Tuesday, July 11, 2006


Higher Ed as Economic Savior?

Apropos of my minor obsession with the economic conditions in Northern Town, the Chronicle of Higher Ed has a story noting that the University of Rochester is now the largest employer in Rochester. A quick check on the always-reliable Wikipedia (I know, I know…) reveals that SUNY-Buffalo is the largest employer in Buffalo, and Syracuse University the largest employer in Syracuse. Binghamton University (a.k.a. SUNY-Binghamton) is the largest employer in the Greater Binghamton region, which is almost an oxymoron. I’m starting to see a pattern here…

Higher ed makes an awfully dicey economic engine for a city, especially when it’s just a single institution and a fair-sized city. (Boston succeeds with gazillions of colleges and universities, and Ann Arbor does quite well by being not much bigger than the University of Michigan, but those are exceptional cases.) Colleges and universities (other than proprietaries) are tax-exempt, so unlike other employers, they don’t pay property taxes. (In the Northeast especially, that’s a big deal.) They generally don’t grow very fast, when they grow at all. With the increased reliance on adjunct faculty, they don’t pay as many middle-class salaries as they once did, even as total employee headcount increases. Students come and go, generally supporting a few local pizza places, bars, and slumlords, and not much else.

The article lists several cities all trying to adopt essentially the same strategy: establish public-private partnerships to encourage biotech spinoffs from the local university that will take root in the local community. (Rochester is using optics, rather than biotech, but the rest is essentially the same.) The idea is that cutting-edge university research will lead to commercially-viable breakthroughs that will generate massive local employment, bringing prosperity in its wake.

The strategy is good, as far as it goes, but it goes only so far.

For one thing, much university research isn’t geared towards immediate commercial applicability. Pretty much everything in the humanities and social sciences falls off the radar, and that’s the core of higher education. Business schools produce research, but the research itself, as far as I know, rarely leads directly to start-ups. Even in the favored ‘techie’ areas, it’s impossible to know in advance what’s going to be ‘hot’ in five years. At my previous college, many of the companies that served on our industry advisory boards and (quite arrogantly) told us what to do in 1999 were bankrupt by 2002. Any research of a level good enough to result in breakthroughs is years in the making, so jumping on the biotech bandwagon now is a riskier move than it may first appear.

I’m a big believer in higher education (which is why I criticize it so much – I want it to be better. The same applies to my government). It’s a good thing in itself, and I think it has very beneficial long-term economic and political effects on the country as a whole. That’s different from saying that SUNY-Buffalo will save Buffalo.

There’s nothing unusual in students taking the education they got in Grad School City and moving elsewhere. It’s normal, natural, to be expected, and not bad. Yes, it would be nice for Grad School City if more grads stuck around and started the next Dell Computers there, but you can’t guarantee that.

There’s also an inherent tension between the universalist/cosmopolitan aspirations of higher education, and the parochial boosterism of public-private partnerships. There’s nothing unusual about research universities going across the country (or into other countries) to raid superstars; it’s simply how the game is played. At the upper echelons of higher ed, place-loyalty is considered quaint, at best. A little is nice, but too much would get in the way of the pursuit of the cutting edge. Resources spent on town/gown events are resources not spent on labs.

The economic-development approach to thinking about higher ed carries other dangers. Community colleges can justify ourselves as low-cost feeders and workforce developers. Research universities can justify themselves as grant engines and incubators. How do mid-level four year colleges justify themselves? Even if SUNY-Buffalo carries some economic charge, does SUNY-Oneonta? Fredonia? Potsdam?

(Answer: they weren’t designed for that.)

I don’t blame these cities for trying. I can imagine a hypothetical conversation with the mayor of Northern Town:

Me: You know, higher ed is a dicey choice for an economic engine.

Mayor: As opposed to…?

Well, yeah. If every other major employer in your area is either dead or dying, and the local university is holding its own or growing, what else are you going to do? It may not be what GM or Kodak or U.S. Steel was back in the day, but it’s the best of the currently available options. Universities don’t usually pack up and move, they bring cultural events and educated people to the community, and once in a while, they generate strike-it-rich breakthroughs.

