Midwest Economy Blog

Can Higher Education Revive the Great Lakes Economy?

November 7, 2005

In the Midwest and elsewhere, state government financial support for higher education has been eroding. Public colleges and universities are increasingly being left to their own resources; this raises a number of issues for them and for the Midwest economy.

In a major conference held here this week, Chicago Fed President Michael H. Moskow summed up one dilemma. “….universities today are increasingly forced to rely on their own resources to make budgets balance. But this can restrict access, because schools must often dip into endowments and resort to aggressive tuition hikes to close the gap. If the school is concerned with maintaining academic quality, large tuition increases are often the best option, but in doing so access for (lower income) students may be limited. If on the other hand, the university limits tuition increases, it is often forced to economize and offer reduced services, which can jeopardize quality through large classes and the use of part-time faculty.

However, if state universities had a free hand in shaping the tuition schedule and financial aid, higher tuition need not be borne by lower income families.

Many state universities charge tuition rates well below the cost of education provision. Meanwhile, the returns of the degree to the students are significant in terms of higher wages and salaries throughout their working life. And especially at state flagship universities, which are highly selective, a large share of students come from high-income families.

Mike McPherson, President of the Spencer Foundation, presented evidence on familial background of the available talent pool of highly selective schools, drawing from a recent book by William Bowen et al. Of children born in 1988 in families where neither parent attended college, only 0.9% went on to score 1200 or higher on the Scholastic Aptitude Test (the common admissions test for highly selective schools). This compares with 6.6% of children in families where at least one parent had attended college, and 14.6% from families in the top quartile of U.S. family income.

The point here is that many more families at state flagship colleges and universities could and would pay more for their education. Of course, unlike private colleges and universities, state flagships are often constrained in raising tuition because they must petition their state governing boards to do so, and such requests often fail to garner political support.

Perhaps that is why many representatives at the conference from public flagship schools instead pushed for a renewal of the “social compact” between public education and the public, in which public financial support would be restored and enhanced. To accomplish this, schools need to do a better job of explaining the many benefits that accrue to the general public from subsidizing the education of the few. For example, economists Kevin Murphy and Robert Topel have documented the societal benefits from public medical research in terms of reductions in mortality and morbidity. These benefits have been enormous in relation to public expenditures—and probably should be promoted.

But what benefits of this type would be specific to a particular state or region? For a (Midwest) region that has been lagging in growth and development, a benefit of economic renewal would certainly get some attention. James Duderstadt, former president of the University of Michigan, proposed that the region’s major research universities collaborate to increase their impact on regional economic activity. (link to Millenium Report).

The possibilities are surely worth pursuing but, in my opinion, the specific linkages between such a collaboration and regional revival must be well-articulated and demonstrated.

One argument offered is that the U.S. economy is continuing to shift toward knowledge and knowledge workers. Since the Midwest is lagging in its transition from agriculture and manufacturing to high-level services, perhaps we should subsidize education more to produce more talent locally? However, at least for the highest levels of educational attainment, there is already a net outflow of young adults from the Midwest region. (link to Yolanda K. Kodrzycki at Boston Fed). What are the public benefits of producing more?

Young adults with somewhat lower educational attainment do tend to remain in the region. So, if further educational subsidies are to be entertained, community colleges and regional institutions might be a better target. We should probably not subsidize the higher end further unless we simultaneously create the job and new-firm opportunities to retain these students after graduation.

Can we create such opportunities? Although there was little conference discussion about university spin-outs of new firms and other technology commercialization, there have been some promising movements in that direction. A Midwest Research University Network (MRUN) was established in 2002 as an alliance of university business development professionals to facilitate technology development and commercialization. Eighteen MRUN member institutions exchange information about financing, placement of management talent, and opportunities for collaboration. (see link to current Testa Fedletter)

More promising still, North Dakota apparently offers a fine model to marry regional economic revival with public university excellence. Leaders there of all stripes held a summit roundtable in 1998 to reflect on the state’s struggling economy and its detached university system.

The North Dakota Roundtable began by asking business, community, and government leaders what they would like a university system to do for the state. The answer was: to promote expansion and diversification of the state’s economy, enhance quality of life for its citizens, become academically competitive nationally and internationally, and be accessible and responsive to all citizens of the state, both individual and corporate.

One year later, enabling legislation assigned responsibilities for these outcomes to all of the involved stakeholder groups. No initial funding was provided for the university system. Rather, the university was given significant latitude to fashion and conduct its programs.

The results? From 1999 to 2004, annual research expenditures climbed from $44.6 million to $102 million. Graduate and professional enrollment climbed 20%. Doctoral programs offered climbed from 15 to 40; doctoral students from 150 to 500. A new 55-acre research park is now nearly full; new investors there include three Fortune 500 companies and several Silicon Valley companies. Internship programs with these companies are believed to be partly responsible for a significant climb in the percentage of graduates who remain in the state.

The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.

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