Universities and Economic Growth?

by: Matthew Denhart

Yesterday the Pope Center and the Heritage Foundation jointly hosted a round-table luncheon to discuss the role of universities in promoting economic growth. Featured was a study by the Pope Center's Jay Schalin that summarizes the literature on the topic. Schalin concludes that higher education spending is subject to diminishing marginal returns and that more evaluation is needed to determine in which situations/settings augmented spending promotes growth and in which cases it is useless, or even harms economic growth.

It is common for politicians, university leaders and the media to promote the false claim that universities are an engine of economic growth, and that by investing even a small amount in higher education, a staggering economic payoff will result.

Work done by CCAP is highly skeptical of this view. Our research suggests that higher education appropriations are subject to diminishing returns, and that current funding levels are such that each additional dollar spent has a smaller benefit than the previous one. Indeed, many states may be so over-invested in higher education that more spending actually leads to negative growth (since resources could be used much more productively elsewhere).

Building an econometric model that accurately answers the question of universities' contribution to economic growth is very difficult. On one end of the spectrum, we have information about inputs into the educational process (government appropriations, number of faculty, incoming students' average SAT scores, etc). On the other end of the spectrum we have economic growth. Between these two are many factors.

Education is almost certainly an important factor in economic growth. Yet, despite all the spending (the U.S. spent $432 billion on higher education in 2008, which is more than the GDP of Belgium), we know virtually nothing about how much learning actually occurs in college.

Furthermore, we know very little about whether the learning that does occur is relevant to labor-market demands. Learning for learning's sake is great, but if one is trying to assess an economic impact of higher education, the possibility that the types of education offered may not have a high economic return must be considered. Better information about outcomes from the expensive higher education process is much needed.

Continuing research needs to closely examine how universities spend their money. It is reasonable to figure that investment in a new science lab will better equip students to be productive members of society. However, investments in things such as intercollegiate athletics, university-owned water slides and lazy rivers, and frivolous research are much more tenuous. Given how much money goes to non-academic dimensions of higher education, it is no wonder that further subsidizing this behavior has minimal (if any) impact on the economic growth of our country.