It’s Not the Size, It’s What You Do With It

Endowments, that is.

Large endowments for universities and colleges are not in and of themselves a problem or an embarassment, nor should institutions with large endowments hesitate to try and increase the size of their endowment still further both through investments and donations.

The real issue is one that Margaret Soltan eventually focused on in her critique of Harvard’s endowment management. A large endowment is like an IRA for an immortal. We spend down our IRAs eventually after we retire because we’re going to die and because as a society we’ve decided to limit the capacity of kin groups to accumulate wealth from generation to generation. However, income from interest is a big part of what makes retirement savings work. Institutions don’t spend down their endowments because they’re not going to die (usually).

The bigger an endowment, the more it contributes to the annual operating budget of an institution (educational or otherwise). The pointed questions we need to be asking then concern what is done with those increased resources.

Broadly speaking, you could do a number of things with large and ever-growing endowment income in an institution of higher education.

1) You could lower the cost of attending the institution. At some proportionate scale of endowment size, you could plausibly make the institution free for anyone admitted. At present, what most selective private institutions do, in effect, is charge a very high fee for relatively wealthy customers and a discounted fee relative to wealth for any customers below a set cutoff, all the way down to no fee.

It sounds very appealing in some respects to make attending completely free, but two things to consider. First, what’s the argument for making it free to wealthy families? That doesn’t serve a social justice objective. Even in a very well-endowed institution, there is a sizeable per-student cost. If it isn’t defrayed by tuition, it’s paid from endowment income, and that payment deprives the institution of other opportunities to use those funds elsewhere.

Second, there’s a lot of evidence out there that lowering the sticker price of selective higher education has a perverse impact on the quality of applicants, e.g., that parents are using high prices as an informational signal of quality. I understand this thinking better when I think about my own behavior in a high-end grocery store. I’m a foodie, but sometimes I’m buying an ingredient or product for a recipe where I don’t have personal experience with the quality difference between three products on the shelf. Yet I know one thing: I want the best product. I also don’t care too much about the price difference between a $5.00 product and a $9.00 product if what I’m trying to do is cook an elegant meal for guests. If the product is one that I think is going to make a significant difference in the end result, I may take the $9.00 price tag as an informational signal of quality and buy that. However, when I’m dealing with food where I have personal experience of the product, I often know that the most expensive product is not the best (or even more commonly, I may know that the three products are identical except for their pricing). As a professor, I know that the actual quality of the education you get at Harvard is probably less than what you get at many similar institutions, but it’s very hard for outsiders to fully grasp that, as it depends on information that can’t be easily accessed from the outside. Plus, of course, Harvard’s prestige as an institution translates into economic and social advantages for its students which may make it worth buying a Harvard education even if its day-to-day quality isn’t equal to some other institutions.

The upshot is that using endowment income to lower (or eliminate) the cost of attending a college or university across the board as opposed to the sliding-scale discounting that’s now the common practice might not be the best use of endowment income, and it might perversely damage the institution doing it.

2) You could use endowment income to increase the quality of the institution itself. Soltan focuses on this point, and properly so. What are most colleges and universities with large endowments doing with their incomes? I think the average or typical answer is, “Much much more of what they already do”. In other words, the expansion of capacity and capability has flowed amorphously out of the existing structure of most institutions. More research, more faculty positions, more administrative capacities, better facilities, upgraded infrastructures. An institute here, a center there. Super Size Me. Eggs in many baskets.

The counter to this strategy would be to argue that expanded incomes from endowments should be largely directed at some singular, specific creative goal, that the institution should resist pressure to increase its administrative capabilities, keep its faculty size largely static, maintain its facilities but not expand them, and do something spectacular and particular.

My question would be, what? Surely the goal of doing a singular spectacular thing with that income is not in and of itself self-evidently better than amorphously improving most of your capabilities in most of what you do. One of Soltan’s suggestions for Harvard has been to look at the example of Florida Southern College, which was designed by Frank Lloyd Wright. I guess the suggestion here is to build architectural or artistic marvels for the pleasure of future generations, to make something of lasting beauty. That’s appealing in a way, but it also has a bit of pharonic vanity about it. It doesn’t seem to me to self-evidently outweigh doing more research, hiring more faculty, beefing up administrative capacity, improving most facilities, investing in better infrastructure.

