Higher Education and the State

By Richard Vedder

My previous articles have dealt with some of the details of higher education, such as the pay of college presidents, or college dropout rates. I want, however, to return to first principles today. Why does government so heavily finance higher education, not only in America but globally?

I hear two major arguments for such funding. First, higher education is allegedly a "public good", meaning some of the benefits accrue to the broader society --not just current users of its services (primarily students). Second, we have a national egalitarian tradition, one that argues that any American, no matter how poor, can rise up the economic and social ladder to success. Education is an important means to achieving that end.

The first argument suggests that universities have what economists call "positive externalities" or spillover effects. For example, the knowledge gained through education allegedly makes us more discerning citizens, more likely to elect level-headed leaders and not charlatans. The advance in higher forms of literacy facilitates communication, making markets function better. Tolerance learned in the course of advanced study ultimately reduces divisiveness, rancor, and arguably civil uprisings. Those subscribing to this view argue that since some of the gains of higher education accrue to the broader populace, it should subsidize it --via appropriations for universities, grants for students, etc.

Yet maybe college has "negative externalites" as well. For example, maybe the celebration of multi-culturalisim in universities has reduced social cohesiveness that binds diverse persons together in a nation. Maybe universities preach a moral relativism that ultimately leads to more crime, greater corruption, etc. Maybe universities promote sin more than virtue, ideology more than knowledge. Maybe the taxes used to finance government support have severe disincentive effects on private activity, and that the "crowding out" of such activity by universities lowers GDP since private market activity in general is more efficiently generated than that at our largely not-for-profit universities.

It is very difficult to measure externatlities or spillover effects. The limited work that I have done in the area, however, leads me to believe that the negative externalities may well exceed the positive ones. For example, states that spend more on higher education, other things equal, tend to have lower rates of economic growth. People do not flock to higher education-intensive areas because of their alleged higher quality of life (the reverse is closer to the truth). If the negative externalities dominate, not only should we stop subsidizing higher education, but probably we should tax it (a point made to me first by Milton Friedman in an e-mail).

What about providing equal opportunity? It is true college grads earn more than high school ones, and access to higher education is usually important in earning sizable incomes. Yet even here the evidence is somewhat disturbing. We do not see, for example, markedly higher levels of higher educational participation in states that spend a lot more on their universities. For every dollar in added state appropriations per student to universities, the vast majority of the money goes for higher college spending -- not lower tuition charges than otherwise would exist. In short, there is very little positve (maybe, no) association between actual spending on higher ed by state governments and the incidence of college graduates. Similarly, the explosion in the federal student loan program since 1980 has been accompanied by a slowing down in the historic rise in college attendance and graduation.

Hence, there are legitimate reasons to be skeptical of the impact of increased federal and state involvement in higher education. Indeed, I applaud the trend for government higher education spending to fall relative to private spending. We are partly privatizing higher education at the state level as governmenting spending has become a reduced share of state university revenues. The HEE (Higher Education Establishment) decries this trend; I applaud it. CCAP will be researching this whole area more in the week and months ahead.