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The Impact of the State Higher Education System
on the Texas Economy

December 2000

Executive Summary
I. Introduction
II. Economic Impact of Out-of-State Expenditures
III. Impact on Higher Earnings
IV. Impact on Economic Productivity

Higher education has a significant impact on the Texas economy, fueling the Texas economic engine with nearly $25 billion a year. Considering that the system receives approximately $4.6 billion annually in state general revenue and local property taxes, every dollar invested in the state’s higher education system returns more than $5 for the Texas economy. This is a remarkable return, even for a high-stakes technology startup. But when it comes to the Texas higher education system, the stakes are much higher. For here, we are investing in our most important venture—the future of young Texans.

Every dollar invested in our state‘s higher education system pumps more than five dollars into our Texas economy. It is a remarkable return on our money for Texans today and a vital stake in the future for successful generations of Texans tomorrow.

— Carole Keeton Rylander

Even with this vital role, state higher education funding is losing ground to other services. After adjusting for inflation, spending on public safety and corrections increased 256 percent in the last 15 years, while real higher education expenditures grew only 31 percent during the same period.

This report investigates the economic impact of higher education through two broad avenues. The first and most immediate impact is the additional sales, income, and employment created by outside dollars being injected into the Texas economy. The second, which is fundamentally more important, is the longer-term role higher education plays in expanding the capacity of the state’s economy through a more educated, productive workforce.

Our study shows that $2.1 billion in annual student, research, and health care-related higher education expenditures from out-of-state sources is spent and re-spent by Texas businesses and consumers each year to total $6.8 billion economic output (see Summary Table 1). This gain could grow even more. If the currently unallocated $33 million in federal indirect cost recoveries were re-directed to public universities for research purposes, the overall state economy would gain another $110 million per year.

While the first, more immediate, economic impact of higher education helps provide jobs and pay the bills, the second effect is more important over the longer term. As higher education raises the skill level of the workforce, employees work smarter. This increases the overall capacity of the economy to produce more with the same number of employees—meaning that there is a larger economic pie to share with everyone.

In order to measure the second, “supply-side” impact, this report uses two approaches. First, based on the estimated lifetime earnings of our graduates, we estimate that the Texas higher education system increases the economic output of the state by $17.3 billion a year. Second, by utilizing a National Bureau of Economic Research statistical relationship between firm-level worker education and economic output, we estimate that each year of knowledge added by the higher education system increases Texas worker productivity by $18.4 billion over the workers’ lifetime in the state labor force.

Considering both the earnings and productivity-based approaches, the Texas higher education system expands the productive capacity of the Texas economy an average of $17.8 billion a year. Adding the “supply-side” gain to the $6.8 billion impact from out-of-state expenditures brings the total impact of the state higher education system on the Texas economy to $24.7 billion a year.

Higher education’s contribution to the Texas economy is substantial compared to other industries. In fact, the sum of three years of higher education’s economic impact surpasses Texas’ $64 billion oil and gas industry or $65 billion high technology business.

Even that does not tell the whole story. Because it is so difficult to measure, this analysis cannot account for the many other offshoots of higher education, including inventions, patents, and the general advancement of knowledge—which has played such a substantial role in the success of the US economy. Also, although higher education’s role is generally accepted, this study does not account for its function in attracting firms and workers from other states, research and development spin-offs, and the other economic development in Texas.