Higher (economics) Education, the “Bowen Rule,” and a challenge to conventional wisdom

In a new study of the economic impact of increased government appropriations for Higher Education, two writers at the Center for College Affordability and Productivity (CCAP) have pressed through a challenging sieve of analysis widespread assumptions about the positive impact of such spending on economic growth. 

In “Oklahoma Higher Education: Challenging the Conventional Wisdom,” Matthew Denhart and Christopher Matgouranis deliver on the provocative title. The Oklahoma Council of Public Affairs (OCPA) released the study last week. 

From the opening page of their analysis, the pair engage the statistically-inclined reader, albeit with language accessible to non-specialists. 

The two men write, “Howard Bowen defined the ‘revenue theory of cost’ to explain the spending pattern of universities. The theory explains that universities tend to spend all of the financial resources available to them. Rather than budgeting based on a strategy of cutting costs, universities instead focus on augmenting revenues to the highest degree possible, and then spending all those resources. Thus, further increasing universities’ revenues will simply lead to higher costs and will fuel a cycle that absorbs more and more resources.

“Revenue and expense data for Oklahoma’s public universities during the past half-decade suggest that the ‘Bowen Rule’ is at work in the Sooner State. All postsecondary institutions in the United States that receive federal support are required to report financial data to the U.S. Department of Education.”

From examination of that data (the agency’s Integrated Postsecondary Education Data System), the writers observe, “Consistent with the Bowen Rule, over the period from 2003-04 to 2008-09 both revenues and expenses at Oklahoma universities increased. This holds true even after accounting for growths in student enrollment and inflation.” 

Over those years, inflation-adjusted revenues jumped 21 percent, from $20,499 to $24,806 per full-time-equivalent (FTE) student. 

They note, “At only three of the state’s fifteen public four-year institutions did total revenues fail to grow over this period, and several schools saw revenue growth outpace the state average.” The largest increases in revenues were at the University of Central Oklahoma in Edmond, the University of Science and Arts of Oklahoma in Chickasha, and East Central University in Ada. 

Statewide, weighted expenses per FTE went, on average, from $18,694 in 2003-04, to $23,442 in 2208-09 – an increase of 25.4%.
The most provocative, if readable, conclusions of the pair may be those aimed directly at the alleged nexus between higher education spending and economic growth. 

They write, “taxpayers and state legislators often assume that by appropriating more money to higher education they are making education more afford- able to the state’s citizens. This spending then is seen as an investment in human capital that will pay large dividends in the form of future economic growth. Yet, as we demonstrate …, this argument is not supported by the empirical evidence.”

They are not picking on Sooner State spending, as such, for as they report, “Statistical evidence from all 50 states suggests that there is not a positive relationship between state appropriations and educational attainment.” 

They conclude one sequence with understated comments on “an interesting disconnect between economic theory and reality.” Specifically, “According to our results, appropriations increases have a statistically significant negative effect on attainment levels.”

Compelling to the researchers are problems of inefficient spending, questionable educational quality, and outward migration of college graduates. 

In this regard, this data (summarized in a CapitolBeatOK Staff Report on Friday, June 10) drive many of the authors’ conclusions:

“In 2009, only 4 percent of students graduated from Rogers State University in Claremore within four years and only 14 percent graduated within six years. Cameron University in Lawton wasn’t much better, graduating 6 percent of students in four years and 20 percent in six years. 

“The University of Oklahoma and Oklahoma State University graduated just 29 percent and 31 percent in four years and 63 percent and 60 percent in six years, respectively.

“In all, less than 20 percent of Oklahoma college students graduate within four years. At the same time, the study found Oklahoma graduates leave the state at a shocking rate. Between 1994 and 2008, the state experienced a net loss of more than 145,000 college graduates, nearly 10,000 each year.”

In their conclusion, Denhart and Matgouranis write, “What has been occurring is a confirmation of the Bowen Rule — universities bring in as much money as possible and accordingly spend as much as possible. This practice often comes at the expense of students and state taxpayers, and fails to deliver a significant return on investment.”

While some analysts may reach different conclusions, the writers bolster their contentions with regression analyses, nuanced conclusions and other weapons of the economists’ trade. 

In a foreward to the Denhart-Matgouranis study, Richard Vedder, an economist at Ohio University and an adjunct scholar at the American Enterprise Institute, reflected, “It is important that public policy debates rely on empirical evidence rather than on just common assumptions.” 

Vedder cautioned that the data summarized by the two researchers “does not necessarily mean that universities do not promote economic growth at all, or that growth would be greater in a world totally absent of higher education. But the evidence does show that, at the margin, appropriating additional dollars to higher education does not deliver increased economic prosperity.”