(A quick aside on behalf of my libertarian/conservative readers: the tax exemptions that make colleges and universities less desirable economic engines also make them less likely to be driven out of town by high taxes. If I don’t pay taxes anyway, do I really give a rip about the rate I’m not paying? Other employers might flee a city as its taxes rise, but colleges generally won’t, in part because they don’t have to. To a city in death spiral of raising rates on a declining tax base, this is not a minor consideration. A quick ‘thank you’ to my libertarian/conservative readers for pointing this out. Some universities pay PILOTs – payments in lieu of taxes – to the towns in which they’re located, but there are natural limits to that. PILOTs are voluntary, and easy for a university to forego when times get tough.)

To indulge in a little prognostication, I foresee some public favor for research universities and community colleges, but rough sailing ahead for the nondescript four-year colleges. CC’s are cheaper than everyone else, and open to everybody. Research universities can sell the prospect of generating the next Dell. The local nothing-special former teacher’s college can, um, uh…

Of the cities mentioned, Rochester looks to have the most hope. Its big-three private employers – Kodak, Xerox, and Bausch & Lomb – all do a lot of work with optics, so both RIT and the U of Rochester have developed specializations in optics, and have already generated a few spinoffs. That’s something, at least. At least in that case, the specialization grew out of local conditions, rather than being imposed upon them (biotech in Bethlehem? Really?).

Even there, though, I can’t imagine higher ed saving the city. A good university or two (or three) can be a valuable supporting player in a city, but it can’t be the lead. The lead has to come from the taxpaying sector. That’s not a criticism of the universities; it’s just a recognition that economic development is an ancillary benefit of a university, while profit is the primary function of a company. Goodwill is a fine thing, but priorities matter.

It's not just that universities don't care about high tax rates when they don't have to pay them, it's that the businesses are being asked, in effect, to pay their own taxes and the ones that the schools have been excused from paying. That's a crushing burden. That's why all the private employers have been, in effect, driven out of all the cities you've mentioned, and they have little reason to return.

Here's a radical idea: end the tax exemption for education institutions. Treat them like the businesses that they are. Why should Yale pay zero taxes on the earnings of its multi-billion $ endowment, yet I am taxed to death when I earn $100 of bank interest? Talk about favoring the rich! How about a system in which only the first $1 billion of endowment is tax free, then taxes are paid just like anyone else? How about a system in which charitable gifts (for education? for all charities?) are 50% deductible instead of 100%? How about no property tax exemptions except for government-owned buildings?

We need to begin to end the tax bias against business and profit if we want to have more of it, it's that simple.

BTW, I hope that you noticed the spike in federal tax revenues reported earlier this week, by the NY Times among others. The increased collections are coming from corporations and the wealthy, and the rate of revenue growth is larger than the rate of economic growth. That means that in actual practice the federal tax system is getting steadily more progressive, despite the Bush "tax cuts for the rich".

That's a development I think will kill our economic growth, but I suspect it matches your priorities. In any event, it vindicates the Laffer curve.
Let's not forget the number of cities/towns that have grown up simply because of the University. Perhaps the most obvious (to me! LOL) is Penn State. As one student once said at a State College City Council meeting, if it wasn't for the University, State College wouldn't even be fly dirt on the map. (a bit graphic, but it made the point.)

What has happened around Penn State is economic growth, in part because of the nature of the university, but also due to people wanting to stay close to the University. Accuweather is there, because their University was there. It doesn't hurt that the University has a good reputation in Engineering--so many engineering firms are close by.

Universities *can* be a draw, if they are good, solid universities that foster a sense of community and family that is typified by Penn State... Remember, if you say, around a Penn Stater "We Are..." they instinctively answer "PENN STATE." Does that happen at many other Uni's?

