the university in a time of financial crisis

Matt Yglesias speculates on the state of the Harvard endowment.

I'm close with some people who work for a distinguished university that has had for some time a sizable endowment, and certainly a very large one in comparison to total enrollment. (It was not, however, in the $1 billion plus club.) They have told me, however, that the endowment has taken a pretty healthy hit, as I'm sure many other universities have. That's a pretty understandable risk, given the nature of an endowment, although I'm sure there are some universities who have been disciplined about how deeply they have exposed themselves to the whims of the stock market.

Perhaps a real reevaluation of the priorities and goals of the financial arms of universities will be one of the silver linings of this financial crisis cloud. People who don't keep an eye on the academy tend not to think much about the various foundations and endowments that constitute the fund-raising and accounting apparatus of most universities (public and private), but they have a great effect on the direction of the university system on the whole.

The enormous growth of the last decade and a half (illusory though much of it might have been) was very good for our colleges and universities, at least in the obvious ways. Many of the endowments soared because of their exposure to various financial markets. Perhaps more importantly, as more and more new billionaires were minted and the top 1% went from crazy wealthy to bat-shit insane wealthy, charitable contributions grew by leaps and bounds. People who can buy whatever material thing they want tend to pursue status objects that are harder to corral than cars or houses or jewelry. Having a building built, or a wing of an athletic center, or a chair endowed in your name, at your alma mater is precisely the kind of status object that the wealthiest enjoy. And they can feel good about the donation, and it's tax deductible, and you get a nice dinner where everyone kisses your ass.

Private universities often keep the numbers close to the vest, or as close as they're allowed, but there's every reason to believe that the average college or university has done very well financially the last decade or more. But there have been some negative effects to this kind of cash on hand. One aspect that I think is little understood outside of the university is the incredible physical expansion that has accompanied the boom, at many of the higher-profile colleges and universities. Many colleges have been building madly, with new athletic facilities, student centers, academic buildings, residences, etc.

This isn't merely a matter of having the money and wanting to spend it. Colleges have expanded for several reasons. The first is that those wealthy donors dropping millions into the coffers expect something to show for their money. Nothing is more glamorous or obvious than a new building, shiny and bright, and with the generous donor's family name on the front. Endowing a chair, while still an option, isn't as visible or sexy. Actually allowing the money to simply fill needs in the operating fund tends to not fly for the really generous donors, who (not unfairly) want to see something tangible for their money.

What's more, there has been an unfortunate tendency among colleges to renovate and expand out of a desire to fulfill what they perceive as incoming students' expectations of college . Colleges, in their great desire to win ever-more competitive students, are deeply concerned with what students use to decide where to apply and where to attend. If my information is correct, a large part of this comes from various surveys that visiting and applying students have provided. One criterion for students that has apparently stood out is student complaints about physical infrastructure and facilities; the tennis courts aren't nice enough, the pool isn't big enough, the dorms don't look new enough, Bowdoin has a nicer food court, Stanford's library is prettier, and so on. Colleges with money fulfill these needs; an attractive and new-looking campus is an obvious and visceral selling point.

What's the problem? The problem, first of all, is that college is not and should not be Club Med with classes. By focusing so much money and attention on buildings and facilities, the universities play into a vision of college that is damaging to the educational mission. You need facilities and buildings. But nice basketball courts and cafeterias are rather peripheral to the core project of the academy. Money should principally be spent on better faculty and better academic services and facilities. Sadly, those things have little of the obvious "curb appeal" that new buildings and new amenities have. ("Did you see how big the dorm rooms are?")

This is particularly a problem because of the highly competitive, copycat nature of university culture. Colleges feel compelled to compete with what they perceive as their natural competition. So Yale competes with Princeton and Harvard, Williams feels compelled to compete with Amherst, Bates with Middlebury or similar schools, etc. So if college X, Y, and Z have built new athletic facilities, another college feels great pressure to do the same, even if doing so makes little pragmatic sense for that individual school. This competitiveness is the progenitor of a kind of prisoner's dilemma for colleges. They can't be the only one to get out of any given area of competition. So the debate about what the worth is of US News and World Report's rankings (hint: about zero), and whether colleges and universities should participate (hint: no), has an academic quality to it, if you'll pardon the pun. Many schools would like to get out of the rankings game but feel like they can't for fear of falling behind the Joneses. No one wants to be the first one out.

Anyway-- the tangible upshot of all this is a ton of money getting spent on projects of dubious benefit to the average school. In addition to the fact that this building pulls resources from academic departments and hiring more and better faculty, these programs are expensive, and they are absolutely a factor in the frankly unconscionable increase in the average cost of tuition we've seen. It's true, as I said, that much more money has been flowing into the college system as a whole. But that money is not evenly applied across all colleges and universities. Yet the colleges who have not had the benefit of this great growth to their endowments still feel pressure to take part in the physical expansion that so many universities are. Whats more, there's a strange facet to the college fund raising game. The endowment always has to grow, in the eyes of the foundations and trustees. So much of the money that flows in simply goes to pad the endowment and doesn't end up decreasing the amount students are expected to pay to attend school. And, again, much of the money that's donated gets earmarked for specific projects, and therefore isn't available to lighten the load for students.

There's a really strange facet of this that I think you can see in Harvard's crazy across the river expansion plan, an enormous expenditure that's going to significantly change the geography of the campus. Like a few other college projects, this one serves as both a reason why Harvard needs more of donors' money and a way to get more of a donors money. Harvard wants to raise more money. This project is expensive, so they can tell donors they need more money because they are building this new extension. The extension justifies fund-raising; fund-raising requires tangible needs, like the extension. See what I mean? Prestigious colleges feel the need for constantly expanding fund raising. A major project like this one gives them the justification for asking for more money. The expansion is both an end and the means to the end of fund raising for its own sake.

I'm not kidding about this desire to raise money for the sake of raising money. A donor might reasonably ask why a college with an endowment larger than the GDP of many countries would need additional fund raising in order to build even an expensive project like the one Harvard is undertaking. But it's pretty natural within the world of college finances, where the endowment exists to be grown. This is happening in a context, meanwhile, where Harvard still charges students (if they are above a certain economic marker) somewhere on the order of $40,000 a year for school.

In my ideal world, colleges would maintain an endowment that functioned as a rainy day fund and financial security for the school, but would get out of the business of growing endowments for their own sake. Certainly, every effort should be made to defray the costs to individual students. We tend to have a pretty weird view of tuition costs, assuming that they are just a part of young life. But they can be very difficult for families back home, and even though loans provide the immediate ability to attend school, large student loan debt can be crippling to a person just setting out in adult life. Some say that I should accept the fact that universities are mere human institutions, and largess and institutional self-regard are inevitable. Others say that I shouldn't complain about how colleges spend their money, if students really prefer amenities like tennis courts and Au Bon Pain over academics and professor salaries.

I believe, though, that the university has a real mission, and that universities shouldn't and can't be driven like profit-making companies, or treat students like college is a service industry. Colleges make a lot of grand claims about their ideals and their mission, and I take that seriously. But it's up to us to ensure that they take that mission seriously. They benefit a great deal from the fact that they are held to different standards than for-profit institutions; they receive tax exemptions that make the academic financial model possible. In return, I think it's appropriate and fair for us to have certain expectations about the way they use the money they've accepted as donations, and how the prioritize the spending of that money. Hopefully, this financial crisis will instill a little more humility into colleges as a whole, and they can reconsider what exactly it is they are meant to accomplish.