Higher, faster, more GDP.

Photographer: Andreas Rentz/getty images

A College Comes With a Side of Economic Stimulus

Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
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There are relatively few sure-fire ways for the government to boost long-term productivity growth. Expanding higher education might be one of them.

Economists have two different views on the value of college. The first is called the signaling model. Basically, this is the idea that college is about making young people jump through hoops, to prove that they have what it takes to succeed as employees. College reveals how smart you are, how hard-working and motivated you can be, and how willing you are to do what professors ask of you. Those who can’t hack it drop out, the theory goes, leaving those who make it to graduation to collect higher paychecks. It’s very popular idea among economists, though I’m very skeptical of this theory -- why not just have young people do one-year internships instead?

The second model of college is more pedestrian -- it’s the idea that higher education actually teaches people useful things. This idea is called the human-capital model. Actually, human capital doesn’t only include the skills students learn in classes. Greater autonomy, time-management skills and exposure to new ways of thinking are all part of the equation. And the most important factor of all could be social capital -- the value of the human networks one builds at college.

Both of these theories can be true at once, and each is probably a piece of the puzzle. Evidence, for example, shows that human-capital gains are substantial. Laws that forced young people to go to public school had a positive effect on their earnings years later. Growing up near a college has a similar effect, especially for children of less-educated parents. That implies a pretty straightforward policy -- put more colleges, and bigger colleges, next to more kids.

Education isn’t the only way that universities can improve economic growth. They also produce research. New technologies have several paths from the laboratory to the world of industry. They can be cross-licensed to companies. They can be written in research papers that are then read by private-sector inventors. And they can influence students, who go out into the world and create companies based on those ideas. More invention means higher productivity and more fast-growing new companies.

There’s some evidence showing that this effect is large. A 2013 paper by Sharon Belenzon and Mark Schankerman found that citations of patents produced at universities are highly localized -- in other words, if you put a university in an area, the tech it produces tends to stay in that area. And Otto Toivanen and Lotta Vaananen found that Finnish inventors who grew up near universities with more engineering education tended to patent more inventions later in life.

Recently, Anna Valero of the London School of Economics and John Van Reenen of the Massachusetts Institute of Technology studied the effect of universities on growth directly. Looking all over the world, they measured whether the presence of a university leads to faster local private-sector expansion years down the line. The authors ruled out other factors like existing growth trends and geographical patterns, and they found that no matter how you slice the data, universities look like they make an area richer. The effect isn’t huge -- doubling the number of universities in a region raised per capita gross domestic product by 4 percent or 5 percent over the life of the study period. But since the regions involved are large, and the effect spills over to other areas, this isn't bad.

So universities give economies a boost through a number of channels. How should government take advantage of this effect? One way is to simply build more universities. Not all areas are equally served by local colleges -- there are some areas where there just aren’t that many good schools. In the U. S., the federal government might establish new universities in places where few state or private schools now exist. State schools could expand the number of students they admit. And wealthy philanthropists could emulate their Gilded Age predecessors like Leland Stanford, and endow entirely new universities instead of giving more money to existing ones.

There’s also scope to improve the efficiency of existing universities. Reining in administrative costs, and using the savings for research and education, could be important.

Universities also might increase their cooperation with surrounding private-sector companies. Some researchers attribute part of Silicon Valley’s unusual success as a technology cluster to the way Stanford University brought together private-sector engineers to exchange knowledge there. The University of Texas has served a similar role in Austin. If more universities made conscious efforts to be part of the local economy, it might help revitalize many struggling regions.

So politicians, local business leaders and planners of all kinds should think of universities as an important tool in their arsenal. More, larger and better colleges won’t send economic growth into the stratosphere, but they’re a very concrete step that leaders can take -- and in a world of slow growth, every bit helps.

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:
Noah Smith at nsmith150@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net