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The $264,000 Question

The $264,000 Question. Patrick M. Byrne, Ph.D. Chairman and CEO, O.co Western Region Captive Insurance Conference Salt Lake City, Utah September 28, 2011. What’s wrong with monopolies?. At market clearing price, supply & demand balance. PRICE. supply. Market clearing price.

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The $264,000 Question

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  1. The $264,000 Question Patrick M. Byrne, Ph.D. Chairman and CEO, O.co Western Region Captive Insurance Conference Salt Lake City, Utah September 28, 2011

  2. What’s wrong with monopolies? At market clearing price, supply & demand balance PRICE supply Market clearing price How much stuff society gets demand QUANTITY

  3. That’s what wrong with monopolies. What’s wrong with monopolies? At market clearing price, supply & demand balance PRICE Demand at monopolist’s price supply monopolist’s price … and pays this much more for it. monopolist’s rent Market clearing price How much society gets now How much society gets demand QUANTITY Society gets this much less stuff…

  4. 7 Questions & Answers About US Education & Spending • How much do state & local governments spend? • How big are the combined fiscal deficits of the 50 states? • How big are the deficits versus the state budgets? • How much does the US spend on K-12 schools? • How many students go to K-12 schools? • How much does the US spend per student? • What is US spending/student vs. the OECD?

  5. 7 Questions & Answers About US Education & Spending • How much do state & local governments spend? $2 Trillion • How big are the combined fiscal deficits of the 50 states?

  6. 7 Questions & Answers About US Education & Spending • How much do state & local governments spend? $2 Trillion • How big is the US “state fiscal crisis”? ≈$60 Billion • How big is the crisis vs. the budgets? • How much does the US spend on K-12 education? • How many students go to K-12 government schools? • How much does the US spend per K-12 student? • What is US spending/student vs. the OECD?

  7. 7 Questions & Answers About US Education & Spending • How much do state & local governments spend? $2 Trillion • How big is the US “state fiscal crisis”? ≈$60 Billion • How big is the crisis vs. the budgets? ≈ $60b/$2T = 3% • How much does the US spend on K-12 education? • How many students go to K-12 government schools? • How much does the US spend per K-12 student? • What is US spending/student vs. the OECD?

  8. U.S. Department of Education(nces.ed.gov)

  9. Education Expenditures: State + Local + Fed (Fiscal ‘06-’07) $275 b + $258 b + $50 b = $583 billion (2006-2007) + 5%/year X 4 years = 1.2 X $583 billion = $700 billion

  10. 7 Questions & Answers About US Education & Spending • How much do state & local governments spend? $2 Trillion • How big is the US “state fiscal crisis”? ≈$60 Billion • How big is the crisis vs. the budgets? ≈ $60b/$2T = 3% • How much do we spend on K-12 education? ≈$700 Billion • How many students go to K-12 government schools? • How much does the US spend per K-12 student? • What is US spending/student vs. the OECD?

  11. U.S. Public School Enrollment

  12. U.S. Public School Enrollment (2010)

  13. 7 Questions & Answers About US Education & Spending • How much do state & local governments spend? $2 Trillion • How big is the US “state fiscal crisis”? ≈$60 Billion • How big is the crisis vs. the budgets? ≈ $60b/$2T = 3% • How much do we spend on K-12 education? ≈$700 Billion • How many students go to K-12 schools? 50 Million • How much does the US spend per K-12 student? • What is US spending/student vs. the OECD?

  14. 7 Questions & Answers About US Education & Spending • How much do state & local governments spend? $2 Trillion • How big is the US “state fiscal crisis”? ≈$60 Billion • How big is the crisis vs. the budgets? ≈ $60b/$2T = 3% • How much do we spend on K-12 education? ≈$700 Billion • How many students go to K-12 schools? 50 Million • How much do we spend per K-12 student? ≈$700b/50m • What is US spending/student vs. the OECD?

  15. 7 Questions & Answers About US Education & Spending • How much do state & local governments spend? $2 Trillion • How big is the US “state fiscal crisis”? ≈$60 Billion • How big is the crisis vs. the budgets? ≈ $60b/$2T = 3% • How much do we spend on K-12 education? ≈$700 Billion • How many students go to K-12 schools? 50 Million • How much do we spend per K-12 student? ≈$700b/50m ≈ $14,000/student 7. What is US spending/student vs. the OECD?

  16. 7 Questions & Answers About US Education & Spending • How much do state & local governments spend? $2 Trillion • How big is the US “state fiscal crisis”? ≈$60 Billion • How big is the crisis vs. the budgets? ≈ $60b/$2T = 3% • How much do we spend on K-12 education? ≈$700 Billion • How many students go to K-12 schools? 50 Million • How much do we spend per K-12 student? ≈$700b/50m ≈ $14,000/student 7. What is US spending/student vs. the OECD? 41% higher

  17. School Spending: 4 Arithmetic Problems • Expenditure ≈ $14,000/child • How many children are in the average classroom?

  18. School Spending: 4 Arithmetic Problems • Expenditure ≈ $14,000/child • The average government classroom has 24.60 children

  19. Expenditures per classroom $14,000 expenditures per child X 24.60 children per classroom $344,400 expenditures per classroom ≈ $ 344,400 per classroom

  20. School Spending: 4 Arithmetic Problems • Expenditure ≈ $14,000/child • The average US classroom has 24.60 children • Expenditure/Classroom ≈ $ 344,400 • How much do a teacher + classroom cost?

  21. Teacher compensation

  22. Average teacher compensation $47,208 average wages (per BLS) X 1.27 benefit load (per NEA) $59,954 total compensation costs “Rent” + Heating, lighting, cleaning + Common Space 25’ X 40’ = 1,000 square feet X $20 rent + CAM $20,000 $59,954 + $20,000 ≈ $80,000 total direct costs

  23. School Spending: 4 Arithmetic Problems • Expenditure ≈ $14,000/child • The average US classroom has 24.60 children • Expenditure/Classroom ≈ $ 344,400 • Teacher comp + direct classroom costs ≈ $80,000 Question: Where does the other $344,400 - $80,000 = $264,400 go?

  24. Here’s my guess: At market clearing price, supply & demand balance Demand at monopolist’s price supply PRICE monopolist’s price … and pays this much more for it. monopolist’s rent marketing clearing price How much society gets now demand QUANTITY Society gets this much less stuff…

  25. A better idea: Let children withdraw from government schools. Save the $14,000. Give them each a scholarship for $6,000. Net savings = $14,000 - $6,000 = $8,000.

  26. The Fiscal Effect of Saving $8,000/Child Assume 20% take the deal: 20% X 50 million kids = 10 million $8,000 X 10 million = $80 billion savings If 30% take the deal…. 30% X 50 million = 15 million 15 million X $8,000 = $120 billion savings

  27. School Spending: 4 Arithmetic Problems • Expenditure ≈ $14,000/child • The average US classroom has 24.60 children • Expenditure/Classroom ≈ $ 344,400 • Teacher comp + direct classroom costs ≈ $80,000 Question: Where does the other $344,400 - $80,000 = $264,400 go?

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