Universities and Economic Growth

By Richard Vedder

Recently, I agreed to speak to a group of legislators and other nefarious persons at the Capitol in Lansing, Michigan, at a gig arranged by the estimable Mackinac Center, one of the premier state-based think tanks in the country. It seems that the Governor and other politicos are asserting that the state's lackluster economic performance can be reversed if the state "invests" more in higher education. The same line has been used in many other states by university presidents, higher education coordinating board leaders and others to justify funding increases.

In the University community, it is an article of faith that higher education is growth-enhancing. After all, college graduates earn far more than high school graduates, so if we simply increase the proportion of adults that are college-educated, we will raise productivity and income levels. This education-related earnings differential provides an empirical basis for the "positive externalities" argument supporting government subsidies to colleges and universities. If the colleges enhance overall economic growth, they help raise income for everyone --not just those people going to college.

It is a great argument, often eloqently delivered by politicians who fervently call for "investing in human capital" and "improving lives for our children and grandchildren." There is only one little problem with it: it is usually wrong. Moving from faith to reason, that is examining the empircal reality of the spending-growth relationship, we find no positive association between the amount of resources invested in higher education by government and the rate of economic growth. I detail this in my book Going Broke By Degree published by the American Enterprise Institute, and also in an article on the subject in the Journal of Labor Research.

To be sure, there is a problem with any statistical analysis. State government appropriations on universities might not have an impact of economic growth for many years, until students who are receiving an education get out into the world of work. There are issues of causation --do lagging economies increase higher ed spending in an attempt to improve the economy, or does increased higher ed spending lead to a lagging economy? There are alternative ways of measuring economic vibrancy. Yet, for all of these problems, it is hard to find much evidence to support the commonly held view that higher education spending by governments has positive economic growth effects. Indeed, the evidence that more public spending on higher education even leads to more college graduates among the adult population is also pretty weak. Many states with public university systems with low public support (e.g., Massachusetts, Connecticut, New Jersey), have high proportions of college grads.

All of this calls into question the common plea for more higher education funds in order to promote economic growth, or, for that matter, promote college access. A great deal of money dropped out of airplanes over college campuses (or the equivalent) gets spent on non-academic things, into making life better and easier for faculty and staff (e.g., higher salaries, lower teaching loads). After a university president shakes the hands of a legislator, the politican should count his or her fingers to be sure they are all there.