The Cost of CSU: What Is Not Seen

The California State University (CSU) Chancellor and Board of Trustees are trumpeting a new study that purports to demonstrate how important and valuable the CSU system is to the state of California. Unfortunately, in evaluating CSU’s economic impact, the study neglects the notion of opportunity cost.

Looking first at the pure economic effect of spending: because of the multiplier effect, for every $1 the state invests in the California State University system ($3.09 billion in 2002/03), CSU-related expenditures generate $4.41 in spending.

As a result, the immediate impact of CSU-related expenditures creates $13.6 billion annually in economic activity and supports 207,000 California jobs. In addition, some $760 million in taxes is generated for the state’s coffers.

The relevant question is, what would have been done with the state’s revenues if they hadn’t been spent on CSU? Maybe they would have been spent on other government programs, or maybe (heaven forefend!) they would have been left in the pockets of taxpayers. Either way, the money would have been spent or invested in other ways. These forgone opportunities are the true cost of funding CSU.

But what about the all-important multiplier effect? Multiplier effects are indeed real: When person A spends money, that money is received as income by person B, who spends the money and passes it on to person C, ad infinitum. The hitch is that there’s also a negative multiplier: Money spent on CSU is money not spent elsewhere, and thus not received as income by person X, who does not spend the money and pass it on to person Y, who does not spend the money and pass it on to person Z, ad infinitum. For every positive multiplier effect like the one identified in the CSU study, there is also an unseen negative multiplier effect elsewhere in the economy. There’s no escaping opportunity cost: money and resources spent in one place are money and resources not spent in another.

But the CSU does not just spend money: it spends money to educate, thus increasing the economic power of the state and of its citizens by building up the knowledge base. CSU graduates obtain better jobs because of their degrees, while the state benefits because the deep pool of trained and knowledgeable citizens produced by the CSU allows more high-end jobs to be created and performed in the state.

“CSU’s well-educated graduates help to attract, retain, and develop the companies that are leading California’s economy into the future,” said Chancellor Reed. “An investment in the CSU is an investment in California.”

There’s a little more truth to this analysis, but it’s still misleading. The education received by CSU graduates (if it is indeed effective) increases their earning power, and that’s clearly good for them. But is it really good for everyone else in the state? The better-trained employees also have to be paid higher wages – that is, after all, why they wanted the education – and that means employers and (ultimately) consumers must pay for their skills. If the CSU graduates don’t get offered high enough pay by California companies, they’ll move out of state.

Now, consumers might still be better off, because it’s always good to be trading with people who can produce high-quality output. But is there some reason why the skilled people we trade with need to be Californian, instead of (say) Texan or Indian? From the consumer’s perspective, the only issue is whether our trade partners produce high quality output at a low enough price; their nationality or state of origin doesn’t matter. But there is a crucial difference between the Californian CSU graduate and the Texan: if you live in California, you’ve subsidized the education of the former but not the latter. For the California taxpayer/consumer, the situation is as follows: you pay for the education of CSU graduates, and then you pay them again when you purchase their services.