Economist: Weak correlation
As Michigan attempts to rebound from what some observers have called a "one-state recession," many have called for more government spending at colleges and universities, in hopes that more college graduates will equal higher personal incomes. The evidence, however, does not support this theory, according to one expert.
Richard Vedder, distinguished professor of economics at Ohio University, spoke at an Issues and Ideas forum hosted by the Mackinac Center for Public Policy, explaining that there is a weak correlation, at best, between spending more tax dollars on higher education and any increase in a state’s economic growth.
Vedder has extensively studied the relationship between economic growth and state appropriations to universities. In a series of empirical analyses, he found that there was, if any, a negative relationship between a state’s spending on higher education and the growth of its personal income.
In comparing similar states, Vedder stated that even though Michigan’s higher education appropriations have historically been higher than those of its neighbors, Illinois and Ohio, Michigan devoted a much higher portion of its personal income to higher education than the other two, and yet it grew the least out of the three states. The same holds true for other states: North Dakota and South Dakota, New Hampshire and Vermont, Kentucky and Tennessee.
"In every case, the state with the smaller higher education commitment had higher rates of economic growth," Vedder observed.
Vedder explained a few reasons why spending more money on higher education will not lead to greater economic growth. The first is that spending more money on higher education does not mean that more students graduate from college. In his analysis of the relationship between state higher education and economic growth, he did find that a 20 percent increase in state appropriations leads to a 1 percent increase in students attending college, a large cost for a small gain.
"What is important is not getting the kids into college so much as getting them out, making them graduates," Vedder said.
Vedder found that there was no relationship between state spending on higher education and the percent of the state population with a college degree.
Second, he argued that getting students to college does not necessarily make them better workers.
"In fact, much of the higher earnings of college grads come not from what they learn in college, but from positive traits they had before entering," he said. "Employers are largely prohibited by law to test applicants in various ways, so a college degree is a legal way for employers to get information to screen out unproductive workers from productive workers."
Because of this, Vedder argues that spending money on higher education would be an ineffective way to grow the economy. While there is not much evidence to suggest that state appropriations lead to higher growth, there is a huge body of evidence to suggest that lowering personal income taxes does, Vedder observed. If policymakers were deciding between the two methods of growing the economy, the evidence falls in favor of the tried and true.