Exhibit A on why charter schools are a bad idea:
It had been a month since one of the nation’s largest charter school operators collapsed, leaving 6,000 students with no school to attend this fall. The businessman who used $100 million in state financing to build an empire of 60 mostly storefront schools had simply abandoned his headquarters as bankruptcy loomed, refusing to take phone calls. That left Mr. Larson, a school superintendent whose district licensed dozens of the schools, to clean up the mess.
Charter schools sound great in the abstract. Less government regulation! More money in the classroom! Anything the government can do, private corporations can do better! Unfortunately, the promise largely remains unmet. As with some other efforts to turn public enterprises into private ones, unforseen problems have developed. Private companies have incentive to cut costs in ways that their employers (the public) do not expect and cannot prepare for in even carefully designed contracts. Charter schools perform no better than public schools in districts with similar income levels, and have the effect of increasing class and race segregation. Right now we’re fighting them in Washington state, although I expect to lose. The other side has better soundbites.
I’ve never really understood the “cut government regulations” argument. For consumers, regulations are great; we don’t have to worry about whether our food is poison or our cars are about to breakdown. In a perfectly free market, we would have to spend an enormous amount of time discerning between the sellers of reliable and unreliable products. Regulations do much of the work for us. Moreover, even business likes regulation, as long as that regulation applies to customers, supplies, and competitors. Regulation cuts transaction costs enormously. Business groups and corporations don’t typically go to Washington to rail against regulation; they go to make regulation more favorable to them and less favorable to the competition. The only sorts of regulations that business really doesn’t seem to like are environmental and labor, and we all have good reasons for keeping those around.
This isn’t to say that no regulation interferes with commerce. In Germany, I observed that it was impossible to go to the grocery store past 8pm on a weekday, 2pm on a Saturday, or at all on Sunday. This is unnecessarily restrictive, and probably detracts from consumption, hiring, and eventually production. But to rail against regulation in the abstract is to fall into a host of libertarian fallacies.
UPDATE: Political Animal weighs in:
What it is, though, is a cautionary tale about the “ownership society.” The problem with privatizing public services is that, in the end, it’s the government that picks up the pieces if the private sector fails. If you invest a piece of your Social Security in private mutual funds and your mutual fund collapses when you’re 64, what happens? In theory, it’s just tough luck and you’re screwed, but we all know perfectly well that’s not what would really happen. As with the S&L disaster in the 80s or the LTCM collapse in the 90s, if enough people are affected the government will step in and make them whole.
There’s no way to avoid this kind of moral hazard completely, but you can reduce it considerably with fairly intrusive regulation. Unfortunately, the cure may be worse than the disease. To reduce the moral hazard sufficiently often requires a level of regulation that effectively converts a private enterprise into a de facto public enterprise. So what’s the point?