One final note: a nice thing about higher ed is it's moderating effect on economic downturns. It is not unheard of for people who cannot find jobs to "go back to school." They may do this on grants and loans, or from savings, but it provides a stability to a community that otherwise might not have it. Of course, the University should work to position itself as the place to get "re-cast" for the future economic boon. If the University just continues to offer the same ol' then why go where you learned THAT?
The Laffer curve vindicated? Uh, no. Keynesianism is vindicated. Several years of massive deficit spending eventually generated some private-sector demand. Of course, the flip side of Keynesianism is that you're supposed to run surpluses in the good years (like Clinton did) to pay those debts back. Let's just say the jury is still out on W on that count.

Very, very few colleges or universities have endowments in the billions.

I'm pretty sure Yale pays PILOTs, though I'm open to correction on that point.

The Professor raises a good quasi-Keynesian point about higher ed; at many institutions (esp. cc's!), enrollment is counter-cyclical. We get more students when the economy tanks, because the opportunity cost of going back to school are lower when there aren't any jobs out there anyway. To the host community, counter-cyclical enrollments can be a buffer in bad times.

(The limiting factor there, though, is that the counter-cyclical phenomenon seems to be more pronounced at commuter schools, which generate less on-site spending than residential schools. Still, the general point holds.)
I went to college and grad school in a city that was recovering from economic collapse and where the university was, by then, the primary employer. . . and now it looks as though I'm living in another such city. So I'm very interested in this question.

However, I have to say that College/Grad School City has been booming over the last 5-10 years, to the point that it's now a fairly attractive place to live (I'd move there in a heartbeat)--which makes me wonder whether the university isn't doing something right despite the many things that I firmly believe it's doing wrong. For one thing, university expansion means more than just the hiring of more faculty: it also involves, in larger numbers, the hiring of more home-grown and potentially permanent employees: adminstrative assistants, museum curators, lab technicians, master plumbers, nurses, etc (don't forget the affiliated hospitals, which often employ as many people as the university itself). And if the staff are unionized and the city's economy is in the tank anyway, the salaries can be decent.

It seems like it *could* work, anyway, although it also seems like a rather unstable model and certainly like a possible recipe for real town-gown distrust and resentment (as it was, and remains, in C/GS City).
Of course, I should add that College/Grad School City is in a much more central and desirable location than my current city, so that may have something to do with its boom. . .
Dude! What's up with your use of the Dell model? Michael Dell did start his company in his dorm room at UT-Austin but he dropped out of school and moved the company just a little bit up the road to Round Rock. That's about all the university connection the company has. Dell is NOT about technological breakthroughs that come from major research universities, Dell is about efficiency in manufacturing and ruthless supply-chain management. They do business processes better than anyone, not technological innovation! Micheal Dell didn't need a BA from a research university much less a Ph.D to build his company.

As to why Dell is in Texas rather than upstate New York (in addition to M. Dell's Texas roots) I'd guess that low taxes and low barriers to starting a business played a part as well as low labor costs (due in part to the fact that Central Texas at the time was full of over-educated under-employed folks thanks to the research university, cheap rents, and warm weather.)
"Keynesianism is vindicated. Several years of massive deficit spending eventually generated some private-sector demand. "

Keynesiasm might explain our current economic growth, that but for the deficit spending the economy would be tanking. It does not explain why, after the "tax cuts for the rich," the rich are now paying an increasing share of total taxes.

Yale did not provide PILOTs when I lived in New Haven, now more than a decade ago. It was a serious concern, as the value of Yale's physical plant probably equaled the value of the rest of the city (Yale-New Have hospital is tax-exempt as well). BTW, Yale's efforts to stimulate local economic development have not met with much visible success.

I'd be happy to lower the taxable threshhold for endowments to $10 million, if $1 billion is too high.
Actually, the university is the largest employer in MOST towns with a large university. (A typical GM assembly plant has around 2000-4000 employees. A large university has five times that, not counting the students "employed" there.)
More generally, the point is that the largest single employers in any city are usually its service facilities -- the local hospital, the airport, the city or state government -- and not a major manufacturing plant or corporate headquarters. Even large employers are geographically scattered.

For the state of Utah, the two major research universities (U. of Utah and Utah State) claim a combined employment of 25,400. By comparison, the Utah economic development office says the 3 largest public companies (by revenue) are:

Zions Bancorp (a regional bank, claiming about 2300 employees in Utah and Idaho),

Questar Corp. (natural gas exploration and public utility), 2105 employees.