I can think of some ideas that are spectacular which appeal to me personally, including scribbling over the entire structure of the average liberal arts and professional curricula to try something completely new. But that would be extremely risky, the kind of risk that trustees charged with due diligence are asked not to take (to the point of being liable if they do.) But this is the kind of argument that anyone who complains about the size of university endowments is really obligated to take on board, because size really isn’t the question. If you’re not happy with endowments, what you’re really complaining about is the uses to which they are put. So, then: which uses make you unhappy, and why? What should be done instead (at the cost of no longer doing something which is presently being done)?

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18 Responses to It’s Not the Size, It’s What You Do With It

  1. Gavin Weaire says:

    “Second, there’s a lot of evidence out there that lowering the sticker price of selective higher education has a perverse impact on the quality of applicants, e.g., that parents are using high prices as an informational signal of quality.”

    Wouldn’t this be an argument that especially prestigious institutions *should* use their endowments to lower their tuition costs? If they don’t use their symbolic capital to send the signal that to link tuition costs to desirability is “perverse”, don’t they end up de facto sending the opposite signal and reinforcing this pattern of behavior? I can’t see much middle ground here.

    Morally speaking, of course – the particular interests of the institution dictate exactly the opposite.

  2. Timothy Burke says:

    Yes, but they’ve got to do it all at once–basically as a cabal, violating antitrust. Otherwise, the one chump that does it gets killed.

  3. Gavin Weaire says:

    I don’t disagree, alas. Who wants to be first is always the problem.

    On the other hand, something similar can be said about the US News and World Report game. Yet Reed College has survived.

  4. Timothy Burke says:

    That’s another way to work in this. A college with an intensely strong “niche” image could probably survive using its endowment to reduce price. E.g., a place that some students choose because they want above all else to be at that college, for some reason independent of a general index of “quality”: Reed is potentially a good example, St. John’s and Hampshire are better ones. If you’ve got a curricular design or an institutional philosophy that’s enough of an attractor in its own right, you don’t have to worry about how you look to parents who are trying to use weak information signals like price to determine quality.

  5. My teacher and mentor, the late David Hays, sent one of his sons to Hampshire. He thought is was a fine place. But he also thought that Hampshire was in the process of evolving into and instution that had lost its original promise. Hays died a decade ago. Don’t know what he’d think about Hampshire now.

    On the whole, I’m inclined to think that American colleges and universities are at a dead end. They’re in thrall to 19th century ideas and institutional modes and can’t or won’t break free.

  6. Sam says:

    One remarkable example of a “niche” school that has survived and flourished can be found very close to Swarthmore: the Curtis Institute of Music offers 100% scholarship to every student accepted. Of course, there is a grueling competitive admissions process, and the class size is limited to, I believe, under two-hundred.

    But the power of exclusivity, as marked by high tuition, is not only verifiable statistically. I was stunned as an undergrad when an aquaintance chose Harvard med school over UCSF, even though she qualified for California in-state tuition, and even though UCSF’s med school was ranked higher than Harvard’s. Even when she calculated that her debt for Harvard’s tuition would consume almost 40% of her (not inconsiderable) income for decades.

  7. Q. How many current Harvard faculty are important to you current research?

  8. nord says:

    The distressing thing about this line of thought is the lack of the donot’s voice. Ideally, donors should be fully aware of the existing policies of the school and should they allow their fund to be used as the trustees direct, fine. Otherwise, my endowment for lefthanded lapplanders better not be used to provide sports facilities that rival professional facilities or phones in students rooms ;-), etc.

