Higher Ed Spending Hurts Economic Growth
Monday, March 15, 2010
Standard Article by Brett Narloch
Issue: Education

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A new study ("Education Spending and State Economic Growth: Are All Dollars Created Equal?") published in Economic Development Quarterly has concluded that spending increases in higher education financed through own-source revenue negatively affects gross state product and employment growth. The study's authors - John Deskins (Creighton University), Brian Hill (Salisbury University), and Laura Ullrich (Winthrop University) - wrote,

Results from a series of fixed-effects regressions using a panel of state-level data for the years 1992 through 2002 indicate that higher education spending negatively affects state private sector GSP and employment growth when financed through own-source revenues.

Higher Education and North Dakota's Economic Future

These results are similar to those concluded by Dr. Richard Vedder of Ohio University, who wrote "Higher Education and North Dakota's Economic Future." Vedder wrote,

The national evidence on the relationship between state government spending and economic growth shows a negative or at best neutral relationship between those two factors –higher spending is not associated with higher growth, and possibly lower growth.

Proponents of increased higher education spending - including Gov. John Hoeven and most state legislators - believe increasing state aid to higher education increases economic development. According to Gov. Hoeven's website,

In today's world, the link between education and commerce is crucial. Six years ago, Gov. Hoeven helped bring about a decisive change in the way higher education is funded by giving the universities flexibility with accountability to help contribute to the economic growth of North Dakota. Flexible spending means North Dakota universities can use tuition dollars and other revenue to produce excellence in education and help with job creation. The strategy has worked.

The Deskins study identifies Gov. Hoeven's theory and suggests that it could be right; however, "simply increasing state-allotted funds for higher education may not achieve these goals and therefore may not lead to significant increases in economic growth."

Increasing the number of college graduates in North Dakota is probably economically beneficial; however, Gov. Hoeven and most legislators believe that increasing higher education spending increases the number of college graduates. As Vedder pointed out, that is just not the case.

In 2008, North Dakota spent 57% more per capita than the national average; yet, the proportion of adults with a bachelor's degree in North Dakota was below the national average.

The Deskins study identified possible reasons why increasing state expenditures on higher education hurts the state's economy. It states,

Our finding that public spending on higher education reduces economic growth may simply be because such expenditures, on balance, have exceeded efficient levels, and therefore the marginal economic development costs associated with the taxes used to finance such expenditures outweigh marginal benefits for economic growth of higher education spending.

The negative impact observed may also be due to the fact, as described in Vedder (2004), that additional state money allocated to higher education is spent inefficiently.

It makes sense. Every state dollar put into higher education has to first be taken from productive citizens and businesses. The money is then run through an enormous and inefficient bureaucracy where a large percentage is skimmed off the top to pay for bureaucrats. Had the money not been taken in the first place, those citizens and businesses would have contributed to economic growth in a generally more efficient way.

State policymakers would be wise to rethink their polices of "investing" in North Dakota's higher education system, and instead focus on freeing citizens from the burden of funding large and inefficient bureaucracies.