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.

You Can't Have Cake and Eat it Too

by Daniel L. Bennett

Surely the temperature was warmer than the message delivered by Mark Wilson of the Florida Chamber of Commerce at last week's Higher Education Government Relation's Conference in Orlando: "Stop asking for money!"

Wilson was quoted by Inside Higher Ed as saying:

Colleges can't just engage in their usual tack of asking business leaders to help them lobby legislators for more money...

they must show a propensity to "match up their supply of students with the demand for jobs.... I'm confident there will be more money available for degrees that the business community needs," but not necessarily more money for the status quo.

Wilson's statements are laudable in calling for accountability of higher ed and he continues with an equally compelling statement that:

What the state needs in order to compete..is an education system that serves as a “talent supply chain” to produce enough educated and skilled workers to provide the workers needed by companies in Florida’s emerging industries

However, Wilson continues with somewhat of a dubious claim:

If Florida doesn’t produce them, the companies will leave to go where the workers are...

I agree with Wilson that the education system should aim to produce graduates with the skills and education in demand by the labor force, but his assertion that companies will pack up shop and skip town if the local supply of workers is less than demand is questionable. Skilled workers are a highly mobile group, with a high propensity to follow the money trail. The high concentration of migratory skilled workers in the nation's most prosperous cities (New York, San Francisco, Washington, DC, etc) seems to suggest that educated workers go where the jobs are, not vice versa.

The idea that a state can attract businesses by increasing its pool of educated citizens is an unproven myth. Yet, it is precisely this fallacy that is often championed by higher education officials and their cheerleaders (see for example, efforts by Arizona and North Dakota) in lobbying for more public funds. A recent study released by CCAP and the ND Policy provides evidence to the contrary: that there is a negative relationship between public investments in higher education and economic growth.

While I'm sure that a skilled local workforce is appealing to prospective businesses, they are likely to consider a number of additional details when deciding where to locate, including the tax and regulatory conditions, local market / wage conditions, and access to distribution routes, among other things. The higher ed establishment favors tax hikes in order to increase the pool of funding available to it, which is counter intuitive to making a state or locale attractive to the businesses that will hopefully hire its graduates. If a state has an oversupply of college graduates but no employers to hire them, then they will migrate to places where jobs do exist. The higher ed establishment needs to learn that it can't have its cake and eat it too.