    The Barnes Foundation debacle has probably been helpful for potential donors to realize that there is nothing so permanent, nothing so clear, that lawyers and politicians can’t find a way to change it …

  9. withywindle says:

    I may try to write something longer in response to this at my co-blog. Some initial responses to this, and to your design for a new curriculum. 1) My druthers are simply to have lots of small colleges with lots of small classes; which, aside from the self-interested consequence of increasing professorial employment, I think would be good for students under almost any curricular framework. 2) If I could shanghai universities with large endowments into my pet scheme, I would have them set up franchises–spin off $1 billion of Harvard’s endowment to start up Harvard West, another $1 billion for Harvard Japan, etc. 3) I do like the idea of many different dedicated funds–increasing the multiplicity of tradition. And I don’t necessarily trust college administrators to have a better idea of how to spend money than the donors. 4) I doubtless have a somewhat different Dream College from yours, but such a critique isn’t at issue; it’s an interestining vision, and would be worth exploring. (Actually, it’s not that far off in some particulars from what places like Sarah Lawrence started out as in the 1930s.) I’ll mention by-the-by that my dad went through very different educational programs at Amherst and Columbia, and concluded that was it was the dedication of the professors and administrators to an educational ideal, rather than the content of the curriculum itself, that made the difference; fervency educates. If I had one overall critique of your program, it would be that it requires fervency–the dedication of the committed–for it to work, and I suspect therefore that it would not last for long. An advantage of the current set-up, despite it’s grave flaws, is that it functions without fervor. I suppose I would say that whatever revolutionary colleges we set up, they all should benefit from some Madisonian thoughts–how to make them survive when run by ordinary men rather than true believers. 5) R. A. Lafferty, “Primary Education of the Camiroi,” is relevant to all discussions of ideal education.

  10. Timothy Burke says:

    I agree with your dad, actually. I raise that somewhere in the design document, that in the end I don’t think it’s a very good plan in that it would require everyone working at the college to firmly believe in the basic precepts of the design, and I don’t know that you can achieve that.

    So then the real question is, how to nurture fervency. Because I think most teachers can achieve it, if they’re in an environment that cherishes and rewards it.

  11. withywindle says:

    Madison on my ouija board … Grasshopper, you must set up a system that aligns the interests of professors with their fervor. (Did I just coin fervency, or is it actually a word?) But having made the “anything goes so long as you’re committed” critique, I want to backtrack enough to say that the theory does require actual commitment to a particular system, and an actual belief that’s it’s better. So I don’t want you to give up your commitment to the mechanics of the rough sketch of academia you just outlined. Please be undetached and unironic about its merits! Anyway, it certainly seemed like a good first draft. I very much like the Car course, combining car-repair and car-reading.

  12. I’d encourage the well-endowed to donate to the endowments of the less well-endowed. A drop in the bucket for, say, Columbia, would triple my institution’s endowment. In another post, you mentioned non-profits that don’t live up to their missions; no matter how much financial aid they offer, the most endowed won’t ever provide opportunity for more than a select few. They could have a much bigger impact by helping public universities in their states that are doing good things do better things. That way the public universities wouldn’t have to rely on tuition and taxes for 99% of their costs….

  13. jadagul says:

    Withywindle: with regard to your ‘lots of small colleges’ idea, are you familiar with the Claremont schools? They may or may not be along the lines of what you’re lookng for, but you might want to check them out if you don’t know them already. Basically, it’s a group of five (totally administratively separate) colleges that share a campus and allow their students to take classes with each other. So we have five small liberal arts collges, with the small class sizes and such that that implies, but resources more in line with a somewhat bigger institution because the colleges can pool their classes.

  14. Doug says:

    “Fervency” turns up in my dictionaries, but you’re right WW, fervor is better.

  15. Timothy Burke says:

    I also like the idea of big endowments helping to build small ones. I’ve counseled some of my friends teaching in public African universities to look into building institute or departmental-level endowments, if they can be protected legally from misuse (one way to do that might be to have a board in charge of endowment management that was partially composed of First World scholars, as a firebreak against misuse). Even a teeny-tiny proportion of a very large endowment could basically make an institute-level endowment in an African university allow for that institute to have self-sustaining independence.

  16. withywindle says:

    Jadagul: vaguely aware of the Claremonts–I’m a Northeastern boy–thank you for reminding me of them as a good model.

  17. Ouija Boards says:

    I agree with Timothy. I just wish they would do something to the South Africans this side and improve on higher education. I dont know how many of you are aware of the South African models, but i sure wish i understood that. Thanks

  18. Ouija Boards says:

    Sorry i forgot to mention that this is a well written article that will surely be noted. Thanks

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