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Should Harvard continue to accumulate an endowment?
Matt writes:
A university that rich [Harvard] ought to either embark on some kind of ambitious expansion program and start educating substantially more students, or else decide that it would unduly alter the character of the place to expand that much and just close up the development department and enjoy the luxury of being able to focus single-mindedly on the university's core teaching and research functions.
Taking this as personal advice, I agree: don't donate your money to Harvard. But as a matter of public policy I would not disturb the current arrangement. First, a donation to Harvard is an act of conspicuous consumption by the rich, a bit like buying the watch that doesn't tell time. In other words, the donors benefit, either through a warm glow or perhaps they receive networking opportunities. Like Bob Frank, you might think we need a new consumption tax on the rich (not my view) but even if so we shouldn't single out Harvard as a starting target.
Second, the Harvard endowment earns a high rate of return, relative to the cost of raising the funds. Let's say the fund nets 10 percent a year. There is some trickle down and furthermore even if you wish to confiscate those resources it is always better to do so later rather than sooner. The wise guy point here is to suggest that everyone give all their money to Harvard and arrange for some ex post compensating transfer. (I've heard by the way that Yale faculty sometimes demand that Yale money managers take care of their personal portfolios.) Obviously that's not realistic but the point remains that ten percent is a very good return on investment. Let's say Harvard earned forty percent a year: should this make us more or less likely to leave the current arrangement in place?
Posted by Tyler Cowen on June 5, 2008 at 06:52 AM in Education | Permalink
Comments
I guess one question would be, where would the rich go if they could not buy this good from Harvard? Would they buy warm glow and network opportunities by actually helping some people, or by buying more toilets?
Posted by: Morten at Jun 5, 2008 7:25:21 AM
On the margin, university education and more research both appear to have strong positive externalities on society. There is good evidence that our growth rate and welfare would be higher if we had a more educated population and that the amount of basic research that the market does is below the social optimum. This suggests that giving money to universities is probably a good thing for society. Perhaps it will even lead to breakthrough solutions to some of our greatest problems.
Assuming Harvard spends the money it gets, either today or at some future date, perhaps a more specific question is: what would the be marginal impact on society of recruiting and/or funding one more superstar to study, teach or do research at Harvard vs. at a university with a lesser concentration of superstars?
My guess is that their are increasing returns to having brilliant people in close proximity, as Prof. Michael Kremer pointed out in is O-ring theory of economic development. The synergies spark creativity and allow the participants to more easily build on each others ideas. For the same reason, a smart engineer is probably more valuable in Silicon Valley than Kansas City or Santiago.
Bottom line: give the money to the top schools.
Posted by: a student of economics at Jun 5, 2008 8:37:34 AM
Harvard has enough money to simply begin a duplicate campus anywhere in the world. I'm sure they are considering this option, which would only pay off in the very, very long term - yet it is a bit easier for them to set up as they have a head start with such a premier brand.
Posted by: reader of MR at Jun 5, 2008 8:43:32 AM
I guess the reason Harvard doesn't expand is because every additional student they let in reduces the exclusivity of the Harvard brand. And the whole point of going to Harvard is to be a member of an exclusive group.
Posted by: Dan T. at Jun 5, 2008 9:26:55 AM
It would make no sense for an endowment to manage a faculty member's money.
University endowments have high rates of return on investment precisely because they have a time horizon longer than any human lifetime, and can make very illiquid, very long-term investments.
Posted by: at Jun 5, 2008 9:27:48 AM
They could start another school under another name to expand without hurting their brand.
Posted by: Floccina at Jun 5, 2008 9:42:52 AM
Why does Harvard need to expand the school? Their endowment can allow them to embark on the types of research that few universities could ever dream of originating. Part of me wishes that MIT was this well endowed as a university. Maybe Harvard and MIT can embark on some grand research project together.
However, lets be real. This 34 billion is barely a drop in the bucket compared to what the U.S government can fund in just one budget year. So its not like the university all of the sudden has some incredible ability to change the world.
Posted by: John Pertz at Jun 5, 2008 9:57:51 AM
Remember too that Harvard is nearing its 400 year anniversary (1636-2036). It is one of the oldest and most successful learning institutions in our country (and the world).
Could it be that Harvard, now a secular institution, has taken on that role of "preserving civilization" that monasteries did in the past, like in the Dark Ages? If so, it is a good idea for us to have this (and similar institutions) "overfunded" a bit.
Posted by: Long View at Jun 5, 2008 10:00:07 AM
How about increased financial aid to deserving students? Total cost per year is over $50K.
Posted by: John Ur at Jun 5, 2008 10:03:48 AM
Of course if everyone gave all their money to Harvard and Harvard managed it, they would no longer earn excess returns. They would, of course, be earning the market return.
Posted by: Sameer Parekh at Jun 5, 2008 11:03:47 AM
RE: increased financial aid:
Since 2002, all of the ivy league colleges have a "need-blind" admission policy, so if you're deserving, you'll get all the financial aid you need to attend.
The competition for good students has been driving the top universities to give better and better aid packages, replacing loans with grants or eliminating tuition all together for lower-income families. Expect that trend to continue.
