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Friday, April 15, 2011

Debunking meaningless statistics about higher education spending

A few months back Dr. Elliot Parker, a University of Nevada Reno economics professor penned an article in the Nevada Appeal arguing that his university can't stand another budget cut. One of the statistics he sites is "state general fund spending on higher education as a percentage of Gross State Product" (GSP). He finds that Nevada System of Higher Education's general fund appropriation is a mere 0.6 percent of GSP.

I meant to write an article at the time to correct some of Dr. Parker's gross exaggerations about the magnitude of the budget cut and point out his GSP statistic is meaningless. Now Dr. Parker's column is popping back up on Facebook and on the Save Our Schools blog.

Now it's time to dispatch this meaningless statistic once and for all.

First, we must know what "General Fund appropriations to NSHE as a percentage of Gross State Product" really means. This is simply the state general fund spending on higher education as a percentage of the state's overall economy. Lets break this statistic down piece by piece.

GENERAL FUND appropriations are a portion, less than 1/3rd, of all revenues for the Nevada System of Higher Education. 

 Source: Regent Ron Knecht. Data comes from NSHE budgets.

  • Dr. Parker and many other university officials pretend that the other 2/3rds of revenue are tied down  and can't be used for anything but their intended purpose. This is not entirely true, in fact, wisely using the resources from the other 2/3rds means you don't have to spend from the general fund to support them.
  • Think about this for a moment. Parker et. al. complain that if you cut from 1/3rd of the budget they won't be able to fund the other parts of the budget either. In other words, they're divorcing 2/3rds of the budget when it is to their advantage, but include the other 2/3rds if they can make it sound like the budget cuts will harm those programs too. Pure information manipulation.

Ok, now we know they artificially lower the amount of spending by ignoring a very large chunk of revenues and expenditures. What else is wrong with this statistic?

Well, what is Gross State Product?

  • Gross State Product is basically the state's version of Gross Domestic Product. It is simply the market value of all final goods and services produced within a state. High GDP or GSP means there is lots of wealth within a country or state. Dividing GDP or GSP by the population tells us the wealth per person. It is an imperfect, but best available, statistic for measuring wealth.
  • Taking X as a percentage of GSP does not tell us the expenditure per person using the service, it is simply the expenditure as a percentage of the overall economy.
  • So if you're a really wealthy state and spend even an average amount on a government service you may have spent a lower percentage of GSP on that service than a poorer state. It does not mean you underfund that service.
For example:

State 1: GSP of $1000 with 100 citizens of which 10 are students ($10 GSP per capita). State 1 spends $100 on higher education ($10 per pupil) or 10 percent of GSP.

State 2: GSP of $500 with 100 citizens of which 10 are students ($5 GSP per capita). State 2 spends $90 on higher education ($9 per pupil) or 18 percent of GSP.

Not only is State 1 wealthier per-capita, it spends more on higher education overall!  State 1 also spends more per-pupil on higher education than State 2. However State 1 spends less as a percentage of GSP. In this example, Dr. Parker would want you to focus on the latter statistic and conclude that State 1 underfunds higher education.

In reality, State 1 is the better state to live in. Not only are they wealthier per-person, their system of higher education appears to be far more efficient and productive. In fact, you want low spending as a percentage of GDP/GSP and high incomes; that is the best possible result because you have lots of extra wealth to now spend on other things.

If we could also prove that Nevada is a wealthy state, Dr. Parker's statistic would be rendered more meaningless, especially since he's been trying to prove Nevada underfunds higher education

Dr. Parker's GSP statistic also doesn't tell us who uses higher education. What if few people need higher education or few people use it? Spreading out the expense of higher education for a few people against the wealth of everyone doesn't make any sense unless you're an elitist who simply wants a bigger cut of the pie (Dr. Parker does work at a school that is mostly white upper-middle class with very few poor students and an under-representation of minorities).
  • Few people in Nevada attend or graduate from college. This is may seem strange since Nevada has a high income per-capita and a low poverty rate. This tells us that higher education isn't very useful in Nevada for getting ahead in life. In other words we can expect spending to be low as a percentage of the overall economy.

 Dunce or Deceiver? You decide.

Let's put this all together.

  • Dr. Parker has ignored 2/3rds of revenue and expenditures so he's artificially lowered the amount under examination
  • Nevada is a wealthy state, so we've got a relatively high GSP to compare with an artificially lowered spending figure
  • Few people in Nevada need or use higher education so of course spending will be low as a percentage of the overall economy.
  • None of this  tells us about spending per-pupil - the most useful metric for determining how much you spend per person actually using the service.

I don't think Dr. Parker is a stupid man, so did he purposefully select a data figure that he knew would produce a low outcome in order to deceive us? Even putting aside looking ONLY at general fund appropriations was he simply ignorant that few people in Nevada attend college in our above average wealthy state?

Given the facts above, there is no denying that looking at general fund spending on higher education as a percentage of GSP is a pretty useless statistic in determining whether or not Nevada underfunds higher education.

Let's look at a more useful spending figure. How about the amount of money spent on education and research per student? In this way we're ignoring all non-education and non-research spending like debt repayment and capital expenditures. That sounds fair doesn't it? Well how does Nevada rank then?

Click on the graph above to get a better view. You will notice that Nevada's spending on education and research PER STUDENT ranks our state 15th highest in the nation! Yes this statistic is from 2006, but 1) all states are cutting from higher education and there is no new statistic to make this comparison and 2) Nevada increased spending through the start of the recession up to 2009. In fact, we are likely still spending as much or more than in 2006 a boom year for Nevada.

Source: NSHE Regent Ron Knecht. I have excluded capital projects.

The problem is not that Nevada underfunds higher education. The problem is that higher education is bloated, wasteful, ineffective and inefficient.


  1. I took this out because of length but it is another argument against Dr. Parker's statistic:

    * There is also the problem with student tuition and fees....some states require students to spend more as a percentage of overall higher education spending. Thus cross state comparison of state appropriations may be meaningless.

    In the example below both higher ed systems spend the same amount but the state appropriations vary.

    State 1: total higher education spending is $10,000 per pupil with the state covering 50 percent of the cost and the students covering the remainder.

    State 2: total higher education spending is $10,000 per pupil with the state covering 30 percent of the cost and the students covering the remainder.

    Once again, looking at just a portion of revenues makes cross state comparison meaningless.

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