Do Public Subsidies for Higher Education Affect Regional Economic Development?

Shawn Kantor
University of California, Merced
NBER
TIAA-CREF Institute Fellow

Alex Whalley
University of California, Merced

May 2008 | Issue # 91

In fiscal year 2006 state and local governments contributed nearly $77.7 billion to higher education across the United States, of which 91 percent was from state funding sources. Despite the importance that policymakers and local boosters of public higher education institutions place on the economic impact of the institutions, very little is understood about how the higher education industry affects the real economy. This paper represents the starting point in a long-term project that will explore the political economy of higher education in the United States since World War II. Gaining a better understanding of the public’s support for higher education institutions will offer new insights into the economic growth of the United States over the course of the last century.

The specific goal of this paper is to analyze modern, state-level data on public expenditures for higher education and its impact on per capita income and house prices. We have constructed a new panel data set based on data from the U.S. Department of Education that reports institution-level revenues and expenditures. The analysis in this paper has aggregated the individual data up to the state level. Using an IV approach, estimates indicate that a 1 percent increase in per capita public higher education expenditures increased per capita income by .28 percent. The impact on house prices was even more pronounced. The results here lend support to the argument that universities can provide benefits to a state’s economic base. Future research will explore the pathway by which this public spending affects the real economy and the political process that leads to changes in public support for universities.

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