At a recent conference on emerging school models, I was struck by one panelist’s observation that because education savings accounts (ESAs) are a public subsidy, they’re having a distortionary impact on the market—raising costs and lowering innovation in the microschooling segment relative to other states without ESA policies. In her view, ESAs are also unnecessary to transform education in the United States. Families, she argued, are migrating to alternative schooling models on their own.
I admit that I was drawn to the remarks because I share the concern. I’ve written about the distortionary impact of government subsidies in higher education, for example, because of how they’ve impacted the pricing of online learning in higher education, the growth trajectory of for-profit universities that led many of them to prioritize access over value, college expenditures more generally, or the various input-based policies and regulations that get attached to those dollars. Free markets and capitalism, by contrast, more efficiently allocate capital and cause individuals to make tradeoffs that—over time—lead to market-creating and disruptive innovations that generate greater prosperity.
Still, I’m less optimistic that without ESAs, we’ll have much of a chance for true Disruptive Innovation in schooling in the US.
As I wrote back in May:
“Schooling is compulsory for the most part. And everyone had access to what, from a consumer perspective, appears to be a free public school. As a result, there was little nonconsumption of schooling.”
In other words, because there’s already a large, public subsidy and a public requirement, “distortions” are already in place. As I continued:
“Because of the ‘free’ element of public schools, there was no true ‘overserving’ of individuals—a phenomenon that occurs when people won’t pay higher prices for product improvements and instead make tradeoffs. They’ll give up increased features for a lower cost, more stripped-down product. Without nonconsumption and overserved consumers, Disruptive Innovation is not possible.”
Although it’s perhaps true that there’s a lot of education entrepreneurship in non-ESA states—a robust supply-side—the demand side is clearly more vibrant in ESA states with large enrollments. That’s not a coincidence, as the ESA helps families overcome the challenge of competing with “free.”
As I wrote then:
“With an ESA, families get an allotment of dollars in, yes, a savings account, from which they can spend it on a variety of educational products and services. These range from schools to classes to tutoring to lessons, therapy, educational products, and more. If you don’t spend the money in a given year, that’s OK, because you can roll over the savings for future use.
As a result, now we’re not just talking about students choosing different schools or educational options. Instead, families have an incentive to consider the relative value of different educational goods and services, make tradeoffs, and choose accordingly.
That opens up the market for a variety of school types priced differently, and for families to factor pricing in their decision-making as they choose the right mix of services for them.
As ESAs grow, this creates the true conditions for Disruptive Innovation of schooling because now there is an opportunity for lower-cost educational products and services fueled by technology enablers to enter the market, start among those who are overserved by the full bundle of public schooling, and improve over time.
For families who stay in the traditional neighborhood school district yet don’t want to use its full bundle of services—and would like a more tailored set of services for their child—they may come, over time, to see this as an “expensive” choice.
Why? Because they are sacrificing receiving several thousand dollars in their ESA, which they could allocate to different educational options to create the right mix of services for their child.
In other words, traditional public schools might not feel “free” any longer.
That would create the opportunity for lots of low-end disruptions to emerge in the market, which could, in turn, shake things up in favor of the customized educational options each student needs to succeed.
That still seems right to me. It also echoes our analysis from 2008 when we first published Disrupting Class and calculated that homeschooling and full-time virtual schools would, in the most optimistic scenario, max out at roughly 10% of students. The data on how private school enrollment has changed over time reinforce the point.
Much has changed since then, but it still seems to me that ESAs are a critical ingredient in driving disruption of schooling, even if they will likely come with their own unintended consequences.
