Cut off Harvard to save America

Richard Vedder

College endowments totaled $448.6 billion in the fiscal year ended June 30, 2013, an increase of 11.7 percent compared with a year earlier, according to recently released data.

As we know, this wealth is concentrated among a privileged few. Harvard, Yale and Princeton universities all have almost $2 million in endowment funds for every student.

We’ve heard the argument that what these institutions do with their privately raised money is their business and that they provide a lot of financial aid opportunities for less affluent students. But these endowments are of dubious value and can be attacked on two grounds. First, they promote inefficiency through misallocation of resources. Second, they are anti-meritocratic.

Regarding inefficiency, Adam Smith got it right more than 200 years ago in “The Wealth of Nations.” College endowments, he said, “have necessarily diminished more or less the necessity of application in the teachers.” At the University of Oxford, he complained, “public professors have, for these many years, given up altogether even the pretense of teaching.”

This sounds similar to situations at some universities today. Before endowments were large, professors sometimes had to earn their salaries by collecting tuition fees from students. When endowments gave professors a guaranteed salary, the incentive of offering quality instruction to students largely disappeared.

The negative consequences of endowments as well as other third-party subsidies (state appropriations, alumni donations, foundation grants) are huge. Faculty can neglect students to do obscure research that no one uses or reads. Endowments have also enabled university administrative bureaucracies to explode.

Compare private universities, which rely heavily on endowments, with public universities, which rely much less on them. Adjusting for enrollments, administrative staffs have grown more robustly at the highly endowed private schools.

Using National Center for Education Statistics data, in 2011 there were 11.56 administrative and noninstructional professional staff for every 100 students in the relatively highly endowed private universities, compared with 7.44 at the much less heavily endowed public institutions.

A private school with 10,000 students typically had about 400 more bureaucrats than a public institution of equal size. If those extra bureaucrats made on average $75,000, counting fringe benefits, they added $3,000 per student to total annual educational costs.

The eight Ivy League schools have less than 1 percent of U.S. college students but almost 17 percent of all endowment money. The top 3 percent of schools ranked by endowment size have more than half the funds. Five schools (Harvard, Yale, Princeton, Stanford University and one public institution, the University of Texas) had endowment increases last year of more than $1 billion, exceeding the total endowment of more than 90 percent of the schools (including virtually all the larger ones) publicly disclosing information.

Do rich schools use their wealth to promote upward economic mobility by disproportionately accepting low-income students? No - just the opposite. I took the 10 highest-endowed schools and looked at the percentage of students receiving Pell Grants, then compared that with the 10 lowest-endowed schools in a survey by the National Association of College and University Business Officers.

Most Pell Grant students come from below-average-income households. In the highly endowed schools, a median of 16 percent of students received Pells, compared with 59 percent at the lowest-endowed institutions. A student graduating from Yale or Princeton, with their roughly $2 million endowments per student, has a ticket to a good job, while one graduating from the College of St. Joseph in Vermont, with its $29,000 endowment per student, does not. Only 12 percent of the Yale and Princeton students have Pells, compared with 71 percent at St. Joseph.

The federal government subsidizes this academic aristocracy (made more exclusive by elite highly endowed schools giving admission preferences for children of alumni) in several ways. Big endowments such as Harvard’s probably often reap at least $1 billion annually from capital gains. They pay no income taxes on those gains; individuals pay 23.8 percent. They also pay no income taxes on dividend and interest income. The donations that form the endowments are deductible against donor income taxes, giving rich people the incentive to give to their already rich colleges, which in turn give preferences to alumni children.

I am no liberal and I’m not preoccupied with the consequences of income inequality. But I can’t figure out why the liberal elite that purports to care about inequality isn’t asking these questions: Why do we provide favorable tax treatment that primarily benefits these wealthy schools? Why not at least phase out tax preferences to donors and to schools with more than, say, a $200,000 endowment per student? Why allow schools that show legacy admission preferences the right to claim special tax privileges?

Maybe many of these liberal leaders went to one of these highly endowed schools - and want their children and grandchildren to have the same opportunity.

*The author is an economist who directs the Center for College Affordability and Productivity and teaches at Ohio University. He is an adjunct scholar at the American Enterprise Institute.

By Richard Vedder