Economic Development

http://edq.sagepub.com/
Quarterly

Education Spending and State Economic Growth: Are All Dollars Created Equal?
John Deskins, Brian Hill and Laura Ullrich
Economic Development Quarterly 2010 24: 45 originally published online 14 October 2009
DOI: 10.1177/0891242409347370

The online version of this article can be found at:

http://edq.sagepub.com/content/24/1/45

Published by:

http://www.sagepublications.com

Additional services and information for Economic Development Quarterly can be found at:

Email Alerts: http://edq.sagepub.com/cgi/alerts

Subscriptions: http://edq.sagepub.com/subscriptions

Reprints: http://www.sagepub.com/journalsReprints.nav

Permissions: http://www.sagepub.com/journalsPermissions.nav

Citations: http://edq.sagepub.com/content/24/1/45.refs.html

Downloaded from edq.sagepub.com at Airlangga University on March 15, 2011

Research and Practice
Economic Development Quarterly

Education Spending and State Economic 24(1) 45­–59

© The Author(s) 2010
Reprints and permission: http://www.
Growth: Are All Dollars Created Equal? sagepub.com/journalsPermissions.nav
DOI: 10.1177/0891242409347370
http://edq.sagepub.com

John Deskins,1 Brian Hill,2 and Laura Ullrich3

Abstract
This article contributes to the literature on the effect of state and local education spending on U.S. state economic growth
by separately analyzing higher and K-12 education spending and by taking into account the possibility that education spending
may generate spillover effects to neighboring states. Results from a series of fixed-effects regressions using a 1992-2002 panel
of state-level data indicate that increased spending on higher education generally exhibits a relatively large negative effect on
private sector employment or gross state product growth when the increase in education spending is financed through own-
source revenue. Results do not identify a statistically significant relationship between K-12 education spending and economic
growth. This finding is an important clarification in the literature because an analysis of combined higher and K-12 education
spending yields an overall negative effect. Results do not provide consistent evidence of cross-state spillover effects associated
with either form of education spending.

Keywords
industrial location, industry, government policy (parks, schools), quality of life, industrial location, industry, public finance, state
and local economic development policy, university role in economic development, economic development incentives/tools

A sizeable body of research has examined the effect of public
education spending on state economic activity (see Fisher,
1997, for a broad review). Education spending is often viewed
as a way to promote economic development by enhancing the
human capital stock that is crucial for productivity growth and
economic prosperity. Especially among U.S. states, increases
in education expenditures are often under consideration
because policy makers may view this as a way to provide a
more attractive workforce in order to attract more business
activity to a region. However, increased education expendi-
tures also have the potential to reduce economic activity if
accompanied by increases in taxes, which may reduce eco-
nomic activity, or by reductions in other areas of government
spending, which may positively affect economic activity.
In this study, we revisit this line of inquiry with an analy-
sis of the effect of education spending on state economic
growth by estimating several econometric models using a
panel of U.S. state-level data for the years 1992 through
2002. We contribute to the literature in two important ways.
First is through the recognition that government spending on
K-12 education and spending on college education may have
different impacts on economic growth. As described in
Blankenau (2005), governments have two decisions to
make. First, they must decide the level of government
spending on education, and second, they must decide how to
allocate the spending between K-12 education and college
education. According to the National Center for Education
Statistics (NCES), around 5% of gross domestic product
(GDP) is spent on public education.1 On average, 60% of
state education expenditures are directed toward K-12 edu-
cation whereas the remaining 40% is spent on public higher
education, and there is significant variation in this break-
down across U.S. states. Distinguishing between K-12
spending and higher education spending has typically been
neglected in the empirical literature: Many empirical studies
ignore potentially differing effects of spending on K-12 and
higher education and simply aggregate the two types of
spending (Blankenau & Simpson, 2004; Cassou & Lansing,
2004; Glomm & Ravikumar, 1992, 1997). Other empirical
studies only consider state public education spending on
K-12 education (Fernandez & Rogerson, 1999; Rangazas,
2000). A couple of studies have been identified that separate
K-12 and higher education spending, but only from a theo-
retical standpoint (Blankenau & Cassou, 2007; Su, 2004).
1
Creighton University, Omaha, NE, USA
2
Salisbury University, Salisbury, MD, USA
3
Winthrop University, Rock Hill, SC, USA
Corresponding Author:
John Deskins, Economics and Finance Department, Creighton University,
2500 California Plaza, Omaha, NE 68178, USA
Email: johndeskins@creighton.edu

