Universities as Economic Engines

Source: "The Economic Impact of Universities: Evidence from Across the Globe"

Source: “The Economic Impact of Universities: Evidence from Across the Globe”

by James A. Bacon

The world’s first university was founded in 1088 in Bologna (in what is now Italy). The idea of bringing scholars together in a dedicated institution caught on. In time, universities were established throughout Europe, the United States and the rest of the world. Almost every country has a university today, with Bhutan in 2003 being the latest nation to open its first. The proliferation of universities has coincided with the accumulation of knowledge and growth of the global economy. Scholars (most of them employed by universities, as it happens) have debated the extent to which universities have contributed to that growth.

Drawing upon a 60-year database of nearly 15,000 universities in 1,500 regions across 78 countries, Anna Valero and John Van Reenen with the London School of Economics think they have an answer. “Doubling the number of universities per capita,” they say, “is associated with 4% higher future GDP per capital.”

Perhaps most significantly for readers of Bacon’s Rebellion, universities appear to have positive spillover effects to neighboring regions. In other words, the effect is felt locally and regionally, not just nationally.

Writing in “The Economic Impact of Universities: Evidence from Across the Globe,” Valero and Van Reenen posit several channels by which universities affect growth.

Perhaps most obvious and easy-to-measure impact is the demand created by students, staff and universities’ purchase of local goods and services. Like any other primary industry, universities provide a service (higher education) that pumps income into the region where it resides. The effect is especially positive when costs are financed through national governments from tax revenues raised mainly outside the region in which the university is located.

But there are other channels. Universities produce human capital, nd skilled workers tend to be more productive than unskilled workers. Universities also spur innovation. The innovation effect is both direct, as when university researchers themselves produce the innovations, and indirect, as graduates enter the workforce and innovate. A third channel is by fostering pro-growth institutions. “Universities,” write the authors, “[provide] a platform for democratic dialogue and sharing of ideas, through events, publications, or reports to policy makers.”

None of this is earth-shattering stuff, although the computation that a doubling of universities per capita results in a 4% increase in wealth is interesting. And there is ample room to refine the conclusions. The authors concede that their methodology does not adjust for the size or quality of universities. All other things being equal, one would expect that a large, prestigious university would have a larger positive impact on the regional economy than an obscure, als0-ran institution.

Bacon’s bottom line. But the study provides a useful reminder as Virginians think about what they expect from their public education system — especially the flagship institutions of the University of Virginia, the College of William & Mary, and Virginia Tech. On the one hand, we want to make high-quality higher education affordable and accessible to Virginians. On the other, we like it when universities function as engines of local and regional economic growth. Insofar as it takes money for universities to generate bigger payrolls, R&D contracts, business spin-offs and other economic benefits, institutions that most effectively extract revenue from whatever source, including their students, will tend to be more powerful economic engines.

The trade-off is most clearly evident at UVa where administrators devised a way to cobble together a $2.2 billion pool of capital capable of throwing off roughly $100 million a year in unrestricted funds. The Board of Visitors voted to dedicate that money to enhancing the prestige of the university, indirectly stimulating economic growth, rather than lowering tuition & fees in order to make a UVa education more affordable.

I have criticized the board’s decision; I think the university has lost its way by embracing the Ivy League high tuition/high aid financial model that exploits its student body, especially middle-class students who struggle to pay the massive bills but don’t quality for student aid. But I also acknowledge that the UVa approach does have the advantage of creating economic growth. If the university were a company that, to pick a fanciful example, developed and manufactured leading-edge smart phones, for which it charged ever-higher prices and plowed revenues back into growing its business operations, Virginians would applaud it as an economic champion.

The higher ed affordability crisis is very real. But so is the economic contribution of Virginia’s universities. We need to strike the right balance between the two.

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23 responses to “Universities as Economic Engines

  1. All this stuff is highly suspect.

    Much such crap is generated by people writing about themselves.

    One could make a convincing argument, for example, that the Universities in America have done more harm to this nation and its people per capita over the past 40 years than any other institution in the nation, even more harm than the US Congress.

    Be very wary of what your read of this ilk. Most is total BS.

  2. I think an argument can be made that the thing that saved the country from a depression … was the retired….who got social security and medicare.

    Medicare lets seniors spend money on things other than medical and the medical is paid for by taxpayers that still have jobs.

    When a guy gets 40K a year in retirement income and his medical expenses are taken care of… he buys “stuff” that gives other people jobs…

    In many communities hit hard by the recession – the one demographic still having money to spend – were seniors…

    Walmart, Lowes, Best Buy and car dealers stayed afloat from senior spending and doctors, nurses, drug stores, and medical providers just stayed the course with Medicare paying for that “stuff”.

