Table Of ContentMIDWEST ECONOMY THE FEDERAL RESERVE BANK JANUARY 2006
OF CHICAGO NUMBER 222b
Chicago Fed Letter
Higher education and economic growth: A conference report
by Richard H. Mattoon, senior economist
The future of higher education and its relationship to economic growth were the focus
of a one-day conference at the Federal Reserve Bank of Chicago on November 2, 2005.
Cosponsored by the bank, the Committee on Institutional Cooperation, and the Midwestern
Higher Education Compact, the event brought together over 100 academic, business,
and government leaders.
In opening remarks, Chicago Fed compact. First, universities must be more
President and CEO Michael Moskow transparent in their operations so that
noted that while the relationship between the public will have a better sense of the
education, productivity, and economic value of higher education to society.
growth has never been clearer, financial Part of this transparency includes more
support for higher education has waned tightly defining the mission of the uni-
while costs have continued to rise.1 While versity in meeting the multiple goals of
private universities have been able to education, research, and public out-
raise tuition and draw on endowments reach. Another aspect of transparency
to maintain fiscal health, public univer- is finances. Moskow urged institutions
sities have faced dif- to make explicit how money is spent and
ficult times as states what resources are available to ensure
1. Annualized real growth rates in public higher ed. costs and GDP
have reduced finan- that tuition is not a barrier to attendance
cial support and often for talented students regardless of in-
1980–81 to 1990–91 to
1990–91 1999–2000 limited their ability to come. Finally, he argued that higher
(percent) (percent) offset cuts with large education leaders need to address grad-
tuition increases. uation rates that currently hover around
Public higher education spending per student 1.92 2.25
Moskow noted that 50%. Particularly in the case of non-
Net public tuition per full-time equivalent enrollment 4.86 3.10
state governments traditional students, universities need
GDP per capita 2.07 2.13
are facing competing to devise strategies to help these students
Aggregate public higher education spending 3.14 2.95 demands for funding succeed. Moskow concluded that while
GDP 3.04 3.38
from K–12 education American higher education is still the
SOURCE: M. McPherson, 2005, “Higher education at a crossroad,” presentation at Chicago and Medicaid, among envy of the world, the rest of the world
Fed conference, based on data from Digest of Educational Statistics and Economic Report
of the President. other priorities. Also, is rapidly catching up.
the perception of
Next, Wick Sloane, visiting fellow at the
higher education as
Chicago Fed, offered some provocative
an important public good has eroded.
ideas. He argued that the U.S. has a
Increasingly, Moskow said, higher edu-
national policy on higher education that
cation is seen as a private good with the
has emerged largely by default and
benefits accruing to the student in the
through provisions in the tax code.
form of higher future wages and qual-
He noted that the two schools where
ity of life.
he obtained his education (Williams
Moskow suggested several strategies for College and Yale University) have im-
restoring the higher education social plied federal subsidies per student of
Federal Reserve Bank of Chicago 1
increasing resources to community col-
2. 1988 eighth grade cohort by income and parental education
leges and nontraditional student popu-
lations? McPherson cited work by Bowen,
Percent of
Percent of cohort Percent of high school Percent of Kurzweil, and Tobin (2005)2 that found
who are high high school Percent of grads who cohort who that family income and parental edu-
school grads grads who cohort who scored 1200 or scored 1200 or
cation are still major predictors of aca-
(Diploma or GED) took the SAT took the SAT above on SAT above on SAT
demic success. Students from the top
Family income
Bottom quartile 79.9 34.2 32.2 7.4 2.4 income quartile receive a combined SAT
2nd quartile 90.1 40.3 38.8 7.9 3.1 score of 1200 or better by a ratio of 6 to
3rd quartile 94.8 50.9 49.3 12.0 5.9 1 over students from the lowest income
Top quartile 97.1 70.1 68.4 21.4 14.6
quartile. A similar ratio holds for students
Parental education that have at least one parent who gradu-
Neither parent ated from college versus those without
attended college 76.9 30.8 28.0 3.3 0.9 a parent who graduated from college
At least one parent
(see figure 2).