Downloaded from edq.sagepub.com at Airlangga University on March 15, 2011

46 Economic Development Quarterly 24(1)
Taylor and Brown (2006) is the only study that has been
identified that separately considers higher and K-12 educa-
tion spending in an empirical analysis, but the distinction is
a minor part of the analysis, which has a different primary
focus.
Our second important contribution is that we consider the
possibility that education spending may generate cross-state
spillover effects. If an increase of education spending (on
either K-12 or higher education) increases the human capital
of a state, the state may become more attractive to businesses;
thus, more business activity may locate in the state, and this
could reduce economic activity in surrounding states. No
other studies have been identified that examine this possibil-
ity. Failure to account for the possibility of interstate spillover
effects could lead to a biased estimate of the overall impact of
education spending on state economic growth.
We also contribute to the literature by (a) providing a
comparison of results when education spending is measured
in per capita terms versus relative to state personal income
(SPI) and (b) comparing the effect of education spending on
alternate measures of economic growth. Existing research
has considered both measures of education spending and
alternate measures of economic growth, but any one study
typically only considers one measure of each. Verifying that
results are not sensitive to the selection of economic growth
or education spending measurement provides for greater
confidence in our results, especially because variation in
econometric specifications along these dimensions in earlier
research has potentially contributed to some of the differ-
ences found in earlier results.
The analysis proceeds as follows: the next section pro-
vides a review of the relevant literature. The following
section details the empirical strategy and the data that are
used. Next is a discussion of the results, and the final section
offers a conclusion. Results indicate that increased spending
on higher education has a negative effect on private sector
gross state product (GSP) or employment growth when
financed through own-source revenue. However, results do
not identify a statistically significant relationship between
economic growth and K-12 spending. Furthermore, results
do not provide consistent evidence of cross-state spillover
effects associated with either higher or K-12 education
spending. These results are robust to (a) the use of either
private sector GSP growth or private sector employment
growth as economic growth measures, (b) different methods
to capture spatial relationships among states in terms of edu-
cation spending, and (c) the measurement of state education
spending as a share of SPI as well as in per capita terms.
Existing Literature
There is a sizeable literature related to the effect of education
spending on economic growth. Fisher’s (1997) review on
Downloaded from edq.sagepub.com at Airlangga University on March 15, 2011
this literature concludes that, among all expenditure catego-
ries that have been considered, the evidence of a relationship
between education spending and economic growth is the
weakest. Fisher summarizes the results of 19 studies con-
ducted between 1985 and 1995 that analyze the effects of
education spending on state economic activity. Of the 19
studies, 12 show a positive relationship between education
spending and economic growth, but only 6 of these are posi-
tive and significant. Some of these studies examine only
K-12 or higher education spending whereas others examine
combined K-12 and higher education spending. The results
are also sensitive to which growth variable is used (e.g.,
employment, GSP, and others). In addition, many of the
early studies fail to control for the general equilibrium effects
associated with an increase in public education revenues.
More specifically, researchers often fail to control for all ele-
ments of the state budget, even though a change in education
spending necessarily corresponds to some other change in
the government budget (see Helms, 1985, and Mofidi &
Stone, 1990, for examples of studies that do properly control
for all budgetary elements). The wide variation in early sta-
tistical results and the availability of stronger econometric
techniques have led researchers to conduct several additional
studies since 1995, which we review below.2
Blankenau and Simpson (2004) provide a theoretical anal-
ysis of the relationship between education spending and
economic growth using an endogenous growth model. They
conclude that the mixed empirical results seen in the literature
previously are due to general equilibrium effects. Specifically,
they find that any positive effect of education expenditures
on growth can be eliminated when other growth determi-
nants are negatively affected by general equilibrium effects.
For example, most education spending increases are funded
through increases in tax rates. If the increase in tax rates
decreases economic growth at a rate higher than the increase
rate associated with the rise in education expenditures, then
a negative relationship may be observed. Because of the
complicated nature of these general equilibrium effects,
Blankenau and Simpson conclude that there is no current
empirical evidence that a positive link between education
expenditures and economic growth exists.
Bensi, Black, and Dowd (2004) use bivariate regression
to examine the relationship between state-level-per-pupil
expenditures and real personal income. They conclude that
when growth and expenditure data are calculated relative to
the U.S. average, there is a positive relationship between
education expenditures and real growth. Fisher and Ditsler
(2003) recognize the complicated general equilibrium effects
that are associated with increases in education spending.
Contrary to Bensi et al., Fisher and Ditsler deduce that if tax
cuts lead to decreases in education spending and are accom-
panied by program cuts, then the effect on economic growth
may be negative.
Deskins et al.
In a commissioned report for the National Education
Association, Hungerford and Wassmer (2003) conclude that
if states must choose between cutting education expenditures
to avoid a tax increase or raising revenue through additional
taxes, the state would be better served to increase tax reve-
nue. Specifically, they find that cutting statewide education
spending by $1 per $1,000 of a state’s personal income
would reduce personal income by about 0.3% in the short
run and 3.2% in the long run. They also find negative and
significant effects associated with decreases in state educa-
tion spending on the state’s manufacturing investment,
employment, and small-business starts. Similarly, Harden
and Hoyt (2003) study the impact of cutting school expendi-
tures on state employment levels. They use statewide data
from 1980 through 1994 to jointly estimate employment and
revenue within a balanced budget framework. They find that
cutting K-12 education expenditures is more detrimental to
long-run statewide employment levels than is an equivalent
decrease in other state expenditure programs including high-
ways and hospitals.
Early research on the relationship between education
spending and growth tends to find a positive relationship
between the two. Later research, however, shows a less stable
relationship, with many analyses showing a negative rela-
tionship, especially if the author(s) is careful to specify the
structure of the analysis such that an increase in education
spending is achieved via an increase in taxes. These differ-
ences may partially be accounted for by considering the
more sophisticated econometric techniques employed in the
more recent studies.
In a study focused on the economic impact of higher educa-
tion spending on economic growth, Vedder (2004) finds that
increased state-level spending on higher education decreases
economic growth. He concludes that this is likely due to
the low level of higher education dollars spent on actual
instruction (around $0.21 of every $1.00, according to his
calculation). He points out that many increases in higher edu-
cation funding have been put toward noninstructional pursuits
such as fancier facilities and the subsidization of college ath-
letics. Vedder concludes that higher education funding is
inefficient because these institutions generally have little
incentive to cut costs. In addition, he finds that some previous
studies are flawed in that they assume that the difference in
productivity between high school graduates and college grad-
uates is entirely due to their level of education rather than
other factors such as intelligence and motivation.
Taylor and Brown (2006) investigate the possibility that
the differing results may additionally be due to the differing
economic conditions that prevailed during the time of analy-
sis. The early papers typically use data from a period of slow
growth in government expenditures (late 1970s to late
1980s). According to Taylor and Brown, the different results
found in later papers may be due to the rapid growth in
Downloaded from edq.sagepub.com at Airlangga University on March 15, 2011
47
government expenditures (at the combined state and local
level) that began in the late 1980s. They hypothesize that the
existing level of government expenditure growth has a sig-
nificant impact on the effect of an increase in government
spending. More specifically, they conclude that increases in
government spending will have a muted effect on growth in
an economy with high existing levels of government expen-
diture growth. Therefore, they expect government spending
in the mid- to late 1990s, during which government expendi-
tures were moderated, to lead to more positive impacts on
economic activity relative to a period of rapid spending
growth. Although school expenditures are only a small part
of Taylor and Brown’s large study, higher education and
K-12 education expenditures are included as explanatory
variables. Their results show, using 10-year rolling windows,
that an increase in K-12 education expenditures in the early
years of the analysis (1979-1992) led to a decrease in pri-
vately held capital. Past that point in the data, an increase in
K-12 education spending increased (or at least did not affect)
private capital. Although they do not find substantial evi-
dence that the level of government spending affected the
impact of subsequent education spending, they do find sig-
nificant results regarding several other spending categories
(including welfare, transportation, and public safety).
As mentioned previously, very few studies in the literature
examine the differential impact of K-12 education spending
and spending on higher education. These expenditure catego-
ries are most frequently lumped together or spending on
public higher education may be ignored all together. Two
studies, however, thoroughly examine the effect of both
K-12 and higher education from a theoretical perspective. Su
(2004) points out that K-12 education is a prerequisite for
attending an institute of higher education, and therefore, the
state’s primary focus should be providing a sufficient level
of K-12 public education. Once a sufficient level of primary
and secondary education is achieved, states may then shift a
portion of their focus toward providing higher education
using public funds. Furthermore, he concludes that a less-
developed economy should focus only on K-12 education for
a “sufficiently long duration.” Su points out that many econ-
omies prematurely invest in public higher education or
overinvest in higher education, before that sufficient dura-
tion has been reached. Based on Su’s theoretical results, an
increase in higher education spending when spending on
K-12 education is below the sufficient level will result in a
decrease in educational efficiency. It may also result in a
decrease in educational equality because state-level K-12
spending generally redistributes from rich to poor and
higher education spending generally benefits the rich more
than the poor.
Blankenau and Cassou (2007) analyze K-12 versus higher
education from a different perspective by examining the dif-
fering mechanisms of K-12 and higher education provision.
48 Economic Development Quarterly 24(1)
An important differentiation between K-12 education and
higher education is made by examining the nature of educa-
tion funds in these markets. K-12 expenditures are provided
entirely by government. Higher education expenditures, how-
ever, come from both public and private sources. According
to the NCES around 40% of all higher education funds are
publicly provided, whereas the rest come from private dona-
tions and tuition and fees. Blankenau and Cassou deduce
from their model that when total education expenditures are
low (K-12 and higher education combined), voters prefer for
all funds to be spent on K-12 education. However, when edu-
cation expenditures pass some threshold, voters prefer some
education funding to be directed toward public higher educa-
tion. This may partially explain the propensity of state
legislatures to cut higher education spending more com-
monly than K-12 education spending, given the preferences
of their constituents.
Although the Su (2004) and Blankenau and Cassou (2007)
articles examine the differences in spending on K-12 and
higher education at the state level, they do not investigate to
what extent, if any, these expenditures increase economic
growth within the jurisdiction or whether one source of edu-
cation spending may be more stimulative than the other. Our
examination improves on the current literature by investigat-
ing these issues. We also further the analysis by examining
any spillover effects that may occur from increased spending
in neighboring states.
Empirical Design and Data
In this study, we quantify the effect of public education spend-
ing on state economic growth through the estimation of a series
of regression models of state economic growth on state educa-
tion spending and a number of appropriate control variables.
Our primary regression model is summarized as follows:
Economic Growthi,t+1 = β0 + β1 Higher Education Spendingi,t
+ β2 K-12 Spendingi,t + β3 Neighboring Higher Education
Spendingi,t + β4 Neighboring K-12 Spendingi,t
+ β5 Total Federal Transfersi,t + β6 Noneducation
Government Spendingi,t + β7 Total Budget
Surplusi,t + β8Xi,t + β9Si + β10Tt + εit,
where i and t are state and year indices, respectively, ε is a
random error term, and X represents a vector of other
controls, which are discussed below. All regressions include
state- and year-fixed effects, as denoted by Si and Tt,
respectively, to control for state- and time-specific factors
that are not included in the model. All models are estimated
using a panel of state-level data from the 48 contiguous U.S.
states for the years 1992 through 2000, and also for 2002,
resulting in 480 observations.3 All variables that are measured
in dollar terms are adjusted for inflation to the 2004 price
Downloaded from edq.sagepub.com at Airlangga University on March 15, 2011
level using the consumer price index. Appendix A presents
summary statistics for all variables for the first and last years
of the data set and Appendix B provides variable descriptions
and source notes.
Economic Growth Measures
As illustrated above, we examine economic growth from
time t to time t + 1 rather than the level of economic activity.4
We choose this approach because policy makers often target
economic growth rates rather than changes in the level of
economic activity. This approach is also useful in that by
specifying our dependent variable in this fashion we avoid
the familiar problem of endogenity of education spending
with respect to economic activity. Economic activity is mea-
sured as nongovernment GSP as well as total private sector
employment in the state.5 Existing research has used both of
these measures of economic activity, but any one study typi-
cally only considers one measure; we consider both to
provide for greater robustness.
Education Spending Measures
Education spending is our variable of interest. In our primary
models, we separately consider spending on higher education
and spending on K-12 education. In all models, we combine
state government expenditures with all local government
expenditures within a state, which we view as especially
appropriate in the context of education spending. We measure
education spending both in per capita terms as well as relative
to SPI. As with our measures of economic growth discussed
above, the existing literature considers both of these measures
of education spending, but usually in isolation. We examine
both measures to allow for greater degree of robustness.
Statistics for both higher and K-12 education spending, mea-
sured both in per capita and SPI share terms, are presented in
Table 1 by state and for the first and last years of our data set.
As illustrated, there is a significant amount of variation in
these figures both among states and across time.
Spatial Considerations
One of our contributions is our consideration of the effect of
education spending in neighboring states on a state’s eco-
nomic growth. Education spending may have a direct effect
on a state’s own economic activity but there is also evidence
that education spending may create interjurisdictional spill-
overs (Case, Rosen, & Hines, 1993).6 As discussed in Case
et al., spillovers may result from residents in one state receiv-
ing an education in that state but moving later in life and
potentially benefiting their new state. Another spillover
occurs if educated workers from neighboring states compete
with each other for jobs. Yardstick competition may also
Deskins et al. 49