  3. Larry,

    Your post bears no resemblance whatsoever to what Jim is talking about. You can perhaps make an argument that the retired, with their stored up wealth that they have created themselves, can have a positive economic impact. But when you are relying on Social Security for the source of “wealth”, you go off the rails. The reason is the same as the counter-argument to the idea of government stimulus, a part of Keynesian economics. Take the simple example: a two person local economy and a government. If A creates butter and sells it to B and A uses the money to buy furniture created by B, the economy is stimulated because both people created value and used the proceeds to, in their turn, buy something from someone else. On the other hand, if government gives A money to stimulate his investment in goods and services, A is certainly stimulated, but B is de-stimulated. Why? Because the government had to take the money from B in order to give it to A. Net economic effect = 0 And don’t tell me that larger numbers in a “real” economic universe make a difference. That would be akin to one of the all-time fallacious arguments made in the 70’s by the Penn Central RR to Congress: “Well, Senator, we lose a dollar per boxcar, but we make up for it in volume”

  4. @Crazy – using tax dollars to pay college professors is not much different than using tax dollars to pay for Medicare or DOD.

    Social Security – is paid for with FICA … collected from people’s pay checks..

    the point is that these dollars go into the local economies -no different than if you paid soldiers to be ‘at the ready’ and they spent those dollars in the local economy.

    my point was that taxpayer funded colleges are – as Jim has stated – an economic benefit to the communities in which they are located..

    and so are senior citizens with their self-funded social security – and taxpayer-funded Medicare… oh and their govt-subsidized 401(k)s … and public pensions …

    all of them go into the local economies… and sustain those local economies…in good times.. and bad… the money keeps flowing.

    does Medicare and DOD create deficits and debt? you bet your sweet bippy… they do – both do – … but they also sustain local economies… to the point where Congressmen refuse to close bases the military wants to close and kill weapons systems the military wants killed.. those Congress just keep on spending those tax dollars to keep them alive …

    • Your point seems to be that local economies are sustained. It simply means that some other local economy that is not the recipient of these tax dollars is UN-sustained. You don’t seem to understand that the net stimulative economic impact is zero.

      • well it might mean fewer big screen TVs or lottery tickets or porn movies are purchased, eh?

        that’s the “economy” also, right?

        you can buy – a policeman, a soldier, a 911 EMS guy or a trip to the Caribbean , a trip to vegas casinos, or cigarettes, or illegal drugs… etc..

        all of them “sustain” the local economy? no?

  5. No. You are looking at the wrong set of facts.

    Look at the original example. A is stimulated, but B is DE-stimulated to the same extent that A is stimulated. For certain, the local pizza guy in the university town is stimulated, but at the expense of some other guy in a non-university town. You simply do not understand that government stimulation is not stimulation. No new net economic value is created. It is taking money from one pocket and moving it over to the other pocket. You need to see that the net economic value created across the whole economy is zero.

  6. it’s the same money – spent on different things.. right?

    taxpayer money for a college professor verses taxpayer money for soldiers at a local base – as opposed to that money going to pay someone to build an RV or a cable TV.

    Do you think it’s ‘stimulation’ for the govt to build ships in Newport News or pay for a deputy in Henrico as opposed to not building the ship or having a deputy but taxpayers spending that money instead on a vacation home at Nags Head?

    keep in mind – I’m NOT advocating this – I’m merely asking how they differ… at the economic level…

    I’m not assigning a “good” or a “bad” purpose to what the money is spent on – but I AM contrasting that it could conceivably be spent on “good” or “bad” purposes – in the eyes of the beholder.

    You do want a deputy when you need him – right? You’d probably not begrudge your dollars going for that as opposed to spending it on a man cave but no local deputy… ?

    • “taxpayer money for a college professor verses taxpayer money for soldiers at a local base – as opposed to that money going to pay someone to build an RV or a cable TV.”

      I think you may be starting to see the point. There is no economic impact difference between taxpayer money for professor or soldier or RV builder. That is merely preference of target. It still remains a transfer payment in economic terms. No new value is created. The taxpayer money had to be taken from, zounds, a taxpayer, and that taxpayer was necessarily de-stimulated. He had less money to spend and invest at the same time that the RV builder or other target had more.

  7. is new value created with entertainment from a big screen TV or lottery tickets or porn movies verses law and order provided by a deputy?

  8. I’m with Reed in being skeptical about academic studies about academia. They say doubling the the number of universities per capita is associated with 4% higher GDP per person. One could deduce from that that adding universities will solve our growth problem. I doubt it.

    While I assume the data used in the study is accurate, I’m not sure about any claims on causation, particularly not now. The explosion in the number of universities likely corresponded with an increase in affluence brought on by the industrial revolution and the rise of the middle class, who could afford to attend college, unlike their ancestors. The Bureau of Labor Statistics (BLS), reports that only 27 percent of jobs require a college degree (associate or higher), while about 47 percent of workers have an associate degree or higher. A strong case could be made that the money would be better spent elsewhere.

