Higher education’s diminishing returns

October 24, 2013

“One of America’s most durable myths,” George Leef writes over at Forbes, “is that the more people who graduate from college, the more the economy will grow.”

For many years, politicians and leaders of the higher education establishment have advanced that notion. In his first major speech as president, for example, Barack Obama said that if we want a strong economy, we need to lead the world in the percentage of the population that has earned a college degree. And in a recent op-ed inThe Wall Street Journal, two college presidents (Robert Gates of William and Mary and David Boren of the University of Oklahoma) argued that decreasing state spending on higher education means that we are “sacrificing our young people’s futures — and our future economic growth …”

Those ideas sound appealing, but they are thoroughly mistaken. We cannot pull the economy up by the bootstraps through increased spending on higher education, even if that led to larger numbers of people with college degrees, which it won’t.

You may recall that in 2011 OCPA and the Center for College Affordability and Productivity (CCAP) pointed out that

CCAP has developed multiple variations of econometric models examining the relationship between state appropriations for higher education and economic growth (measured as growth in per capita personal income). Our center’s models have consistently found that no relationship exists between state appropriations and economic growth. The models explore variations in state economic growth over a 46-year period from 1960-2006. As state monies invested in higher education cannot be expected to have immediate results (for example, it takes several years to educate an individual), the models include three separate time lags to more accurately assess the determinants of state economic growth. Even with five-, ten-, and fifteen-year time lags, no relationship exists between appropriations and growth.

As researcher Jay Schalin has observed, state-government investment in higher education “fits the classic Laffer Curve model for diminishing marginal returns … As states invest more money in university systems, the returns from each new dollar spent diminish. Eventually, the returns become negative.” Indeed, economist Richard Vedder told Oklahoma Watchdog this year that “econometric analysis I have done suggests that the relationship between state appropriations for higher education and economic growth is actually negative — resources are taken from competitive private enterprise driven by market discipline and given to an inefficient sector sheltered from such discipline.”

Big changes are coming to higher education, and Oklahoma policymakers need to prepare for them now. Moreover, if policymakers are serious about controlling government spending — and using growth revenues to buy down the state income-tax rate, as Kansas is doing — then higher education cannot be sacrosanct.