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Can free community college save the U.S. economy?

February 11, 2014: 9:34 AM ET

Tennessee Governor Bill Haslam certainly seems to think so.

Tennessee Governor Bill Haslam

Tennessee Governor Bill Haslam

FORTUNE -- Tennessee Governor Bill Haslam made national news last week during a "State of the State" speech when he proposed diverting $300 million in receipts from the state's lottery program to make two years of vocational or community college free for all high school graduates, regardless of merit or need.

The local proposal made national headlines in part because it's an example of a Republican governor from a red state seeking to 1) create a new spending program, and 2) effectively increase the public responsibility for a citizen's education by two years. But the proposal also addresses the much-publicized problems of rising inequality, stubbornly slow economic growth, and the so-called skills gap problem of companies not being able to find qualified workers to fill needs. If Haslam's proposal can kill three birds with one stone, and not raise taxes in the process, is it a model solution for America's economic woes?

Economists have long struggled over whether education is the cause of economic growth, or simply a product of such growth. In other words, does a highly skilled workforce create economic growth, or do the already wealthy seek out education as one of the finer things in life?

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Robert Barro, a Harvard University economist, has studied this question over many years, and last fall he published a paper estimating that the real rate of return on an additional year of schooling falls at 7% per year. In a world where the U.S. government can borrow money for 10 years at 2.7% interest, providing more free education seems like a no-brainer, if Barro's analysis is correct.

Other scholars and commentators cast doubt on whether we should place so much emphasis on the capacity for education to spur growth. Alison Wolf, a professor of public sector management at King's College London, has long questioned public officials' focus on higher education as an economic tool. As she writes, "it is no more self-evident that since some education makes some of us richer, more would make more of us richer, than it is that 'two aspirin are good means five aspirin are better.'"

Wolf argues that much of the money poured into higher education in the developed world would be better spent making sure that young students get the basics right. Workers that have been well educated in basic concepts can be trained by their employers to do all sorts of jobs, but workers without basic literacy or math skills aren't going to be very useful to the economy.

Undoubtedly, there are students who will benefit from increased access to community college education, but Wolf's analysis calls into question whether higher education is the best place to devote extra education spending. Like many programs the government offers to help people get a leg up, free community college will mainly help those who have already learned the basic skills needed to succeed in the workforce. Indeed, President Obama and other elected officials have called for increased spending and support of pre-K programs across the country.

Furthermore, there is evidence that increased public funding for higher education, through loans or public funding, merely removes the incentive for private companies to pay for necessary worker training. Wharton management professor Peter Capelli argues that the so-called skills gap is largely a myth perpetrated by a private sector that no longer wants to take on the expense of properly training their workers, or doesn't want to pay skilled workers a wage they deserve.

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In other words, what's ailing the economy is not a lack of knowledge, but other, more entrenched forces. A lack of demand means that firms feel no urgency to ramp up operations and take a chance on talented but inexperienced workers who can be trained. And there's overwhelming statistical data that show that much of the education that is being done in primary and secondary schools across the country simply isn't being done well.

Of course, the U.S. education system has spent considerable time and money on developing the best methods of teaching basic skills to a highly diverse population. If Haslam's proposal is the difference between many Tennesseans realizing their potential in life and not, it's worth a shot.

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