The Higher Education Laffer Curve

By Richard Vedder

Happy Labor Day!!! If you are a bit bored, here is a little homework assignment. Take a piece of paper and draw a huge "L" --the coordinates for a graph. Under the horizontal axis, write the words "gross domestic product." On the vertical axis, write the words "public higher education spending." Then draw a big upside down U in the graph space. This suggests a society with little or no higher ed spending is likely to be poor, and spending on colleges raises GDP --to a point, after which further spending tends to have negative effects on GDP. If our investigations are correct, we are presently in the downward sloping portion of this curve, which mimics the famous Laffer Curve relating taxes to growth.

Why? Two reasons. First, too many people are going to college, many of them ill-prepared. High dropout rates abound. Many persons take jobs for which a college education is not truly a prerequisite. You don't need to go to college to be a plumber, but some plumbers have college degrees. Second, massive third party funding and a lack of a financial bottom line because of the non profit nature of most schools have made colleges terribly inefficient, and poring more resources into this relatively inefficient sector crowds out spending on parts of the economy that are more productive and which are disciplined by the forces of the market and the imperatives of having to make a profit.

I have been saying this for some time now, but it largely falls on deaf ears in the Higher Education Establishment. But we will plug on. Our latest work, consistent with the conclusions above, is that there is very little if any correlation between state spending on higher education and the actual proportion of the adult population who have college degrees. More spending does help, very modestly, to increase college enrollments, but getting in to college is a lot easier than getting out.

There are two types of policy implications. First, of course, we can simply reduce our public higher ed spending until we maximize our GDP or at least improve the rate of return on public investment in this area somewhat. Second, we can restructure the way we do higher ed --for example, introducing more market discipline, and imposing real accountability standards on those who spend university funds.

A little story on the lack of accountability is appropriate here. My university a couple of weeks ago ordered new lines painted between spaces in one of its parking lots, a some tangible expense. Within a week, the University closed the lot, permanently, and used a backhoe to tear up the asphalt in preparation for new building construction. The life of the newly painted lines was one week or less. What are the consequences of this waste of money for those responsible? I doubt there are any at all, and the person responsible for this expensive boo-boo is probably feasting this Labor Day secure in the knowledge that his job will continue in the weeks and months ahead. There is too much of this going on today in higher education.