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What If Higher Ed Funds Don't Help Economy?

What If Higher Ed Funds Don't Help Economy?
June 22, 2007

Greater prosperity requires more jobs, and more jobs require more economic growth. And the best way to do that, this chain of reasoning continues, is to make investments in higher education and high-tech research. How else to cultivate the next generation of highly skilled, motivated workers for today's ever-dynamic information economy?

That view -- promoted by college presidents, governors and experts in the economics of higher education -- is often cited in the quest for more funding for state university systems. But what if it's wrong?

A new study published Wednesday by the free-market-oriented, Michigan-based Mackinac Center for Public Policy suggests just that. Its major finding, that increased state appropriations for higher education actually correlate with lower economic growth, is counter to both established understanding and conventional wisdom.

The study, also sponsored by the Center for College Affordability and Productivity, will have its critics, to be sure. The primary author, Richard Vedder, has defended his work from other economists in the past. He has made a name for himself -- and earned a spot on the Spellings Commission -- by criticizing colleges as too expensive and poorly run. But Vedder, a distinguished professor of economics at Ohio University, the director of the college affordability center and a visiting scholar at the American Enterprise Institute, believes he has found "startling enough" results that others will want to try to look at the issue themselves -- a development he'd welcome.

Looking at all 50 states over more than 20 years and using at least 1,000 data points, the study found that more state funding to higher education doesn't necessarily lead to higher growth, and in fact correlates negatively with high growth rates. Building on previous research -- which Vedder has done over the years on the topic -- the study operates under the theory that students will take some time between the years they enroll and the moment they contribute fully to the economic growth of society. The study looks at three intervals -- 5, 10 and 15 years -- between the "input" of state funding levels in a particular year and the economic output that comes as a result of students' education and development later on in life. And instead of finding the kind of positive correlation between increases in state funds and economic impact that colleges like to talk about, he found the opposite.

Vedder is sure enough of his results, and he acknowledges that they don't necessarily mesh with the views of other economists studying the issue: "I don't see the statistical relationship that a lot of people allege … that university spending promotes economic growth. I said, 'show me the evidence.' That's all I'm asking. Don't give me theories. Show me the evidence."

One scholar who has criticized Vedder's previous work is Ronald G. Ehrenberg, director of Cornell University's Higher Education Research Institute. While he hadn't seen the study, Ehrenberg noted that there was the possibility that the poorest states were pumping the most funding into higher education in an attempt to boost growth in the future -- a theory that would explain the negative correlation.

Vedder acknowledged the criticism but said he doesn't believe it applies to the study. "In the latest statistical modeling, we have been very conscious of that question," he said. "First of all, we modeled the data differently so we're not looking at it just between states, comparing one state with another at one point in time. … We're looking at it over a long period of time."

He theorized that increased funding to higher education means less money in the private sector and more in an environment that doesn't necessarily promote efficiency and productivity. "Universities, while they're virtuous institutions … do not necessarily promote economic growth and development, because resources have to be taken from the private sector or somewhere to pay for them," he said.

Other researchers have pointed to the fact that states with the highest growth tend to have the largest proportion of college graduates. But Vedder said his study doesn't dispute that.

"Those are two different questions. There is very, very, very weak evidence that more spending on state universities actually leads to more college graduates," he said -- let alone higher-quality ones. So if there's a connection between the proportion of students in a state with bachelor's degrees and that state's economic growth, Vedder said, it isn't because of more funding to higher education.

So what does more spending lead to? According to the report, there's a possibility it could result in "lower living standards for all." It concludes: "Empirical evidence suggests that a more promising approach would be to constrain government and universities in their spending growth, using the fruits of higher tax revenues over time to lower the tax burden."

 

 

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