Skywest, Inc. (commuter airlines), claims approx. 9440 employees at ten maintenance bases.

(I didn't bother looking up any further down; none of the others looked promising.)

Privately held companies are listed separately; of these only three had more than 5000 employees: the nationwide franchises Mrs. Fields (cookies) and Flying J Inc. (truck stops), claiming 30,000 and 10,613 respectively; and the local (nonprofit) hospital network Intermountain Health Care, with 25,500 employees. (And for what it's worth, Brigham Young University has 3000.)

(These statistics aren't exactly on point, because I couldn't find city statistics easily, but I think they make the point: the way Kodak dominated Rochester is, these days, the exception not the rule. Most people are employed by smaller businesses or franchises, so they don't tend to show up in the Largest Employers list. Buffalo may or may not be doing well economically; the fact that SUNY is its largest employer tells us nothing, either way.)
Regarding the Laffer curve, why does this need to be vindicated? Is there any doubt about it? I am not an economist but my understanding is that in economics tax revenues as a function of tax rate is continuous.

Every continous function on a closed interval ( the interval [0% - 100 %] ) has an absolute max and min. So, it is definitely possible that lowering taxes can raise revenues. (The max does not occur at 100%.)

In all likelyhood this function has many local max and min and so changing the tax rate in either direction might have the desired affect of raising revenues.
I've lived in Utah and can see where Jason is comming from.

HOWEVER, the fact that the SUNY system is the largest employer in many upstate NY cities/towns does tell us something when we take a historical look at the economic base of these towns. We all know the story of manufacturing closing up shop and moving south and then out of the country, for good or bad to the entire country/economic system is debatable. What is intersting (and perhaps something unique to western NY or even the rust belt) is that these places were traditionally blue collar, non-educated towns. Furthermore, they ususally had less than a handful of very large employers (not a diversity of employers like say the Wasatch Front in Utah). To be at a point where the local 4 year, middle of the road state school (as opposed to the flagship state school) has surpased the major industry (meaning major employer and supply chain) is a big economic shift.

There is nothing keeping the next big thing from being developed in Northern Town. We have hashed that out here before. However, when there really isn't an educated base in Northern Town, it is scary to believe that the high tech off shoots from higher ed is going to turn around the economy as the economic savior.

Let's be real here. I wouldn't describe Buffalo as an overeducated city. Yet, Buff State is the largest employer. (Which, in contrast to Utah where the population is quite educated.) Where exactly are these people graduating from a SUNY school supposed to work? Rochester might be slightly different, but still.

I don't know. Maybe in another 15 years there will be a diverse enough base of white collar jobs to actually have the fact that the SUNY system is the biggest employer be an economic asset. But it just isn't there yet. And I'm not sure how to get it there either.
Two things:

1. Equality is quite right that the increased revenues do not vindicate Keynesianism. (Frankly, the history of the last 40 years has basically buried it.) The idea of balancing out deficits with surpluses in the good times ("functional finance") was a chalkboard dream when Lerner developed it in the 30s and there's good reasons we've never really seen it happen - all of which are structural and not about the particular occupant of the White House or Congress.

2. Ann Arbor is a hell of a lot more than the U of M (he says, having grown up in Detroit, attended Michigan, and returning to Detroit a couple of times per year). Big story in the Detroit paper today that Google is moving 1000 jobs there, and they are hardly alone in the hi-tech industry there.
"It does not explain why, after the "tax cuts for the rich," the rich are now paying an increasing share of total taxes."

Um, isn't that explained by wealth accumulation and steadily increasing inequality? That is, isn't the lesson from this that the wealthy are enjoying much faster income growth than the less wealthy?
Yikes, it's worse than I thought!

I did a quick check, and Yale does not yet make a payment in lieu of taxes to New Haven. They do make a voluntary "fire services" payment of $2.1 million.

But New Haven is not left out in the cold, they do get $20 million in lieu of taxes for all the property owned by Yale. Instead of Yale paying this bill, the entire $20 million is funded by the State of Connecticut! So even though I've moved out of New Haven, I'm still indirectly paying their property taxes!

