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Investing in Higher Education: The Macro Perspective

In the second installment of the “Further Reading” blog on higher education spending, we move from considering the damage caused by cutting funding to the advantages of spending on higher education in the first place.

The significance of disinvestment is more obvious:  money that was spent is withdrawn and bad things happen.  There are program cuts and layoffs; students pay more in tuition or go outside the state for their education.

As implied by the term disinvestment, spending on higher education is frequently defended and promoted as an investment:  resources committed here and now, not for their immediate and direct benefits, but for what they accomplish more broadly and in the future.

The articles discussed this time focus on the economic benefits, though most acknowledge that there are other, non-material advantages.  For now, we’ll consider how higher education spending improves local communities, states, and nations.  

A good place to start is with the 2013 Economic Policy Institute study by Noah Berger and Peter Fisher:  
“A Well-Educated Workforce is Key to State Prosperity” (http://www.epi.org/publication/states-education-productivity-growth-foundations/).  
Arguing that state governments have a responsibility to “boost the economic well-being of their people,” particularly as measured by median wages, they argue that investing in higher education is a more effective way to do so than other strategies.  For example, cutting taxes in order to “lure” employers from other states is a “race-to-the-bottom state economic development strategy that undermines the ability to invest in education.”  Rather than such short-term strategies of trying to attract higher-skilled jobs, states should focus on creating more skilled workers.  In short, “if you educate them, jobs will come.”

Frank Manzo IV and Robert Bruno (mentioned already in the inaugural blog) have another good piece put out by the Illinois Economic Policy Institute:  
“Policies that Support Employment:  Investments in Public Education, Investments in Public Infrastructure, and a Balanced State Budget” (https://illinoisepi.org/site/wp-content/themes/hollow/docs/budgets-taxes/Employment-Supports-Paper_FINAL1.pdf). 
In the context of Illinois’ ongoing budget crisis in 2015, they made the general political point that public policy should focus not just on the cost of taxes, but also on the benefits of spending.  Strategic spending, they argue, can increase employment.

Spending on higher education is one of several investments which will support employment, an argument they argue is bolstered by history.  The United States spent heavily on expanding educational attainment in the 20th century (the “human-capital century”) and thus
 “it is no coincidence … that, at the time America began to pull ahead of other countries in terms of income, it also pulled ahead of other countries in terms of education.”  

It’s not as convincing, however, to point out that a particular strategy has benefits as to argue that it outperforms alternate strategies.  Manzo and Bruno do this by deflating the claims for other, typically pro-business, strategies.  Not only do cutting tax rates and providing corporate subsidies have little impact on employment, much less increase it, but neither do keeping minimum wages down, cutting the number of weeks of eligibility for unemployment benefits, reducing union density, or promoting “right-to-work” laws.  While these might increase business profits and power, they don’t increase employment.  Investing in education does.

The most general arguments for higher education spending focus on the “economic impact”, specifically the multiplier effect, of the presence of higher education institutions, whether in a particular community or in a state more generally.  This was one of the basic points in the Center for Tax and Budget Accountability study discussed in the first blog.  In that 2017 study, the economic impact of every dollar spent on higher education in Illinois was $2.29.  

This 2.29 multiplier also appears in a 2016 study on the economic impact of higher education institutions in McLean County, Illinois (home to Illinois State University) (blogs.iwu.edu/dmendez/files/2016/12/IMPLAN_Higher_Education_Report_DMC.pdf).  Author Diego Mendez-Carbajo argues that the multiplier, however, is lower at the county level, because of “leakage” of the effects outside the local economy (e.g. students spend money locally on textbooks, but that spending supports out-of-area book publishers).  Focusing narrowly on staff salaries and benefits, as well as on spending by out-of-town students, Mendez-Carbajo estimates an aggregate annual economic impact of $394.6 million of the three colleges and universities in McLean County.

The McLean County study refers to three kinds of spending that contribute to the overall economic impact:  direct, indirect, and induced.  This distinction is also part of a 2014 Tripp Umbach study of the annual economic impact of the University of Washington system (www.washington.edu/externalaffairs/files/2015/01/14-Economic-Impact-Report.pdf), which reports a $12.5 billion impact statewide.  Direct spending is money spent by UW itself, on “goods and services, capital, and pay and benefits.”  Indirect spending is what’s spent by suppliers to UW to support its operations. Induced spending is money “re-spent” by UW employees, visitors, students, and UW suppliers’ employees in the state, e.g. running up a tab at a bar on a UW football game day.  When local (and state) boosters talk about higher education institutions as “economic engines”, it’s typically these ripple effects they have in mind.

Some, however, urge caution in considering the economic impact of higher education spending, insisting that effects be directly attributable to spending  by higher education institutions. Many “impact studies,” according to
“The Rights and Wrongs of Economic Impact Analysis for Colleges and Universities” (http://www.economicmodeling.com/wp-content/uploads/Rights-and-Wrongs-of-Econ-Impact-Studies_1a.pdf), 
are simply analyses of “contributions” analysis.  That is, they simply look at how much is  and add in the multiplier effect of that spending.  These contributions studies don’t consider what else such money might have been spent on, the “sacrificed alternative spending,” and so may exaggerate the benefits.  

The best kind of study, they argue, focuses on the net change resulting from higher education spending in a particular place.  Focusing simply on dollars spent in a local economy by an institution of higher education is basically about “rearranging the furniture,” not bringing new furniture in.  They argue that “An impact analysis needs to take account of: 1) only the moneys brought into the region by the college operations, or 2) the local dollars retained in the region that would otherwise be lost in the absence of the college operations.”

While this may not be the way that advocates want to talk about the benefits of higher education spending (because it tends to low-ball the impact), these more modest effects are much more directly attributable to the presence and activities of colleges and universities.  While we’d all like to be able to say that investing in higher education pays off like a clever stock purchase, it’s probably more accurate to say that it’s like a more reliable, if more modest, investment in bonds.  It’s certainly better than some of the other ways that governments spend money.

Next blog:  is college a good “investment” for individuals?

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