Walter W. McMahon

In a nutshell

Higher Learning, Greater Good is the first book to systematically identify and develop the evidence necessary to measure comprehensively the benefits of higher education and to estimate their economic value.

The benefits of higher learning include not only increased earnings, access to jobs, and economic growth effects, but also non-market private benefits beyond earnings to individuals and their families and external benefits to the society.

The non-market private benefits are, for example, better health, better spousal and child health, greater longevity, child cognitive development, and increased happiness. The value of these private benefits estimated by the income-equivalent method is substantial, and approximately equal to the earnings benefits.

The non-market social benefits are different. They are benefits to others in the society and to future generations. They include the contribution of higher education graduates to the improved operation of democratic, civic, and charitable institutions, to human rights, to political stability, to lower crime rates, to social capital and social cohesion, to the generation and adaptation of new ideas, and so forth. They also are substantial; estimated to be another 40% beyond the private earnings benefits.

The book also evaluates the returns to university-based research – its interaction with the education of Masters, PhD, and professional students, and the spillover effects as the new ideas and new technologies generated by research and the education of graduate students are embodied in human capital through the education of undergraduates.

The total measured market plus non-market benefits of higher learning can then be evaluated in relation to institutional costs, which have been rising, but also in relation to the total costs that include the forgone earnings costs which have been flat. The analysis leads to more meaningful criteria as to whether there is underinvestment, overinvestment, or about the right level of investment in higher education by individuals, families, and government.

In terms of policy, the book addresses the main source of the worsening economic and social plight of the American middle class. Higher Learning, Greater Good develops the only key major policy that can eventually correct the problem of a whole class of people currently excluded from the benefits of growth and the related problem of rising inequality: increased investment in improved education and skill levels. Simultaneously, this policy will foster higher economic growth and development.

The wide angle

64% of the US population — which includes the middle class — has a high school education or less, a pattern also found in the UK and EU countries. This group has had flat and now declining real earnings since 1980. During this same period those with a college education have experienced a 48% to 57% increase in their real earnings. The less well-educated middle class has not shared in the benefits of freer trade and economic growth, producing a political protectionist reaction.

The benefits of growth do not trickle down if those below do not have the necessary skills. Those with less education are confined to occupations where demand is expected to continue to fall. The latter generates surpluses of workers, thereby holding down wages and earnings growth.

The book develops the evidence showing that in occupations where demand is rising two to four years of higher education or more are needed. (The only exception is home health care). I weigh higher education policy options for support of increased access and affordability for two and four year college degrees.

Conceptually, as a systematic human capital formation analysis of higher education and higher education policy, the book has a chance of displacing what Charles Clotfelter referred to as “the familiar, but curious, economics of higher education” (Journal of Economic Perspectives, 1999).

The framework developed in the book is one for achieving overall economic efficiency – not just internal efficiency but also external efficiency. This implies a degree of accountability for not just instructional units but for the more ultimate higher education outcomes that motivate most faculty. A modern human capital perspective also offers new insights into central higher education policy issues such as the appropriate degree of access, affordability, accountability, and the degree of privatization in funding.

Probably the book’s most important conceptual innovation is that it is not static, but instead analyzes dynamic lags in the process in a way consistent with modern endogenous growth theory and empirical research. When only a static perspective is taken, and when indirect effects from higher education operating through political stability, trade, new ideas, and other intervening variables are ignored, many or most social benefits of higher education are overlooked. This leads to significant public underinvestment in student financial aids and in institutional support of higher education.

The mainstream of modern economic growth and development theory now tends to incorporate human capital formation in a central role. This is typical of the work by Robert Lucas and Paul Romer, for example. In what they refer to as “endogenous growth,” the creation and adaptation of new ideas and the formation of human capital are determined inside the system and are no longer benefits that fall in an unexplained way like “manna from heaven.” This new work underlies the popular concepts of the “knowledge-based economy” and “knowledge-based growth.” This new theoretical framework on the sources of growth and development gives education – higher education included – a central role. But, oddly, these developments have not been brought into the systematic analysis of higher education and higher education policy.

A close-up

Chapter 5 adopts a rigorous definition of what externalities are, identifies a wide range of external social benefits of higher education, presents and evaluates the empirical evidence for each, and uses two of the four ways available for estimating their economic value.

There are a few economists, who appear to be in the minority, who deny that any external social benefits at all exist at the higher education level. This chapter shows how some can arrive at this view.

The table on pages 233-4 lists the range of external social benefits of higher education beyond earnings, the evidence for each, and estimates of their total value. This value is estimated to be an amount above and beyond earnings that is on average about 40% of the earnings benefits. Since some of the earnings of higher education graduates also include a measurable portion that can be attributed to the education of others including those in prior generations, there is an additional overlap with earnings. This all implies that the external social benefits from higher education are substantial. But there must be a degree of public support if these external benefits are to be realized.

The book also has policy implications at the campus level. Currently, policy at campus and university levels is moving toward further privatization of revenue sources. This involves raising tuition and fees, and seeking private industrial support for research. Institutions are forced in this direction as they need to replace public support that is being cut back at the state level – Federal support for institutions has been largely nonexistent, apart from support for research.

The benefits from higher education that are external social benefits as a percent of the total benefits offers a new basic guide to the extent to which privatization should go and still be consistent with achieving overall economic efficiency, properly defined to include external benefits.

Chapters 7 and 8 discuss policy options as well as new strategies for supplemental financing of higher education.

Lastly

Higher Learning, Greater Good is directed to a general but intelligent audience, not to economists or specialists. It can be easily understood by anyone who has had high school algebra. But as specialists look further into the book they will see that it has broad implications for the coherence of the field.

This book develops the implications of modern human capital theory as a coherent framework for the analysis of the efficiency of the contributions of higher education and research to human welfare. These implications include familiar market outcomes but also less familiar non-market private and social benefits beyond earnings. Delayed direct and indirect impacts of higher education which compound over time are dynamic aspects that define the central role of human capital formation in broader economic development.

The significance for current policy is that it develops the evidence for private and social non-market benefits that have been overlooked. This has contributed to market failure and underinvestment in higher education by families and by government. Both standard and new total social rates of return presented in the book confirm this. The underinvestment has led to a lack of sufficient skills to adapt to new technologies and to the international outsourcing of jobs that describes the current plight of the middle class. The current temporary recession only makes the same problem worse.

Higher Learning, Greater Good also has implications for academic policy at the campus level. For example, national priorities that stress patenting and contributions by certain fields to growth influence allocations of resources among disciplines. But when the indirect effects of higher education on growth that come through its contributions to democratization, political stability, and trade are considered, then the indirect contributions to growth of fields like political science, constitutional law, and foreign languages become more apparent.