Table 1. Higher Education and K-12 Education Spending Across States—1992 and 2002

Education Education
Spending Per Capita Spending/SPI (%)

1992 2002 1992 2002

Higher education spending

Alabama 4.69 6.38 1.99 2.48
Arizona 5.15 4.22 2.11 1.97
Arkansas 4.32 5.59 1.95 2.33
California 4.84 6.11 1.58 1.81
Colorado 5.68 6.67 1.96 1.93
Connecticut 3.16 4.73 0.82 1.07
Delaware 7.61 8.21 2.44 2.43
Florida 3.07 3.65 1.10 1.22
Georgia 3.13 4.79 1.20 1.62
Idaho 4.61 5.43 1.98 2.13
Illinois 3.89 5.44 1.26 1.58
Indiana 5.23 6.18 2.01 2.13
Iowa 6.02 8.35 2.35 2.91
Kansas 6.54 6.86 2.43 2.30
Kentucky 4.28 6.18 1.83 2.37
Louisiana 3.92 4.91 1.71 1.91
Maine 3.89 4.55 1.57 1.63
Maryland 4.69 6.82 1.43 1.87
Massachusetts 2.92 4.12 0.87 1.01
Michigan 5.61 7.64 2.05 2.45
Minnesota 4.98 6.18 1.70 1.79
Mississippi 4.41 6.75 2.22 2.96
Missouri 3.35 4.91 1.27 1.66
Montana 4.06 5.87 1.76 2.34
Nebraska 5.82 7.26 2.19 2.41
Nevada 3.82 3.93 1.25 1.29
New Hampshire 3.32 4.63 1.11 1.30
New Jersey 3.76 4.94 1.05 1.23
New Mexico 6.41 8.30 2.89 3.45
New York 3.79 4.39 1.12 1.17
North Carolina 5.05 6.51 1.96 2.29
North Dakota 7.86 8.47 3.29 3.11
Ohio 4.36 5.38 1.60 1.78
Oklahoma 4.57 6.71 1.93 2.57
Oregon 5.33 7.59 2.02 2.59
Pennsylvania 4.50 4.93 1.55 1.53
Rhode Island 3.89 4.72 1.36 1.50
South Carolina 4.72 5.46 2.04 2.11
South Dakota 3.50 5.01 1.44 1.79
Tennessee 4.06 5.37 1.60 1.91
Texas 4.38 6.03 1.70 2.05
Utah 6.52 9.69 2.95 3.88
Vermont 6.36 7.31 2.44 2.44
Virginia 4.41 6.00 1.49 1.78
Washington 5.31 6.91 1.80 2.08
West Virginia 4.12 5.84 1.89 2.43
Wisconsin 5.26 7.18 1.96 2.35
Wyoming 7.12 7.60 2.70 2.48
K-12 education spending
Alabama 7.90 11.94 3.35 4.64
Arizona 11.18 11.13 4.57 4.20
Arkansas 9.39 11.47 4.23 4.79
(continued)

Downloaded from edq.sagepub.com at Airlangga University on March 15, 2011

50 Economic Development Quarterly 24(1)

Table 1. (continued)

Education Education
Spending Per Capita Spending/SPI (%)

1992 2002 1992 2002

California 11.68 15.95 3.81 4.72

Colorado 12.04 13.73 4.16 3.97
Connecticut 16.02 18.13 4.15 4.10
Delaware 12.20 15.70 3.92 4.66
Florida 11.04 11.73 3.96 3.92
Georgia 10.79 15.16 4.13 5.12
Idaho 10.50 12.80 4.51 5.01
Illinois 10.82 14.99 3.52 4.35
Indiana 11.89 13.66 4.57 4.70
Iowa 11.55 13.64 4.52 4.76
Kansas 11.55 13.39 4.29 4.49
Kentucky 8.83 10.02 3.78 3.85
Louisiana 10.26 12.27 4.48 4.77
Maine 13.15 14.67 5.31 5.24
Maryland 11.86 15.70 3.61 4.30
Massachusetts 10.98 16.81 3.27 4.13
Michigan 12.88 16.75 4.71 5.37
Minnesota 13.96 16.30 4.77 4.72
Mississippi 8.65 10.82 4.36 4.75
Missouri 10.55 13.71 4.00 4.65
Montana 12.51 13.12 5.41 5.22
Nebraska 12.51 15.10 4.71 5.01
Nevada 12.08 13.45 3.94 4.41
New Hampshire 11.99 14.94 4.01 4.21
New Jersey 15.72 19.62 4.38 4.90
New Mexico 11.29 14.23 5.09 5.92
New York 16.56 21.04 4.87 5.59
North Carolina 10.80 12.15 4.18 4.26
North Dakota 10.81 12.43 4.53 4.56
Ohio 11.51 15.21 4.21 5.03
Oklahoma 10.54 13.21 4.45 5.05
Oregon 13.01 14.37 4.93 4.91
Pennsylvania 11.70 14.04 4.02 4.36
Rhode Island 12.73 15.50 4.44 4.92
South Carolina 10.71 14.76 4.62 5.69
South Dakota 11.08 13.02 4.57 4.67
Tennessee 8.17 11.17 3.21 3.97
Texas 11.98 15.50 4.64 5.26
Utah 11.16 12.94 5.06 5.18
Vermont 13.79 15.98 5.30 5.34
Virginia 11.83 15.01 3.99 4.46
Washington 14.11 14.21 4.77 4.27
West Virginia 11.73 13.18 5.39 5.53
Wisconsin 13.72 16.39 5.11 5.35
Wyoming 17.69 18.08 6.70 5.89
Note: SPI = state personal income. Spending per capita is measured in thousands. Per capita figures are adjusted for inflation to the 2004 price level.

