As my colleague Jay Schalin has explained, there is a big controversy over endowment spending these days. Are wealthy schools spending enough of their money? If not, should the federal government rewrite the tax laws to make them spend more or else face some monetary consequences?
I believe that this is an issue where politics should not intrude. Whatever good might come from federal intervention would be small in comparison to the harm of opening up a new Pandora’s Box of political dictation of decisions that should be left in the hands of university officials.
The battle over college endowment spending reminds me of one of our most foolish blunders of the 1970s – the Alternate Minimum Tax. Allow me to explain.
When it was revealed that in 1969, 21 people with incomes of one million dollars or more had paid no federal income tax, politicians leaped into action to correct this supposedly horrible inequity. Under the tax rules, those people didn’t owe any taxes that year, but the politicians weren’t going to drop an issue so laden with opportunities for grandstanding. United under the banner of “fairness,” Democrats and Republicans pushed for legislation to ensure that no wealthy person would escape paying income taxes, by setting up an alternate system with different rules. Thus, the AMT became law, and now engulfs millions of taxpayers who are not very rich.
The AMT debacle was born out of the political imperative to “Do Something” whenever there is the slightest pretext for knocking the rich. With the college endowment spending kerfuffle, we have a small number of really rich schools rather than a small number of really rich individuals, but the dynamics are exactly the same. Assuming that the law is changed to compel schools to spend marginally more of their endowment income than they currently do, very little will change – just as having the IRS squeeze a little more money out of rich taxpayers didn’t make the country any better. It did, however, set in motion an array of unintended consequences that now menace us. I suspect that letting the politicians tinker with levels of college endowment spending will similarly turn out to have unintended consequences we will later regret.
What this issue boils down to is that schools with large endowments aren’t putting as much of their money into financial aid as some outsiders think they should. There wouldn’t be any issue here at all if it weren’t for the fact that Americans keep hearing that college is becoming “unaffordable” except to the very wealthy. That’s what makes the minutiae of college spending interesting – people think they see a way to make degrees more accessible by lowering tuition.
Let’s step back for some perspective. The colleges and universities with multi-billion dollar endowments provide undergraduate education to only a very small percentage of American students. Among those students, many can afford the cost of going to Harvard, Yale, Princeton, et al. because their families have sufficient wealth or because the kids have won big scholarships. For them, lower tuition would be nice, but all that it does is to leave the families somewhat wealthier and the universities with somewhat less to spend on other things they’d like to do.
What about the students from non-wealthy families? Certainly it would be good for them if, let us say, the cost of going to Harvard were cut in half.
Yes, it would be good for them, but good public policy doesn’t necessarily mean making things less expensive for ordinary people. Keep in mind that if Harvard is thought to be too expensive, prospective students have other options. A top-notch student from Raleigh who has the brains to go to Harvard but not enough money can choose to go to UNC (or some other school that’s less costly than Harvard) instead. If tuition were lower at elite institutions, some small number of students whose families couldn’t afford them would apply and get in. An equal number of students who now can afford these schools would be displaced and have to settle for a less prestigious college. That is to say, we would slightly change the distribution of students. Is that an important objective?
I don’t think so. Harvard is very prestigious, but students who go there don’t get a dramatically superior education compared to students at other schools. In fact, there is no reason to assume that it’s superior at all.
There really isn’t any great benefit to the country in mandating that the elite schools spend more of their endowment earnings on student aid or anything else that politicians want to take credit for. There is a cost, though. It’s the cost of allowing politics to intrude in one more area where it has no business. Once politicians started to meddle in the financial decision-making of colleges and universities, their first step probably won’t be the last. Until now, the allocation of college financial resources has been left alone, but think about how government regulation has grown apace in other aspects of college operations. Should we risk the financial equivalent of Title IX?
Don’t assume that my opposition to government regulation over endowment spending means that I’m indifferent to the high cost of a college education. I believe that many institutions of higher education are more costly than they need to be because administrators don’t regard affordability to undergraduates to be a particularly important objective.
Federal intervention simply isn’t the right way to solve that problem.
To read Jay Schalin’s opposing opinion, click here.