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Patents, Graduates Key to Fighting Kentucky's Persistent Poverty?

April 16, 2007

It’s no secret that research and education are important to a state’s economy, but for many poorer states, they may be even more vital than previously believed. A few recent studies suggest that increasing the number of patents and the education level of residents in a state could be a valuable first step in overcoming persistent poverty.

In a May 2006 working paper, Paul Bauer and Mark Schweitzer of the Federal Bank of Cleveland and Scott Shane of Case Western University argue that a state's stocks of knowledge, as measured by its patents and its high school and university graduation rates, are the most important determinants of state per capita income. The authors conclude that policymakers in states with lower incomes should focus their efforts on boosting these stocks of knowledge in order to build in-state wealth.


Economic development leaders in Kentucky also have been examining the Commonwealth’s consistent low ranking for personal wealth, and it would appear to be a prime candidate for such an approach. Kentucky is the sixth-poorest state in per capita income -- the same rank the state held 27 years ago. It also has struggled with low levels of educational attainment. In 2004, the state ranked 49th in the percent of adults with high school degrees and 44th in college graduates.


Researchers at the University of Kentucky's Center for Business and Economic Research (CBER) recently examined the impact of patents and educational attainment on the state’s economy in a report for the Kentucky Economic Development Partnership. CBER Director Kenneth Troske and researcher Kenneth Sanford collected data on Kentucky and its neighboring states over the past 35 years to find out why the Commonwealth has suffered from persistently low incomes and one of the slowest growth rates in the nation. The study reaffirmed the findings of the Bauer, Schweitzer and Shane study, concluding that although many factors have a significant impact on per capita income, stocks of knowledge – including patent capital per capita and percent of high school and college graduates – appear to be the most influential.


Sanford and Troske believe that, by building stocks of knowledge, Kentucky may finally be able to improve the incomes of more of its citizens. Their study reports that in 2004 the state earned only 85 percent of the U.S. average for per capita gross state product (GSP), a reflection of its low income levels. The authors’ model, however, estimates that if the state had possessed the U.S. average for patents and educational attainment, its per capita GSP might have been 96 percent of the U.S. average. Other variables, such as business climate, infrastructure, and state industrial structure, also correlated with income growth, but were less significant.


Future statewide economic development initiatives, Troske and Sanford conclude, should place a high priority on increasing the state's number of college-educated workers and encouraging innovative research. Kentucky currently offers several programs to encourage university and private R&D, such as the Kentucky Enterprise Fund and the Research Challenge Trust Fund. These programs have helped the state make progress in generating profitable intellectual property and introducing new technologies to the marketplace. Education levels, however, have long been a problem for Kentucky, and, according to another study, show little signs of improvement.


Tuition, Enrollment & the State Economy

A report from State Auditor Crit Luallen indicates that rising tuitions may be one factor to blame for the slow growth of the number of Kentucky's college graduates. In 1997, the state established a long-term goal for its efforts to improve higher education. The Kentucky Postsecondary Education Improvement Act declared that by 2020, the state would double its number of residents with a bachelor's degree. In a recent update on Kentucky's progress, however, Luallen predicts the state will not be able to reach that goal if current trends continue. In fact, the number of full-time undergraduate students enrolled at two- and four-year institutions had decreased by 900 since 2003. Though some growth has occurred at four-year colleges and universities, 45 percent of that increase was due to nonresident students, who frequently leave the state following graduation.


Luallen reports that high tuition may be discouraging many Kentucky residents from pursuing an undergraduate education. Since 2001, resident tuition at the state's four-year universities have risen more than 80 percent, compared with just 35 percent for the U.S. as a whole. During the same period, full-time undergraduate resident enrollment has significantly slowed. Much of the growth that has occurred has favored nonresident students who often find that even with the recent tuition hikes, Kentucky universities remain an affordable option among universities in the region. The report recommends restructuring the state's tuition levels to help residents enroll in the state's universities and to eventually improve the state's overall education level.


The Kentucky Long-Term Policy Research Center confirms Sanford and Troske's claim that improving the education level of the state's workforce could have substantial benefits for the economy. The group estimates that reaching the U.S. average in educational attainment by 2020 could result in a $71 billion increase in personal income and a $5.3 billion increase in state revenue. Luallen's findings suggest that adjusting tuition levels may help the state finally start generating that kind of growth.


Read "Why is Kentucky So Poor?: A Look at the Factors Affecting Cross-State Differences in Income," at: http://gatton.uky.edu/CBER/Downloads/Annrpt07.pdf


Read the Kentucky State Auditor report on Tuition at: http://www.auditor.ky.gov/Public/Audit_Reports/Archive/2007TuitionBriefing-Performance.pdf