One View of State Budgets and Higher Education

I start out with the belief that investment in higher education is in general a good thing. However, I’ve been worried by the decline in real college grad wages.

 I came upon this 2009 Brookings paper, “The Causal Impact of Education on Economic Growth:Evidence from U.S.”, by P. Aghion , L. Boustan , C. Hoxby, and J. Vandenbussche. Let me take two excerpts from the beginning and end of the paper: 

Should countries or regions (generically, “states”) invest more in education to promote economic growth? Policy makers often assert that if their state spends more on educating its population, incomes will grow sufficiently to more than recover the investment.

 //giant snip//

We find support for the hypothesis that some investments in education raise growth. For the U.S., where all states are fairly close to the world’s technological frontier, we find positive growth effects of exogenous shocks to investments in four-year college education, for all states. We do not find that exogenous shocks to investment in two-year college education increase growth.

This suggests that the money would used equally productively elsewhere. We find that exogenous shocks to research-type education have positive growth effects only in states fairly close to the technological frontier. In part, this is because research-type investment shocks induce the beneficiaries of such education to migrate to close-to-the frontier states from far-from-the-frontier states. Put another way, Massachusetts, California, or New Jersey may benefit more from an investment in Mississippi’s research universities than Mississippi does. Finally, we show that innovation is a very plausible channel for externalities from research and four-year college type education. Exogenous investments in both types of education increase patenting of inventions.

What conclusion should I draw from this paper?  Should we put more money into research-related education spending and four-year schools, and less into two-year colleges? Or are we missing something important here?


  1. Simplistically, it is not that different from asking how you’re going to keep them down on the farm after they’ve seen “Paree” (Paris). The bright ones are drawn to where the action is, with great results overall, and the authors’ point is that efforts to keep them in Mississippi will be wasted.

    In the short term, I cannot argue with the findings. If we have an economic emergency and limited funds for education, then spend it in California, not Mississippi. If we want to do nation building, however, then why not attempt to recreate the forces that created the technological frontiers? This paper does not seem to explore that option.

    Drawing national resources to the frontiers produces intense cost-of-living pressures that devalue all of those apparent benefits when pitted against global competition. Technological frontier status, hinging around 1963 patents, is an accident of history. If we are genuine in our claims to want to compete honestly in global commerce, then we need to start with a clean slate. The University of Illinois, for instance, has drawn a seriously respectable collection of frontier type elements, yet it is still not too far from the corn fields and fading rural towns. Pouring resources into it until it caught fire and became the center of excitement for a generation seeking to outshine everyone else in the world — competitively — would surely pay off in the long term. I am sure there are other bright spots worth investigating.

    It was a good question. Thanks.

  2. To commenter cm — thanks for all the data and analysis regarding software jobs. It was very interesting.

  3. It’s not going to matter. Online learning and research will soon destroy the university. Look at how wikipedia is destroying the existing encyclopedia companies (despite using a suboptimal online model in many ways), p2p has demolished the recorded music business, blogs and online classifieds are decimating the newspaper companies, and podcasting is killing the radio companies. To think the same won’t happen to education, which is just another information business like the rest, is pure fantasy.

    • Hi, Ajay, If your point is that investment needs to chase virtual communities, if at all, rather than geographically based ones, then I would argue that there is a physical aspect to economic activity and a great deal of research that cannot be denied.

      Whether virtual academic communities would kill the reported propensity to exploit patents in near proximity to the physical location of the research and the researcher remains to be seen. There has been a far greater move toward physical congregation to support humanity’s physical needs and desires than away from it, so it is highly likely that some similar force would still draw people together in a way that facilitates that exploitation, even if the academic community dwindles and becomes somewhat dispersed.

      The answer probably falls too near to sociology and psychology to yield a testable and inarguable position on the subject, not to mention that timing matters. If evidence shows that educational institutions have driven these economic effects in the past, then one cannot simply say it is a moot point because someday they will be different.

    • LAO, since we’re talking about govt “investment” here, my point is that they should just return that money to taxpayers, because the govt bureaucrats are clueless about what to do with it. As for the so-called physical aspect, now that we have pretty good video conferencing to replace face-to-face interaction, there’s pretty much nothing physical left, just a few research laboratories and that’s about it. I don’t know what magical “similar force would still draw people together,” so I’ll stick to the actual internet and video tech and the dispersion it now facilitates. Sociology and psychology pale in respect to economics: it’s just a lot cheaper to have everyone work from their cheaper home offices, not having to drive to work every day, and allow innovation to come from anywhere on the network. I question that educational institutions ever “drove” anything: at best, some bright researchers abandoned the university and drove the economic effects through their companies from then on. However, it is very much a moot point if those same educational institutions will not exist in a decade or two. It’s not merely a matter of universities changing: they will be destroyed by online learning and research, just as other information businesses like the NYT or Encarta are being destroyed today. :)

      • Greater exploitation of the home based office makes so much sense that it surely will happen. Abandoning research into the physical seems about equivalent to living in a dream world — not saying it couldn’t happen, just that it would probably doom humanity.

        In order to consider the proposition that government investment in education cannot return valuable benefits, one could revisit this paper, substituting “nation” for “state”. The new premise would be that the nation which has the most old patents will be the most productive. Just guessing, that seems true.

        We could then study whether government investment in education seemed to cause more or less of those patents — a bit difficult to prove causality, and I don’t have the data myself, but I suspect that government investment in education wins big time. For one thing, I cannot name a nation that invested in education with the result that the rate of patents plunged. I’m not choosing patents as the predictor of increased productivity, it’s the authors of the paper who did it, so unless someone refutes their evidence, I’m sticking with it.

  4. While other states may have more benefit from stimulus in a less technologically advanced state, such as Mississippi, it is still important to invest in that lesser state’s research and academic institutions, otherwise why invest there at all? Moreover, the investment would spur growth in the local community which can then help retain the skilled labor that is native to the area as well as those who migrate to attend or work at the school. This becomes the foundation upon which the region can grow to reach the technological frontier and have the same reputation and attractiveness as the likes of Massachusetts, California, or New Jersey. If the problem is that the states can’t afford it or not find it worth the opportunity cost, then this is an area where some federal input and resources could be beneficial so that those states don’t fall even more behind.

    I think a conclusion to draw from the 4-year vs 2-year dilemma is that if they don’t find an increase in growth via investment in 2-year schools then this might mean there aren’t as many 2-year schools in states pushing the technological frontier, and that they’re more concentrated in lesser advanced states. 2-year schools, such as community colleges, are natural feeder schools to 4-year universities and many are located in less densely populated areas. In this way they can act as a funnel out of the area. They can also help retain some of the lower skilled, as well as those who work or have a career in the region and have more incentives to stay there, and are just taking a short course to complete a degree. If investment was cut or decreased from these schools, I’m not sure which consequence would have a greater immediate effect, but I think in the long run it would just help to increase the technological and economic gap between urban and rural areas.

  5. I think the important thing we’re missing is that we’ve systematically denigrated two-year and vocational schools as lesser, when it might be a better choice than paying the hefty price of a four year degree and not having much to show for it. Some four year college students at the margins –not sure what that percentage is–would be better off without the huge student loan debt. Community college isn’t free, but it’s a lot less expensive.


  1. [...] Mike Mandel considers a 2009 Brookings Institute report and makes a perhaps less-expected conclusion, given the usually [...]

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