    Having a university is an economic benefit to the local community (funded at the expense of taxpaying areas without a university), which is why politics comes into play with where they are located. When they were setting up one university in a state with two centers of population, it would often be set up in between because the legislature could not otherwise agree on where to put it. (University of Missouri, Penn State, etc.)

    North Carolina is an exception, with the two major state universities only 25 miles apart, which helped form 2/3rds of the Research Triangle. Technology-related businesses located there because of this concentration, creating a net benefit for North Carolina (at the expense of other states). Virginia’s major research universities, VT, UVA, and VCU are far apart and in the case of VT and UVA, in relatively small cities, so they unfortunately don’t have nearly the same impact on the state economy.

    • Izzo, I agree with you. To say that investing in doubling universities per capita has increased per capita GDP in the past is not to say that continuing to double the number of universities will continue to increase per capita GDP in the future. Indeed, I would argue that, in the United States, we have reached the point of diminishing returns. We have too many universities trying to educate too many people who are not prepared for higher education, and that further expansion of higher ed will generate negative economic returns.

      Actually, I was thinking of pointing that out in the original post, but I got distracted by the economic growth/affordable education trade-off.

  9. right there are two different issues …

    the first is Universities as economic engines… and I pointed out that other things like army bases – and really a population of retirees with pensions … also are sources of economic activity in a place and you could do a similar study to what these guys did – and also demonstrate than an Army/Navy base ALSO provides economic “growth’.

    I further equivalenced them by saying that both Universities and Army/Navy bases are funded by taxpayers and that in both good times and bad – as long as those institutions continue to exist and continue to receive funding they will help sustain a local economy.

    that’s an argument separate and apart from:

    1 – whether or not the there are “issues” in the budget that provides their funding.

    2. – whether or not there are “too many” of them… or not…

    or for that matter what metric or process you would use to determine what “too much” or ‘the right amount” is.

    Not Bacon’s Bottom Line: any group that supports a particular occupation or industry can “make the case” that it is an “economic benefit”.

    that’s just like the top guy as VNG saying that more natural gas would be an “economic benefit” to Hampton Roads.

    none of these approaches are much more than “puff” pieces.. in any substantiative way.

    Crazy also made the argument that if taxpayer dollars are involved – it’s more of a “transfer” than true economic “productivity” … which is true if you’re not going to assign a productivity “value” to say literacy/education or law and order/national defense – and just assume that both are dead losses because the folks that got taxed to provide them – did not themselves “choose” to spend their money in that way and may have preferred to spend it on other things…

  10. Top 15 cities for entrepreneurs:

    https://www.entrepreneur.com/slideshow/279782

    Here’s a good story about how a university made its city the fastest growing venture capital ecosystem in America:

    http://www.vcpost.com/articles/115652/20160204/charlottesville-university-of-virginia-national-venture-capital-association-pricewaterhousecoopers.htm

    I think a lot of the idea of universities as economic growth engines is about: A.) the quality of a university and its research. Perhaps the most useless metric of a university is “total research dollars.” Wow, great grant writing….the question is whether the research either turns into actual academic product that is cited in top journals and by the private sector OR the research gets licensed and turned into a an actual enterprise. and
    B.) access to wealthy people. A lot of these towns are highly desirable to live in…thus they attract very wealthy people and alums. That can create an effective venture/angel capital network for local entrepreneurs coming out of the university.

  11. uh… FREDERICKSBURG, VA

    Located 50 miles west of Washington D.C., Fredericksburg attracts around 1.5 million visitors a year due to its abundance or cultural and historical attractions. It is also listed as one of the best places to live in 2016, has a low unemployment rate and is home to Mary and Washington.

    west? and what in the world? can someone explain what exactly
    is in Fredericksburg that gets it on the top entrepreneur list?

    something is bad wrong here..

    • A perfect example why all such statistical lists should be closely scrutinized. The compilers have no idea what’s going on at the local level, and often get basic stuff wrong. Even so, I regard these lists as potentially useful. They point out things we might otherwise overlook. Maybe something positive is going on in Fredericksburg that even the locals realize about themselves.

  12. The Fredericksburg area is primarily a bedroom community and the University of Mary Washington ain’t exactly UVA or VaTech.

  13. “If the university were a company that, to pick a fanciful example, developed and manufactured leading-edge smart phones, for which it charged ever-higher prices and plowed revenues back into growing its business operations, Virginians would applaud it as an economic champion.”

    No smart phone manufacturer would be considered an economic champion if it charged “ever-higher prices”. If our universities want to transfer knowledge to a new generation they should lead by example. Successful businesses always find a way to provide more value at the same or lower prices. This is certainly not the business model followed by universities.