contribute to interjurisdictional spillovers. Besley and Case
(1995) describe yardstick competition through their model
that describes how states set fiscal policy in the presence of
multiple states, where asymmetric information regarding
politicians’ decisions exists between voters and politicians.
As a result, voters make decisions about politicians’ abilities
to set taxes and expenditures in a relative way; that is, a poli-
tician’s performance is measured relative to politicians from
other states. In this world, a voter may be unhappy if her
education expenditures are not rising while other states are

Downloaded from edq.sagepub.com at Airlangga University on March 15, 2011

Deskins et al.
experiencing growth in education spending. Because voters
decide whether to vote for an incumbent based on their state’s
fiscal policies compared with other states’, incumbents may
consider other states’ fiscal policies when setting policy.
Given evidence of the interjurisdictional relationship
among states in setting education spending, it may be sug-
gested that one state’s education spending will have an
impact on economic growth in other states. To properly
account for this impact, known as spatial correlation, we
apply spatial econometric techniques to our standard panel
estimation. With spatial correlation, observations are related
by geography and their spatial relationship to one another.
Thus, an observation in one state may be influenced by
observations in a neighboring state. For our research, it
might be that an increase in education spending in one state
would affect the economic growth of a neighboring state if
interjurisdictional spillovers exist. Failing to account for this
possibility could lead to a biased estimate of the total impact
of education spending on state growth.
Before modeling the interstate spillover, we must
settle on the extent to which we believe the spillover per-
tains or, in other words, which states should be considered
neighbors. Here, we follow previous research in restrict-
ing our definition of neighboring states to geopolitical
neighbors because we view these potential spillover
effects as primarily local in nature (see, e.g., Bruce,
Deskins, Hill, & Rork, 2009; Case et al., 1993; Rork,
2003).7 Next, we assign weights to capture the relative
importance of each neighbor’s role in interstate spillovers.
We follow the common practice in the spatial literature to
use row-standardized weights, meaning the sum of our
weights equals 1. Thus, the “Neighbor’s Education Spend-
ing” variable captures the weighted average of the bordering
states’ education spending.
In our first weighting scheme, we simply assign an equal
weight to all contiguous states, referred to below as contigu-
ity weighting. Specifically, all neighboring states are assigned
an equal weight and nonbordering states are assigned a
weight of zero. For example, for Nebraska, each adjoining
state—Colorado, Iowa, Kansas, Missouri, South Dakota,
and Wyoming—would receive equal consideration whereas
all other states would receive no consideration. Thus, “Neigh-
bor’s Education Spending” is the simple average of education
spending in neighboring states under this weighting method.
We use a second weighting scheme, for added robustness, in
which we weight neighboring states by their population
(nonadjacent states still receive a weight of zero). We refer to
this approach below as population weighting. Under this
weighting scheme, again using Nebraska as an example,
Nebraska’s neighbor Missouri would receive a higher weight
in constructing the neighboring education spending variable
for Nebraska than, say, South Dakota, because Missouri’s
population is higher.
Downloaded from edq.sagepub.com at Airlangga University on March 15, 2011
51
Other Budgetary Elements
We control for all elements of the state budget to obtain an
unbiased estimate of the effect of education spending. There-
fore, we include total noneducation government expenditures,
federal transfers, and the total budget surplus. We omit one
element of the government budget to avoid perfect multicol-
linearity. The choice of which variable to omit is arbitrary. We
choose to omit total own-source revenue so that our results
can be interpreted as a change in education spending financed
through own-source revenues (because own-source revenue
is the only other budgetary element allowed to vary in our
econometric model). We feel this approach is appropriate
because the policy debate more often takes this point of view.
The K-12 education spending variable and the total non-
education government spending variable have ambiguous
theoretical effects on economic activity: Firms and individu-
als may be more likely to locate in a state with greater
expenditures due to the benefits of public education and
other public goods and services. Alternatively, recognizing
the tax costs associated with these public services, individu-
als and firms could seek to avoid higher tax burdens and
choose to locate elsewhere. However, as stated in the review
above, studies have found both positive and negative effects
of education spending on economic activity, though more
recent studies tend to find a negative relationship.
The theoretical effect of spending on higher education is
also ambiguous for the reasons just described. However, an
additional issue exists with regard to public spending on
higher education. Previous theoretical explorations have
pointed to the likely negative impact of increases in higher
education spending given the relatively low levels of spend-
ing on K-12 education across the country. As described by
Su (2004), if a certain level of K-12 spending and achieve-
ment has not been reached, spending publicly raised funds
on higher education is not Pareto improving and will be
expected to decrease economic growth.
Other Controls
The other control variables in our model are consistent with
the literature that explains the determinants of economic
activity as discussed above.8 Most of this literature models
locational decisions by constructing profit functions (or
related functions) to determine profitability and, corre-
spondingly, the decision to locate into a region. The literature
includes variables such as measures of regional market
demand, costs of producing in a particular location, and
public policies.
Because high input costs may reduce economic activity,
two measures of input costs are included: the average hourly
wage for manufacturing workers in a state and a measure of
overall energy prices in a state.9 State population and median
52 Economic Development Quarterly 24(1)
income are included to control for state size and demand.
Population density is included because a high population
concentration may influence the ability of firms to achieve
economies of scale in operation. State unemployment rates
are included to proxy for the general economic health of the
state. Measures of the intensity of the agricultural and manu-
facturing sectors (e.g., the share of a state’s GSP that is in the
agricultural and manufacturing sectors) are added to control
for the differential impacts each sector has on state econo-
mies. We also control for the age distribution of the population
as different age groups may affect economic growth dif-
ferently. Specifically, we include three variables denoting
(a) the percentage of the population that is between the ages
of 25 and 44 years, (b) the percentage of the population that is
between the ages of 45 and 64 years, and (c) the percentage
of the population older than the age of 64 years.
Results and Discussion
Results from our regression models are presented in Tables
2, 3, and 4. With the models presented in Table 2, we com-
bine higher education expenditures with K-12 education
expenditures. We present this series of models as a compari-
son to much of the earlier research on the topic because
many researchers have combined these two types of educa-
tion spending as discussed above. Here the results are
separated based on our measurement of fiscal variables in
per capita terms versus as a share of SPI and also by the GSP
versus the employment measures of economic growth.
Results from all four models indicate a negative relationship
between combined higher and K-12 education spending in a
state and economic growth, which is consistent with much of
the previous research on the topic. Furthermore, we fail to
identify a significant relationship between combined educa-
tion spending in neighboring states and a state’s own
economic growth rate. We return to results with other control
variables below.10
In Tables 3 and 4 we present results from our primary
models in which we separate higher education and K-12 edu-
cation expenditures. Results in Table 3 are for models that
explain private sector GSP growth whereas Table 4 presents
results from the models that explain private sector employ-
ment growth. Each table is divided into the models in which
fiscal variables are measured in per capita terms (Columns 1
and 2 of each table) and as a share of SPI (Columns 3 and 4).
The last division is between the models that use contiguity
weighting for the neighboring education spending variables
versus those that use population weighting.
GSP Growth Results
We begin with results for the models that explain GSP growth,
as reported in Table 3. Results from all four specifications
Downloaded from edq.sagepub.com at Airlangga University on March 15, 2011
indicate that higher education spending has a negative and
statistically significant effect on GSP growth when higher
education spending is financed through own-source revenue.
More specifically, results indicate that a $100 increase in
higher education spending per capita is associated with
roughly a 1.5 percentage-point decline in a state’s GSP
growth rate, based on our contiguity weighting method. This
translates into a large elasticity of about −2.7 based on over-
all averages for GSP growth and higher education spending
per capita (the average GSP growth rate is 2.9%; average
higher education spending per capita is $520). Similarly,
results indicate that a 1 percentage-point increase in higher
education spending as a share of SPI is associated with a 3.1
percentage-point decline in a state’s GSP growth rate (trans-
lating into an elasticity of about −1.9 based on overall
averages and our contiguity weighting method). In contrast,
however, results from all four models indicate that K-12
spending does not exhibit an effect on GSP growth that is
statistically distinguishable from zero (again when K-12
spending is financed through own-source revenues). This
likely indicates that the positive effects of K-12 education
spending on GSP growth are just offset by the negative
effects of own-source revenues. This makes for an interest-
ing contrast to our earlier finding as presented in Table 2:
The negative overall effect shown in that model was driven
by higher education spending. Results are very similar across
both specifications for our contiguity and population weight-
ing methods.
Contrary to our hypothesis, results fail to identify any sta-
tistically distinguishable effect of higher education spending
in neighboring states on own-state GSP growth in any of the
four models. A statistically significant relationship is identi-
fied between neighboring states’ K-12 education spending
and GSP growth in only one of the four models. Turning to
our other fiscal controls, results do not identify a statistically
significant relationship between noneducation spending and
GSP growth in any of the four models. This likely indicates
that, on average, the benefits of all other types of state and
local government spending roughly equal the associated tax
costs in terms of their impact on GSP growth. Furthermore,
results identify a statistically significant and positive rela-
tionship between GSP growth and the combined state and
local budget surplus in all four models.
Although not the focus of our analysis, results regarding
some of the other control variables deserve mention. First,
results indicate that state population density is positively
related to GSP growth in all four models. Also, a larger share
of GSP in either the agricultural sector or the manufacturing
sector is associated with slower GSP growth in all four
models. Results indicate that states with a larger share of the
population in the older than age 64 category exhibit higher
rates of GSP growth relative to states with larger population
shares in the younger than age 25 category in all four models.
Deskins et al. 53

