Long-Term Returns to Stimulus: Education

The fiscal stimulus debate is currently hampered by confusion over its objectives. On the one hand, one purpose of the stimulus is to generate economic activity quickly in order to boost aggregate demand and break the recessionary spiral we seem to be in. On the other hand, people rightly worry about the capacity of the government to spend large amounts of money quickly without wasting it, and argue that the money should be put to productive use, rather than paying people to dig holes and then fill them in again. (This is why you see (at least) two versions of criticism of the stimulus plan: on the one hand, the criticism is that the government is incapable of putting money to productive use; on the other hand, the criticism is that money for things like electronic health records will not be spent in time to have a short-term effect.)

My opinion is that both are valid purposes. There probably is a limit to the number of tens of billions of dollars the government can spend next month without wasting some of it. But given the projected duration of the output gap (the difference between potential and actual GDP, meaning that the economy is performing below its full-employment capacity), I think there is also value in programs that take several quarters to disburse their money – as long as those programs are also good investments.

One major area of spending is education, where the plan includes more than $150 billion in new spending over two years. While politicians (and economists) reflexively cite education as an area where investments can have positive long-term returns (through increases in productivity which increase GDP and our average standard of living), I wanted to see what empirical research there has been on this topic. There has been a lot of research on the impact on individuals’ earnings of additional education (this is a common example used in first-year statistics classes), but somewhat less on the impact on national economic growth.

Two leading researchers in the economics of education are Claudia Goldin and Lawrence Katz. I looked through their papers, and the simplest one I found that covers this topic directly is “The Legacy of U.S. Educational Leadership: Notes on Distribution and Economic Growth in the Twentieth Century.” This paper discusses the United States’ educational lead over other countries in the 20th century and the impact it had on the U.S. economic growth. The main difference between the U.S. and Europe was not elite education, but the development of mass secondary education between World Wars I and II: as the economy became more technologically sophisticated, there was greater need for an educated workforce, including in production jobs.

Many studies have found that countries with more educated labor forces experience higher rates of economic growth. More difficult to determine is the extent to which the positive relationship between education and growth results from the causal impact of education on
growth and not from reverse causation or from confounding factors correlated with both education and growth. Educational advance can contribute directly to economic growth by increasing the human capital and thus the productivity of the work force, and indirectly by increasing the rate of innovation and adoption of new technologies.

They addressed only the first effect: the impact of higher productivity. The results:

The direct impact on economic growth of the expanding education of the work force was about 0.37 percent per year . . . since 1915, and the educational factor accounts for 23 percent of the 1.62 percent per year increase in U.S. labor productivity (non-farm, non-housing business GDP per worker for 1913 to 1996 . . .).

In other words, 23% of productivity growth in the last century was due to increased education. In other studies, they discuss the decline in the rate of educational growth (the average educational level of the workforce) that has set in since 1980. If increased spending on education can reverse that decline (a big if, I know), then it could have a significant impact on productivity for decades to come.

I know this is a very controversial topic. For an opposing viewpoint, Arnold Kling says (referring to Goldin and Kaz’s new book) that what’s really at work there is that the average educational level can’t keep growing at its earlier pace, since the current level is higher than the former level, and it just isn’t possible to dramatically increase college attendance and graduation rates.”

If readers know of other more recent, or contradictory, studies on the relationship between education and economic growth, please share.

3 responses to “Long-Term Returns to Stimulus: Education

  1. The Minneapolis Fed has done a considerable amount of research on the returns on education, specifically early childhood education. Here is an interesting proposal from two Fed economists:

    http://www.minneapolisfed.org/publications_papers/studies/earlychild/early_intervention.cfm

    This is certainly not a quick fix but it seems like quality program that could generate high long term returns. There’s is also alot more research on early childhood education if you want to check out the Minneapolis Fed website.

    Thanks for the great blog.

    Ross

  2. Please G*d, do not subsidize education any more than it already is. Private schools are already charging more than the average salary earned for a years attendance. Inflation in education costs has far outpaced other areas. I assert, without evidence or expertise, that this is because of the reasonable desire to subsidize education manifesting itself as widely available loans.

    Start new schools, give money directly to researchers, anything but putting more money in school-seekers hands and boosting demand of a relatively fixed-supply good.

    *gasp* A supply sider!

    Cheers,
    Carson

  3. Charles R. Williams

    Why is increased spending on medical care a problem but increased spending on education a priori an investment? The truth is that government policy has driven up costs in both sectors. What is needed to protect American living standards is a more cost-effective education sector. We need a better educated workforce and we need to spend less to achieve this. If you look at the budgets of public universities since the sixties you see an explosion of spending on peripheral or ideologically driven activities and, at the undergraduate level, a precipitous decline in the content of the BA degree. This is the result of huge government subsidies to educational institutions. Something similar has happened to K-12 education.