College booster.

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Another Reason to Cheer for Local U

Stephen L. Carter is a Bloomberg View columnist. He is a professor of law at Yale University and was a clerk to U.S. Supreme Court Justice Thurgood Marshall. His novels include “The Emperor of Ocean Park” and “Back Channel,” and his nonfiction includes “Civility” and “Integrity.”
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Lots of presidential-campaign observers have been questioning the numbers in Hillary Clinton’s plan to make public colleges and universities “free” for students whose families earn below a set threshold. And I will admit that I am a longtime skeptic of proposals to further subsidize higher education. But one thing critics such as myself tend to overlook is the positive value of a university not to the student but to the region. A new study suggests that the value is substantial.

Most of the work on the value of college has focused on whether the return is worth the student’s considerable investment. (Thus far, the yeas still have it.) But more and more research lately has asked whether colleges and universities, by their very existence, add value to society. It now seems clear that the answer is yes. They add value, and the value they add is quantifiable.

That is the conclusion of a working paper released this week by the National Bureau of Economic Research. The assessment, by Anna Valero and John Van Reenen of the London School of Economics, used a dataset of 15,000 universities in 1,500 regions across 78 countries to study what they call “the university effect.” Using data from UNESCO’s World Higher Education Database for the period 1955-2010, the authors studied regions rather than countries to avoid some of the pitfalls that have deviled earlier efforts. They found the university effect to be significant at the regional level -- a doubling of the number of schools is associated with a 4 percent higher gross domestic product per capita -- even after controlling for other regional trends.

I’m not arguing that this is a reason to give universities the huge subsidies promised by the Democratic platform. But it is reason to think that in economic terms, at least, the continued growth of higher education as an enterprise is a net positive.

The new research is especially useful because of the problems plaguing many of the earlier studies into the impact of colleges and universities on local economies. Attempts that have claimed extraordinary multipliers, when subjected to rigorous analysis, turn out to be “preposterous.” Others may illustrate nothing more than a mere “rearranging of the furniture.”

Valero and Van Reenen have found ways to correct for most of the difficulties besetting previous efforts. For example, in the regions they studied, they controlled for everything from country-level macro shocks to distance from the ocean to the education of the local populace.  Each of these controls makes the university effect smaller, but it never goes away.

Intriguingly, although the authors confirm the existence of the university effect, they have some trouble accounting for it. Their analysis rejects one explanation found frequently in the previous literature, to wit, that the university effect is caused by the increased demand brought about by the institution’s presence. Similarly, they show that reverse causality is not at work.

They do find a small positive effect from two other factors: innovation (at least in the U.S.) and the increased supply of human capital. In the data, these are not sufficient to explain the entire effect, but the authors speculate that the effect of human capital may be larger than they can measure, given the limited time horizon they were able to study.

One wants to think that this is true. But there is another possibility that their data cannot exclude. By studying economic effects since 1955, the authors are looking at an extraordinary period of growth. A lot could happen to make that period hard to replicate. The peace bubble could burst. Anxiety over the effect of technology on work has long been with us, and this time the pessimists could be right. Most important, the return to education itself could fall. In particular, the value added by the traditional four-year curriculum is likely to decline. In that case, the amount of human capital produced by the presence of colleges and universities will be smaller.

All of this might sound like an argument against interest -- I am a professor, after all, so what’s bad for higher education would seem to be bad for me -- but my point is not that any of this will happen. I suggest only that there are many possible futures, and in a nontrivial number of them the returns to the establishment and maintenance of colleges and universities will fall. Naturally one hopes the happier futures will come to pass.

  1. Yes, the authors also control for lagged population growth.

  2. The authors concede that they were unable to control for university quality and other ways in which universities differ. They are able to show that the cost of building a new university is small compared to the benefit, but that particular dataset covers only the U.K.

  3. Here’s one reason for optimism: Valero and Van Reenen find a correlation between university presence in a region and popular support for democratic government. This finding holds for respondents with or without degrees.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Stephen L. Carter at scarter01@bloomberg.net

To contact the editor responsible for this story:
Stacey Shick at sshick@bloomberg.net