News Story

MSU Uses Obscure ‘Government Purchases Index’ To Claim School Funding Down

The common CPI inflation measure shows funding up, not down

In a new study that has received extensive media coverage for declaring that Michigan public school spending has had the sharpest decline in the country since 1994, Michigan State University researchers relied on an obscure method to adjust for inflation.

The researchers compared past school spending levels by using an inflation index that is based on changes in state and local government purchase prices. As a result, their analysis overstates past school spending compared to what an analysis using the familiar Consumer Price Index would show.

The authors of the report used the U.S. Commerce Department’s GDP price deflator for state and local government purchases as their index of inflation. As a result, their work generated an inflation estimate that is 50 percent higher than what the Consumer Price Index shows, according to an analysis by the Mackinac Center for Public Policy. This allowed the authors to claim in a press release that “funding for Michigan’s public schools has fallen more sharply than any other state over the past quarter-century.”

David Arsen, lead author of the MSU study, said in the press release, “Michigan has tried to improve schools on the cheap, focusing on more accountability and school choice.”

Ben DeGrow, education policy director at the Mackinac Center, ran the same numbers using the CPI. He came up with numbers that were very different from those obtained by the MSU authors, whose adjustment suggested that Michigan public school revenues in 1994-95 would be 91 percent higher if stated in 2014-15 dollars.

In contrast, when DeGrow used the CPI inflation adjustment, he found that the 1994-95 school spending levels are just 60 percent higher when stated in 2014-2015 prices. The 2014-15 fiscal year was the last year included in the MSU study.

This is important because choosing one method versus the other can create a very different impression of how school funding has changed over time.

Because they used the less common cost index, the MSU researchers were able to conclude that 2014-15 Michigan school revenues declined more than 14 percent from 1994-95 after adjusting for inflation. In comparison, using the Consumer Price Index indicates that over the same period, school revenues actually increased by 2.1 percent in real, inflation-adjusted terms.

DeGrow said the discrepancy is even larger when the different methods are applied to per-pupil funding, rather than overall school funding.

“The index Arsen uses shows that per-pupil funding dropped around 10 percent. Using CPI instead flips the direction and says that per-pupil funding increased 8 percent,” DeGrow said in an email.

Michael Van Beek, director of research at the Mackinac Center, said neither method is necessarily invalid, but the MSU researcher’s narrative relies on figures produced using the inflation index that is based on the cost of government purchases.

“The GDP deflator produces the most dramatic results. The other methods produce a much less shocking one: real school funding is up slightly from 1994 and down slightly from 2002.” Van Beek said in an email.

Arsen said in an email that the government purchases inflation index was the appropriate inflation index for this study.

Antony Davies, an associate professor of economics at Duquesne University, said he had never seen the government purchases index used before, but it was appropriate for MSU to use it.

University of Michigan-Flint economist Mark Perry agreed that Arsen selected the appropriate inflation index.

“Overall, I think it’s reasonable for them to use that deflator,” Perry said in an email.

The MSU authors explained why they chose the less-known inflation index:

“The conversion of nominal to real dollars is common in economic analyses and requires use of the proper price deflator. Price deflators measure changes in the price level of goods and services from year to year. The consumer price index, generated by the U.S. Bureau of Labor Statistics, is well known as the composite measure of inflation for a fixed basket of household consumption items. The CPI market basket, however, is poorly matched with what K-12 public schools spend money on. Compared to the CPI basket, school purchases are far more concentrated in labor services than goods and far less concentrated in expenditures on housing and food. The best available deflator for school district finances is the U.S. Commerce Department’s GDP price deflator for state and local government purchases. We use this price index to adjust education revenues for inflation in this section.”

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.