attended college 92.4 49.6 48.1 13.7 6.6
McPherson concluded with two obser-
NOTES: Based on data from the National Educational Longitudinal Study of 1988 conducted by the National Center for Education vations. First, higher education policy
Statistics. The maximum SAT score was 1600 for the period in which this study was conducted. Income quartiles are based on the 2000
Census, deflated to 1991 dollars. The third and fourth quartiles are slightly smaller than they should be, and the bottom two quartiles is rocket science. These are complex
are slightly larger, due to variable coding restrictions. The percentage of the cohort who took the SAT is not equal to the product of those
who graduated from high school and the high school graduates who took the SAT because there were nongraduates who took the SAT. institutions, and better studies and more
SUOnUivReCrEs: iWtyi lPliarems sG .o Bf oVwiregnin, iMa.artin Kurzweil, Eugene Tobin, 2005, Equity and Excellence in American Higher Education, Charlottesville, VA: careful analysis need to be developed
to improve policymaking. Second, the
stakes are very high for our society.
$25,000 to $35,000 per year. Sloane ar- Then, Michael McPherson, president Higher education can be a critical ele-
rived at this estimate by calculating the of the Spencer Foundation, discussed ment in supporting social mobility and
value of the tax-exempt investment re- various measures of the affordability of improving our economic future.
turns that each institution receives on higher education for private individuals B. Joseph White, president of the Univer-
its endowment and the value of tax- and the public. When comparing public sity of Illinois, offered a perspective from
deductible donations. He noted that this higher education spending per student the front lines of higher education. He
is more than twice the cost of attending to gross domestic product (GDP) growth characterized the three campuses of the
any community college. An additional per capita from 1980 to 2000, it is clear University of Illinois as the most valuable
subsidy is in the form of indirect cost that aggregate higher education spend- assets that the state possesses to ensure
recovery for doing federal research. ing has grown at an equivalent pace to that globalization benefits rather than
This can range from 36.5% to 60% and GDP. This suggests from a social afford- harms Illinois residents. White cited a
often helps pay for elaborate buildings ability perspective that costs have not recent visit by a Chinese delegation to
on college campuses. Sloane emphasized skyrocketed in this period (see figure 1). underscore the university’s economic
that these are resources that appear to However, private affordability, measured relevance for the state. The delegation
come before increased financial aid as net public tuition growth relative to wanted to learn about best practices for
for students. GDP per capita, has eroded. During the livestock development to improve the
Sloane questioned the length of time it period 1980–81 to 1990–91, net public Chinese diet. University researchers
takes to get a degree as a fundamental tuition per full-time equivalent enroll- were able to provide expert advice,
driver of higher education costs. He ment grew nearly 5% per year versus real which could very likely lead to increased
challenged the idea that a bachelor’s GDP per capita growth of slightly over exports of midwestern grain to China to
degree has to consist of four years of 2%. Over the subsequent decade, public feed a growing livestock population. Such
study and 32 credit hours. Breakthroughs tuition growth slowed to 3.1%, while a visit demonstrated a clear benefit from
in the study of human cognition may GDP grew at 2.13%, slowing the erosion the free exchange of ideas through the
lead to new ways of reaching students in private affordability (see figure 1). university that could lead to potential
that are not as time bound. Sloane con- McPherson said that the real question trade for the state.
cluded by noting that his real concern facing higher education is how public However, the University of Illinois is fac-
was with meeting the needs of nontra- resources should be allocated between ing some significant financial challenges.
ditional students. Many of these students, rich and poor students and among dif- The university provides a $25,000 per
who tend to be older and often have jobs ferent types of institutions to achieve student education; however, it charges
and families, need better support so that an optimal distribution for society. Is the students only $8,000 to $10,000
they can realize their potential. This it more efficient to invest in our most each. It is a reliable employer that pro-
will benefit not only these individuals talented students and our best institu- vides benefits to the state, and yet the
but society as a whole. tions, or can more gains be made by clear message from the state is that the
2 Chicago Fed Letter Midwest Economy January 2006
university is now on its own financially. and theaters. A university is involved in (cid:127) Desire to stay on the cutting edge.
