Category: Education

Alan Gunn asks:

Why do universities (in the US and Britain only) have endowments, and should they? And why does no one but Henry Hansmann [pdf, eBook version here] write about this question?

Because they can.  Tax law doesn’t stop them, and why should a University President spend down the fund?  An ongoing high balance in the fund means prestige, a good ranking, and an ability to make credible commitments to quality faculty and quality programs.

Current donors know that their support will feed into something long-run and grand.  Rationally or not, it is less persuasive for an alumni donor to hear a pitch like “We will spend down the corpus.  Penn State will rise seventeen spots in the ratings, for twenty years, and then fade into obscurity.”  Many givers care predominantly about the “here and now,” but they donate to political campaigns, or benevolent charities, not universities.

Ultimately we need a theory of segmented giving, and how board structures of universities support such giving.  University board members benefit most from a prestigious school with a high endowment and other prestigious board members.  In general those boards will support accumulating the endowment, at least if the school has any chance for prestige in the first place.  Spending money within the university instead distributes those benefits to current faculty and students, rather than to the decision-makers over the endowment.

Note that while the most visible colleges and universities usually have large endowments, the median and modal schools have endowments very close to zero.  They have no chance of accumulating their way to substantial prestige benefits.

Alternatively, you could drop the fancy institutional economics and apply crude price theory.  Universities can borrow or otherwise raise money tax-free, and at g > r you should expect ongoing and rising accumulation.

It is striking how much the list of top U.S. universities does not change over the last century, albeit with some new entries from the west coast.  Among other things, that suggests there has been no fancy, expensive and effective new product that a school might invest in and run down its endowment for.  This might change in the next twenty years.  One can imagine a middling school running down its endowment to spend its way to leadership in on-line education.

I have never seen a good paper on which non-profits accumulate endowments and which do not, and how that difference functions as both cause and effect.  I would think, for instance, that the Heritage Foundation has a substantial endowment, but many think tanks do not.

Here is a new paper on university endowments (pdf), by Gilbert and Hrdlicka, asking whether endowments are invested in too risky a fashion.  It also raises the question of how well endowment practices will survive in a time with low rates of return.  Here is a 2008 dialogue on endowment reform.  Here is a 2009 law review piece on university endowments, it is a little slow to load.  Here is a TIAA-CREF perspective (pdf) on the investment committees for university endowments; they tend to be run by donors.  Here is a look at mandatory payout proposals.  Here is a good 2010 paper (pdf) on what happens when endowment values decline, it is called “Why I Lost My Secretary.”

In 2010, 31 percent of the graduating (undergraduate) class reported taking a job in financial services, source here, pointer from Dylan Matthews.

One of the most consistent findings in educational studies of creativity has been that teachers dislike personality traits associated with creativity. Research has indicated that teachers prefer traits that seem to run counter to creativity, such as conformity and unquestioning acceptance of authority (e.g., Bachtold, 1974; Cropley, 1992; Dettmer, 1981; Getzels & Jackson, 1962; Torrance, 1963). The reason for teachers’ preferences is quite clear creative people tend to have traits that some have referred to as obnoxious (Torrance, 1963). Torrance (1963) described creative people as not having the time to be courteous, as refusing to take no for an answer, and as being negativistic and critical of others. Other characteristics, although not deserving the label obnoxious, nonetheless may not be those most highly valued in the classroom.

….Research has suggested that traits associated with creativity may not only be neglected, but actively punished (Myers & Torrance, 1961; Stone, 1980). Stone (1980) found that second graders who scored highest on tests of creativity were also those identified by their peers as engaging in the most misbehavior (e.g., “getting in trouble the most”). Given that research and theory (e.g., Harrington, Block, & Block, 1987) suggest that a supportive environment is important to the fostering of creativity, it is quite possible that teachers are (perhaps unwittingly) extinguishing creative behaviors.

