Macroeconomic Effects of Public Education Expenditure

Abstract

This article studies the growth and welfare effects of public education spending in the USA for the post-war period. We calibrate a standard dynamic general equilibrium model, where human capital is the engine of long-run endogenous growth. Our results suggest that while increases in public education spending raise growth, these increases are not necessarily welfare promoting. Welfare gains however can be realized if increases in public education spending are accompanied by changes in the government tax-spending mix. (JEL codes: H52, E62) In almost all countries, primary and secondary education are publicly provided. The government uses tax revenues to finance public schools, libraries, etc., at a zero or very low price. Also, in many countries, the government finances or co-finances higher education. Behind such public education policies there are two important issues: the role of human capital as an engine of economic growth, and the existence of externalities, or spillovers, from economy-wide human capital. The path-breaking work of Romer (1986) and Lucas (1988), stressing the roles of knowledge and human capital accumulation, has led to an enormous body of theoretical and empirical literature attempting to better understand the determinants of endogenous (long-term) growth. The same literature has also emphasized the potential role of human capital externalities, which means that the return on the human capital of private agents is increasing in the average human capital in the economy (Lucas 1988; Azariadis and Drazen 1990; Tamura 1991). 1 The importance of