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Higher Education Collaborative November 20, 2013 Walter W. McMahon

Higher Education for Growth or for Development? Financing Criteria and Social Rates of Return in the US. Higher Education Collaborative November 20, 2013 Walter W. McMahon University of Illinois at Urbana-Champaign. Growth Only Criteria (Jobs, Earnings)

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Higher Education Collaborative November 20, 2013 Walter W. McMahon

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  1. Higher Education for Growth or for Development? Financing Criteria and Social Rates of Return in the US Higher Education Collaborative November 20, 2013 Walter W. McMahon University of Illinois at Urbana-Champaign

  2. Growth Only Criteria (Jobs, Earnings) • Symptoms: (Problems, No Solutions!) • Vocationalization • Privatization,higher tuition, less state support • Privatized Research, more research parks, patents • Enrollment falling with recovery & high tuition (-2% 2012-13); Percent with college of age 21-34 in US (39%) is below Canada 53%, • S. Korea 47%, Finland 40%, Norway40% & Sweden 40% (OECD,’13) • Development Focus • Econ Literature: Outcomes overlap, not comprehensive • Needed for better public support. Esp.forhumanities, education, criminology, social sciences • Needed for increasing US enrollments (e.g., Pell Grants fell 10% in 2010-13, tuitions rising) • Needed for supporting basic research, NSF, NIH, budgets sequestered

  3. Optimal Growth • Financing Criteria: Use ‘Narrow’ Social Rates of Return Based on Endogenous Growth Theory (Lucas) Objective:Max. PV of Per capita Consumption over time; ct Procedure: Form Hamiltonian, Derive first order conditions Result: ‘Narrow’ Social r* high, invest more for optimal growth OptimalDevelopment • Financing Criteria: Use ‘Full” Social Rates of Return Based on Endogenous Development Theory(Hu, McMahon) Objective: Max.PV of Per Cap.Development over time; cmtγcnmt1-γ Procedure: Form Hamiltonian, Derive first order conditions Result:‘Full’ Social r* high,invest more for optimal development

  4. Note: 1) Peak BA Earnings: US: ($2011) $86,700 Sweden: $86,467 UK: (£2011) $69,214 2) Flat Voc. Earnings in UK: Average $35, 747 3) Large Return to Associate Degrees US (above all high school) UK (over level 3 Voc., not over Academic) 4) Small Return to 2 Yr. HE in Sweden: Separate programs, low awareness

  5. Narrow Social Rates of Return Sweden, 2011; UK, 2007 ; and US, 2010 *Longitudinal trends included affecting rates as follows: th <9 Grade - .8%; HS - .7%; 2Yrs Post Sec.+1.64%; BA+3%; S weden* UK* US* 9 Yrs. Compulsory School, M 3. 7 % 6.8% 2.8% (9 < 12Yrs) 9 Yrs. Compulsory School, F .1 % 4.8% 2.5% (9 < 12 Yrs) 4.8% M 2 Years or Less Upper Sec. - .6% 7.3% F 2 Years or Less Upper Sec. 1.0% 4.6% 3.5%(3Yrs) 7.3%(Ac), 1%(Voc) 9.3 % (4 Yrs) Upper Secondary , M 8.3% (4 Yrs) Upper Secondary , F 3.5%(3Yrs) 4.6% (Ac), 2.8%(Voc) Post Secondary ~ 2yrs , M 3.8% (<3Yrs) 1 2.2% (1.6 Yrs) 15.4% (2 Yrs) Post Secondary ~ 2 Yrs, F 4.2% (<3Yrs) 12.0 (1.7 Yrs) 17.9% (2 Yrs) % Bachelor’s Degree, M 10.2% ( 3+Yr) 13.1% (3+Yr) 15.1% (4 Yrs) B achelor’s Degree, F 1 1.1% (3+Yr) 14.2% (3+Yr) 13.2% (4 Yrs) M 6.6 Postgrad: Licentiate,PhD, % 4.7% 11.6% 10.1% F Postgrad. Licentiate,PhD, 1 3.2 % 5.1% 17.5% 11.2% Professional, M (US Only) 23.3 % Professional, F (US Only) 15.9 3% 8.7% 3.2% PhD +1.5%

  6. Understanding External Social Benefits • Benefits to others, including future generations • Insufficient incentives for students to invest: benefits to others • For financial support: Must convince public and legislators • Arguments like • Reduce HS dropouts saves $70 mil. prison costs/yr* in IL • Increase Com. College enrollments 1%increases tax revenue by $1,100 per year per graduate • Also Must Convince More Economists • Indirect Educ.effects on market outcomes is inconclusive • But this ignores direct effects on NM outcomes (Table 3) • Acemoglu controls for fixed effects, time, lagged Dep.Var.: • Nothing is significant! • And yes, some politically motivated:Pritchett, Psach. * For each 1% graduation rate is increased.

