Vicki Alger

Rescue Through Research an Economic Fantasy

Posted on June 09, 2003 | Type: Op-Ed | Author: Vicki Alger
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Call it the Sleeping Beauty Syndrome: a lonely schoolgirl raised on Disney movies dreams of a knight in shining armor who will enter her life in a dashing whirl and save her from boredom, poverty and solitude. For schoolgirls, it's a harmless fantasy. But when Arizona policymakers begin dreaming that a knight in biotech armor will save the state economy, the fantasy may be very costly.

The Arizona Legislature is presently considering a proposal to spend $800 million over 30 years on lab construction at the state's universities. The happy ending, according to Arizona State University president Michael Crow, is an 11-to-1 return on the state's investment and a glowing biotech future. But with so much taxpayer money at stake, policymakers should re-examine their dream to make sure that it comports with reality.

Every fantasy contains a grain of truth. In this case, research has long shown that college graduates have significantly higher lifetime earnings than nongraduates. So it is clear that higher education is beneficial to the individuals who receive it. But it does not follow that public spending on higher education by a state automatically leads to more economic growth for that state's economy.

In a recent study released by the Goldwater Institute, analyst Jon Sanders examined data from all 50 states spanning more than two decades. Given the claims of the higher education lobby, he expected to see a robust correlation between increased state spending on higher education and economic growth. Instead, he found only weak and inconsistent correlations between state funding of higher education and economic growth. Sanders' findings make sense: after all, graduates often move out-of-state, taking their earning potential with them. Also, any returns from higher education spending must outweigh the deadweight loss of taxation.

Sanders is not alone in making a wake-up call to those who dream of knights in higher-ed armor. In an article for the May 9 Chronicle of Higher Education, Will Potter examines some of the faulty claims made by universities in economic-impact studies and suggests that politicians are starting to doubt the credibility of such studies.

Of course, some people don't want to hear the bad news. Crow released a scathing letter attacking the methodology of the Sanders study. In response, Sanders has re-run the data, again finding weak and inconsistent correlations between state funding of higher education and economic growth. (For statistics buffs: he increased the number of lagged variables to 15, ran the model both with and without the concurrent variable, and summed the coefficients.)

In his June 3 op-ed in the Tribune, ASU alumni chairman Martin Shultz joined the campaign, playing Squire Sancho to Crow's Quijote. Echoing Crow, Shultz argues that Arizona is dealing with a new form of higher education spending: "ASU has started the shift from an agency model to an enterprise model of investment." In other words, the new knight is stronger and more handsome than any we've dreamed of before. But it's unclear what is so entrepreneurial about saddling taxpayers with all the risk and all of the up-front costs.

Further, there is plenty of reason to doubt that higher-ed knights are made stronger and more handsome by virtue of their connection to biotechnology. According to Joseph Cortright and Heike Mayer of the Bookings Institution's Center on Urban and Metropolitan Policy, "To date, even successful biotechnology industry clusters have produced only modest returns on their regional economies."

Rather than dreaming of higher-ed knights, Arizona policymakers should make the state attractive to private investment by reducing taxes and decreasing regulation. According to a study by the late University of Minnesota economist Willis Peterson, the annual marginal rate of return on publicly invested capital between 1980 and 1990 was seven percent. But the annual marginal rate of return for private capital investment during the same period was 22 percent. Best of all, private investment doesn't require taxpayers to pick up the tab for politicians' dreams.

--Vicki E.J. Murray, Ph.D., is education policy analyst with the Goldwater Institute

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