Table 2. Regression Results: Economic Growth on Combined Higher and K-12 Education Spending

Per Capita Models SPI Share Models

Employment Employment
Variable GSP Growth Growth GSP Growth Growth

Combined education −0.433* (0.222) −0.147* (0.078) — —

spending per capita
Neighbor’s combined education −0.325 (0.269) −0.064 (0.095) — —
spending per capita
Federal grants per capita 2.031 (1.798) 0.714 (0.635) — —
Noneducation −0.154 (0.818) −0.343 (0.289) — —
spending per capita
Total budget surplus per capita 0.857** (0.333) 0.225* (0.118) — —
Combined education — — −1.370** (0.609) −0.464** (0.214)
spending/SPI (%)
Neighbor’s combined — — −0.756 (0.852) −0.554* (0.299)
education spending/SPI (%)
Federal grants/SPI (%) — — 0.506 (0.497) 0.184 (0.175)
Noneducation spending/SPI (%) — — 2.802 (23.219) −3.545 (8.158)
Total budget surplus/SPI (%) — — 0.229** (0.101) 0.060* (0.035)
Population (millions) 0.410 (0.442) 0.070 (0.156) 0.506 (0.429) 0.082 (0.151)
Average manufacturing wage −0.232 (0.350) −0.099 (0.123) −0.273 (0.348) −0.110 (0.122)
Median income (thousands) 0.029 (0.072) 0.090*** (0.025) −0.016 (0.074) 0.069*** (0.026)
Population density 49.449** (19.583) 28.759*** (6.911) 41.679** (19.002) 27.658*** (6.676)
Energy price −0.274 (0.342) −0.078 (0.121) −0.322 (0.342) −0.093 (0.120)
Unemployment rate (%) −0.311 (0.220) −0.184** (0.076) −0.329 (0.221) −0.193** (0.078)
Agricultural share (%) −0.878*** (0.226) −0.018 (0.080) −0.913*** (0.227) −0.029 (0.080)
Manufacturing share (%) −0.346*** (0.099) 0.009*** (0.035) −0.370*** (0.102) −0.014*** (0.036)
Age 25-44 years (%) 0.196 (0.275) 0.176* (0.097) 0.384 (0.283) 0.248** (0.099)
Age 45-64 years (%) 0.063 (0.260) 0.038 (0.092) 0.166 (0.261) 0.064 (0.092)
Age 65+ years (%) 3.235*** (0.709) 2.986*** (0.708) 3.360*** (0.707) 1.177*** (0.248)
Constant −34.169* (20.320) −22.104*** (7.171) −40.006** (19.662) −21.657*** (6.608)
R2 .341 .642 .340 .645
Note: SPI = state personal income; GSP = gross state product. Entries are fixed-effects panel regression coefficients with standard errors in parentheses.
All models include state and year fixed effects. All percentages are on a 0 to 100 scale. Education spending variables are measured in hundreds. All
other government expenditure variables are measured in thousands. All variables measured in dollars are adjusted for inflation to the 2004 price level.
*p ≤ .1. **p ≤ .05. ***p ≤ .01.

Employment Growth Results models, we are unable to identify a statistically significant

Next we turn to results from the models in which we model
employment growth, as reported in Table 4. Similar to our
GSP models, we identify a statistically significant and nega-
tive relationship between higher education spending and
state employment growth. Here, results indicate that a $100
increase in higher education spending per capita is associ-
ated with a 0.6 percentage-point decline in a state’s private
sector employment growth rate, based on our contiguity
weighting method. This translates into an elasticity of about
−1.6 based on overall averages (the overall average employ-
ment growth rate is 2.0%; average higher education spending
per capita is $520). Similarly, results indicate that a 1 per-
centage-point increase in higher education spending as a
share of SPI is associated with a 1.1 percentage-point decline
in a state’s employment growth rate, which translates into an
elasticity of about −0.9 (again based on overall averages;
also based on contiguity weighting). Also similar to the GSP
relationship between K-12 spending and employment growth.
Results are again very similar between contiguity and popu-
lation weighting schemes.
Results continue to provide only scattered evidence of a
relationship between education spending in neighboring
states and a state’s own employment growth rate. In particu-
lar, in the population weighted model with the per capita
measures of fiscal variables, we find a statistically signifi-
cant and negative relationship between higher education
spending in neighboring states and state employment growth.
We do not, however, place much importance on this result,
along with the small evidence of a cross-state spillover effect
in Table 3, given the limited nature of the finding among the
various specifications considered. Also similar to the GSP
results, results do not identify a statistically significant rela-
tionship between noneducation spending and employment
growth in any of the four models. In contrast to the GSP
growth models, results here do not identify a statistically