  7. Private Non-MarketEstimated Value for Bachelors Own -Health $16,800 Better Child Health $1,333 Better Spousal Health $1,917 Greater Longevity $2,179 Child Education & Cognitive Dev. $7,892 Smaller Family Size (less poverty) $1,551 Increased Happiness (overlaps) +$ Efficient Cons., Saving & HH Mgt. $3,401 Work and Location Amenities +$ Total Pvt. is Lifelong Learning +$ 122% of US Total Private Non-Market Benefits $38,080 Earnings Incr. External Social Benefits: (132% in UK) Democracy (better civic institutions) $1,830 Human Rights (judicial institutions) $2,865 Political Stability $5,813 Longer Life Expectancy $2,308 Less Inequality (Due to FEC’s, Grants) ? Poverty Reduction $3,100 Lower Homicide Rates $719 Less Property Crime (by income/cap.) $4,928 Lower Public Welfare, Prison Costs $2,176 Additional Taxes Paid, Fed,State,Local $3,707 Water, air, forest, wildlife sustainability $5,609 Total Social Increased Social Cohesion ? Benefits are New Ideas & Adaptation of R&D ++$105% of US Total Social Non-Market Benefits:$33,055Earnings Incr. Av.Earnings Increment, Males, over HS: $ 31,644 (CPS, Census) Table 3. Value of Benefits from 4 Yr. Bachelor’s in US, Per Year

  8. Applying Efficiency Criteria • For Growth: ‘Narrow Social Rate: 16% 2-year, 14% bachelors, 6% mutual funds Increase both public and private investment! For efficiency and for optimal growth • For Development: ‘Full’ Social Rate 36%, 2 and 4-year, 6% mutual funds Significantly increase funding, especially public, access, & grants. For efficiency and for optimal development

  9. Discussion

  10. Improved Financing Criteria Other Policies for Efficiency: • Reduce Market Failure: Improve information Re: Social Benefits to Voters and Legislators Fill Research Gaps • Raise Tuition in EU, Scotland, Sweden, Africa; Lower tuition in England, US Results Of Current Underinvestment • Middle Class Earnings Flat, Rising Inequality • Slow Development, State tax revenue limited • Slow Regional Development in rural areas • Internal Misallocation: Privatization,STEM,MBA • Societal Misallocation: More for Prisons, Gambling, Less for Education, unequal persists

  11. Figure 1 • Years of • College • Needed: • 2-4 • 4 • 4 • 4 • 0 • 2 • 2 • 4 • 4 • 0 • 2 • 4 • 2 • 0 (OJT) • 2 • 2 • 0 (OJT) • 0 (OJT) • 2 • 5+

  12. Measurement of Non-Market Outcomes Income or Earnings: (1)Y t = 1 Et-20 +  2Zit-10 + 1 Non-Market Private and Social Benefits (Recursive): (2) Zi t =1 Et-20+2Yt-20+3Zj t-20 + i2 , i ≠ j Investment in Education: (3) Et = 1 Et-20 + 2Yt-10 + 3 Y t= Real per capita income or earnings, Lucas, 1988 & full method Z it= Non-Market Benefits, ~30 articles, plus McMahon 2002, 2009 Et-20 = Investment in Human Capital via Education (3) Lucas,1988. 1, .. 3 = Disturbances The indirect effects from education are: In Eq. (1): δY/δZ δZ/δE-20 = α2 β1 E-20 , Ditto in Eq. (2).

  13. Social Rates of Return by the Full Method Foregone Earnings Social Costs Subtracted from Investment Tuition, Fees, Less Subsidies

  14. Development impacts • UK, Sweden fewer hours worked(OECD) Non Market Impacts are 10% larger than US • UK, Sweden 3 year bachelors; 25% smaller NM impacts than US • Swedish Income Tax higher; social benefits of HE therefore about 20% larger

  15. Valuing Research Outcomes New Ideas Determined Endogenously By investment in bachelor’s and PhD Degrees Technical change endogenous, Not “from heaven” Creates “A Large Class of Educated People Spending All Day Every Day Creating, Exchanging, & Adapting New Ideas” Lucas (2008), Jones & Romer (2009) Measure New Idea Creation by Using Numbers of Masters and PhD’s? Then their impact on development indicators e.g. productivity in firms (Glasgow); rule of law, etc.

  16. Illustration of Non-Market Value Estimate Regression:Z =αY + βE +..+ u Equate ratios of MPP to Price: P(E) = β/α P(X) • Value of Education’s Contribution to Own-Health: H = Scale 1-10 P(E) =.187($1,000)(ΔCPI) = $16,800 .292 P(X) of 1 Unit Own-Health which is a +10% increase in Health: Takes 3 Doctor’s Visits + Drugs = $1,000 Cross check using regressions: 1=.001 ΔY, ΔY=$1,000 • Value of Contribution to Democratization (Social Benefit): D = 1-8 P(E) =β(ΔY) = .00096($57) = $1,824 α .00003 P(X) of average change per Yr. in Democratization in the OECD,1975-04 or .0017 = .000030(Y)+ u, P(X) = $57 per capita

  17. Methods ofValuing Non-Market Benefits • Willingness to Pay/Income-Equivalent (Haveman-Wolfe, 1984) • Simulation of Difference Eqns: Indirect Effects (McMahon, 2002, 2007) • Aggregate Effects, Single Growth Equation: Market Externalities Only • Total Accounts (Kendrick, Eisner) and Well Being Estimates Household Production Regression: Z = αY + βS +..+ u Valuing Education: Marginal Product of S = Marg. Product of Y,β = α Value of S Price of Y P(S) P(X)

  18. Geographical Impacts? Aghion, Boustan, Hoxby, & Vandenbussche (2010), US and OECD: • Rate of Return highest for Post-Graduate Education in regions closest to technological frontier where job opportunities are best e.g. US Eastern seaboard, Chicago, CA: EU in Large cities • Rate of return highest for short degrees in regions farthest from the tech. frontier e.g. US Deep South, rural midwest; EU rural areas • Community College graduates stay in localities where they went to college Best for regional and rural development

  19. Policy Implications of Criteria Access: Encourage enrollments, or cut budgets? Affordability: Upper middle class families are stressed Accountability: For what? Earnings? Development? Market failure: Increase efficiency with information and correction of under-investment Degree of Privatization: How Far to Go? Efficiency limits to tuition,fees, excessive corporate research, vocationalization

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