J. Scott Moody & Wendy Warcholik, Ph.D. | October 1, 2008

Does Education Spending Boost Economic Growth?

J. Scott Moody & Wendy Warcholik, Ph.D.

Policy discussions on education spending usually revolve around the assumption that more spending equals better educational outcomes and greater economic growth. Unfortunately, this is a very simplistic way to look at a complex public policy issue.

A brief review of cutting-edge academic research shows that, in fact, education spending alone has very little to do with better educational outcomes and greater economic growth.

Economists Eric Hanushek, Dean T. Jamison, Eliot A. Jamison, and Ludger Woessmann have concluded:

In a series of studies conducted over several years, the four of us have explored the role of both school attainment and cognitive skills in economic growth ... [Using] more countries over a longer period of time than any previous study ... [we find that] increasing the average number of years of schooling attained by the labor force boosts the economy only when increased levels of school attainment also boost cognitive skills. In other words, it is not enough simply to spend more time in school; something has to be learned there. ... [R]eformers should bear in mind that money alone will not yield the necessary improvements. Many expensive attempts around the world to improve schooling have failed to yield actual improvements in student achievement [emphasis added].

Indeed, as the nearby chart indicates, increased education spending in Oklahoma is no guarantee that students will learn more.


Moreover, in the quest for better education, ever-increasing education spending has created an enormous education industry-comprising everything from teachers to janitors to administrators. But is the education industry itself good for the economic health of a community?

Economists Andrew T. Young, Daniel Levy, and Matthew J. Higgins asked the same question and found that

... the overall picture still would suggest that the provision of education has a positive, or at worst, insignificant effect on economic growth. We find the contrary. The percent of the population providing education services is negatively correlated with economic growth ... Why does human capital appear to foster growth while the provision of it does not? Perhaps the benefits of education provided in a given county are not internalized by the county itself . . . another explanation is bureaucratic overexpansion of the public school systems [emphasis added].

Finally, as the French economist Frédéric Bastiat famously taught, economists must consider not only that which is seen, but that which is unseen. It must be pointed out that government spending on public education does not come free. The resources used to pay for Oklahoma's public education system come from mandatory taxation. Therefore, another important public policy question to ask is whether or not the benefits of education spending outweigh the cost of taxation.

In a recent study, economists Lori L. Taylor and Stephen P.A. Brown found that, at the margin, increases in elementary and secondary education spending lead to decreases in private employment, private capital, and private gross state product. In addition, the negative effect on private employment occurs regardless of whether education is funded by a sales tax, property tax, or income tax. The authors conclude, "As a general rule, the costs of the negative effects of the additional taxes more than offset the benefits accruing from additional government services." To put it another way, the economy would be better off if the next $1 spent went toward reduced taxes rather than to increased education spending.

J. Scott Moody (M.A., George Mason University) and Wendy P. Warcholik (Ph.D., George Mason University) are OCPA research fellows.

J. Scott Moody

OCPA Research Fellow

OCPA research fellow J. Scott Moody (M.A., George Mason University) serves as chief executive officer of State Budget Solutions. Formerly a senior economist at the Tax Foundation and a senior economist at the Heritage Foundation, he has twice testified before the Ways and Means Committee of the U.S. House of Representatives. Moody is the co-creator of the Tax Foundation’s popular “State Business Tax Climate Index.” His work has appeared in Forbes, CNN Money, State Tax Notes, The Oklahoman, and several other publications. This article is an updated version of an analysis published in 2008.

Wendy Warcholik, Ph.D.

OCPA Research Fellow

Wendy P. Warcholik (Ph.D., George Mason University) is an OCPA research fellow. She formerly served as an economist at the U.S. Department of Commerce’s Bureau of Economic Analysis, and was the chief forecasting economist for the Commonwealth of Virginia’s Department of Medical Assistance Services. She is a co-creator (with J. Scott Moody) of the Tax Foundation’s popular “State Business Tax Climate Index.”

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