Ending school segregation is the key to social mobility

Half-baked reforms offering only an illusion of choice risk compounding the problem of wealthy paren

This week, the Deputy Prime Minister unveiled indicators the government will be using to measure the extent of social mobility in the UK – in other words, the degree to which labour market success is determined by the socio-economic status of your parents.

In today’s economy, now more than ever, high human capital is critical for future individual prosperity and health. So educational attainment is critical for social mobility. Just look at the premium from attending university: on average, £108,000 over a lifetime.

Parental background, particularly in countries such as the United Kingdom with high income inequality, is a key determinant of social and economic outcomes.  But, despair not, because our genes and our parents don’t have to determine our destiny: high-quality educational institutions - schools and especially nurseries - can mitigate the disadvantages associated with growing up poor.

Good schools have good teachers. A wealth of US literature shows that children who have effective teachers reap significant long-term rewards: in one study, pupils learning from an excellent teacher for just one year gained on average a quarter of a million dollars more in their lifetime earnings than similar students who didn’t.  For the British Government, fretting about the country’s decline in the international league tables for students’ reading, the key task is to drive up the quality of teaching.

We have financial incentives for high-quality graduates to join the profession, with discounts on the repayment of their tuition fee loans. And the House of Commons Education Select Committee has recently proposed performance-related pay for teachers. But the Secretary of State’s main mission is supply-side liberalisation to encourage more choice - through more free schools – and to increase competition – through greater autonomy for schools from local authorities and Whitehall to allow freedom to innovate.

Promoting choice and competition is the right direction of travel, but there are limits to how effective the current strategy will be. Many parents and community groups simply do not have the capital, especially when government won’t fork out, to set up new schools to facilitate greater choice. And government, wrongly, will not allow for-profit providers to set up schools. As Nick Clegg’s special adviser commented in the FT last year, “If nothing changes a few good schools will open, but not the hundreds needed for competition to have an impact on standards”.

In fact, a half-baked choice strategy can have damaging implications for the most disadvantaged pupils. When choice is limited, there is no competitive pressure on poor performing schools, which can fill their rolls regardless. Meanwhile parents with more resources monopolise the best schools, effectively buying a place by having the funds to move into the catchment area. This dynamic is confirmed by research from the Centre for the Economics of Education at the LSE, which showed that the modest expansion of choice for parents in some parts of England led to children from the same socio-economic background being more likely to be educated together.

Increased segregation then compounds the social mobility problem. Work by OECD in 2009 demonstrated that there is a significant advantage for poorer students to be educated in socially mixed schools, and this has no negative effect on overall performance. Without mixed school populations, the attainment gap between rich and poor children just widens.

So, how can we use parental choice without it resulting in damaging social segregation? A school-specific lottery for admissions would help. Here, parents could be free to apply to a school of their choice. Where schools are over-subscribed, places would be allocated in full or in part by a lottery, rather than by catchment areas, giving a greater chance to ambitious poorer parents who didn’t have the funds to move into the local area. Why not insist that schools do this if they want pupil premium funding or academy status?

Another mechanism would be to incentivise more affluent parents to hedge their bets on sending their children to a school which traditionally doesn’t do as well in the league tables. In the late 1990s, Texas introduced a rule where pupils who were in the top 10% for exam results in every school were automatically guaranteed a place at a state university. Recent research has shown that the policy led to greater social diversity in schools.  It would be possible to apply this scheme in the UK without undermining the independence of universities, by creating a pool of extra places universities could bid for which includes the top 10% of students from a select number of schools.

Parental choice is an important tool for driving up quality in schools. But we need to be realistic about its limits when public money is short. The challenge is to use choice to improve performance while avoiding the unintended consequences of entrenching disadvantage through social polarisation. Lotteries and an adaption of the Texas 10% plan are ways to square this circle.

Ryan Shorthouse is a researcher at the Social Market Foundation

Ryan Shorthouse is the Director of Bright Blue, a think tank for liberal conservativism 

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We're racing towards another private debt crisis - so why did no one see it coming?

The Office for Budget Responsibility failed to foresee the rise in household debt. 

This is a call for a public inquiry on the current situation regarding private debt.

For almost a decade now, since 2007, we have been living a lie. And that lie is preparing to wreak havoc on our economy. If we do not create some kind of impartial forum to discuss what is actually happening, the results might well prove disastrous. 

The lie I am referring to is the idea that the financial crisis of 2008, and subsequent “Great Recession,” were caused by profligate government spending and subsequent public debt. The exact opposite is in fact the case. The crash happened because of dangerously high levels of private debt (a mortgage crisis specifically). And - this is the part we are not supposed to talk about—there is an inverse relation between public and private debt levels.

If the public sector reduces its debt, overall private sector debt goes up. That's what happened in the years leading up to 2008. Now austerity is making it happening again. And if we don't do something about it, the results will, inevitably, be another catastrophe.

The winners and losers of debt

These graphs show the relationship between public and private debt. They are both forecasts from the Office for Budget Responsibility, produced in 2015 and 2017. 

This is what the OBR was projecting what would happen around now back in 2015:

This year the OBR completely changed its forecast. This is how it now projects things are likely to turn out:

First, notice how both diagrams are symmetrical. What happens on top (that part of the economy that is in surplus) precisely mirrors what happens in the bottom (that part of the economy that is in deficit). This is called an “accounting identity.”

As in any ledger sheet, credits and debits have to match. The easiest way to understand this is to imagine there are just two actors, government, and the private sector. If the government borrows £100, and spends it, then the government has a debt of £100. But by spending, it has injected £100 more pounds into the private economy. In other words, -£100 for the government, +£100 for everyone else in the diagram. 

