Do Universities Cause Local Economic Growth?

Taxpayers are asking some reasonable questions about what they are actually funding at public universities.   Tomorrow, I will attend a UCLA men’s basketball home game.  I thank the taxpayers for subsidizing the game ball.  The professors hope that the good times will continue. Some evidence documenting our social benefits might help our cause.   The Chronicle of Higher Education offers a clear case study of  North Carolina’s Research Triangle  .     Sweden also offers a neat natural experiment.  John Quigley  and co-authors document that universities offer significant local spillover benefits.   Universities also may solve a Schelling co-ordination problem. The educated want to live near each other.  Knowing that graduates live near excellent universities after planting roots, other graduates may agglomerate there.   Firms who seek out skilled workers will also locate there and the city flourishes.   Enrico Moretti  documents that wages are higher in cities with high levels of average “human capital”. This is likely to be due to learning and external productivity effects.

Author: Matthew E. Kahn

Professor of Economics at UCLA.

7 thoughts on “Do Universities Cause Local Economic Growth?”

  1. I understand why LA, or more precisely Westwood-area taxpayers might want to pay for this. But every town can’t have a university campus: what economic growth in Merced has merely been diverted from Fresno and Yreka? Are you arguing that concentrating prosperity and Yuppies in your neighborhood is something California taxpayers should all pony up for?

  2. I can understand how a sufficiently high concentration of universities causes economic growth. But I can also understand how a sufficiently high concentration of casinos causes economic growth. And I’m not sure that the mechanisms are all that different.

  3. I guess you needed to attend classes more often in order to see the foolishness of that comment. The computer ‘revolution’ was built around universities and their environs, for example, whereas we got Donald Trump as an outgrowth pfm casinos.

    I wouldn’t trade.

  4. The question isn’t, ‘do universities cause local economic growth’; You could collect taxes state wide, and dump them from a helicopter in one location, and you’d cause ‘local economic growth’. The question is whether they cause non-local economic growth, and more of it than some other use of the money.

  5. I think that economic growth is undeniable. The only question is the degree.

    Locally, it’s often obvious. In Normal, Illinois we have Illinois State University with an outstanding business college. We also have the national headquarters for State Farm and Country Companies. Those companies feed on the labor force coming from the business college and State Farm even recognizes that symbiotic relationship to the extent of heavily funding buildings and resources (as do Caterpillar, Mitsubishi and several other neighboring industries). The School of Theatre’s Illinois Shakespeare Festival, which brings visitors from all over the region each summer (generating economic benefit), also adds to the factors for attracting businesses and employees (quality of life, things to do, etc.) as do all the other cultural and athletic events at the University.

    State-wide, having a strong quality university system attracts business for employers in general, so it pays off for the entire state and not just the local community, and it limits the exodus of the most talented young people to other states. That’s an absolute win.

    Additionally, state taxpayers are shouldering a lower percent of the cost than they used to. At least at Illinois State, in the past 25 years, the state has gone from supporting close to 70% of the university’s budget, to now under 20%. Universities have had to make up the shortfall through fundraising, tuition and other means.

  6. Matthew–You may want to examine the issues surrounding the mammoth development of a bio-tech park in east Baltimore. While not precisely on point with the issue that you discuss, it’s close.

    In essence, the development was (and is) in the words of its backers:

    [A]bout using biotech development – and other strategic investments – to revitalize a once vibrant neighborhood that had become overwhelmed by poverty, abandoned housing, joblessness, crime and other social maladies.

    EBDI [the developer] and its supporters have also been investing in human capital; in long-term infrastructure; in improved and new schools; in equitable relocation; in health promotion; in retail, commercial, and cultural opportunities; in responsible demolition; in diverse job training; in rehabbed and new residential housing options; and in planning other amenities critical to rebuilding a strong, vibrant mixed-income community.

    Access to the debate concerning the project can be found here:

  7. “I guess you needed to attend classes more often in order to see the foolishness of that comment. The computer ‘revolution’ was built around universities and their environs, for example, whereas we got Donald Trump as an outgrowth pfm casinos.”

    The point is that Matthew phrased this in terms of LOCAL economic growth, which strikes me as an exceptionally foolish conceit.

    For reasons that I do not understand, economists appear to have zero interest in R&D, even though all economic growth springs from that. (Don’t believe me — look at how much effort economists put into justifying dicking around with the tax code, which empirically has been shown to have very little to do with growth, and how little effort they put into lobbying for doubling the budget of NSF.)

    If we are going to make economic arguments for universities, the stuff he has offered is weak sauce. The real argument is that
    – science and engineering (as shown by a 300 year track record) has tremendous capabilities to improve our lives BUT
    – the progress is uncertain, and so the future gains cannot be calculated AND
    – whatever is discovered has tremendous spillover effects
    So it’s basically a perfect example of a public good.
    Beyond that, US experience has shown that running science and engineering at a vast number of very different universities with very different missions and ideologies is a lot more productive than running science at a few national labs (eg the German model).

    So that’s the argument at the federal level. The argument at the state level is more of the same
    (a) the universities can be steered into spending more time investigating issues of near and long term interest to the state and its residents (agriculture, mining, seismics in CA, stem cells independent of the feds, etc etc)
    (b) once again experience shows that SOME of the spillovers from science and engineering ARE captured by the states with the sponsoring universities, because for various reasons, the industries that result tend to stay in those states.

    Matthew seems to be trying to push this to the municipal level. I’m not sure what the point is. Is the idea to have Westwood kick in pay more to maintain UCLA? I think the argument becomes weaker as you go more local. In the first place localities have less money than states and the fed, in the second place the spillover gains that are captured to some extent by the state are captured rather more weakly by localities.

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