White added that a new social compact all of these lines of work in order to Technology tends to increase costs
has been developed to adjust to this new meet its broad mission of creating and because the newest equipment is
reality. First, it defines what the state can transmitting knowledge. In addition, a needed to make high-value discov-
reasonably do to support higher educa- university takes advantage of shared eries. Also, competitive pressure to
tion. The second and third elements are inputs across its lines of work to pro- retain the best faculty puts pressure
increasing revenue from tuition and hav- vide some cost and quality advantages. on wages.
ing faculty leverage external sources to Courant suggested that the major dis-
Courant suggests that the important ques-
support their work. The fourth element advantage of this structure comes from
tion is how fast should expenditures
is increasing private donations and en- administration and coordination prob-
rise given the high rate of return from
dowment resources. Finally, leadership lems. While universities tend to operate
university spending.
is needed to push cost reductions and as high-quality firms, administration and
improve productivity. coordination issues also tend to make As for tuition, Courant believes that
them have high production costs. Clearly, given declining public tax support (in
In conclusion, White discussed the fre-
a university is not a profit-maximizing the case of Michigan, state appropria-
quent criticism that a university should
firm; rather, a university tries to maxi- tions for general fund expenditures are
be run more like a business. Such an ap-
mize some notion of knowledge-based down to less than one-fourth of the bud-
proach, he argued, would eventually
value. So, how good are universities at get versus one-third three years ago),
raise tuition to reach a market-clearing
doing this? How should they be gov- tuition becomes the major revenue
price; this would effectively triple tuition.
erned and in whose interest? source that the administration has some
Running a university more like a business
control over. Still the guiding principle
also would lead to the closing of finan- The second issue concerns tuition out-
is for tuition to rise as little as possible,
cially unattractive operations that are of- stripping the cost of living, as measured
but enough to maintain quality.
ten critical to the mission of the university. by the Consumer Price Index (CPI).
For public universities, tuition is only Courant concluded that the objective
Higher education finance one source of revenue. As such, the rel- of a research university is not profit and
Professor and former provost Paul ative growth of other revenue sources should not be cost minimization. Rather
Courant of the University of Michigan needs to be considered, e.g., declining the goal should be to maintain quality
and Professor Richard Vedder of Ohio state support. Second, university costs while promoting access through ap-
University and the American Enter- also rise faster than the CPI. Courant propriate financial aid programs.
prise Institute offered perspectives on suggested three reasons for rising costs.
what drives higher education costs.
First, Courant asked the following
questions:
The perception of higher education as an important public
• How is a university like, and not like, good has eroded. Higher education is viewed by some as
a business?
a private good with the benefits accruing to the student in
(cid:127) Why does tuition keeps rising faster the form of higher future wages and quality of life.
than the cost of living?
(cid:127) How happy or unhappy should we
be about the answers to the first (cid:127) Baumol’s disease. Developed by Vedder offered a different perspective
and second questions, or in other William Baumol to explain the growth on what is driving college costs. He not-
words, how close are universities to of costs in the theater, it suggests ed that college costs (as measured by the
producing educated citizens and that in certain fields (e.g., the the- college tuition fee price index of the U.S.
research efficiently? ater) technical change does little to Department of Labor) have risen faster
increase productivity because basic than even the health care cost index,
To answer the first question, Courant
inputs (e.g., actors and costumes) are and have more than doubled in real
suggested that a major research
still needed. Since wages still grow terms since 1980. Even after allowing for
university,such as the University of
to keep pace with other industries, grant assistance, higher education costs
Michigan, is something akin to a multi-
costs tend to grow at the overall in real terms are still considerably higher.
product firm with many lines of business.
rate of inflation plus productivity. Of greater concern is that cost increases
A partial list would include undergrad-
in tuition have eclipsed increases in
uate, graduate, and postgraduate edu- (cid:127) The role of the university as a conser-
family income.
cation; basic and applied research; and vatory. Universities cannot do all of
a wide range of services, such as health their innovation through substitu- Vedder argued that rapidly rising tuition
care, technology transfer, athletics, tion. They need to retain knowl- costs are being driven by surging stu-
museums, libraries, concert facilities, edge of the past. dent demand, which in turn is at least
Federal Reserve Bank of Chicago 3
partially driven by government policy In contrast to public higher education, of providing education because it does
related to financial aid. Essentially, prices Vedder noted the rise of for-profit univer- not have other revenue sources, such as
can rise because much of the cost of sities, such as the University of Phoenix endowments. Finally, Strayer has to pay
tuition is covered by third parties; as a and Strayer University. These schools taxes, and it cannot raise tuition indef-
result, the primary consumers (students) have seen astonishing growth in enroll- initely or it will lose market share.
remain relatively insensitive to price ment and returns on equity, and have
Silberman stated that, at its core, edu-
hikes. Another factor driving costs has developed a powerful model for meeting
cation is part of the value chain that is
been languishing productivity. Most the needs of older, career-minded stu-
directly related to building income.
