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Economy in Lockup: The Effect of High Prison Costs on Education and the Economy

Michigan, like many states, suffers an education gap that threatens its growth. According to a state turnaround plan, 62 percent of jobs will require a post-secondary education by 2018. Sadly, less than 40 percent of today's workers qualify. Without more college graduates, the best-paying jobs will move away—or they will never be created in the first place.

The Higher Education Gap Hurts Economic Growth

Why don't more Michigan residents finish college? What does this have to with jails? The answer is money: Prisons and universities compete for shrinking state budgets. Much of the state's budget is protected by statute or long-standing contracts. It can't be cut in the near term. Higher education budgets are the least protected, and they have suffered the deepest cuts.

"Our public universities are a major driver of Michigan's economy yet we are spending more on a prisoner in one year than we are to help a Michigan student go to college for four years. This investment strategy is upside down if we want to attract business investment and good paying jobs," says Doug Rothwell, president and CEO of Business Leaders for Michigan, a council of CEOs and other top executives from Michigan's largest companies. Business Leaders for Michigan developed Michigan's Turnaround Plan with help from McKinsey and the Lumina Foundation.

Prison Costs Have Strong Advocates Across the United States

Powerful constituencies protect prison budgets by putting more people in jail and keeping them there longer. "Law and order" conservatives want to show toughness on crime. Corporations that run outsourced prisons want to raise revenues. Unions representing correctional workers want to protect jobs and salaries. These groups promote tough mandatory sentencing and parole restrictions.

Michigan is a relatively high-cost jailer. It imprisons 51 percent more of its residents than its neighbors (as a percent of population). Compared to its neighbors, Michigan spends more money per prisoner per year to keep to keep its prisoners in jail.

California and many other states also confront soaring, entrenched prison costs. Former California Governor Arnold Schwarzenegger summed it up this way:

Thirty years ago, 10 percent of the general fund went to higher education and only 3 percent went to prisons. Today, almost 11 percent goes to prisons and only 7.5 percent goes to higher education. Spending 45 percent more on prisons than universities is no way to proceed into the future.

Higher Prison Costs Lead to Higher Tuitions and Fewer Graduates

With state revenues under pressure and prison budgets off-limits, funds for higher education have been slashed. Colleges and universities must raise tuition, since they have no other way to bridge the funding gap. The chart below shows the dramatic change.

Source: Michigan Turnaround Plan

When college costs soar, fewer people enroll and graduate. The damage will likely spread through the economy. Michigan-based companies will move jobs elsewhere if they can't fill them locally. Out-of-state companies will hesitate to expand in Michigan. Talented and ambitious graduates will flee for better opportunities. Burdened with loans, those who stay will spend little on consumer goods and services.  

The future of Michigan's economy depends on educating its residents. "Our state cannot afford to continue its recent trend of declining investment in the talent pool of tomorrow," said J. Patrick Doyle, president and CEO of Domino's Pizza, Inc., which is based in Ann Arbor, Mich. "Businesses are struggling now to find the right talent."

North Carolina Made the Sustainable Choice

Education makes the economy productive, but prisons do not. Some states, notably North Carolina, choose to educate. North Carolina's economy is similar to Michigan's, but it spends much more on higher education. The University of North Carolina gets nearly four times as much state support per student as Michigan schools. As a result a four year degree costs in-state students $38,215 in Michigan but only $18,887 in North Carolina.

You don't need a Ph.D. in economics to predict which state will field the most talented and productive workforce. Today, North Carolina and Michigan rank about even in economic performance. But 30 to 40 years ago, North Carolina lagged way behind, whereas Michigan led. Since then, North Carolina's investments and Michigan's disinvestments have leveled the playing field. North Carolina offers far more to support knowledge-based businesses that pay high wages and fuel the state's economy.

Don't Eat the Seed Corn

Many states—North Dakota, Kansas, Oklahoma, and others—are planning cuts to sales or income taxes. Where will the cuts fall? Will the states find ways to make government more efficient? Or will the states eat their seed corn, dismantling the educational institutions needed for a modern economy? These consequential decisions will determine the states' economic future.

(A version of this was posted earlier at