Higher Education Policies and Economic Growth in the American States

Abstract

The emerging theory of investment expenditures indicates that the public sector can promote economic vitality by investment in the physical and human infrastructure. However, most existing studies of the relationship of government to growth have concentrated on tax burdens or specific locational incentives and have come to a negative view of the role of public spending on economic change. Examining several indicators of economic growth, we find that the quality of a state's university system, measured by federal grants received, is positively and strongly related to growth in aggregate income, income per capita, and net business establishments created. State spending on universities is related strongly to business establishments created and, more weakly, to university quality. We conclude higher education plays a unique dual role in the modern economy, contributing to the size and the quality of the job structure. Thus spending on higher education can be considered an investment in a state's future economic growth.