university instruction is delivered in the dents. These schools offer a real alter-
Strayer’s business model focuses on
same manner as it was generations ago. native to traditional higher education.
working adults and offers a limited
number of academic disciplines and
limited campus facilities to hold costs
While the public is concerned with accountability, competition
down. It also offers an online universi-
at both the national and international levels leads universities ty to reach students who cannot attend
to make the investments to stay on top. a campus. Ironically, this model has
proven successful enough to attract in-
vestments from public universities that
have purchased Strayer stock through
Even if instructional productivity has Given the competition from for-profit
their endowments.
remained constant, it has fallen relative universities and other current trends,
to other segments of the economy. In Vedder argued that growth in university Silberman cited three imperatives for
addition, new staff members are increas- budgets is likely to slow. State appro- Strayer. First is open enrollment. Strayer
ingly added outside the classroom. Today priations will be constrained, along with graduates large numbers of minorities,
there are six nonfaculty professional staff student financial aid; the earnings dif- and admits students regardless of high
per 100 students versus three in 1976. ferential that college graduates receive school record, as long as they have grad-
over less-educated populations may uated. Second, the program promotes
University pricing practices are also at
decline as well. These factors will force academic rigor. Strayer is regionally
play. Schools have become better at price
universities to find ways to save costs, e.g., accredited and offers BAs, MBAs, and
discrimination, meaning that they charge
by finding applications of technology, technical degrees. Third, high student
different consumers different amounts
increasing teaching loads, and changing achievement is required. Between 5%
of tuition based on the intensity with
their work force practices, including and 10% of Strayer’s student popula-
which the student wants to purchase the
revising tenure. tion fail each quarter.
education. When this is done success-
fully, it increases the aggregate tuition Vedder concluded that traditional univer- Silberman concluded that Strayer’s
yield. There are also issues of cross-subsidy sities are expected to lose market share success is based on efficient use of as-
between various functions on campus— and will be required to develop new sets and a different student focus. The
research, athletics, undergraduate ed- funding mechanisms. He predicted that school doesn’t have to offer amenities
ucation, and graduate education—that state aid will become more focused on or pay for expensive real estate. It also
make pricing less transparent. students than institutions and that for- does not pay for a faculty that is attempt-
profit universities will begin to target ing to push the boundaries of knowledge
According to Vedder’s own research,
the traditional 18- to 24-year-old mar- through research; instead, it hires faculty
there is a lack of evidence that public
ket as they develop innovative models that focus on teaching and know their
spending on higher education pro-
to meet students’ needs. While the tra- academic discipline. He suggested that
motes economic growth. In fact, his
ditional university will not die, it will Strayer’s ultimate success can be seen
work finds that states that spend more
need to change significantly to be suc- in the annual earnings of its gradu-
on higher education have lower eco-
cessful in the future. ates, which a recent survey shows rose
nomic growth rates. Similarly, Vedder
from $28,000 to $57,000 in two years
finds little evidence that spending does The role of the for-profit university was
after graduation.
much to increase student involvement the focus of remarks by Robert Silberman,
in university life. chairman and CEO of Strayer Education.
Adapting to the knowledge economy
Strayer is not that different from tradi-
The goal of universal access, regardless James Duderstadt, president emeritus
tional schools in that it focuses on the
of income, has also not been met. Schools of the University of Michigan, gave the
value of education that it provides its
tend to value academic rankings and have keynote address focusing on the role of
students. However, Strayer must also pay
focused on becoming more elite rather higher education in driving economic
attention to its return on capital and
than expanding access. Median family transformation. Borrowing from Thomas
market returns to investors. In addition,
income of students at most elite colleges Friedman’s book, The World is Flat: A
Strayer’s revenue must equal the cost
is easily many times the national level. Brief History of the Twenty-first Century,
4 Chicago Fed Letter Midwest Economy January 2006
Duderstadt suggested that information tax cuts and tax abatements provided to among these sectors. These could in-
and telecommunications technologies dying industries. Public debate has tended clude groups consisting of governors,
have radically changed the economic to pit groups against one another rath- mayors, CEOs, and university and foun-
landscape, allowing new competitors onto er than developing a shared vision for dation presidents. Other resources could
the economic playing field. In particular, the state. include the National Academies4 and a
this is apparent in sophisticated supply coalition of midwestern Federal Reserve
To improve Michigan’s and the region’s
chain management practices that allow Banks. Financial support could be drawn
economic future, Duderstadt argued that
for global sourcing of not only low-skilled from the many foundations that operate
a commitment to educational oppor-
work but almost any form of knowledge within the region that still have an im-
tunity and technological innovation is
work, no matter how sophisticated. The portant stake in the region’s health.