    I also question the purpose of our educational system. It seems that it grew up to make factory workers out of farm hands. It was a system of indoctrination to condition students to do what they were told when they were told to do it. The story of our culture was told and retold. Essentially that we are individual economic units of productivity.

    Our colleges seem to exist to make sure that the future leaders of our organizations will toe the line and re-enact the same story of our culture. We penalize anyone who doesn’t give the “right” answer. From elementary school we stamp out natural curiosity and measure intelligence by answers to a standardized test. I know all of the arguments about why they are necessary, but what do they really prove? Whether or not you have been successfully conditioned?

    Einstein said that imagination is more important than knowledge because knowledge limits us to the box that we are already in. Imagination frees us and inspires us. It creates possibilities that would not exist if we remained in the box.

    It seems UVA’s fund exists to improve their marketing pitch and create more prestige. Is it a tool to extract more money from a student’s or their parent’s pocket? In return for what? A diploma that certifies that they have been suitably conditioned to not rock the boat. That they can be trusted with the keys to our organizations and will maintain the status quo?

    It was once said, “the A students work for the C students and the B students work for the government.” The social and commercial entrepreneurs cannot be too attached to what already is (the “A” answers). They must be unconditioned enough to see something different.

  14. “If the university were a company that, to pick a fanciful example, developed and manufactured leading-edge smart phones, for which it charged ever-higher prices and plowed revenues back into growing its business operations, Virginians would applaud it as an economic champion.”

    No smart phone manufacturer would be considered an economic champion if it charged “ever-higher prices”.’

    that’s a funny example considering the price that cell phone companies charge for phones and data plans these days!!!

    😉

    “I also question the purpose of our educational system. It seems that it grew up to make factory workers out of farm hands. It was a system of indoctrination to condition students to do what they were told when they were told to do it. The story of our culture was told and retold. Essentially that we are individual economic units of productivity.”

    the first public schools in the US were to provide basic literacy to kids of folks who themselves had no formal education.

    across the country – towns of citizens agreed to pool their money and go hire a teacher to teach their kids reading and writing… this was BEFORE the industrial revolution and manufacturing.

    “Our colleges seem to exist to make sure that the future leaders of our organizations will toe the line and re-enact the same story of our culture. We penalize anyone who doesn’t give the “right” answer.”

    well that’s because when you provide goods and services to people that can kill them if not done “right” … there’s a problem….no matter whether it’s a car, a pill.. a medical treatment, a bridge.. electrical wiring…etc..

    ” From elementary school we stamp out natural curiosity and measure intelligence by answers to a standardized test. I know all of the arguments about why they are necessary, but what do they really prove? Whether or not you have been successfully conditioned?”

    if you cannot read and write – you cannot learn…. a simple thing.
    you can go to any one of 150 countries on the planet and see what happens when the population is illiterate… they literally live like animals.. without electricity, medical care, potable water, sanitation , etc…

    do we think that people who live that way – and education are separate issues? that a nation can progress from 3rd world to 1st world without education being a central component?

  15. “that’s a funny example considering the price that cell phone companies charge for phones and data plans these days!!!”

    Why is that a “funny example”? The latest iPhone has 10 times the processing power, better screen resolution, better cameras, longer battery life, is waterproof and has wireless headphones – all substantial improvements in value from the original iPhone for about the same price. Do our universities deliver multiple times the value for the same price after 10 years? Or the same value for a significantly lower price? Why not?

    ” that a nation can progress from 3rd world to 1st world without education being a central component?”

    I don’t think anything that I wrote suggested anything related to that. I was speaking about an educational system that is designed to produce “adequate” when we should be striving for “excellence”. We are focused on producing functional units of economic production. Actually, we are more focused on producing effective units of economic consumption. We should be concentrating on developing excellent human beings; people who are aware, collaborative, compassionate, responsible, respectful, innovative, healthy and happy.

    This generation compared to my generation ( and probably yours) is less healthy, more in debt, and more dissatisfied with their work and life. Education (I prefer learning to education) should be a process of preparing the future citizens of our society to help it to evolve to higher levels.

    Instead, we use standardized measurements to make sure our mass produced units are within an acceptable range of tolerance, just like an assembly line. I am not arguing that such an approach is wrong if that is what we want our system to do.

    I am suggesting that a system designed in such a way severely diminishes our possibilities. We spend a dozen years stamping out the curiosity and uniqueness of our beautiful children, in order to have them meet a very low standard of conformity. Ideas that are beyond normal bounds are considered subversive or “wacky” instead of transformational. Scientists must color within the lines in order to receive grant money. We are much more guided by fear than the spirit of exploration and adventure.

    Einstein reminded us that we cannot use the same type of thinking to solve a problem that we used to create it. We have been going around and around on a downward spiral for decades. Rather than continue to circle the toilet bowl, I am suggesting that we consider other possibilities; focused on excellence and fulfillment rather the quiet despair of wage slavery and consumerism.

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