As somebody who went to Princeton and benefited from a generous financial aid package in the 80's, I'm torn on whether or not I they're a worthwhile charity. I'm grateful for the education and opportunities, but skeptical that donating more money to an already wealthy organization will make the world a better place.
Posted by: Gavin Andresen at Jun 5, 2008 11:16:14 AM
John Pertz, apparently the NSF budget is 4.8 billion a year. That is of course not the only government spending, but it does give an impression. If Harvard were to spend an extra, say, 5% of it endowment that would be more than a drop in a bucket
Posted by: greatzamfi at Jun 5, 2008 11:19:14 AM
Harvard does face resistance in Cambridge, MA from local expansion. I'd walk around the neighborhoods daily and see "STOP HARVARD ENCROACHMENT" signs all over the place. Some might just think they're reaping what they sow, I guess.
Do people still believe that financial aid is anything different than the perfect price discrimination? I know it's popular, and I sure benefited from it when I went to college. But Harvard could let all their students in for free, meaning the middle class don't need to turn over all their financial data to the college just to send their kids to school.
Posted by: Dan Weber at Jun 5, 2008 12:17:03 PM
Who cares what Harvard's rate of return is if it never intends to spend it.
Posted by: at Jun 5, 2008 1:32:07 PM
If Harvard were spending the money...but, Harvard isn't spending the money. They are investing it. So, the question is, do agree with what their investments are supporting. To get Harvard's return, why not just invest in what Harvard is investing in? The difference in investment horizon implies you wouldn't reap their returns in your lifetime anyway.
Some might think that institutions like Harvard are not entirely acting to preserve the best of civilization. I wonder how people who love the benefits of the estate tax think of ginormous endowments.
More Harvard does not equal a more educated populace, maybe even the reverse. There are certainly increasing returns to concentrating brilliant people, especially to those brilliant people. I don't see a direct correlation of benefit to the rest of us. I also see a lot of useless research, some even worse than useless. So, the value of additional research dollars is an open question in my mind. As for giving money to the top schools, I don't see why monopoly bloat and other problems of size would not apply to universities, especially with regards to desiring a more educated populace. More competition for research dollars, even assuming the competition is along the line of pertinence (which it isn't always) and not pull, seems to militate against teaching quality.
It's my opinion that the best schools aren't really that great, they just vacuum up the best people. Some may not see any difference in my distinction. I do.
Posted by: Andrew at Jun 5, 2008 1:45:50 PM
The consistently above market returns generated by Harvard and Yale money managers -- could that possibly have anything to do with them getting tips and favors on investments from Wall St. people hoping to get their kids into Harvard or Yale?
Posted by: Steve Sailer at Jun 5, 2008 2:23:10 PM
The argument about Harvard's endowment isn't quite fair. A lot of it can be contributed to the PMs of Harvard Management; Jack Meyer did an extremely impressive job while he was there. If I recall correctly, his returns (around 13% on average) generated returns equivalent to Yale's entire endowment.
In response to Steve @ 2:23, while empirically, you could argue that there is a very well-connected network, Meyer's daughter also went to Harvard, that's not a fair approach. It would be impossible to consistently do this without someone catching on.
University endowments were extremely diversified. As opposed to most investors, even during times of economic boom, the university's endowments are not centered on the "product of the moment," ie. for this example, CDOs. Instead, you would notice on their listings of investments in buying stakes of wood companies in Timbuktu. Intelligent investing put them at the size of where they're at. Not having to run away and taking considerable losses (unlike hedge funds) minimizes the losses.
I disagree heavily with Andrew. Frankly, you can't pick and choose research as well as you think. Most applications of research don't reveal themselves until many years down the road. Therefore, what you see as worthless research right now, will likely have sizable benefits in the future. Same arguments are often raised against mathematicians, stating the irrelevance of some of their higher-level research. In which is completely unjustified. The returns are certainly there.
The ability for students to find his/her niche, excel in it, and find some type of breakthrough is the only LR way to increasing our GDP - bar none.
Why give the money to government if it's going to be reckless with it and return less than 13%? I would feel only comfortable if it seemed likely that the marginal returns were higher than what Harvard's endowment was creating.
Posted by: Jeff Shek at Jun 5, 2008 5:27:37 PM
Well, has anybody checked to see if the positive correlation between endowment ROI and prestige of the college isn't partly attributable to some aspect of insider trading? It sounds like a pretty interesting topic for a young economist to investigate, no? But perhaps the "wrong" results might make you unemployable at one of those prestige universities, so why bother ...
Posted by: Steve Sailer at Jun 5, 2008 5:43:50 PM
Steve, it just seems nearly impossible for this scheme to work.
Multiple issues with this scenario:
It would require multiple insider information from a variety of sources. If it was was from one source, ie. let's say one specific department at an investment bank, then this would work. However, at that point, the likelihood of getting caught is extremely high - the SEC could easily see specific odd bets being placed consistently over and over for one particular type of asset.