a key element. This requires not only
impact of this shift has been particularly Finally, a roadmapping exercise should
investments in human capital, infra-
disruptive to the industrial Midwest. be conducted within each major sector
structure, and appropriate tax and in-
of the economy. In the end, the chal-
For the Midwest, the industrial produc- tellectual property policies, but also the
lenge of this coalition would be to trans-
tion paradigm has shifted from material- creation of an environment that stimu-
form what was once the manufacturing
and labor-intensive products to knowl- lates creativity and innovation. To achieve
center of the world economy into what
edge-intensive products and services. this, the region must leverage its eco-
could become its knowledge center.
This places a high value on knowledge nomic assets, which include its size and
institutions, such as research universities, market position, research base, geo-
Perspectives from higher education
corporate research and development graphic location, key industry and re- leaders
laboratories, and national research agen- search and development centers, and
Lou Anna Simon, president, Michigan
cies, for creating advanced education, re- historical importance to the U.S.
State University; Paul Courant, profes-
search innovation, and entrepreneurship.
Furthermore, Duderstadt said that the sor and former provost, University of
Duderstadt said that the region needs region has one unique asset in its con- Michigan; and Richard Saller, provost,
to develop a strategic plan to harness centration of strong flagship research University of Chicago, offered their views
these economic forces. As an example, universities. The Big Ten universities on the challenges facing higher edu-
Duderstadt described the Michigan along with the University of Chicago con- cation. Simon noted that the universi-
Roadmap,3 which he led as part of the duct $6 billion per year in research and ties’ core mission of providing access to
Millennium Project at the University of development; enroll 300,000 undergrad- cutting edge knowledge and democra-
Michigan. At its core, the roadmapping uate and 76,000 graduate students; and tizing information has remained un-
process analyzes where the economy award 20% of the nation’s doctorates changed. A particular challenge to higher
currently is, where the state would like it in engineering, chemistry, mathematics, education is improving connectivity
to be, and how much of a gap exists be-
tween the two. A roadmap is developed
from this process to describe how to im-
Most university instruction is delivered in the same manner
prove the state’s economy. Duderstadt
characterized Michigan’s economy as as it was generations ago. Even if instructional productivity
facing significant challenges. Its largest has remained constant, it has fallen relative to other segments
city, Detroit, is among the poorest in the
of the economy.
nation, and one of its major industries,
domestic autos, is suffering staggering
losses. Michigan’s education system is
and computer science. Despite this with other institutions and the public.
underachieving, with one-quarter of its
success, all of these universities have Higher education must restore public
adult population without a high school
seen diminished state support and, in- trust that it provides access in an inclu-
degree and only one-third of high school
creasingly, are largely supported through sive fashion. It must also highlight the
graduates ready for college. Yet, the state
private funds. For the region to succeed, benefits of its basic, applied, and com-
has a system of higher education that is
Duderstadt argued, these institutions mercial research. In particular, Simon
regarded as among the finest in the
must be at the heart of the strategy. cited the work of Michigan’s Cherry
nation, although it too is beginning to
Commission on higher education, which
suffer from a withdrawal of state support. Finally, Duderstadt laid out a structure
suggested that universities should focus
for improving the region’s health. First,
A particular problem is that Michigan on giving students the ability to acquire
this requires the attention and commit-
continues to try and promote short-term any form of knowledge and move beyond
ment of leaders from all sectors of society,
economic strategies to improve its lot. an emphasis on vocational training to a
including business and industry, state
Rather than funding education and re- broader, more classical education in or-
and local government, higher education,
search, state support has gone to building der to develop the knowledge workers
foundations, and the media. Second,
prisons, sports stadiums, and casinos, with of the future.
organizational links need to be built
Federal Reserve Bank of Chicago 5
Courant suggested that universities have tuition and attract outside resources popular perception was that the North
a special problem when it comes to pro- have helped balance them. Dakota University System was a burden
moting their value to society. Given that on the state.
