Investing in Public Education

By: Dr. M. Ray Perryman
Published in syndication June 08, 2016

Education is essential to success, both for individuals and for the economy. Higher educational attainment is clearly linked to increased earnings and decreased unemployment, and workforce preparedness is essential to attracting and retaining desirable corporate locations. In spite of these well-documented facts, funding for education continues to fall further behind the needs of students.

A recent decision by the Texas Supreme Court found that the Texas school finance system is constitutional (though severely flawed), thereby taking some pressure off of legislators to improve it. While some leaders have vowed to try to move forward, others have indicated no desire to tackle the issue if not compelled to do so or even aggressively proposed diverting additional resources away from the public school system. The reality is that Texas lags virtually every other state in the United States (and all of the major competitors for high quality economic growth) in terms of per-pupil spending (as I've discussed in prior columns) and the gap is widening.

The irony is that investments in education actually pay for themselves many times over when you consider the benefits, which range from increased productivity to decreased needs for social services. I recently ran some numbers to help inform the debate. The results were, frankly, startling.

A starting point methodology for estimating returns on investments in education (over and above the bare minimums to keep the doors open) was developed and used in an October 2006 study by Henry Levin, Clive Belfield, Peter Muennig, and Cecilia Rouse ("The Costs and Benefits of an Excellent Education for All of America's Children"). The study, supported by a grant to Columbia University and involving scholars from Columbia and Princeton, looked at the costs and effectiveness of programs designed to increase high school graduation rates.

The authors also looked at lifetime public benefits of graduating from high school such as higher tax revenues and lower government spending on health, crime, and welfare. They did not include private benefits such as higher earnings, nor did they consider the multiplier effects through the economy. Even with those limitations, though, the study did a good job of looking at the direct effects of incremental educational spending.

Starting with this method, I derived direct effects for Texas, updating as needed and otherwise adjusting to reflect the current situation. I also converted the analysis to reflect the effects per dollar of additional State investment in education (over and above current levels). I then calculated the full effects (including spinoff and productivity gains) using my US Multi-Regional Impact Assessment System, which I originally developed more than 30 years ago and have since used in hundreds of analyses for corporations, communities, and government agencies.

The results speak for themselves. The long-term return per dollar of incremental State investment in education is $49.69 in additional spending throughout the economy. This includes $15.09 in direct private sector benefits from the increased productivity and earnings of the affected students, $27.47 in multiplier effects from the direct production, $6.12 in government revenues ($2.01 direct from earners and $4.11 indirect), $1.01 in reduced social costs to governments ($0.59 in health costs reductions, $0.38 in crime-related costs, and $0.04 in welfare costs). All of these long-term values are discounted at a 3% real rate to convert to a net present value (NPV) basis and are expressed in constant (2016) dollars to take out any effects of inflation.

Looking at other measures of business activity indicates each dollar generates $22.95 in output (gross product) and $14.11 in personal income. These are not additive with the items above, but rather different views of the overall effect.

As a mode of comparison, the long-term economic return on a dollar spent in a typical private sector initiative is about $2.82, while the highest multiplier of any private sector industry (petroleum refining) is $16.51. The private return on public education spending is only about $2.40 (in terms of spillover activity to the provision of education services), thus indicating that it is the very essence of a public good worthy of substantial commitment with external benefits far exceeding private ones. This $49.69 return is also well above that for other public investments, such as transportation infrastructure ($7.62).

Even beyond these numbers is the value of civic participation and volunteerism, which increase with education, and the sheer pleasure of knowledge and discovery. These numbers also don't capture the competitive advantage wrought by a superior workforce.

What if I told you about an investment that would yield almost $50 for every $1 you invested? What if on top of that, it improved lives, increased volunteerism, and otherwise paid major dividends to individuals and society? A "no brainer," right? Similar logic applies to strategic investments by the State in public education, and it's irrational and shortsighted to ignore the tremendous return on this particular investment of taxpayer dollars.

Future prosperity, both for individuals and for society, depends on education. There is more at stake than many people seem to realize. It is essential that our vision extend beyond the next two-year budget cycle and that we provide sufficient resources to ensure we are not setting up a downward spiral in our way of life for generations to come.