Introduction
The United States spends more on K-12 education per student than almost every other country, yet student academic achievement lags behind many developed nations. This seeming paradox can be explained by examining the underlying economics of the education system. There are several economic factors that help explain why U.S. academic achievement lags despite high spending per student, as well as potential solutions that could improve incentives and competition to enhance student performance. If designed appropriately based on sound economic principles, education reforms in areas like school choice, administration, labor policies, economies of scale, and equitable funding can strengthen provider incentives, redirect resources to the classroom, and boost student outcomes in a cost-effective manner.
Monopolistic School Districts
One major reason U.S. academic achievement lags is that most public schools operate as monopolies within their geographic school districts. Unlike most industries, public schools do not have to compete for students. Families are assigned to schools based on where they live, and funding is tied to enrollment within district boundaries. This lack of competition reduces incentives for public schools to efficiently allocate resources or improve quality. As Smith and Schwalbach explained, monopolies tend to be wasteful and unresponsive to consumer preferences compared to market-based systems with choice and competition.
Some parents do have options like charter, magnet or private schools, most families are still limited to their zoned public school. Breaking up school district monopolies through expanded school choice policies like vouchers, tax-credit scholarships, and education savings accounts (ESAs) could induce more competition and force schools to improve academic offerings to retain and attract students (Lueken and Shuls). Countries that outperform the U.S. often have robust school choice policies. For example, the Netherlands allows parents to freely choose any public or private school and funds follow students. Introducing similar universal choice through ESAs or vouchers in more states could positively impact achievement.
Bureaucratic Administration
Another issue is that public school districts in the U.S. are overseen by centralized bureaucratic administrations. According to Lueken and Shuls, large bureaucratic organizations tend to be less responsive to consumers and less efficient compared to organizations operating in a competitive market environment. Administrators in a competitive market must constantly improve quality and efficiency to retain customers and maximize profits. In public school districts, as tenured monopolies, administrators face less pressure to efficiently manage resources or satisfy parents and students. Decentralizing administration by breaking up school districts into smaller units, or shifting power to the school level, could improve accountability and responsiveness. Bureaucracies may also contribute to inefficiency through administrative bloat. From 1950 to 2009, the number of K-12 students increased by 96 percent, while the number of full-time public-school employees increased 386 percent (Lueken and Shuls). Administrative staff expanded 702 percent, nearly eight times faster than student enrollment. Reducing administrative staffing and overhead through better incentive structures could free up resources for instructional spending and student services.
Labor Market Rigidities
Collective bargaining agreements and tenure policies for public school teachers also contribute to inefficiency, inflexibility, and rising costs. Tenure provides guaranteed job security after a probationary period, while collective bargaining centralizes teacher compensation decisions. Economist Caroline Hoxby found that tenure and collective bargaining increased per-pupil spending but had no effect on student outcomes. Tenure laws make it difficult to remove low-performing or mismatched teachers (Lueken and Shuls). Collective bargaining locks teacher salaries to rigid pay schedules based on seniority rather than performance or labor market conditions. Reforming tenure laws and decentralizing teacher salary decisions could create flexibility to better align teacher compensation with teaching effectiveness and local conditions. Retaining top talent may require higher salaries, while low-performers could be paid less or replaced rather than granted automatic tenure. Adjusting salaries based on performance, qualifications, experience and local competitiveness could improve teacher quality and student outcomes.
Economies of Scale
Research by economists Smith and Schwalbach suggests U.S. public schools may also suffer from diseconomies of scale, where consolidation and larger schools increase costs without improving quality above a certain threshold. Consolidation policies drove a 34 percent decrease in the number of public school districts from 1951 to 1971, while average district enrollment tripled from 2,100 to 6,100 students (Smith and Schwalbach). Larger consolidated districts realized administrative economies of scale, but the reduction in competition led to inefficiency. Costs rose faster than outcomes improved.
Similarly, average school size increased over time. But Studies show an optimal school size of 300 to 500 students before diseconomies emerge. Above this threshold, performance diminishes while costs continue rising. Downsizing large districts and schools could reduce overhead costs while improving accountability, community ties, and academic outcomes. Smaller schools often outperform larger ones, with greater individual attention and stronger relationships. Policies limiting district and school size could recapture economies of scale lost to consolidation.
Inequitable Funding
Public education funding in many states remains inequitable, providing less revenue per student to high-poverty districts. This violates the economic principle of vertical equity, which holds that students with greater needs should receive more resources (Smith and Schwalbach). Low-income students face more challenges requiring additional support services and funding compared to more affluent students. Policies tying more education funding to students rather than districts through weighted student funding formulas can direct more money to disadvantaged students and schools. This enhances fairness and better matches funding to student needs.
Social Factors
Finally, academic underperformance partially stems from socioeconomic factors like poverty and family instability that schools cannot control. Addressing these root causes through new welfare, healthcare, housing and labor market policies may be necessary to boost achievement. Students facing poverty, hunger, trauma or unstable home environments will struggle academically regardless of the education system. While school policies play a key role, adequately addressing student needs requires coordinated efforts across policy areas — not just education reform in isolation.
Conclusion
Several economic factors help explain why U.S. academic performance lags despite high spending, and potential solutions. Expanding school choice and decentralizing administration could strengthen provider incentives and improve efficiency. Reforming tenure and collective bargaining policies could enhance teacher quality and flexibility. Rightsizing larger districts and schools could recapture lost economies of scale. And addressing socioeconomic factors requires a comprehensive antipoverty policy approach beyond just education reform. While the challenges are complex, research shows well-designed reforms can strengthen provider incentives, redirect resources to the classroom, and ultimately boost student outcomes cost-effectively. With smart economic solutions, the U.S. can close the achievement gap while also enhancing productivity and maximizing returns on education spending.
Work Cited
Lueken, Martin F., and James V. Shuls. “The Future of K-12 Funding: How States Can Equalize Opportunity and Make K-12 Funding More Equitable.” EdChoice (2019). https://eric.ed.gov/?id=ED595038
Smith, Aaron Garth, and Jude Schwalbach. “The Conservative Case for Public School Open Enrollment. Sketching a New Conservative Education Agenda.” American Enterprise Institute (2023). https://eric.ed.gov/?id=ED629270
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