Education Spending and State Economic Growth: Are All Dollars Created Equal?

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.