Does Spending on Higher Education Drive Economic Growth? 20 Years of Evidence Reviewed

Posted on May 12, 2003 | Type: Policy Report | Author: Jon Sanders
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At a time when every dollar counts, appropriation decisions must be based on fact, not fiction-no matter how noble the fiction. Arizona's taxpayers subsidize the estimated 6.8 percent of residents enrolled in the state's two-year and four-year colleges and universities. Taxpayers also subsidize the one-third of enrollees who are nonresidents. What is the return on this investment?

Research has long shown that college graduates earn significantly more than nongraduates. Conventional wisdom holds, likewise, that public spending on higher education drives economic growth. Using data from all 50 states and spanning two decades, this study puts that conventional wisdom to the test and attempts to determine whether taxpayers are getting a good return on their money.

Three distinct regressions find no consistent, statistically significant impact of higher-education appropriations on states' economic growth. Indeed, a stronger relationship is found when the models are reversed, suggesting that a better case can be made that growth drives spending, rather than spending driving growth.

Comparing states' higher-education appropriations and gross state products also yields no solid evidence that spending drives economic growth. For example, 2 of the 10 fastest-growing states from 1981 to 2000 experienced real decreases in per capita higher-education appropriations, while 3 of the 10 slowest-growing states were among the top 10 in growth of real higher-education appropriations. From 1991 to 2000, none of the top 10 states in greatest higher-education appropriations were among the top 10 in economic growth. From 1991 to 2000, Arizona was 46th among the 50 states in real higher-education appropriations per capita - actually appropriating less in 2000 than in 1991 - yet it was the 16th fastest-growing state.

Finally, analysis suggests no connection between the presence of prestigious universities in a state and its economic growth.

This study is the first in a series examining the impact of higher-education spending and investment on Arizona's economy.

Read Does Spending on Higher Education Drive Economic Growth? here.

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