Downloaded from edq.sagepub.com at Airlangga University on March 15, 2011

54 Economic Development Quarterly 24(1)

Table 3. Regression Results: GSP Growth on Education Spending

Per Capita Models SPI Share Models

Variable Contiguity Weight Population Weight Contiguity Weight Population Weight

Higher education spending -1.486*** (0.429) -1.522*** (0.427) — —

per capita
K-12 education spending -0.183 (0.217) -0.213 (0.218) — —
per capita
Neighbor’s higher education -0.155 (0.685) -0.197 (0.639) — —
spending per capita
Neighbor’s K-12 education -0.326 (0.298) -0.944** (0.398) — —
spending per capita
Federal grants per capita 2.372 (1.795) 2.375 (1.787) — —
Noneducation spending -0.132 (0.810) 0.088 (0.807) — —
per capita
Total budget surplus per capita 0.764** (0.333) 0.753** (0.331) — —
Higher education — — -3.110*** (1.193) -3.221*** (1.190)
spending/SPI (%)
K-12 education — — -0.564 (0.599) -0.554 (0.597)
spending/SPI (%)
Neighbor’s higher education — — 0.680 (2.294) -1.186 (1.964)
spending/SPI (%)
Neighbor’s K-12 education — — -0.493 (0.975) -0.184 (0.863)
spending/SPI (%)
Federal grants/SPI (%) — — 0.558 (0.499) 0.573 (0.499)
Noneducation spending/SPI (%) — — -2.100 (22.874) -1.864 (22.734)
Total budget surplus/SPI (%) — — 0.216** (0.101) 0.213** (0.101)
Population (millions) 0.419 (0.438) 0.531 (0.430) 0.447 (0.437) 0.528 (0.445)
Average manufacturing wage -0.282 (0.347) -0.224 (0.346) -0.347 (0.348) -0.318 (0.347)
Median income (thousands) 0.044 (0.072) 0.040 (0.071) 0.007 (0.074) 0.011 (0.073)
Population density 39.820** (20.146) 46.956** (20.723) 40.444** (20.032) 35.076* (19.946)
Energy price -0.262 (0.340) -0.234 (0.339) -0.335 (0.343) -0.314 (0.343)
Unemployment rate (%) -0.277 (0.221) -0.309 (0.222) -0.328 (0.221) -0.313 (0.222)
Agricultural share (%) -0.899*** (0.227) -0.908*** (0.224) -0.917*** (0.230) -0.935*** (0.229)
Manufacturing share (%) -0.361*** (0.099) -0.428*** (0.104) -0.357*** (0.102) -0.365*** (0.102)
Age 25-44 years (%) 0.273 (0.274) 0.277 (0.272) 0.415 (0.283) 0.414 (0.284)
Age 45-64 years (%) 0.117 (0.258) 0.057 (0.257) 0.177 (0.260) 0.172 (0.260)
Age 65+ years (%) 2.869*** (0.714) 2.859*** (0.705) 3.140*** (0.715) 3.054*** (0.718)
Constant -27.704 (20.800) -24.018 (19.983) -38.574* (20.001) -35.704* (20.124)
R2 .355 .362 .345 .345
Note: SPI = state personal income; GSP = gross state product. Entries are fixed-effects panel regression coefficients with standard errors in parentheses.
All models include state and year fixed effects. All percentages are on a 0 to 100 scale. Education spending variables are measured in hundreds. All
other government expenditure variables are measured in thousands. All variables measured in dollars are adjusted for inflation to the 2004 price level.
*p ≤ .1. **p ≤ .05. ***p ≤ .01.

significant relationship between employment growth and the
combined state and local budget surplus in any model.
Many of the results regarding the other control variables
are robust across the GSP and employment growth specifica-
tions but there are some exceptions. One such difference is
that median income is found to exert a positive effect on
employment growth in all four models. Unsurprisingly, the
state unemployment rate exerts a negative effect on employ-
ment growth. This result is virtually universal in this
literature. Results indicate that the agricultural and manufac-
turing shares of GSP do not exhibit a statistically significant
relationship to employment growth. The last difference bet­
ween the GSP and the employment models is that states with
a larger portion of the population in the age 25 to 44 category
exhibit higher rates of employment growth (relative to states
with a larger population share in the younger than age 25
category). These results are also common in the literature
(see, e.g., Dalenberg & Partridge, 1995).
Conclusions
In this article, we examine the relationship between public
education spending and state economic growth. We con-
tribute to an already sizeable literature on the subject,
primarily by examining the potentially differing impact of
K-12 and higher education spending on economic growth

Downloaded from edq.sagepub.com at Airlangga University on March 15, 2011

Deskins et al. 55

Table 4. Regression Results: Employment Growth on Education Spending

Per Capita Models SPI Share Models

Variable Contiguity Weight Population Weight Contiguity Weight Population Weight

Higher education spending -0.636*** (0.150) -0.646*** (0.150) — —

per capita
K-12 education spending -0.040 (0.076) -0.055 (0.077) — —
per capita
Neighbor’s higher education -0.318 (0.240) -0.423** (0.224) — —
spending per capita
Neighbor’s K-12 education -0.058 (0.104) -0.079 (0.140) — —
spending per capita
Federal grants per capita 0.864 (0.628) 0.813 (0.628) — —
Noneducation spending -0.304 (0.284) -0.263 (0.283) — —
per capita
Total budget surplus per capita 0.191 (0.117) 0.190 (0.116) — —
Higher education — — -1.098*** (0.420) -1.126*** (0.419)
spending/SPI (%)
K-12 education — — -0.042 (0.211) -0.047 (0.210)
spending/SPI (%)
Neighbor’s higher education — — -0.202 (0.807) -0.729 (0.691)
spending/SPI (%)
Neighbor’s K-12 education — — -0.407 (0.343) -0.288 (0.304)
   spending/SPI (%)
Federal grants/SPI (%) — — 0.203 (0.176) 0.212 (0.176)
Noneducation spending/SPI (%) — — -6.217 (8.053) -6.639 (7.997)
Total budget surplus/SPI (%) — — 0.058 (0.036) 0.057 (0.036)
Population (millions) 0.073 (0.153) 0.127 (0.151) 0.060 (0.154) 0.089 (0.156)
Average manufacturing wage -0.104 (0.121) −0.091 (0.122) -0.136 (0.122) -0.128 (0.122)
Median income (thousands) 0.097*** (0.025) 0.099*** (0.025) 0.080*** (0.026) 0.082*** (0.026)
Population density 22.843*** (7.052) 21.032*** (7.276) 25.970*** (7.052) 23.786*** (7.017)
Energy price -0.062 (0.119) -0.053 (0.119) -0.093 (0.121) -0.083 (0.121)
Unemployment rate (%) -0.154** (0.077) -0.144* (0.078) -0.190** (0.078) -0.184** (0.078)
Agricultural share (%) -0.039 (0.080) -0.049 (0.079) -0.026 (0.081) -0.033 (0.081)
Manufacturing share (%) -0.0002 (0.035) -0.004 (0.036) -0.005 (0.035) -0.007 (0.036)
Age 25-44 years (%) 0.198** (0.096) 0.194** (0.096) 0.251*** (0.100) 0.244** (0.100)
Age 45-64 years (%) 0.051 (0.090) 0.054 (0.090) 0.064 (0.091) 0.062 (0.091)
Age 65+ years (%) 0.998*** (0.250) 0.983*** (0.248) 1.073*** (0.252) 1.041*** (0.253)
Constant -17.210** (7.281) -17.106** (7.016) -20.531*** (7.041) -19.493*** (7.079)
R2 .656 .658 .646 .647
Note: SPI = state personal income. Entries are fixed-effects panel regression coefficients with standard errors in parentheses. All models include state
and year fixed effects. All percentages are on a 0 to 100 scale. Education spending variables are measured in hundreds. All other government
expenditure variables are measured in thousands. All variables measured in dollars are adjusted for inflation to the 2004 price level.
*p ≤ .1. **p ≤ .05. ***p ≤ .01.

