Speaking at the 2011 TED Conference (Technology, Education, Design), Gates sharply criticized states for the waste in American education.
"The guys at Enron never would have done this! I mean this is so blatant, so extreme that, is anybody paying attention to what these guys do?" Gates said.
The 55-year-old multi-billionaire has made it a mission to find the money to make schools and teachers better.
"State budgets are a critical topic because here's where we make the real tradeoffs," he said. "If we make the wrong choice education won't be funded the right way."
Gates said many states, in their efforts to close their budget deficits, are making the wrong choices, cutting education.
"The bottom line is we need to care about state budgets because they're critical for our kids and our future."
Gates' theory: Identify and develop teachers, then reward excellence in the field.
The Bill and Melinda Gates Foundation, which he and his wife started, is studying and videotaping teachers in seven urban school districts. The goal is to determine exactly what teaching methods work, and which don't.
In the meantime, Gates challenged some long-held assumptions about education. He said the U.S. spends $50 billion a year on automatic salary increases for teachers based on seniority, but, according to Gates, "Seniority seems to have no effect on student achievement."
Gates also questions spending $15 billion a year on salary bumps for teachers who get advanced degrees.
"Such raises have almost no impact on achievement," he said.
The head of the nation's largest teachers union vehemently disagreed.
"I was a math teacher for 23 years," said Dennis Van Roekel, President of the National Education Association. "I can guarantee you that what I took as part of my masters degree program in mathematics made a difference to me as a teacher."
Gates challenged the notion that smaller class sizes are better. He proposed that the best teachers actually take on more students. He said skilled teachers ought to be paid more to take on five or six more kids per class, so more children can benefit from what those teachers are doing right.