The main cause and best permanent solution to the populist dissatisfaction that led to the 2016 electoral revolt in the US and in Europe lies in the issues discussed in this book. Colleges and universities do not produce students, they produce human capital skills that are used throughout life not just to increase earnings, savings, and income but also during times not at work to produce better health, children’s health, children’s achievement, greater longevity, and happiness. During time spent in the community, the human capital skills of graduates operate civic institutions, contribute to lower crime rates, increase tax revenues, and generally improve the quality of life and life’s chances. Beyond this, there is a race between new technology and education. Research universities produce both. This book addresses, and documents, how these processes occur.
The 64% of the US population that have a high school education or less have not enjoyed these benefits. Their plight is real. They have not benefitted from the economic growth generated by freer trade and advancing technology, but instead have been left behind with no increase in their real earnings since 1980. Many suffered reductions as they lost their manufacturing jobs and now lack the skills to adapt to increasingly sophisticated and technological production and management methods. During the same period college graduates have enjoyed a 49% increase in their real earnings, and only slightly less if the top 1% is removed. Distributionally, those with high school or less generally cannot penetrate the power structure of elites in business and government that maintain institutions that include dramatically unequal funding of K-12 and community colleges and other subtle institutional features that redistribute income from the less educated to the benefit of the elites. In Bismarck’s words, it is the 1/3 of the college students who do not waste their time in the pubs or drop out who will “rule Germany.”
Development economists stress this control by elites and the institutions that support them. But they normally do not get into how both are created, or the whole process of “endogenous development” over time within families and societies that is developed in this book. Human capital formation is defined and its implications developed in an easily readable way. This offers the base for a comprehensive theory of higher education that focuses on higher education’s total outcomes, shaping the whole person including but not confined to job skills. But there is more. New ideas and their adaptation which is the driving force behind technical change and productivity growth are largely determined in both their number and depth by the number of advanced university graduates and are part of the conceptual framework in this book. In fact, the social benefits of higher education including more new and adapted ideas and other specific spillover benefits to society are the main rationale for the support of public universities and colleges. They are shown to lead to higher per capita growth and rates of development than is possible in a competitive economy without public support for education externalities and these higher rates are sustainable without bounds.
In view of this, it is distressing that states have been cutting back on their public investments in community colleges and universities over the last 15 years, with only a few recent exceptions. This book estimates the earnings-only growth-related return on the total investment by families and the state in higher education to average 13% for associate degrees and 11% for bachelor's. The unemployment rate for college graduates compared to that for those with high school or less is miniscule. The “total return” to higher education which is the measure relevant to broader development that includes non-monetary private and social benefits beyond earnings is well over twice these earnings and jobs benefits. The private non-monetary benefits of college beyond earnings add about 156% of earnings to the earnings benefits, and the social benefits add at least another 96%. Since both the net earnings benefits and the total return that includes the non-market outcomes are far above the 7.2% average return over 10 years on S&P 500 index funds, the opportunity cost of the costs of college and also approximately the total return on investment in physical capital, it is possible to conclude from the theory and from this data that there is underinvestment in higher education, in spite of its flaws, for there to be optimal per capita growth, and even more serious underinvestment for optimal, sustained, development.
There is underinvestment in higher education since the returns are higher than the alternatives as mentioned but also because many qualified high school graduates that are not going on would benefit if it were more accessible to them. When Community College tuition is lowered by $850 for example, simulations show that enrollment increases by about 13% in all ability deciles except the very highest and very lowest where it increases by about 8%. This indicates that more individuals of all abilities, motivations, and other unobservables are induced to enroll, with the percentages slightly lower in the highest decile, which includes students who would have gone to college anyway, and slightly lower in the lowest decile largely because the lowest income families that are largely there cannot afford it. The remedy is not apprenticeships for high school students in the trades as has been proposed by the President. The age-earnings profiles at this level of skills are relatively flat, leaving high school graduates dissatisfied with modest incomes, more inflexible skills, and without the substantial non-monetary benefits college offers beyond earnings. They would be far better off with a 2 year Associate Degree that can include apprenticeships and that can help older workers who have been displaced with lifelong learning in which Community Colleges specialize.
Policies are discussed in this book for reducing the exclusion of the dissatisfied majority from the lifelong learning programs in community colleges and their children from 4-year university programs. Cyclical factors in the economy are not the focus. But the current serious problems with rising inequality and a secular under-employed and very dissatisfied populist majority need not be perpetuated into future generations.
Walter W. McMahon is an emeritus professor of economics and emeritus professor of education at the University of Illinois at Urbana–Champaign. He is the author of Education and Development: Measuring the Social Benefits. His book Higher Learning, Greater Good: The Private and Social Benefits of Higher Education is now available.