and also by incorporating the possibility that the effect of
education spending in one state may generate spillover
effects on economic growth in neighboring states. Failure
to account for spillover effects associated with education
spending could lead to biased estimates of the overall
effect of education spending on economic growth. In our
analysis we are careful to control for all elements of the
public budget to avoid omitted variable bias and to pro-
duce clear estimates of the effect of a change in education
spending when specifically financed through own-source
revenues.
Results from a series of fixed-effects regressions using a
panel of state-level data for the years 1992 through 2002
indicate that higher education spending negatively affects
state private sector GSP and employment growth when
financed through own-source revenues. Results do not iden-
tify a statistically significant relationship between K-12
education spending and either measure of economic growth.
This finding contrasts with results from models in which the
two types of education expenditures are aggregated. Further-
more, our analysis does not provide consistent evidence that
education spending generates a spillover effect on economic
growth in neighboring states. Our general results are robust
across several specifications.
Our finding that public spending on higher education
reduces economic growth may simply be because such

Downloaded from edq.sagepub.com at Airlangga University on March 15, 2011

56 Economic Development Quarterly 24(1)

expenditures, on balance, have exceeded efficient levels, and
therefore the marginal economic development costs associ-
ated with the taxes used to finance such expenditures
outweigh marginal benefits for economic growth of higher
education spending.
The negative impact observed may also be due to the
fact, as described in Vedder (2004), that additional state
money allocated to higher education is spent inefficiently.
There is general consensus that a state will experience eco-
nomic growth if a more educated workforce can be achieved.
This can be heard in many local, state, and national political
arenas. For example, Jennifer Granholm, the governor of
Michigan, recently stated that “our higher education system
is the jet fuel that propels our economy. If we want a
high-performance economy, we must work now to improve
the strength, depth, and adaptability of our colleges and
universities” (Michigan Office of the Governor, 2004).
This may very well be the case; however, simply increasing
state-allotted funds for higher education may not achieve
these goals and therefore may not lead to significant increases
in economic growth.
This empirical finding of a negative effect, however,
could also be related to the theoretical work of Su (2004) and
Blankenau and Cassou (2007). As discussed, Su’s basic
argument is that the public will prefer strictly K-12 educa-
tion spending until K-12 spending reaches some threshold.
Then, under several assumptions, once an economy passes
that threshold, any money spent on higher education will be
Pareto improving and should result in an increased rate of
economic growth. Our finding of a negative relationship
between economic growth and higher education spending
may lend credence to the theory that the sufficient level of
K-12 education spending was typically not reached during
our period of analysis, thus higher education spending nega-
tively affected economic growth. However, we leave further
investigation of this hypothesis to future research.

Appendix A
Summary Statistics
1992 2002

Mean SD Mean SD

Private employment growth (%) 2.410 1.335 0.523 1.049

Nongovernment gross state product growth (%) 2.749 2.492 3.014 2.040
Higher education spending per capita (hundreds) 4.756 1.184 6.077 1.343
K-12 education spending per capita (hundreds) 11.862 1.974 14.359 2.234
Neighbor’s higher education spending per capita (hundreds) 4.493 0.713 5.794 0.892
Neighbor’s K-12 education spending per capita (hundreds) 11.937 1.703 14.850 2.331
Higher education spending/SPI (%) 1.810 0.542 2.071 0.605
K-12 education spending/SPI (%) 4.427 0.637 4.775 0.522
Neighbor’s higher education spending/SPI (%) 1.636 0.353 1.879 0.409
Neighbor’s K-12 education spending/SPI (%) 4.282 0.520 4.722 0.553
Federal grants per capita (thousands) 0.976 0.240 1.370 0.335
Noneducation spending per capita (thousands) 3.334 0.767 5.094 0.861
Total budget surplus per capita (thousands) 0.179 0.261 −0.687 0.434
Federal grants/SPI (%) 3.704 1.099 4.679 1.472
Noneducation spending/SPI (%) 12.435 2.572 0.170 0.025
Total budget surplus/SPI (%) 0.704 0.988 −2.228 1.282
Population (millions) 5.265 5.669 5.956 6.442
Median income (thousands) 42.900 4.740 61.587 8.510
Population density 0.172 0.240 0.189 0.259
Average wage 11.287 1.281 15.026 1.679
Energy price 8.248 1.374 11.129 1.610
Unemployment rate (%) 6.765 1.554 5.346 0.992
Agricultural Share (%) 2.774 2.681 1.418 1.383
Manufacturing share (%) 17.834 6.454 13.297 5.150
Age 25-44 years (%) 31.728 1.698 27.340 1.442
Age 45-64 years (%) 19.009 1.037 44.238 0.855
Age 65+ years (%) 12.806 1.773 12.619 1.608
Note: SPI = state personal income. All dollar amounts are expressed as current year dollars. Neighbors’ variables are calculated using the simple
contiguity weight matrix as described in the text.

Downloaded from edq.sagepub.com at Airlangga University on March 15, 2011

Deskins et al. 57

Appendix B
Data Descriptions and Source Notes
Variable Definition

Private employment growth (%) Growth rate of private state employment from t to t + 1 (1)
Nongovernment gross state product growth (%) Growth rate of nongovernment gross state product from t to t + 1 (2)
Higher education spending per capita Total state and local government spending on higher education
   divided by state population (3)
K-12 education spending per capita Total state and local government spending on K-12 education
   divided by state population (3)
Higher education spending/SPI (%) Total state and local government spending on higher education divided
   by state personal income (4)
K-12 education spending/SPI (%) Total state and local government spending on K-12 education divided
   by state personal income (4)
Noneducation spending . . . Total government spending − total higher and K-12 education spending* (3 and 4)
Total federal transfers to . . . Total federal transfers* (3 and 4)
Total budget surplus . . . Total government revenues − total government spending* (3 and 4)
Population (millions) State population (5)
Median income (thousands) State median income (5)
Population density Population/square miles in a state (6)
Average wage Average hourly wage for manufacturing workers (7)
Energy price Estimate of energy costs for all forms of energy, measured per million BTU (8)
Unemployment rate (%) State unemployment rate (7)
Agricultural share (%) State agricultural production as a share of total gross state product (2)
Manufacturing share (%) State manufacturing production as a share of total gross state product (2)
Age 25-44 years (%) Share of state population between the ages of 25-44 years (6)
Age 45-64 years (%) Share of state population between the ages of 45-64 years (6)
Age 65+ years (%) Share of state population older than the age of 64 years (6)
Note: SPI = state personal income.
*Expressed in both per capita and state personal income share terms.
SOURCE NOTES:
1. Author’s calculations based on data from Employment and Wages, Bureau of Labor Statistics, various years.
2. Author’s calculations based on data from Regional Economic Accounts, Bureau of Economic Analysis, various years.
3. Author’s calculations based on data from State Government Finances, U.S. Census Bureau, various years.
4. Author’s calculations based on data from State Government Finances, U.S. Census Bureau, various years, and Regional Economic Accounts, Bureau of
Economic Analysis, various years.
5. Statistical Abstract of the United States, U.S. Census Bureau, various years.
6. Author’s calculations based on data from Statistical Abstract of the United States, U.S. Census Bureau, various years.
7. Employment and Wages, Bureau of Labor Statistics, various years.
8. Energy Price Estimates by Source, U.S. Department of Energy, various years.

