The Roles of Public Higher Education Expenditure and the Privatization of the Higher Education on U.S. States Economic Growth

Previous empirical literature finds that government expenditure on higher education has a negative, or null, effect on U.S. economic growth rates. This empirical result may be driven by omission of an important variable—the privatization of higher education. Using state-level panel data from 1970 to 2005, this analysis investigates whether the exclusion of the privatization level of the higher education system within a state potentially biases the estimated relationship between state higher education spending and economic growth. The results indicate that the omission of the size of the private higher education system may negatively bias the estimated relationship between higher education spending and economic growth. Specifically, states with a large market share of students in private higher education institutions have a negative relationship between higher education spending and economic growth, while states with large public shares are found to have a positive relationship.