Spend Money to Make Money?

by Jane S. Shaw

An October 6 meeting sponsored by the Pope Center and the Heritage Foundation raised the question of whether public investment in universities leads to economic growth. Ask any governor, and he or she will say, “of course” — and justify everything from laboratory buildings to dormitories on those grounds. Most of us might say the same — the idea has been drummed into our heads that education is the key to prosperity (at least to our own).

But digging into the question, Jay Schalin found that there isn’t much evidence either way. A myriad of studies tout the wealth that comes from higher-education spending, but how much of that “growth” is just money moved from somewhere else? And how much is wasted?

The topic is murky enough that universities keep rolling out “economic impact studies” that defend public spending even though the studies’ assumptions stretch the imagination. One group of scholars at Vanderbilt University looked at the supposed economic returns in 67 such studies and found that they ranged from $1.84 (per dollar spent) to $26 — “a range simply beyond belief.”

Taking a macroeconomic look, Jay cited two unpublished studies, one by Rich Vedder and Matthew Denhart of the Center for College Affordability and Productivity, the other by Bornali Bhandari (Fitchburg State) and Bradley Curs (University of Missouri-Columbia). Both found that investment in higher education correlates with less economic growth.

Jay proposes that investment in education is like the Laffer curve. That is, like taxes, investment is subject to diminishing marginal returns. Initial amounts may have solid economic impact, but then the benefits start to dwindle. The question is, who (which state, for example) is where on the curve? The Edububble blogger liked Jay’s idea because it challenges conventional wisdom without embarrassing anybody: “It’s not always a good idea to speak truth to power or even the powerless,” wrote C. Davis. “I think the phrase ‘diminishing marginal returns’ is convoluted enough to be emotionally neutral.” Maybe that’s the way to puncture the overinvestment balloon.