously need to take about of the entire cost of the taxation/benefit. If both sides were measured correctly it is a lot more likely they would “wash out”.
Thirdly, and most importantly – government spending is determined by an implicit social contract that tells us what society is “willing” to spend for these services. The tax system should then be set to raise this revenue at the lowest cost.
Now if there is no actual benefits outside of the private individual to other private individuals (technological externalities), stating that we have an externality is tenuous – unless you can define a different inefficiency in the tax/benefit system to start with. And if that is the case, it would be preferable to solve that directly.
On the community involvement and family violence the argument is different:
Here, we have a group who voluntarily function with each other in a repeated sense – there will be some implicit “market price” for any action.
Trying to treat these as “externalities” is really crossing the thin line towards telling people how they should be living their lives.
ok I sort of agree with you now on the tax and benefit thing – though it relies on the assumption of the most efficient tax system, even though such a system may be pollitically untenable. (given that, I would still want to include it because its more about what policy is best for society, and achievable)
on community involvement though I cannot control who else is in my community, but perhaps there is a lower market price for rent in my community so that is fine (sort of, because surely there is some benefit from fewer “undesirable” communities).
but family violence is at least partial when it comes to children, but I suppose this is included under crime?
Thanks very much for this post, business success depends on everyone’s experience.
Sometimes I wonder why laws are made in the first place and to whose benefit is it made for. Way back in school when I was young, I had the impression that laws were made to benefit the public and to improve everyone’s lives. Now, this grim reality is painting an ugly picture of how ugly politics can be. Who calls the shots???
but family violence is at least partial when it comes to children, but I suppose this is included under crime
family its but under crime
great post really thanks