Thursday, November 1, 2012

Education's Return on Investment

In this era of austerity, it must be remembered that expenditures by the state are not unilaterally expenses. Funds dispensed by the state are also investments, which yield a measurable return on investment. According to the OECD's Education at a Glance 2012 report, education-related expenses grant massive returns on investment at both public and private levels. The OECD reports that the Net Present Value of public and private premium for completing secondary and tertiary education is $388,300 for men and $250,700 for women across the 28 OECD member nations. The net public return for tertiary education is two to three times public investment level. 

Unfortunately, this is not the way that this issue has progressed. Education expenditures have recently become and issue for the wrong reasons in several places, such as the UK, Quebec and the Netherlands. 

A Question of Externalities
Another interesting aspect of the OECD report is the discussion over public and private returns to educational expenditures. Private returns on education are comprised by a measurable earnings gap as well as an unemployment gap. Public returns on education include tax revenue, an unemployment gap, and social contribution effects (which are housing benefits and social assistance that does not have to be paid by the taxpayer). In addition, higher education rates are directly causally linked to increased economic growth.

While costs are borne mostly by the individual, benefits are divided between the individual and the public. The combination of (partially) public gains and (mostly) private financing can cause a  costs-benefits mismatch which might lead to lower-than-optimal investment in education under laissez-faire, despite high returns, public benefits, and economic growth effects which education causes. 

While education is 31% privately financed in the UK, it is 97% publicly financed in Finland. In 2009, the US spent 2.6% of its GDP on tertiary education. More than half of this figure was comprised by private expenditures. 

What Should Be Done?
Expenditures of the state should be evaluated taking potential Return on Investment into consideration. For policy markers, this should mean that GDP growth, revenue growth, and growth levels in other relevant measurable metrics should be considered.  

The debate then shifts from asking "Can we afford to spend more on education?" to "How can we best spend on education in order to maximize future revenue growth?" and "How can educational expenditures help reducing other social costs, such as unemployment, housing subsidy, incarceration, and healthcare costs?"
Max Berre is an economist at the EDHEC-Risk Institute (Ecole Des Hautes Etudes Commerciales du Nord) who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands.

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