Acknowledgments
4. Specifically, we use the economic growth rate from time t to
We would like to thank three anonymous referees for helpful com- time t + 1, which we calculate as follows: Ln(Economic Activi-
ments and suggestions. tyt+1/Economic Activityt).
5. We focus on private sector economic growth but all of the esti-
Declaration of Conflicting Interests mations below were also performed on total economic growth.
The authors declared no conflicts of interest with respect to the These estimations resulted in very similar results compared
authorship and/or publication of this article. with those that use private sector economic growth and are
available from the authors on request.
Funding 6. For further information on the relationship between states’
The authors received no financial support for the research and/or spending programs other than education spending, see Baicker
authorship of this article. (2005), Saavedra (2000), and Figlio, Kolpin, and Reid (1999).
7. Although it is true that spillovers can occur beyond geographic
Notes neighbors, we have chosen only geographic neighbors because
1. Available at http://nces.ed.gov/ of substantial evidence indicating that bordering jurisdictions
2. See also Bartik (1994). are economically integrated. For example, the 2000 Census in-
3. Data for local government expenditure variables for 2001 and dicates that 42%, 43%, 41%, and 57% of out-of-state movers
2003 were not reported by the Census Bureau. to Alabama, Connecticut, Maryland, and Oregon, respectively,

Downloaded from edq.sagepub.com at Airlangga University on March 15, 2011

58 Economic Development Quarterly 24(1)
came from bordering states. Obvious exceptions include Flori-
da and California where only 8% and 15%, respectively, of out-
of-state movers came from bordering states. In addition, see
Devereux, Lockwood, and Redoano (2007) for recent evidence
of cross-border shopping occurring between bordering states.
8. See, for examples, Fisher (1997), Dalenberg and Partridge (1995),
or Wasylenko and McGuire (1985).
9. The energy price index represents the cost of producing one
million BTUs of energy based on a weighted average of the
cost of energy from different sources such as coal, natural gas,
nuclear, and so on, in each state.
10. In Table 2, we only present results for models in which education
spending in neighboring states is constructed using our contigu-
ity weighting method. Results for models in which that variable
is constructed using our population weighting method are virtu-
ally identical and are available from the authors on request.
References
Baicker, K. (2005). The spillover effects of state spending. Journal
of Public Economics, 89, 529-544.
Bartik, T. J. (1994). Jobs, productivity, and local economic develop-
ment: What implications does economic research have for the
role of government? National Tax Journal, 47, 847-861.
Bensi, M. T., Black, D. C., & Dowd, M. R. (2004). The education/
growth relationship: Evidence from real state panel data. Con-
temporary Economic Policy, 22, 281-298.
Besley, T., & Case, A. (1995). Incumbent behavior: Vote-seeking, tax-
setting and yardstick competition. American Economic Review,
85, 25-45.
Blankenau, W. F. (2005). Public schooling, college subsidies and
growth. Journal of Economic Dynamics & Control, 29, 487-507.
Blankenau, W. F., & Cassou, S. P. (2007). Allocating government
education expenditures across K-12 and college education. Eco-
nomic Theory, 31, 85-112.
Blankenau, W. F., & Simpson, N. B. (2004). Public education
expenditures and growth. Journal of Developmental Econom-
ics, 73, 583-605.
Bruce, D., Deskins, J., Hill, B., & Rork, J. (2009). (Small) business
activity and state economic growth: Does size matter? Regional
Studies, 43, 229-245.
Case, A. C., Rosen, H. S., & Hines, J. R., Jr. (1993). Budget spill-
overs and fiscal policy interdependence. Journal of Public Eco-
nomics, 52, 285-307.
Cassou, S., & Lansing, K. (2004). Growth effects of shifting from
a graduated-rate tax system to a flat tax. Economic Inquiry, 42,
194-213.
Dalenberg, D. R., & Partridge, M. D. (1995). The effects of taxes,
expenditures, and public infrastructure on metropolitan area
employment. Journal of Regional Science, 35, 617-640.
Devereux, M. P., Lockwood, B., & Redoano, M. (2007). Horizontal
and vertical indirect tax competition: Theory and some evidence
from the USA. Journal of Public Economics, 91, 451-479.
Downloaded from edq.sagepub.com at Airlangga University on March 15, 2011
Fernandez, R., & Rogerson, R. (1999). Education finance reform
and investment in human capital: Lessons from California. Jour-
nal of Public Economics, 74, 327-350.
Figlio, D. N., Kolpin, V. W., & Reid, W. E. (1999). Do states play
welfare games? Journal of Urban Economics, 46, 437-454.
Fisher, P., & Ditsler, E. (2003, May). Taxes and state economic
growth: The myths and the reality. Policy Brief, Iowa Policy
Project, Mount Vernon, IA.
Fisher, R. C. (1997). The effects of state and local public services
on economic development. New England Economic Review,
March/April, 53-82.
Glomm, G., & Ravikumar, B. (1992). Public versus private invest-
ment in human capital: Endogenous growth and income inequal-
ity. Journal of Political Economy, 100, 818-834.
Glomm, G., & Ravikumar, B. (1997). Productive government
expenditures and long-run growth. Journal of Economic Dynam-
ics & Control, 21, 183-204.
Harden, J. W., & Hoyt, W. H. (2003). Do states choose their mix of
taxes to minimize employment losses? National Tax Journal,
71, 7-26.
Helms, L. J. (1985). The effect of state and local taxes on economic
growth: A time series-cross section approach. Review of Eco-
nomics and Statistics, 72, 574-582.
Hungerford, T. L., & Wassmer, R. W. (2003, September). K-12 edu-
cation in the U.S. economy: Its impact on economic develop-
ment, earnings, and housing values. Report conducted for the
National Education Association.
Michigan Office of the Governor. (2004). Granholm, Cherry
announce commission on higher education and economic
growth. Retrieved August 20, 2009, from http://www.michigan.
gov/ltgov/0,1607,7-169—88248--,00.html
Mofidi, A., & Stone, J. A. (1990). Do state and local taxes affect eco-
nomic growth? Review of Economics and Statistics, 72, 686-691.
Rangazas, P. (2000). Schooling and economic growth: A King-
Rebelo experiment with human capital. Journal of Monetary
Economics, 46, 397-416.
Rork, J. C. (2003). Coveting thy neighbors’ taxation. National Tax
Journal, 56, 775-787.
Saavedra, L. A. (2000). A model of welfare competition with
evidence from AFDC. Journal of Urban Economics, 47, 248-
279.
Su, X. (2004). The allocation of public funds in a hierarchical edu-
cational system. Journal of Economic Dynamics & Control, 28,
2485-2510.
Taylor, L. L., & Brown, S. P. (2006). The private sector impact of
state and local government: Has more become bad? Contempo-
rary Economic Policy, 24, 548-562.
Vedder, R. (2004). Going broke by degree: Why college costs too
much. Washington, DC: AEI Press.
Wasylenko, M., & McGuire, T. (1985). Jobs and taxes: The effect of
taxes on states’ employment growth rates. National Tax Journal,
38, 497-514.
Deskins et al.
Bios
John Deskins is an Assistant Professor of Economics at Creighton
University in Omaha, Nebraska. He specializes in empirical policy
research. Recent topics have examined state tax policy and small
business activity, tax planning activity in response to state corporate
income taxation, and state practices in determining transportation
expenditures.
Brian Hill is an Assistant Professor of Economics at Salisbury Uni-
versity, which he joined after earning his PhD from the University
Downloaded from edq.sagepub.com at Airlangga University on March 15, 2011
59
of Tennessee in 2006. His research primarily focuses on state and
local tax policy. Recent research has focused on the extent to which
local governments use tax rates to compete for tax bases, the degree
to which entrepreneurial activity affects state economic growth, and
the effect of property tax limits on local government finance.
Laura Ullrich is an Assistant Professor of Economics at Winthrop
University. She obtained her PhD in Economics from the Univer-
sity of Tennessee and her BBA in Economics from the University of
Georgia. Her primary research interests involve education policy
and issues related to state and local taxation.