We have a problem. There is an obvious and growing scarcity of seats in the elite college market. Students who can obviously handle the rigor and who are desperate to attend are routinely rejected by the elite college cartel. This scarcity of seats drives up prices, enables other anti-competitive conduct like price-fixing and restrictive early decision contracts, and results in corrupt behavior like million dollar donations and even criminal behavior like Varsity Blues. We obviously need to fix the scarcity of seats problem.
Unfortunately, the elite college market has failed at self-resolution. Whereas other markets would increase supply to meet this obvious growing demand, the elite college market is organized in a cartel structure where low enrollment is rewarded with more prestige. Therefore, we need outside intervention to break this cartel.
This is why, two days ago, I proposed breaking up the big elite college endowments into many different ones so that we could seed a new batch of elite colleges ready to compete with the existing giants. This proposal, to tax everything above $10 billion in an endowment, picked up some traction on Twitter, and then it went semi-viral on Hacker News. As a result, I received all sorts of comments and criticisms. I want to address some of these responses now.
First, I have a meta-response to some critics who went after the feasibility of the few specifics I did offer. For example, a lot of the comments I received were about specifically how many new elite colleges you could or couldn’t seed, or precisely how much of a hole you would create in Harvard’s budget, or about how the decentralized nature of endowments makes moving money into new uses impossible. My broad response is that breaking up endowments is an idea that is meant to be taken very seriously but not very literally, at least at this stage. This is an idea I am still developing, and it is one I am developing with your help. I’m happy to engage on these details, but if your first instinct is to attack a new idea on procedural grounds, you are either missing the point or might just be naturally opposed to any real reform. That said, I also have specific responses for a few of these critiques.
The main theme of the criticism I received was that breaking up endowments would kill the existing elite colleges.
One reason Harvard might die, critics claimed, was because the money left in the endowments couldn’t be easily moved around into alternative uses, which meant that there would be no chance that an elite university could adapt to new budget reality. As Peter Shulman, a history professor, tweeted, “Anyway, there is no such thing as a university endowment. There are instead hundreds or thousands of legally separate funds. If you take away 80% of an endowment, you just make those thousands of funds *each* 80% smaller, and legally the school has to keep using them…”
I suppose that this type of criticism is technically valid, but it just showcases a lack of imagination. Here’s a solution I came up with in the shower. Instead of taxing 100% of every dollar above $10 billion in an endowment, just tax 100% of all the small endowments that we collectively refer to as the endowment. When you tax every cent out of these old distributed endowments, they will all die. You can then give Harvard a new $10 billion endowment with none of the old strings attached. Harvard will have total flexibility to use that new endowment as it wishes, and the new endowment will be centralized in one place. The government will still receive the $40 billion it will use to seed four new Harvard-like colleges with $10 billion endowments each. Problem solved.
A different criticism on the killing Harvard theme was about the ways endowments are used to meet annual budgets. This criticism said that if you recapture such big portions of an endowment you will blow a hole in a school’s budget that it will never be able to fill. For example, as AM commented on my last post, “Ivies spend about 5% of their endowment a year on operating costs, so endowments have to increase each year enough to keep the school running AND beat inflation. If you tax Harvard’s endowment 80% from $50B to $10B, suddenly it’s spending 25% of its endowment per year, so its endowment would need to increase every year by 25% plus inflation — clearly impossible. (So it would have to cut spending, fire faculty + staff, and offer less financial aid to disadvantaged students.)”
AM is right. I concede the point that you will create a big, maybe even multi-billion dollar hole, in Harvard’s budget. I will also concede that this will make Harvard cut costs. But this is precisely the point. At present, Harvard has absolutely no incentive whatsoever to cut costs and find efficiencies. Because Harvard is operated as a non-profit, it operates on a revenue theory of cost where whatever it makes, it spends. In fact, colleges like Harvard routinely waste money on things that do little to improve the quality of education. Harvard’s spending priorities are based on improving its ranking and its ability to raise donor money. But when Harvard can’t coast on its endowment as much as before, it will have to cut wasteful spending! Further, the methods of teaching at Harvard haven’t changed in a century. Massive lecture halls, midterms, and finals are an old and expensive method of instruction. Harvard can surely invent something better. Now it will have to. Big budget shortfalls will force adaptation. They will force innovation. Harvard will not fail. It will lean out.
