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Anthony Hennen is a writer and editor at the James G. Martin Center for Academic Renewal. He holds a master's degree in politics/philosophy/economics from the Cevro Institute in Prague, Czech Republic. He is the co-author (with Richard Vedder) of “Dollars and Sense: Assessing Oklahoma’s Public Universities,” published by OCPA in 2014.

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An indiscriminate mindset of “more funds mean more growth” is how universities stagnate and reinforce bad habits. It’s true that smart investments in research can benefit a university and spark economic growth, as University of Oklahoma President Jim Gallogly has noted. However, to separate the good spending from the bad, university leaders need rigorous and transparent analyses on how funds are used. 

In figuring out how valuable higher education is, it’s crucial to know its benefits. However, when colleges are responsible for analyzing themselves, their thumb is on the scale. One way this is done is with “economic impact studies,” which try to show how much economic activity a university causes.

Unfortunately, impact studies do more to exaggerate the benefits of colleges and distort how colleges actually affect the economy.

One recent assessment, done by the Oklahoma State Chamber Research Foundation, estimates that every dollar from state funds generated “9.4 dollars in economic output”—which is an overall total of $8.21 billion.

There’s good reason, however, to be skeptical of such a high estimate. For one, though many state governments and colleges commission economic impact studies, the results vary wildly.

In a 2006 study, for example, economists John J. Siegfried of Vanderbilt University, Allen R. Sanderson of the University of Chicago, and Peter McHenry of Yale University reviewed 138 academic papers on economic impact studies. They found that the multiplier equations used to calculate job growth “ranged from 1.03 to 8.44,” and the effect of a dollar of government spending went “from 1.84 to 26, a range simply beyond belief.” In other words, most studies don’t agree on how much colleges can boost growth, nor whether the effect of government funding is modestly good or astronomically high. That hints at sloppy analysis. It’s also strange that the tax money sent to colleges was so influential.

“These measures are particularly sensitive to the proportion of an institution’s budget that is paid by government, but have little to do with local economic impact,” the authors note. But those measures shouldn’t be so sensitive. Whether a college gets money from tuition or from taxpayers doesn’t make the money better at boosting economic growth. A shop owner doesn’t create more jobs when women buy $200,000 worth of goods than when men buy $200,000 worth of goods. The revenue is what matters, not the source.

That emphasis on government spending also shows a “sleight of words that exaggerates the multiplier,” as Siegfried et al. noted. The Oklahoma study argues that “The System generated 9.4 dollars in economic output for each dollar of revenue from state appropriations,” or $8.21 billion. That statement is misleading, though, because it implies that all of the college system’s economic impact is thanks to taxpayer funding. But state appropriations are a relatively small part of a college’s budget. If anything, state funding plays only a small role in a college’s economic impact.

In fiscal year 2019, for example, the Oklahoma State System of Higher Education will receive about $854 million in state funding, but $1.3 billion in student tuition and fees. If colleges drive so much economic growth in Oklahoma, students paying their bills deserve more credit than the Oklahoma Legislature.

Believing the inflated $8 billion figure from the impact study also requires a big belief in market failure. Again, as Siegfried et al. argue, “If the returns to higher education were as high as these statements imply, states and the private sector would be building universities frantically.” A half-competent private college would make unemployment disappear in rural America and nurture an entire economy around it if the returns to college were so high. Yet, that is not the case for many rural colleges, private and public.

Not all university spending drives economic growth equally. A medical innovation or new engineering process that drives down building costs, for instance, will have a larger effect than hiring student affairs and diversity administrators, or funding another academic paper on Othello. When colleges find an economic niche, the returns can reshape a local economy. Cities like Pittsburgh, for instance, with its “meds and eds” approach, which has become a hub for fields like medicine and robotics/artificial intelligence and attracts high-tech businesses. Cities that figure out a way to connect their colleges and businesses can spark growth for everyone. And smart investments in research can benefit a university and spark economic growth, as University of Oklahoma President Jim Gallogly has noted. Dismissing economic impact studies does not mean universities can’t play a role in economic growth.

But, to separate the good spending from the bad, university leaders need rigorous and transparent analyses on how funds are used. Doing so does not mean all universities should ditch the liberal arts or majors that are not economically valued, of course, but leaders should be realistic about the economic impact of their institutions.

To remain clear-eyed, it’s important to remember the economic principle of opportunity cost. Every dollar spent on one line-item in the budget is a dollar that cannot be spent elsewhere in the budget—or returned to taxpayers. At a time when the cost of housing, health care, and living continues to increase, state governments need to get serious about spending taxpayer money wisely. Rather than claiming that colleges have a secret formula for economic growth, their leaders need to show that they are responsibly using the state funds they already receive.

One way to demonstrate good stewardship is by improving graduation rates. For instance, the University of Oklahoma’s six-year graduation rate is 67 percent. The University of Central Oklahoma only graduates 38 percent of its students. And community colleges, like Tulsa Community College’s 15 percent three-year graduation rate, trail far behind many four-year schools. The room for improvement is vast.

While colleges (especially community colleges) should not be solely evaluated by graduation rates, low completion rates call into question how useful economic impact studies really are.

A shockingly high number of students who enter an Oklahoma college leave with debt but no degree, yet colleges are still credited as centers of economic growth. If the arguments about those magical growth machines were credible, helping more students graduate may spark more growth than state funds could.

Colleges, of course, have goals beyond the economic, but that is partially why they shouldn’t be seen as a driver of economic growth. Education can contribute to economic growth, but it depends on what kind of education. Just as Pittsburgh has found a way to connect colleges with businesses, Oklahoma needs to know what strengths its colleges have before it unites education and economy. An indiscriminate mindset of “more funds mean more growth” is how state universities stagnate and reinforce bad habits.

Though optimistic impact studies provide an argument for more higher education funding, using them hurts the credibility of colleges. Academic research will be well respected only if it’s rigorous. Making big economic promises might mean more funding in the short term, but in the long term, people may trust their leaders—or local college—less.

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