Demographic Structure and the Political Economy of Public Education [report]

James Poterba
1996 unpublished
This paper examines the relationship between demographic structure and the level of govemmentspendingon K-12education. Panel data for the U.S. states over the 1960-1990 period suggests that an increasein the fraction of elderly residents in ajurisdictionis associated witha significant reduction inperchild educational spending. This reduction isparticularly large when the elderly residents and the school-age population are from different racial groups. Variation in the size of the school-age
more » ... lation does not result in proportionate changes in education spending, so students in states with larger school-age populations receive lower per-student spending than those in states with smaller numbers of potential students. These results provide support for models of generational competition in the allocation of public sector resources. They also suggest that the effect of cohort size on government-mediated transfers must be considered in analyzing how cohort size affects economic well-being. and NBER Spending on primary and secondary education is the largest expenditure item it state and local government budgets, While tax-financed public education may provide some benefits to society and the local community at large, most of the return to such spending accrues to families with children. The costs of public education nevertheless fall on households with and without school-age children. In particular, older households with owner-occupied homes pay local property taxes as well as state sales and income taxes that ultimately finance K-1 2 education. These generational differences in the net benefits from publicly-provided education can lead to tensions in the political process in which education budgets are set. This paper explores the empirical significance of these generational tensions, and presents evidence suggesting that during the postwar period, a state's demographic composition has affected the level of per-child education spending. Questions of intergenerational burden-sharing and equity in school finance have received less attention to date than intra-generational issues such as inequality in school district spending levels. The prospective aging of the United States' population, indicated by the projected growth of the population share aged age 65+ from 12,5% in 1990 to 18,7% in 2030, may however lead to heightened generational tensions and interest in these issues. These issues have already become salient in debates over Social Security, where younger workers are taxed to finance benefits for older retirees, The transfers in the public education system flow in the opposite direction. The analysis presented below relates more generally to the analysis of how cohort size affects the well-being of cohort members. Traditional analyses of this issue in economic the induced rates 2 demography focus on the supply and demand for workers, and on of return on various assets. Those in a large cohort must supply their labor when real wages than aggregate labor supply is high, so they are predicted to earn lower those in relatively smaller birth cohorts. Similarly, when those in large cohorts decide to save for retirement, they must compete with many other savers in buying assets, thereby bidding up prices and driving down returns. These two effects combine to reduce the lifetime utility of those in large birth cohorts relative to those in smaller cohorts. This traditional analysis neglects the potentially important role of government transfers in altering the inter-cohort distribution of resources. Because the level and direction of government-mediated transfers reflect in part the relative political powers of different cohorts, those in small cohorts may receive smaller net transfers than those in larger cohorts. Preston [1 984] suggests that such generational competition is part of the explanation for the relative improvement in the economic status of elderly households in the U. S., and the decline in the well-being of children, during the 1960-1980 period. This hypothesis is confirmed by at least anecdotal evidence on public support for various government programs. Recent survey results suggest that support for increased federal funding of public schools declines from 77 percent if the respondent is under 30, to 47 percent for those over age 70 [Business Week, 3 April 1995, p. 42]. The theoretical relationship between demographic structure and the age-specific pattern of government spending is complex, in part because the age-specific benefits of various government programs [19861, for example, develop an 3 may be difficult to assess. Richman and Stagner alternative to Preston's [19841 hypothesis that a rising number of elderly households will lead to greater government transfer flows toward this group. They suggest that rising numbers of dependent elderly may seek to raise the training of younger workers, both to raise the pool of resources from which transfers can be funded and to raise the quality of services they receive. Such alternative hypotheses make the relationship between the age structure of the population, and the level of age-specific transfers, an issue for empirical research. The present paper explores the link between cohort size and spending patterns by focusing on the relationship between state and local education spending per child and three demographic variables: the share of the population over age 65, the share of the population of school age (5 through 17), and the difference in the racial composition of the elderly and school-age populations. The paper is divided into four sections. The first summarizes previous work on demographic structure and public spending determination, with particular attention to studies of public education. Section two presents the econometric specification that provides the basis for this study, and summarizes the demographic variation across the U.S. states. The third section presents regression evidence on the association between demographic structure and education spending, along with "control equations" that relate state and local spending for activities other than K-1 2 education to the same set of demographic variables. A brief conclusion suggests several limitations of the current analysis, as well as directions for future work. Health: Why and How, " in V. Fuchs (cd,), Individual and Soc ial ResDonsibilitv (Chicago: University of Chicago Press). Poterba, James M. (1995b), "Capital Budgets, Borrowing Rules, and State Capital Spending," Jou rnal of Public Fcono mic s 56, pp. 165-188. Preston, Samuel (1 984), "Children and the Elderly in the United States, " Demoaraohv 21, pp. 435-457. 30 Richman, Harold A. and Matthew W. Stagner (1986), "Children: Treasured Resource or Forgotten Minority ?," in Alan Pifer and Lydia Bronte (eds, ), Ou r Aainq Societv, paradox and .
doi:10.3386/w5677 fatcat:zvfg3wbgjjgfbmjydjn533ldui