Higher Education and Economic Development

(Note: The following are edited excerpts from remarks delivered by professor Richard Vedder at the Mackinac Center’s October 2006 Issues and Ideas luncheon).

By all indications, Michigan has lost its way economically. By most measures Michigan’s economy has performed poorly by state or even regional norms. Job opportunities are too few, wages are too stagnant, young residents are more prone to leave far more than they are to enter. I have read that United Van Lines has a problem because a lot of vans leave the state but never come back, so how do they get the vans back in the state?

So here we have a problem with people leaving Michigan. Why is this happening? Is there anything that people here in Lansing or anywhere else in the state can do to change this? And that’s the issue.

One solution that has been suggested is to invest more in human capital by increasing state appropriations for colleges and universities. It has been argued that Michigan has reduced its support of public higher education in recent years; that education is key to economic development; and that accordingly, Michigan should recommit itself to excellence in higher education as a way of getting the state out of its economic doldrums.

Presumably, this would be financed in the long run by higher taxes, or at least by using funds that could have gone to finance some tax reductions instead of to enhance legislative appropriations to higher education.

Indeed, many states are using the same kinds of arguments and talking about doing the same things. For example, last Sunday three of the four leading newspapers in the state of Ohio did something extraordinary: they jointly ran the same columns, the very same editorials, the same op-eds together simultaneously advocating more support for higher education to promote economic development in Ohio. So it’s not unique to Michigan.

Advocates of this kind of strategy have two kinds of factual arguments that they use. First, they correctly point out that college graduates earn a good deal more money than high school graduates do, indicating that they are economically more productive. By some measures the earnings of college graduates are 60 percent to 80 percent greater than those of high school graduates. And it could be argued that if we can increase the proportion of our population that are college graduates, we are raising the average productivity of workers of the population and therefore the income of the people.

The second argument which relates to that point is that the incomes of people are higher in states that have higher proportions of college graduates. It’s even true if you look at the statistical relationship between the percentage of college graduates in the state and the rate of economic growth — it’s a positive relationship. States with more educated people tend to have higher rates of economic growth.

But there’s only one problem with this conclusion: it’s wrong. It’s wrong for at least four reasons. First of all, it assumes that increasing appropriations for universities will lead to a greater number of university graduates. That assumption in general is not valid.

Second, it ignores the fact that much of the higher productivity of college graduates results not from what they learn in college, but from personal attributes that would make them better workers than high school graduates in any case, regardless of their education. Attributes like greater work discipline, higher innate intelligence, great conscientiousness, and so forth.

Third, this argument ignores the cost issue. Are the costs of gaining the added productivity associated with having more college graduates greater or less than the benefits that arise from the added productivity itself? That’s not obviously clear.

Fourth, these arguments ignore the alternative uses of resources that would occur if university appropriations had not been increased. Where would the money have gone otherwise?

Starting with the first point I made, the statistical relationship between state appropriations and student access is pretty weak. You might assume that every time the state legislature gives one dollar more in money per student to the universities that that would lead to one dollar lower tuition charged to the student than otherwise. In other words, the university sets a budget goal and takes it in whatever way they can, and if they get it in appropriations they do a dollar for dollar tuition cut. But the empirical evidence for the United States, and I have been running a lot of regressions on this, shows that that is not really true.

The best I can tell, my last estimates show, that roughly thirty cents out of every new dollar in gross appropriations per student end up in lower tuition charges per student. In other words, the student gets thirty cents relief out of that new dollar. The other seventy cents goes to the universities for God only knows what, higher levels of spending of some sort. It may be legitimate, it may not be legitimate, but it doesn’t really go for lowering costs to increase access.

Finally, let’s suppose that you’re debating in Michigan whether to greatly increase appropriations for Michigan universities, or, as an alternative, let me pick something … lower the personal income tax from 3.9 to 3.6 or 3.5 percent. I’m just throwing out a hypothetical alternative. There’s a huge body of evidence that shows that lower income taxes are associated with higher rates of economic growth. Therefore it is possible, maybe it’s even probable, that the growth inducing effects of lower taxes would exceed any positive effects of increased state appropriations. Which one would give you the most bang for the buck? It’s not clear that it is the university spending.

Do states with high levels of higher education appropriations in relation, say, to the personal income levels of the state or in relation to population have higher rates of economic growth than states with low appropriations? This is an empirical question and it can be evaluated rather straightforwardly. I do so in my book and I’ve done so in a scholarly article since and I am doing so now. I have a great data set. I have state appropriations per capita and in relation to personal income by year, so I’m doing extensive analysis on this at the moment.

But let’s take the evidence in the book because it is as good as any. I took the economic growth of the states of our union from 1977 to 2002 — a 25-year period – and I related that to state appropriations for higher during that period. I took an average of appropriations at the beginning and the end of the period, sort of an average appropriation during that long 25 years. And I related it first to personal income and then per capita, and I did it various ways.

I found a statistically significant negative — negative — relationship between state spending on higher education and the rate of economic growth. The more states spend, the lower the rate of growth.

The best historical example I could find involves this state. Let’s look at decades of the 1980s and the 1990s and compare the higher education commitment of Michigan and Illinois against their economic performance.

In 1980, Michigan spent about 50 percent larger proportion of its income on higher education than did Illinois. Michigan spent a lot relative to Illinois and in the next two decades, Michigan increased its state appropriation for higher education.

It did this not only in absolute terms, or in inflation adjusted terms or population-inflation adjusted terms, but as a percentage of personal income of this state, Michigan increased the percentage of personal income considerably going to higher education, so that by 2000, the state of Michigan had the sixth highest proportion in the nation. You devoted the sixth largest share of the total income of people of this state on state appropriations to higher education of the 50 states of the union.

The gap between Michigan and Illinois widened since it did not follow this state’s policy of massive appropriation increases for universities. In fact, the Illinois share fell. Yet, Michigan had less growth. In 2000, per capita income in Illinois was 10 percent higher than in Michigan. In 1980 it was 5 percent higher. So the growth deficit relative to Illinois about doubled despite a big expansion; despite a big commitment to education in this state. Illinois made the smallest commitment to higher ed but had the highest growth rate.

Richard Vedder is Distinguished Professor of Economics at Ohio University and a member of the Board of Scholars at the Mackinac Center for Public Policy, a research and education institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.