Adam points to a new study estimating a 400K social value of a good teacher. This is in line with other recent estimates. I want to make a couple of notes on how to think about that.

1) Social value isn’t a feel good concept. Hanuschek limits himself to future earnings of the students. The other big drivers are always crime reduction and public assistance reduction. So we are saying better teachers lead to higher wages, lower crime and less welfare. This is a far cry from trying to put numbers on soft factors like civic engagement.

2) As big as these numbers are they actually accord with the way people behave. In areas where private school dominates, parents obsess over getting Johnny into the right private school. There are obviously some peer factors at work here but at its heart a school is primarily a collection of teachers and classrooms. Unless we think the classrooms are really, really good, then the parents are implicitly obsessing over getting the right teachers.

Some of the most gripping scenes in a recent controversial movie shows parents in tears and praying over whether or not their child will win the lottery for entry into a particular school.  Rarely do you see people crying and praying that they will get into say, a T.G.I.Fridays. There are some fine dining establishments in New York and elsewhere that might be a different matter.

Yet, we notice that when people are on their knees hoping that God will intervene to get them into a place, that typically translates into a high market value of said place.

So we get big numbers, but people also act like their ought to be big numbers.

3) Not only are university professors paid more than K12 teachers but the pay per instructional hour differs wildly because professors spend so little of their time instructing. We can have a whole debate about why that it is but at the end of the day the market is telling us that the value per hour of professorial instruction is extremely high.

Yet, our science tells gives us strong reason to believe that K12 instruction should be more valuable. In general the older one gets the less impact good education seems to have. Giving someone a great college professor should be less impactful then giving them a great Kindergarten teacher.

Now, it could simply be that the technical nature of university instruction means that great professors are in short supply, while there are plenty of great Kindergarten teachers. Thus, the short supply drives the wages of professors higher. That implies, however, that there is enormous consumer surplus just raining out every single Kindergarten classroom.

That’s not how parent behave. They behave as if some Kindergartens are much better than others. With very low prices on Kindergarten instruction, that looks like market failure.

4) I want to leave as light a touch as I can here but let me simply say that when market forces control neither the quantity nor the price in a market, the observed prices can diverge wildly from the optimum even when those setting the price and quantity have the best of intentions.

That is, if finding the best teachers is worth upwards of half-a-million a year then something is seriously going wrong in the structure of education. However, with no market check its entirely possible for things to go really, really wrong.

Now since there is no restriction on the production of private K12 education we would expect it to eventually come to dominate. The key thing to remember, however, is that there are credit constraints. The children are the ones who are going to be making the extra money, not the parents. The children can’t borrow because kids can’t enter into binding contracts. The parents can’t borrow because they themselves won’t actually have any higher earning capacity with which to repay the loan.

You could try to arrange something where the parents borrowed and then sought to guilt the children into paying the loan back but there is serious moral hazard here since its fully and totally in the parents interest to simply default and let their kid walk away with a great education and no debt.

Thus you have a major problem where no one in the private market can make a creditable commitment to repay the schools for the future value they produce.

5) Where we do see something like strategic behavior emerging is in the housing market. By buying into an expensive school district parents are able to credibly amortize the value of education by linking it to the physical house. Though no one can repossess your kids education they can take back your educational golden ticket: a house in the right district.

Thus we would expect to see skyrocketing prices as people compete for this valuable resource through side channels. Indeed, it does look like that happens.