If then, it was from a variety of sources, the chances of this scheme being caught by a newsreporter is even larger. IE, PMs would be notified of a significant change in grading of assets, trade it, and then inform Harvard Admissions they would like them to pay "special attention" to student X/Y? Unlikely, given that Harvard Management (the firm that runs Harvard's endowment), is outside of the Cambridge Campus.
--
Above, I explained Harvard's investment strategy that worked for them. But frankly, schools that have more prestige can and will afford to higher better skilled portfolio mangers.
This insider-trading model assumption is too far-fetched. It works for hedge funds because they're allowed to move large amounts of capital in and out of an asset quickly. Harvard's endowment isn't run like a hedge fund, although they do have a large stake of hedge funds.
FYI. During the years of 22% increase - Harvard's endowment only consisted of holding 25% American stocks, bar the hedge funds they also invested in.
Posted by: Jeff Shek at Jun 5, 2008 8:23:23 PM
>>could that possibly have anything to do with them getting tips and favors on investments from Wall St. people hoping to get their kids into Harvard or Yale?
Steve, you asked this question a few months back on your own blog, and I answered it. I have intimate knowledge of how top university endowments operate. And the answer to your question is "absolutely not." First, people on Wall Street who have worthwhile tips do not need managers of university endowments to get their kids into elite schools -- chances are, they're Ivy League grads themselves. Second, endowment managers have no influence with the admissions office.
Admissions officers are some of the most PC people on the planet, lowering standards and skirting the law to grant admission to minorities. Just imagine how they would respond if an endowment manager (evil capitalist!) asked them to let some pal's unworthy kid slip in.
Posted by: assetmgmt at Jun 5, 2008 8:54:09 PM
Harvard is a brand as well as an institution. Brand managers spend their lives figuring out how to get maximum leverage from brands, while protecting the brand from dilution.
It is by no means clear that Harvard's brand is being fully exploited. And of course, given its extraordinary capital base, the idea of geographic expansion (Shanghai? Bangalore? Baghdad?) seems obvious. A bigger challenge, but one commonly undertaken by other firms would be to create or acquire a second brand which would allow them to serve a much broader audience (CMU? U of Phoenix? HarvardOnline?)
About investing, my favorite idea is for Harvard to create a clone fund that parallels its endowment's investments. Investors could invest in the parallel fund in proportion to their contributions to the University proper. Given Harvard's extraordinary performance, I'd expect that to be a quite popular strategy, if it's legal.
Posted by: Larry at Jun 5, 2008 10:23:38 PM
Assetmgmt says:
"Admissions officers are some of the most PC people on the planet, lowering standards and skirting the law to grant admission to minorities. Just imagine how they would respond if an endowment manager (evil capitalist!) asked them to let some pal's unworthy kid slip in."
So, giving money to Harvard doesn't help get your kid into Harvard? That's pretty interesting if true.
Anyway, the relationship, if any, between college donations, endowments, and admissions sounds like an awfully good topic for economists to research ... although I gather economists are all too busy researching hepatitis in South Korea and the relationship between abortion and crime and other things economists are naturally expert upon to look into esoteric topics that they don't have any familiarity with, such as money and universities. So, forget I ever mentioned it. It's way too crazy a subject to contemplate researching empirically.
Posted by: Steve Sailer at Jun 5, 2008 10:47:54 PM
>>So, giving money to Harvard doesn't help get your kid into Harvard? That's pretty interesting if true.
I'm not sure how you arrived at that from what I wrote. You were suggesting that a person who helped out the Harvard endowment with a potentially illegal tip would be able to translate that into special treatment for his kid with the admissions office. That's a far different scenario than the parent of an applicant who has been a regular donor or who has made one large donation to the university. That the children of donors are given a leg-up in admissions is a generally accepted practice, although the poor and middle class may grumble about it. On the other hand, the scenario you described is unseemly.
Researchers *have* investigated the source of endowments' strong performance. Just a few of the reasons: Top university endowments generate high returns b/c they're invested in asset classes that are not available to average investors -- like private equity, venture capital, hedge funds, etc. They're well diversified among asset classes and have "infinite" time horizons, which allow them to generate returns by taking on illiquidity risk. Plus, endowments are especially attractive clients for money managers, allowing endowments to have access to the very best managers.
Posted by: assetmgmt at Jun 6, 2008 12:01:52 AM
I think the bottom line is that we shouldn't punish people for success. Microsoft has a bunch of cash sitting around - should we just come up with a software company tax to take that money? Harvard, et al, are of course a different scenario, but I'm sure they're thinking hard about what to do with the money. Currently, they're significantly raising financial aid ceilings. As more money accumulates, they likely will come up with other good ventures. If they don't, contributions will diminish. Just because they're not spending every cent today or tomorrow doesn't mean that they plan to just sit on a growing pile of cash indefinitely. Having said that, I do think people should spend more time coming up with good ideas for universities on how to spend their endowments. Taxing them or telling them to shut down the fundraising departments don't seem like the most innovative ideas along these lines.
Posted by: Greg at Jun 8, 2008 5:39:50 PM
I think harvard and the other colleges should be taxes with the same windfall profits that the Dems are asking for Big business.
Posted by: at Jun 24, 2008 11:07:24 PM