Similarly, if the government taxes someone for £100 , then the government is £100 richer but there’s £100 subtracted from the private economy (+£100 for government, -£100 for everybody else on the diagram).

So what implications does this kind of bookkeeping have for the overall economy? It means that if the government goes into surplus, then everyone else has to go into debt.

We tend to think of money as if it is a bunch of poker chips already lying around, but that’s not how it really works. Money has to be created. And money is created when banks make loans. Either the government borrows money and injects it into the economy, or private citizens borrow money from banks. Those banks don’t take the money from people’s savings or anywhere else, they just make it up. Anyone can write an IOU. But only banks are allowed to issue IOUs that the government will accept in payment for taxes. (In other words, there actually is a magic money tree. But only banks are allowed to use it.)

There are other factors. The UK has a huge trade deficit (blue), and that means the government (yellow) also has to run a deficit (print money, or more accurately, get banks to do it) to inject into the economy to pay for all those Chinese trainers, American iPads, and German cars. The total amount of money can also fluctuate. But the real point here is, the less the government is in debt, the more everyone else must be. Austerity measures will necessarily lead to rising levels of private debt. And this is exactly what has happened.

Now, if this seems to have very little to do with the way politicians talk about such matters, there's a simple reason: most politicians don’t actually know any of this. A recent survey showed 90 per cent of MPs don't even understand where money comes from (they think it's issued by the Royal Mint). In reality, debt is money. If no one owed anyone anything at all there would be no money and the economy would grind to a halt.

But of course debt has to be owed to someone. These charts show who owes what to whom.

The crisis in private debt

Bearing all this in mind, let's look at those diagrams again - keeping our eye particularly on the dark blue that represents household debt. In the first, 2015 version, the OBR duly noted that there was a substantial build-up of household debt in the years leading up to the crash of 2008. This is significant because it was the first time in British history that total household debts were higher than total household savings, and therefore the household sector itself was in deficit territory. (Corporations, at the same time, were raking in enormous profits.) But it also predicted this wouldn't happen again.

True, the OBR observed, austerity and the reduction of government deficits meant private debt levels would have to go up. However, the OBR economists insisted this wouldn't be a problem because the burden would fall not on households but on corporations. Business-friendly Tory policies would, they insisted, inspire a boom in corporate expansion, which would mean frenzied corporate borrowing (that huge red bulge below the line in the first diagram, which was supposed to eventually replace government deficits entirely). Ordinary households would have little or nothing to worry about.

This was total fantasy. No such frenzied boom took place.

In the second diagram, two years later, the OBR is forced to acknowledge this. Corporations are just raking in the profits and sitting on them. The household sector, on the other hand, is a rolling catastrophe. Austerity has meant falling wages, less government spending on social services (or anything else), and higher de facto taxes. This puts the squeeze on household budgets and people are forced to borrow. As a result, not only are households in overall deficit for the second time in British history, the situation is actually worse than it was in the years leading up to 2008.

And remember: it was a mortgage crisis that set off the 2008 crash, which almost destroyed the world economy and plunged millions into penury. Not a crisis in public debt. A crisis in private debt.

An inquiry

In 2015, around the time the original OBR predictions came out, I wrote an essay in the Guardian predicting that austerity and budget-balancing would create a disastrous crisis in private debt. Now it's so clearly, unmistakably, happening that even the OBR cannot deny it.

I believe the time has come for there be a public investigation - a formal public inquiry, in fact - into how this could be allowed to happen. After the 2008 crash, at least the economists in Treasury and the Bank of England could plausibly claim they hadn't completely understood the relation between private debt and financial instability. Now they simply have no excuse.

What on earth is an institution called the “Office for Budget Responsibility” credulously imagining corporate borrowing binges in order to suggest the government will balance the budget to no ill effects? How responsible is that? Even the second chart is extremely odd. Up to 2017, the top and bottom of the diagram are exact mirrors of one another, as they ought to be. However, in the projected future after 2017, the section below the line is much smaller than the section above, apparently seriously understating the amount both of future government, and future private, debt. In other words, the numbers don't add up.

The OBR told the New Statesman ​that it was not aware of any errors in its 2015 forecast for corporate sector net lending, and that the forecast was based on the available data. It said the forecast for business investment has been revised down because of the uncertainty created by Brexit. 

Still, if the “Office of Budget Responsibility” was true to its name, it should be sounding off the alarm bells right about now. So far all we've got is one mention of private debt and a mild warning about the rise of personal debt from the Bank of England, which did not however connect the problem to austerity, and one fairly strong statement from a maverick columnist in the Daily Mail. Otherwise, silence. 

The only plausible explanation is that institutions like the Treasury, OBR, and to a degree as well the Bank of England can't, by definition, warn against the dangers of austerity, however alarming the situation, because they have been set up the way they have in order to justify austerity. It's important to emphasise that most professional economists have never supported Conservative policies in this regard. The policy was adopted because it was convenient to politicians; institutions were set up in order to support it; economists were hired in order to come up with arguments for austerity, rather than to judge whether it would be a good idea. At present, this situation has led us to the brink of disaster.

The last time there was a financial crash, the Queen famously asked: why was no one able to foresee this? We now have the tools. Perhaps the most important task for a public inquiry will be to finally ask: what is the real purpose of the institutions that are supposed to foresee such matters, to what degree have they been politicised, and what would it take to turn them back into institutions that can at least inform us if we're staring into the lights of an oncoming train?