Friday, June 10, 2005

Return on investment in public universities 

While the governor and the state legislature are fighting their battle over the budget, one area that is done is higher education. After reading Richard Vedder in Forbes today, they might want to reconsider.

When university presidents plead for government money, they often make an argument for social investment. Pump funds into higher education and the economy will grow, they claim. After all, this is an information- and skill-based age in which college graduates are far more productive than their less-educated peers.

True. But the evidence suggests that increased public funding for universities doesn't lead to greater prosperity-and may even reduce the chances of it. Compare the growth in real per capita income in states that spend a lot on higher education with that of states that spend less and a few surprises show up. Over the past 50 years low-support New Hampshire outdistanced neighboring Vermont on nearly any economic measure, though Vermont spent more than twice as much of its population's personal income on higher education (2.37% versus 1.15% in New Hampshire). Missouri, with modest state university appropriations (1.32% of personal income), grew faster than its neighbor to the north, Iowa (at 2.41%).

Similar examples abound. Using data for all 50 states from 1977 and 2002, I compared the 10 states with the highest state funding for universities against the 10 states with the lowest. The result: The low-spending states had far better growth in real income per capita, a median growth of 46% compared with 32% for the states with the highest university spending. In 2000 the median per capita income level for the low-spending states was $32,777, 27% higher than the median for the 10 states where higher education got the most state money.

How could this be? Certainly money is invested in human capital which should return to the state in additional economic growth right?
Colleges have devoted relatively little new funding over the past generation to the core mission of instruction (spending only 21 cents of each new inflation-adjusted dollar per student on it), preferring instead to assist research, hire more nonacademic staff, give generous pay increases, support athletics and build luxurious facilities. And while in the private sector companies have learned to get more work out of fewer employees, the opposite appears to have happened in higher education. In 1976 American education employed three nonfaculty professional workers (administrators, counselors, librarians, computer experts) for every 100 students; by 2001 that number had doubled.

If someone wants to flip through our university's budget to get that number, be my guest. Here's some data, though, that's a little older but indicates that the ratio of students to staff has fallen by a third while the number of full-time students has held about constant. That is, we've increased non-faculty staff here by about 50% since 1994. I don't beleive that number has decreased since 2000, but I'd need to get better data than we can grab from the public website.

Meanwhile, here in St. Cloud my colleague Rich MacDonald has announced some results of a study of the university's impact on the local economy: We're 3% of St. Cloud's $10 billion economy. Of the $315 million in impact he's estimated thus far -- they are doing a study of alumni spending in St. Cloud, such as returning for hockey and Homecoming -- $50 million is from state dollars. $55 million is tuition dollars; more millions are spent from allowances and summer work savings students bring to campus, and then circulate around SCSU. The full results of the study are due in the fall.

(H/T for Vedder article: Jeff at Mises Blog.)