Outside of UW-Madison, the argument that the colleges have huge multiplier effect on communities and the state is nonsensical

By Ike Brannon for the Badger Institute

The University of Wisconsin educational system is without a doubt an important contributor to the state’s economy. The fact that a motivated high school graduate can obtain a quality college education at a relatively affordable price may seem like a service all states would provide, but that is not necessarily the case, unfortunately.

After teaching in the UW System for nearly a decade, I can attest to the fact that the system has some extremely talented professors who go to great lengths to help their students learn, and I have seen numerous former students of mine excel in their careers.

How can we measure the impact of our university system on the state and local economies?

For UW-Madison, this can be complicated, but only because the impact is, most economists would aver, very large. The university churns out thousands of talented graduates each year, many with degrees in STEM (science, technology, engineering and mathematics) fields who prefer to remain in Madison. This means that all manner of high-tech, high-value-added businesses locate — or get created — in Wisconsin to take advantage of the pool of labor, as well as to have access to the cutting-edge research that takes place on campus.

Few would dispute the notion that this university’s economic impact on the state greatly exceeds the school’s annual budget.

However, measuring the impact of the non-research universities is a little more straightforward, I would submit, because the impact is much smaller.

For instance, while UW-Oshkosh, where I taught, also has dedicated scholars who diligently do research, the amount and quality of research published there and at the other non-research universities does not lend itself to the creation of new businesses. And unlike Madison, most graduates of the regional UW schools have no great compunction to remain in the community after graduation. Some do obtain their first jobs in their town, but they’re much more likely to decamp to Madison or Milwaukee or points outside the state than remain in their college town.

recent analysis published by UW-Stevens Point, written by David J. Ward of NorthStar Analytics, eschewed that perspective, finding that the impact of the campus on the Wisconsin economy to be $671 million, which is more than three times its operating budget. It’s also nearly 60% higher than Ward’s 2015 estimate of $420 million, despite campus enrollment falling significantly since then.

Either estimate is nonsensical. The notion that such an institution creates aggregate economic activity that greatly exceeds its spending is the product of wishful thinking that’s untethered to reality. While the school indeed creates jobs for the community outside of those directly employed by the school, no one would seriously contend that these are more than a fraction of the school’s employment.

The dubious calculus of the economic multiplier

When an organization wants to quantify its economic benefits to the community, it often hires a regional economist who proffers an economic model that purports to capture the full economic benefits of the organization’s spending. The idea central to this model is that spending by any entity — hiring workers, purchasing equipment and the like — creates income for other people, who also spend it in the community, which in turn creates other income for people in the community and so on.

This so-called multiplier effect suggests that $1 spent by an organization may have an economic impact much more than that $1.

For UW-Madison, that multiplier is undoubtedly greater than one: The businesses created, the visitors coming for sporting events or other entertainment and even the cachet the school gives the Madison area generate new economic activity.

However, for the other UW system schools — or most businesses, for that matter — there is probably not much of a multiplier effect. In Oshkosh, the presence of the school’s 1,000 employees and 13,500 students may boost demand for goods and services in the community, but it is little different than any other business of that size.

A quick tour around the town drives this reality home: Besides a small strip of bars on the edge of campus that cater to students, it’s tough to identify anything in Oshkosh that wouldn’t be there if the college disappeared or that there are any services in the community that aren’t common to other towns its size. Indeed, most economists dismiss the fanciful estimates that come from regional models claiming that the aggregate benefits of some business are several times greater than their spending.

A 2001 Badger Institute study I authored with M. Kevin McGee — at the time, my colleague at UW-Oshkosh — surveyed two classes of the school’s alumni and found that a sizable proportion did remain in northeastern Wisconsin but not necessarily in Oshkosh. Appleton, Green Bay and Neenah-Menasha were more common homes than the Oshkosh area. We also found that alumni who graduated with a STEM degree were more likely to leave the area or the state than other graduates.

A 2018 Badger Institute study that I did with Andrew Hanson, associate professor of economics at Marquette University and a visiting fellow at the Institute, found that the brain drain that bedeviled the state for the previous decades appears to have reversed, but the beneficiaries of the change appear to be Madison, Milwaukee and the southeastern Wisconsin suburbs of Chicago.

The multiplier effect in regional economics is a dubious nostrum that few economists give much credence to and is most often used whenever a community is trying to justify investment in a pro sports stadium. For instance, when the Green Bay Packers lobbied for neighboring counties to pay for Lambeau Field improvements, it duly hired a consulting firm that purported to show all kinds of multiplier impacts as well. Having a company with a $200 million payroll that brings 70,000 people to town 10 times a year definitely makes an economic contribution to the community, but not much more than the team’s payroll — maybe less, given that few players live in Green Bay year-round.

The UW System provides all kinds of benefits to the citizens of the state — mainly by helping to create a well-educated workforce and to help keep talented college graduates in the state. However, the argument that these campuses have some sort of huge force multiplier that greatly expands their economic impact in their communities is — outside of Madison — nonsensical.

Ike Brannon is president of Capital Policy Analytics and a visiting fellow at the Badger Institute. Reposted with permission.