Senator Grassley recently held hearings into how colleges use their endowments. There’s some understandable interest here. Universities frequently control large amounts of money, with a handful of them controlling huge assets. (Harvard, the richest by far, has over $34 billion.) With college costs rising faster than inflation, some in government have thought about ways to force colleges to put this money to work faster to help out with their expenses and reduce tuition. I really think this debate, though, has missed a few points.
First of all, and I think this is the most important point, the money has to be used on education/research eventually. Most of the money in endowments is tied to specific uses. It’s for scholarships, or the salary for a named professorship or something. Even what isn’t specifically targeted is going to end up being used by an educational institution. The real complaint here is just that colleges are saving more than they should — overvaluing education in the future as compared to the present.
I’m inclined to think they are not. Recognize first of all that, to a great extent, any lack of them funding education out of their endowments right now will be replaced with funding from people paying tuition, as long as tuition doesn’t get so high as to dissuade people from going to college. Now, I believe it’s clearly the responsibility of government to provide enough financial aid that everyone can attend college (assuming they put in the effort in high school to make themselves qualified). This is what’s annoying congressmen, since they don’t want to make room in the budget for it, and of course that’s understandable.
The real problem here, though, is that the vast majority of endowment money is held by only a small handful of schools. Maybe Harvard, Princeton, Yale, Stanford, and MIT can make college free for everyone for a little while by spending down their endowments (or at least, not growing them fast enough to keep up with inflation), but that only affects a tiny minority of college students in the US, and those schools already offer enough financial aid that students from poor families pay very little if anything. Most students go places that don’t have much in the way of endowments, and Congress is still going to have to offer enough financial aid to keep those places affordable.
However, these big endowments do constitute a form of national savings for the US. The American savings rate is low (or negative, really) and could use every bit of help it can get, and a half-trillion dollars in savings isn’t something we should be trying to get rid of. Also, more importantly, it helps to lock in the leading status of US universities. The world’s most elite universities are near-universally in the US (the main exceptions being Cambridge and Oxford). This is largely a consequence of economics. The schools with the ability to bring in the top people will always be the best. The US isn’t going to stay the world’s biggest economy forever, and the gap is definitely going to shrink fast. Building up huge endowments in our top universities essentially locks in their top position, guaranteeing that they’ll be able to fight and stay at the top even as the overall position of the United States deteriorates.
The government should try to avoid forcing private actors to spend their money. I’m not a libertarian, and regulation of nonprofits is something I could live with when clearly necessary. Here, though, I don’t think it is. Harvard is still raising lots of money, so clearly their donors don’t have a problem with the way the endowment is being used. At a time when the United States is failing in general to invest in the kind of long-term society-building things that keep a country at the top of its game, private charities that devote resources to planning for the very long term should be helped, not hurt.