Election 08: Measure 60

Ballot measure 60 proposes to mandate that public school teacher pay and job security be based solely on classroom performance and not on seniority.

Teachers are one of the most visible examples of an age old problem in economics: what we call the principal-agent problem. The crux is this: how do you write a contract that aligns the incentives of the agent (the employee in workplace situations) with the incentive of the principal (the employer). Another visible example of this (and the most studied in economics) is the CEO of a public corporation. The principles are the shareholders who generally care about dividends and long-term performance of the value of the shares. The agent is the CEO who cares primarily about his/her own compensation. These are often in conflict. For example, the CEO might want an extra $100 million in salary, but this would cut into firm profits and lower dividends and restrain share performance as well. At the same time, the firm needs a talented leader so paying nothing is equally bad.

How do you overcome this? Perhaps there is a way to write a contract such that the agent is rewarded for maximizing shareholder returns and thus the incentives of the principals and the agent are aligned. It was for this very reason that paying CEOs in stocks and stock-options became so popular. But it was imperfect: CEOs had a new incentive to run up stick prices by compromising the long-term health of the firm for short-term performance gains which would run up the share price and allow them to cash in on a huge payday. One example of how they did this is by cutting R&D to lower costs and raise profits. Good for now, but without R&D the future is less bright. Think of the current state of the US auto industry. This is the problem with these situations, it is often impossible to write contracts that perfectly align incentives and so we are forced to do as best as we can.

Now back to measure 60. Taxpayers and especially parents, as principals would like to be sure that the agents (school districts and teachers) have incentives to perform in the way we would like - to increase the amount of learning and development that our kids. This would be simple if measuring such learning and development were straightforward. Measuring the retention of facts and tools is easier - tests on history and math, say, can do an adequate job. Harder is measuring analytical ability, socialization, artistic ability and appreciation, personal growth, etc., etc. As a parent, were I only concerned that my son could recite the preamble to the constitution, then such tying such measures as standardized tests would be a good solution. But I am much less worried about his ability to memorize by rote then I am about his analytical and social development and I can think of no easy way to measure this.

As an economist, if there is one thing I believe in as virtually universal truth it is that incentives matter. So you might think that this measure would appeal. But 'incentives matter' cuts both ways, creating the wrong incentives will make things worse not better. Until good metrics are developed, tying teacher pay to 'classroom performance' is dangerous. Let's not turn our schools into General Motors.

Finally, in the absence of such metrics, what do I, as a parent, think is a good way to address the principle-agent problem? Well, in economics, one way to overcome it is through monitoring. I trust that with the amount of parent involvement in the classroom, oversight from the principal and parent-observed progress of their own children - problems in the classroom will be adequately addressed. Also, one of the natural incentives built into any job is that the better you are at it, the easier and more personally rewarding it is. Thus I assume that through self-selection and natural attrition, it is the more talented teachers who disproportionately populate our schools. I also believe that experience matters a lot. It can cut both ways, but I believe that there is a very strong correlation between experience and performance and so to cut the incentive to retain talented teachers by rewarding them for their tenure is also dangerous.