What Happens if a State Raises Education Spending?

For many years, we have questioned whether increased expenditures on schools mattered. Money does matter. New research confirms it. This new research comes as states like Michigan pass legislation to increase funding to schools, and Arizona considers Governor Ducey’s proposal to use proceeds from the State Land Trust to increase funding of Arizona’s schools.

It is reasonable that there have been doubts about the impact of money on education quality. Resources can be spent on infrastructure, administration, and other non-instructional expenses. Many doubt that these non-instructional expenditures improve learning outcomes and the quality of education. New research addresses those doubts and makes the case for the impact of money on a state’s educational quality and state GDP. The research comes from the National Bureau of Economic Research (NBER). It includes two recent studies, Human Capital Quality and Aggregate Income Differences (Human Capital), released this week and The Effects of School Spending on Educational and Economic Outcomes (Spending and Outcomes), released a few months ago.

The most recent study on Human Capital attributes up to one-third of variation in state GDP to the quality of a state’s human capital. It demonstrates this result over a four-decade period. The study makes the case for state investment in attracting a highly skilled workforce and growing that workforce with investments in the quality of the state’s educational system. The authors conclude, “The importance of human capital, and particularly cognitive skills, provides support for policies of various states that are aimed at improving the quality of schools.” The research supports the recent actions of Michigan and the plans of Arizona.

The Spending and Outcomes study from NBER links increased funding of education to important, desirable outcomes, including higher graduation rates, lower subsequent adulthood poverty and increased wages. It shows the greatest effect of a state’s investment for low-income children who are often educated in the poorest of a state’s school districts. The study examined how a district spends additional resources. School districts could spend more on support services, physical capital, and instruction. In considering instruction, the study looked at student-to-teacher ratios, student-to-guidance counselor ratios, teacher salaries and length of the school year.

The study found that about 80% of the marginal increase in funding was spent on instruction with more of the increased funding going to instruction than any other area of the budget. It concluded that the positive results for a state’s increased spending are primarily driven by reductions in class size, increases in instructional time (e.g., longer year or elimination of 4-day school weeks), and increases in teacher salaries that result in attracting and retaining more highly qualified teachers.

For states that raise funding of schools, then, there are very positive outcomes. In addition to the demonstrated impacts on high school graduation rate and increased state GDP, there are other benefits that can be derived from the outcomes. Companies depend upon the quality of the human capital in the labor force, and a better-educated citizenry raises the state’s economic development potential. With lower poverty, there is likely to be depressed demand on services like Medicaid for the poor. Prison populations may well drop, thereby decreasing the need for more funding. With higher wages of citizens and higher state GDP, there is likely to be more tax revenue without pressure to raise tax rates or search for new forms of taxation.

These two studies from NBER make the case for increased state expenditures on education.   The research demonstrates that the expenditure on education is an investment with substantial positive outcomes. That is what happens when a state raises funding for its educational system.