(Bloomberg View) -- In 2016, economist Lyman Stone of the U.S. Department of Agriculture wrote one of the most important blog posts in recent history. It was promptly overlooked by almost everyone. But Stone's post -- a deep dive into the economics of the small town of Pikeville, Kentucky -- shows the way forward for the U.S. economy and American society.
Pikeville, with about 7,000 people, is located deep in Appalachia near the West Virginia border -- the same kind of poor, dying coal-mining region described in books like J.D. Vance's "Hillbilly Elegy." But as Stone shows, Pikeville has been bucking this well-known trend, with an increasing population and a thriving downtown. Why? Because of the University of Pikeville. The University of Pikeville has fewer than 3,000 students, and it won't show up on many elite college applicants' top 10 lists alongside Stanford and Harvard. But since the turn of the decade, this tiny school has been expanding dramatically:
In addition to educating the local populace, the plucky little university now has a medical center, and engages in research and patenting. That economic activity, in addition to the energy of a college town and the amenities that serve the student population, have revitalized the downtown -- even as people move out of the surrounding areas, they're moving into Pikeville. "It is not too much," Stone writes, "to say that the University of Pikeville is saving the city."
Pikeville's example has been repeated across the country. In his landmark book "The New Geography of Jobs," University of California-Berkeley economist Enrico Moretti demonstrated that human capital -- the supply of educated workers -- has been a crucial factor in which American cities have thrived in the new knowledge-based economy and which have declined. College towns have tended to do very well. This probably isn't because their graduates stay in town (most tend to move away), but because of the smart people who come to work at the university itself, and at the companies spun off by university research.
Other research confirms that the beneficial effect of universities isn't just correlation. A 2015 paper by economist Shimeng Liu found that areas where the U.S. federal government made land grants to universities back in the 1860s have been flourishing in the 21st century. In other words, investing in universities was one of the most far-sighted moves that the government ever made.
The effect appears to be worldwide. Looking at countries around the globe in a recent paper, economists Anna Valero and John Van Reenen find:
Increases in the number of universities are positively associated with future growth…Doubling the number of universities per capita is associated with over 4% higher future GDP per capita. Furthermore, there appear to be positive spillover effects from universities to geographically close neighboring regions.
There are a number of reasons why universities are good for towns. They produce educated workers, some of whom stick around after graduation. They employ lots of smart people. Many students work while they study. Universities generate innovation, share the revenues from patents and spin off cutting-edge companies. University workers and students also provide demand for local service businesses (though Valero and Van Reenen don't think this effect is very important). University medical centers give old people an incentive to move from rural areas into town. International students pay high fees to go to school in the U.S. -- higher education is an American export industry. And the density created by college towns is often a more efficient development pattern than the sprawl of the rural areas that surround them.
One would think, given the success of college towns, that every city council and state legislature in the country would be racing to upgrade, expand and advertise local universities. Sadly, this hasn't been the case. The Great Recession led to a five-year dip in higher-education funding as states tightened their budgets. That forced students to shoulder more of the financial burden, which they often do by taking out huge loans that limit their life options. Spending has recovered somewhat since the economy got onto a firmer footing in 2013, but hasn't yet reached pre-crisis levels.
Meanwhile, U.S. leaders look determined to make life much harder for the country's universities. The tax reform plan now being put forward by congressional Republicans contains big cuts to higher-education funding. It eliminates tax credits and deductions that students use to help pay for college. And it makes certain kinds of financial aid taxable -- for example, tuition waivers, which help graduate students eke out a meager living while they get their advanced degrees. Besides putting college out of reach for some, it would force many remaining students to borrow more, thus exacerbating the student loan problem.
These cuts -- about $65 billion during the next decade -- would force universities to cut costs and tighten their belts. But they would also crush the nation's Pikevilles. The Ivy League universities and big flagship state schools would survive, but many smaller colleges in more vulnerable regions would be devastated. The same struggling working-class regions that Donald Trump promised to save during his campaign would find one more path to a brighter future cut off.
The potential of the U.S. economy lies not in coal mining or resource extraction, but in knowledge industries and denser towns. The university system is the country's last great economic advantage, and the only thing standing between many healthy small towns and the looming specter of long-term decay. Congress needs to stop trying to cut funding for higher education; if anything, it should do just the opposite and increase spending.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
To contact the editor responsible for this story: James Greiff at jgreiff@bloomberg.net.
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