From Creativity: Asset or Burden in the Classroom?, a good review paper. What the paper shows is that the characteristics that teachers use to describe their favorite student correlate negatively with the characteristics associated with creativity. In addition, although teachers say that they like creative students, teachers also say creative students are “sincere, responsible, good-natured and reliable.” In other words, the teachers don’t know what creative students are actually like.  (FYI, the research design would have been stronger if the researchers had actually tested the students for creativity.)  As a result, schooling has a negative effect on creativity.

My experience as a parent is consistent with the idea that teachers don’t like creative students but I try not to blame the teachers too much. Creative people, for better and worse, ignore social conventions. Thus, it can be hard for teachers to deal with creative students in a classroom setting where they must guide 20-30 students en masse. As Jonah Lehrer puts it:

Would you really want a little Picasso in your class? How about a baby Gertrude Stein? Or a teenage Eminem? The point is that the classroom isn’t designed for impulsive expression – that’s called talking out of turn. Instead, it’s all about obeying group dynamics and exerting focused attention. Those are important life skills, of course, but decades of psychological research suggest that such skills have little to do with creativity.

One hope I have for personalized learning, ala the Khan Academy, is that  teachers will not feel the need to suppress creative students when classroom dynamics do not require that all the students follow all the rules all the time .

Hat Tip: Erik Barker.

“Who pays a tax is determined not by the laws of Congress but by the law of supply and demand,” as Tyler and I say in Modern Principles. In particular, whether demanders or suppliers pay a tax is determined by the elasticities of demand and supply. The more elastic side of the market can better escape a tax, leaving more of it to be paid by the inelastic side. The same thing is true for a subsidy but in reverse, the inelastic side of the market gets the benefit of the subsidy. Virginia Postrel applies the idea to education and education subsidies.

If you offer people a subsidy to pursue some activity requiring an input that’s in more-or-less fixed supply, the price of that input goes up. Much of the value of the subsidy will go not to the intended recipients but to whoever owns the input. The classic example is farm subsidies, which increase the price of farmland.

A 1998 article in the American Economic Review explored another example: federal research and development subsidies. Like farmland, the supply of scientists and engineers is fairly fixed, at least in the short run. Unemployed journalists and mortgage brokers can’t suddenly turn into electrical engineers just because there’s money available, and even engineers and scientists are unlikely to switch specialties. So instead of spurring new activity, much of the money tends to go to increase the salaries of people already doing such work. From 1968 to 1994, a 10 percent increase in R&D spending led to about a 3 percent increase in incomes in the subsidized fields.

“A major component of government R&D spending is windfall gains to R&D workers,” the paper concluded. “Incomes rise significantly while hours rise little, and the increases are concentrated within the engineering and science professions in exactly the specialties heavily involved in federal research.”

The study’s author was Austan Goolsbee, then and now a professor at the University of Chicago but until recently the chairman of the president’s Council of Economic Advisers.

….Goolsbee declined a recent request to comment on the subject, but the parallels to higher education are hard to miss.

In the short-term, the number of slots at traditional colleges and universities is relatively fixed. A boost in student aid that increases demand is therefore likely to be reflected in prices rather than expanded enrollments. Over time, enrollments should rise, as they have in fact done. But many private schools in particular keep the size of their student bodies fairly stable to maintain their prestige or institutional character.

…On the whole, it seems that universities are like the companies making capital equipment. If the government hands their customers the equivalent of a discount coupon, the institutions can capture at least some of that amount by raising their prices

…This doesn’t mean that colleges capture all the aid in higher tuition charges, any more than capital-equipment companies get all the benefit of investment tax credits. But it does set up problems for two groups of students in particular. The first includes those who don’t qualify for aid and who therefore have to pay the full, aid-inflated list price. The second encompasses those who load up on loans to fill the gaps not covered by grants or tax credits only to discover that the financial value they expected from their education doesn’t materialize upon graduation.

Addendum: Long time readers may remember my rebuttal to Krugman on a similar point. Liberal Order has graphs and further discussion.