Researchers Parantap Basu and Keshab Bhattarai published a fascinating article on the relationship between government-funded education and economic growth.  Their study, “Government Bias in Education, Schooling Attainment, and Long-Run Growth,” appeared in the July 2012 issue of the Southern Economic Journal.  They argue,

Our calibration experiment shows that nations with a larger government bias have a higher tax on output to finance higher education spending. This has a positive effect on growth. However, on the negative side, a higher tax on output gives rise to the distortionary effect which crowds out private schooling efforts and depresses growth for the reasons mentioned earlier. The latter negative effect depresses growth. For our sample of countries in the calibration experiment, the latter distortionary effect dominates, and we and an inverse relation between growth and public spending on education consistent with the stylized facts. Thus, even though there is a technological complementarity between private and public inputs in human capital production, a greater government bias in the education sector crowds out private schooling efforts for the majority of countries in our sample. (p. 4; Quoted from the January 2012 draft of the study)

Government spending on education has a positive effect on growth because it builds human capital, that is, provides children the skills, competencies, and knowledge to be productive in the workforce.  But higher taxes imposed by government (and subsequently allocated to schools) stifles growth by depressing the investment in physical capital (material goods) and private schooling, an effect that trumps human capital benefits and ultimately slows economic growth.  Interestingly, they argue that households respond to this imbalance by raising investment in physical capital at the expense of human capital, thereby depressing investment in human capital.  In the end, both human and physical capital suffer.

In the context of the research literature, Basu and Bhattarai’s article joins a significant number of studies that suggest that public schooling has a net negative effect on growth.

As with any study, the results should be interpreted with caution.

H/T: JH