But AM is also right that some faculty and staff would have to be fired. The beauty of this solution is that there will now be dozens of new elite colleges looking for faculty and staff. These people will likely be reabsorbed into new elite colleges or some of the colleges which already exist. The other benefit of expanding elite colleges is that it will alleviate some of the publish or perish culture of academia, resulting in more high impact research from younger researchers. This is a theme I will explore in the future.
On AM’s point about financial aid decreasing substantially, I have three responses. First, increased competition in the elite market means that decreasing financial aid for the best students won’t be viable because if Harvard doesn’t offer a strong aid package, then the best students will go to another one of the new or already existing elite colleges who are desperate to attract them in this new more competitive marketplace. This means that schools will have to cut all other waste before they can arrive at financial aid.
Second, in our world, more government money will make its way to students. This is because, presently, government subsidies, like Pell grants, are largely stolen by elite institutions. How? Well, when a disadvantaged student gets a Pell grant, the elite college knows because they read the applicant’s FAFSA form. As a result, the more government aid the student gets, the less institutional aid the college gives. As Lesley Turner quantifies, “among selective nonprofit institutions: these schools capture 93 cents every Pell Grant dollar.” This type of cannibalism is only possible because these elite colleges have so much market power. Other colleges in more competitive market segments are able to cannibalize much less of the government subsidies (usually a single digit percent) because if the school gives less aid, the student goes to the school that offers more. Therefore, as we increase competition, the cannibalism of government aid will decrease in the elite market, netting students more money from the government even if they get less from the school. Also, less institutional capture of government subsidies meant for students will create more incentive for the government to expand things like Pell grants for students in the elite college market.
Thirdly, increased competition and supply will drastically lower the sticker price of an elite college education, and therefore it will make borrowing or income-share agreements more viable for students who are looking to afford it.
Then there is the line of argument which says that the endowments are these schools are currently being very productively used because they are invested in markets (VC, PE, Hedge Funds, public equities, and others). I just disagree that this is the best use of that money. In their study, Blair and Smetters conclude that being accepted at Harvard, Princeton, Yale, or Stanford, instead of getting a guaranteed spot at a next 2% university created roughly $114, 942 in consumer surplus. In other words, if you moved a one student from UVA to Yale, you would be creating more than a hundred thousand dollars of market value. As this study proves, the preference for an elite education is extreme, borderline fanatical. Solving the scarcity of seats is an order of magnitude bigger market opportunity than the miserly percentage gains the endowments are making in market speculation. We need to free this money up for productive use by breaking up the seat cartel.
On the broader argument that Harvard can’t survive on a $10 billion endowment. I just don’t believe it. Cornell has an endowment of $10 billion. Columbia has one that is $11 billion. It is obviously possible to have a still giant $10 billion endowment and continue to survive and offer a quality education. As far as path dependency of budgets are concerned, elite colleges have survived all sorts of shocks before from WW2 to Covid-19. They will survive.
As I continue to develop this idea, I encourage people to offer constructive criticism. If I find them to be fair, I’ll address your comments in future posts like this.
We Need to Break the College Cartel!
What would you suggest is driving the appetite to enroll at an elite institution? While the reasons are manifold, I would assume prestige, networking, and our innate braggadocio aren’t far from the top. And to what degree does the prestige associated with the handful of truly elite universities – and the networks they carry with them – trickle down into career-defining heuristics, such as the quality of a graduate’s first job or his long-term earnings potential?
While I like the idea of a student’s attending university as a purely intellectual endeavor, we need to maintain an air of pragmatism. I fear that an oversupply of many good institutions will unintentionally hamper the post-college success of those who attend all good institutions, while almost certainly impacting those who attend universities that are currently in the elite tier. As they say, there is no free lunch.