By Richard Vedder
When he was with the Bush Administration, Mitch Daniels had a reputation for being a hard money man, a guy who would occasionally say no to some spending initiatives amidst a group of Big Government Conservatives whose unprincipled spending behavior contributed to the GOP's debacle last month.
Now as governor of Indiana, Daniels is threatening to repeat the sins he fought in Washington several years ago. To get Indiana moving ahead economically, he wants to spend a bunch of money on higher education. By privatizing the state lottery (probably a good idea), he wants to take a billion dollar windfall and drop it into higher ed, partly to fund HOPE-style scholarships and to lure big name scholars to the Hoosier State.
The intentions are good, and the goal of improving Indiana's so-so economic performance is laudable. However, the proposal, if adopted, suffers from several flaws.
1) National data suggest that the relationship between spending more state funds on higher education and economic growth is either non-existent or is negative -- more spending means lower growth;
2)An increase in scholarship aid will likely be at least partially offset by larger tuition increases than otherwise would be the case, as universities try to capture some of the funds that Governor Daniels wants to spend;
3)HOPE type scholarship programs extenuate the move away from need-based financial aid and tend to make flagship universities (e.g., Indiana University at Bloomington (U) and Purdue at Lafayette) into more bastions for upper class kids who tend to be the major recipients of merit-based scholarships. Should Indiana be selling state assets to provide assistance to children of yuppies attending increasingly country club-like institutions? Is this the optimal use of state resources?
4) Targeted programs to bring eminent scholars into states seem to have no effect on economic growth. For example, neighboring Ohio's Eminent Scholar program of a decade or two ago was implemented --and income per capita relative to the nation continued to fall. It is not clear to me how Indiana benefits if Professor X does his or her work at IU rather than at the University of Illinois, unless there is a huge royalty payoff from patents, which seldom is the case in the short or intermediate run.
I suspect that if Governor Daniels really wanted to increase Indiana's competitiveness, he would be better served reducing the tax burden, which historically once was low in Indiana but is no longer so.