In this discussion, the three leaders
universities have a stake in the outcome,
agreed that communication was at the Isaak explained that the roundtable’s
there is a moral hazard related to their
center of the higher education prob- efforts led to the development of a
suggesting that they should receive signif-
lem. Simon suggested that universities consensus on how the North Dakota
icant public resources. To make the role
often fail to speak the language of the University System could best focus its
of the university in promoting growth
public, and this tends to create distrust. assets and talents. The plan included:
more credible, Courant said that the
Saller noted that more work needs to
business community should make the (cid:127) Promoting expansion and diversifi-
be done on the tangible outcomes from
case that developing basic and applied cation of the state’s economy;
higher education spending, and cited a
research and educating the work force are
study by University of Chicago econo- (cid:127) Enhancing the quality of life of the
important public policy issues. Courant
mists Robert Topel and Kevin Murphy state’s citizens;
offered that part of the reason why uni-
that demonstrated a huge return to so-
versities can fulfill this role is because (cid:127) Engaging at every level with the needs
ciety from university research funded
they promote agglomeration economies and problems of the state and its
by National Institutes of Health grants.
where talented people in the same dis- citizens;
Research on the returns from other as-
cipline can join together and share ideas.
pects of higher education spending (cid:127) Becoming academically competitive
Moreover, some institutions in society
would be useful. at the national and international
still need to serve as repositories for
levels; and
collected knowledge; while technology
North Dakota—A statewide effort to
might promote some efficiencies, there improve higher education (cid:127) Being accessible and responsive to all
will still need to be a physical place where citizens of the state, both individual
In 1998, North Dakota began a remark-
knowledge resides. and corporate.
able effort to reform its higher educa-
Saller provided the perspective of a pri- tion system. Describing the work of the Dunn discussed the roundtable’s vision
vate research university. He suggested North Dakota Roundtable on Higher and structure. Consisting of 61 members,
that higher education benefits from Education were Larry Isaak, former chan- the roundtable drew from legislators,
intense competition. While the public cellor, North Dakota University System, private sector leaders, members of the
is concerned about accountability, com- and president, Midwestern Higher state board of higher education, college
petition at both the national and inter- Education Compact; State Senator Ray presidents, government leaders, faculty
national level leads universities to make Holmberg, chair, Higher Education members, and students. However, more
than half of the members were either leg-
islators or private sector leaders, ensuring
that traditional higher education inter-
For the Midwest, the industrial production paradigm has
ests would not dominate the discussion.
shifted from material- and labor-intensive products to
The group established a straightforward
knowledge-intensive products and services. This places a goal—“To enhance the economic vitality
high value on knowledge institutions. of North Dakota and the quality of life
of its citizens through a high quality,
more responsive, equitable, flexible,
accessible, entrepreneurial, and account-
the investments to stay on top. In global Roundtable, and chair, North Dakota
able University System.”
rankings, American universities continue Senate Appropriations Committee; Eddie
to dominate, but a disturbing trend is Dunn, vice chancellor, North Dakota Dunn reported that the roundtable
the increasing stratification between University System; Joseph Chapman, pres- completed its initial work by May 2000,
private and public universities. Although ident, North Dakota State University; although it had managed to have legisla-
some stratification may be necessary, and Roger Rierson, president, Flint tion in support of its recommendations
the private universities have been able Communications, and Higher Education passed as early as 1999. While the pro-
to attract greater endowment resourc- Roundtable member. cess was far from easy, Dunn said that the
es and have had more stable funding. nature of the process, the ability to es-
North Dakota’s economy in 1998 was
The costs of continuing to provide small tablish a common vision, and private
struggling and its higher education system
class sizes, as well as price increases in sector involvement and leadership were
was not seen as a player in the state’s
purchasing new equipment and main- the keys to success.
economic future. There was little co-
taining lab space for the sciences, have
operation among universities, govern- Senator Holmberg then discussed the
raised private universities’ overall costs.
ment, and the private sector, and the legislative process for the roundtable.
Yet private universities’ ability to raise
At the outset, the state legislature had
6 Chicago Fed Letter Midwest Economy January 2006
no shared vision of what the university university system seemed mired in out-
1 For a condensed version of this conference
should be and had developed a mindset dated principles. It was slow to react, risk
summary, see Richard H. Mattoon, 2006,
that saw the system as a financial burden. averse, not tuned to the needs of the
“Higher education and economic growth,”
Proposals to consolidate the system had future work force, and being micro-
Chicago Fed Letter, Federal Reserve Bank
been popular, and numerous studies had managed by the legislature. Those in of Chicago, No. 222a, January, available
at www.chicagofed.org.
