Tuition: It's Not Like An Ice Cream Cone

Education. It builds human capital, right? So why does Uncle Sam see it as consumption?

By Michael Mandel in New York, with Christopher J. Farrell in St. Paul, Minn., and Howard Gleckman in Washington

Forty-two grand a year. That's the going rate for tuition, room, and board at Vermont's pricey Middlebury College, where Donna Kelly's son and daughter go to school. "It's what we spend all our discretionary income on: education," says Kelly, who lives in St. Paul, Minn. "We look on it as an investment in their lives."

Government number crunchers don't see it that way, though. By their reckoning, the money households lay out for college and other levels of education -- an eye-popping $224 billion in 2005 -- is consumption, no different than buying an ice cream cone or a new pair of sneakers. Ditto for money plowed into federal job programs, the National Science Foundation (NSF), and even the salary of the local public school teacher who helped your child learn to read.

Imagine if all the money you devote to education, plus the government's outlays for education, training, and R&D, went into the investment column instead. Suddenly, Americans would look a lot less profligate. The U.S. devotes more to education and R&D than most other industrialized countries. For example, America spends well over 7% of gross domestic product on education, compared with 4.6% for Japan. And if the money socked away by households and spent on education was counted as savings, then the U.S. personal savings rate for 2005 would be 2.0%, not the -0.5% the official numbers show.

So why aren't these outlays being categorized as investment? Supplementary accounts for government and business R&D are coming. But treating education as investment is much farther off, despite the obvious long-lasting nature of the "human capital" asset created by education. After all, the skills learned in school last a lot longer than the typical computer, which is counted as investment by the statisticians.

The reason is simple: There is no consensus, among economists, educators, or, for that matter, broader society on how to measure the value of a dollar spent on education. Should it be valued higher if it raises test scores or results in a higher wage down the road? Should it be valued lower if the kids are taught in a crowded classroom or if the college economics course is taught by a research assistant who speaks broken English? Are high school courses in art appreciation an essential part of the curriculum or a mere frill? These questions are not merely technical but matters of intense public and political debate, both at the national and local level.

Similar concerns complicate a more rational assessment of the federal budget. The government spends an enormous amount, $396 billion in fiscal 2005, on long-lived, intangible investment such as R&D and education, as well as such physical assets as computers and jet fighters. So why not take a page from the business world: Separate out investment spending from the day-to-day costs of running the government.

Calculating the budget that way would put the federal government's current operations into surplus, since the investment outlays exceed the total deficit of $318 billion. What's more, it would become clear that government borrowing was funding investments with a future payoff. In an ideal world, Congress would weigh whether boosting basic research, as President George W. Bush proposed in his State of the Union speech, was worth taking on more debt. Today, by comparison, the NSF is funded in the same appropriations bill as the Justice Dept., so that more money for long-term research may be competing against more dollars for the Federal Bureau of Investigation. That sort of choice encourages short-run thinking.

In the real world, even proposing a shift to operating and investment budgets would scare up a lot of opposition. One fear is that politicians would try to game the system. Says Joseph J. Minarik, research director for the Committee for Economic Development, a research organization in Washington: "One man's investment is another man's pork -- pork being defined as spending that doesn't generate a broad return."

Still, calling things by their right names has clear advantages. Persisting in the fiction that government and household spending on R&D, training, and education is only consumption is to misunderstand the knowledge economy.

Blog on all matters economic with Michael Mandel at

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