Universities and Economic Development

(Note: Following is an edited version of a commentary that first appeared on the Center for College Affordability and Productivity Web site on Sept. 21, 2006. Earlier that day, Economics Professor Richard Vedder spoke on this issue at a Mackinac Center Issues & Ideas forum in Lansing.)

Last Sunday, three Ohio newspapers (The Cleveland Plain Dealer, The Columbus Dispatch and the Dayton Daily News) jointly ran several articles advocating increased higher education funding, arguing that more money would help reverse that state’s relative economic decline. I recently spoke at a Mackinac Center meeting in Lansing, Mich., where many opinion makers made similar arguments. Michigan can work its way out of its doldrums, we are told, if it would just renew its historically major commitment to its public universities.

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While I have written on this many times before, my position that this argument is simply wrong seems to be not only a minority view, but one that is considered almost treasonable by some of my higher education colleagues. Whenever state legislatures start accumulating some budget surpluses, the higher education lobby is quick to call for new "investments" in higher education to stimulate the economy. It is considered tacky or worse for a member of the higher education community to try to stop this effort.

It is true that college graduates are, on average, far more productive than men and women who acquire only a high school diploma, so it seems that increasing the proportion of college grads in the work force would raise productivity and incomes. Hence, some would argue, we should increase higher education funding.

Yet the evidence shows no positive relationship between state higher education spending and economic growth — indeed, the opposite is the case. Higher university spending results in lower economic growth. Why? The evidence shows that higher appropriations do not translate into higher access. Only a minority of newly appropriated funds are used to keep tuition rates down. While participation in college is related positively to appropriation levels, it is an extremely weak relationship. Moreover, there seems to be no relationship between the more meaningful indicator, namely college graduation rates and state government support for higher education.

Do new appropriations lure only a few new kids to college, many of whom are largely academically unqualified? I suspect the answer is yes. Are large portions of new appropriations used for non-academic purposes, including funding an overly large university bureaucracy, or for what economists call "economic rent," providing bigger pay raises for employees? Again, the answer is yes. Does using budget surpluses to reduce tax burdens have more positive economic impact than increasing state spending on universities? These questions are seldom asked in the rush to "invest" new funds in the universities.

If increased appropriations are to be made, why not at least tie the receipt of incremental funds to university compliance with certain practices, like complete financial transparency or requiring that schools provide evidence of the amount of student learning occurring?

States should be wary of succumbing to the "new investments" argument, particularly in the absence of real university efforts to improve efficiency, accountability and measurability of performance.


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 educational 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.