2 William G. Bowen, Martin A. Kurzweil,
A recent study of the economic impact of a reformed North
and Eugene M. Tobin, 2005, Equity and
Dakota State University on its state economy has seen its Excellence in American Higher Education,
contribution rise from $14 million to $105 million in just five years. Charlottesville, VA: University Press of
Virginia.
been commissioned. The key to success- the business community saw a system 3 James J. Duderstadt (project director),
2005, A Roadmap to Michigan’s Future:
ful legislative participation, Holmberg that had considerable promise and re-
Meeting the Challenge of a Global Knowledge-
said, has been the willingness of the leg- sources but was underperforming. Most
Driven Economy, University of Michigan,
islature to step back yet demand account- of all, the university system was not an
Millennium Project, report, available at
ability from the higher education board asset for private business other than it
http://milproj.ummu. umich.edu/
for a unified higher education system. provided talent. publications/roadmap/index.html.
He stressed that the legislature created a
What the private sector brought to the
structure and support for higher educa- 4 The National Academies consist of the
roundtable was a perspective of business
tion without excessive oversight. National Academy of Sciences, the National
as the ultimate consumer of university
Academy of Engineering, the Institute
Next, Chapman reported that the round- products; it also brought the imperative of Medicine, and the National Research
table process has had a profound effect that the system needed to be more pro- Council.
on the behavior of the universities. It has gressive and entrepreneurial. The strat-
focused them on placing students first, egy was to remove barriers and let the
expanding program offerings while bol- college presidents lead and be account-
stering quality, and leveraging external able for results. Rierson argued that the
support. Through these efforts, enroll- results have been impressive, including
ment at North Dakota State University new work force training programs, the Michael H. Moskow, President; Charles L. Evans,
Senior Vice President and Director of Research; Douglas
grew from 9,700 in 1999 to over 12,000 development of centers of excellence, Evanoff, Vice President, financial studies; David
in 2005. Equally impressive has been the more trade corridors, and fully occupied Marshall, Vice President, macroeconomic policy research;
Richard Porter, Vice President, payment studies;
expansion of doctoral programs from research parks. The state is attracting
Daniel Sullivan, Vice President, microeconomic policy
15 to 40 and growth in doctoral students new businesses and start-ups and is re- research; William Testa, Vice President, regional
from 150 to 500. Research expendi- taining college graduates at a higher programs and Economics Editor; Helen O’D. Koshy,
Kathryn Moran, and Han Y. Choi, Editors; Rita
tures soared from $44 million in 1999 level. To sum up, Rierson said that a Molloy and Julia Baker, Production Editors.
to $102 million in 2005. Chapman sug- successful higher education system is one Chicago Fed Letter is published monthly by the
gested that a new entrepreneurial and that is engaged with its communities. Research Department of the Federal Reserve
Bank of Chicago. The views expressed are the
results-oriented culture, based on flex-
authors’ and are not necessarily those of the
ibility, partnerships, vision, and broad Conclusion Federal Reserve Bank of Chicago or the Federal
support, is paying real dividends to the This one-day conference made it clear Reserve System.
state. The most recent study of the eco- that traditional models of higher edu- © 2006 Federal Reserve Bank of Chicago
Chicago Fed Letter articles may be reproduced in
nomic impact of the university on the cation finance and service delivery are whole or in part, provided the articles are not
state’s economy has seen its contribution under stress. Declining financial sup- reproduced or distributed for commercial gain
and provided the source is appropriately credited.
rise from $14 million to $105 million in port from state sources appears to be a
Prior written permission must be obtained for
just five years. Each additional dollar of structural issue, and changing student any other reproduction, distribution, republica-
state funds is now attracting $9.60 of demographics require new service de- tion, or creation of derivative works of Chicago Fed
Letter articles. To request permission, please contact
external support. livery models. The question for policy- Helen Koshy, senior editor, at 312-322-5830 or
makers is this: If higher education is email [email protected]. Chicago Fed
Finally, Rierson described the role of Letter and other Bank publications are available
essential to economic growth, how do
business in driving higher education re- on the Bank’s website at www.chicagofed.org.
we best support this critical sector?
form. To the business community, the ISSN 0895-0164
Federal Reserve Bank of Chicago 7