I hate to admit it, but those Yalies are damn smart.
On the source of the recent rise in tax revenues, you might see today's WSJ: http://www.opinionjournal.com/editorial/feature.html?id=110008640
let me try that again:

try here
There's a large university in my city (Johns Hopkins, in Baltimore) and they have actually made an effort to do programsnow that are of great potential benefit to they city in which they reside. Some examples-- offering incredible benefits to full-time employees, sending students out into public schools surrounding their main campus to do volunteer work, developing a charter public school to encourage science-based curriculum, and the most recent, a program by which any Baltimore high-school student who resides in Baltimore and is accepted to Hopkins can go-- tuition paid for by Hopkins.

I have relatives in upstate NY, near Geneseo, and they are definitely in a pretty dire situation jobs-wise up there. Maybe the universities should be required to offer more to their communities, in exchange for tax breaks.
Okay, hang on -- the WSJ Editorial Board is not precisely a paragon of objective analysis. News section, yes. Editorials . . .

Anyways, this paragraph is silly:

"In the nine quarters preceding that cut on dividend and capital gains rates and in marginal income-tax rates, economic growth averaged an annual 1.1%. In the 12 quarters--three full years--since the tax cut passed, growth has averaged a remarkable 4%."

Let me shorten this: "Over the course of the past five years, approximately half of one business cycle, growth has averaged out at a little below trend."

"This growth in turn has produced a record flood of tax revenues, just as the most ebullient supply-siders predicted."

This is just deceptive; nobody disputes that economic growth produces tax revenues.

"revenues as a share of the economy are now expected to rise this year to 18.3%, slightly above the modern historical average of 18.2%."

Right, but since the historical average of expenditures is 20.2%, what the WSJ is advocating is a structural budget deficit of 2% of GDP. Which, I dunno, maybe that's all right, but they really ought to bring it up.

There are three kinds of lies, man . . .
Desperate times call for desperate measures...

OK, I hope these communities aren't desperate, and I have a good example of a university coming through for its town, if not as a primary employer, at least a good one.

Daktronics. It's based in Brookings, South Dakota because the founders (a couple of SU professors) wanted to give their engineering students a chance to stay in their great state.

At least that's the story they gave me when I wrote a piece on them for Ernst & Young a few years back.

The company is doing well and it's in Brookings because of the University.

I'm a grad of both Mansfield State (traditional teacher ed school--BM in music ed) and Penn State (ph.d).

Both provide good solid, jobs, particularly for unskilled or semi-skilled individuals (janitors, beat cops, secretaries, etc. etc). In particular, with Mansfield growing into a university and with enrollment at historic highs, it has kept the larger area from sliding into the economic dustbin.

Mansfield has also been good at reaching out the larger region, offering undergraduate and masters degrees to human service professionals in the region. Since MU is about 2 hours from Penn State, it's a great deal (particularly in winter--who wants to drive over snow covered mountain roads in early February??).

Mansfield continues its traditional focus on serving working class students, while expanding offerings to professionals in the area. It's done a nice job helping the region while helping itself.
Two comments:

On Ann Arbor, I'd like to second the comment about the auto industry, and to add that U/M also has a *huge* health system. It probably employs more people than the university.

On the matter of taxes, I'd like to point out that the citre by Steven Horwitz is of the *editorial page*, as opposed to the news part of the paper (otherwise known as the 'sane' part). The news part of the paper doesn't agree with the editorial page. See http://blogs.wsj.com/washwire/2006/07/11/do-tax-cuts-pay-for-themselves/ for an analysis.
The US has essentially a flat tax over income groups, not a progressive one, if you include all taxes. It's actually a slight U-curve, as you can see from this 2003 graph from the New York Times at http://www.discourse.net/archives/pix/flat-tax.html

As the graph demonstrates, it's important to consider all taxes when deciding whether the tax system is progressive or regressive. The one table in the tax code with marginal tax rates is a tiny fraction of the thousands of pages of federal and state tax codes, so it's hardly the whole story.
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