Harvard University’s endowment is $35 billion, and some people aren’t happy about it. Massachusetts legislators see money that could be theirs, and are contemplating new taxes. Social activists see money that could be going to charity, and want to divert it. Distinguished alumni who have landed at public universities wonder why, with all that cash, Harvard graduates such a tiny number of students.
These are all legitimate concerns, and I won’t be suggesting the ideal policy compromise. But there is one misimpression that people seem to have, that might as well be corrected before any hasty actions are taken: the purpose of Harvard is not to educate students. If anything, its primary purpose is to produce research and scholarly work. Nobody should be surprised that the gigantic endowment isn’t put to use in providing top-flight educational experiences for a much larger pool of students; it could be, for sure, but that’s not the goal. The endowment is there to help build new facilities, launch new research initiatives, and attract the best faculty. If it weren’t for the fact that it’s hard to get alumni donations when you don’t have any alumni, serious consideration would doubtless be given to cutting out students entirely. Sure, some would complain that they enjoy teaching, that it keeps them fresh, or that students can be useful as research assistants. But those are reasons why the students are useful to the faculty; they are not assertions that the purpose of the institution is to educate students for their own sakes.
Don’t believe me? Here is the test: when was the last time Harvard made a senior tenure offer to someone because they were a world-class educator, rather than a world-class researcher? Not only is the answer “never,” the question itself is somewhat laughable.
This is not a value judgment, nor is it a particular complaint about Harvard. It’s true of any top-ranked private research university, including Caltech. (Note that Caltech has over 1200 faculty members and fewer than 900 undergraduate students.) And it is not a statement about universities in general; many large public universities, and smaller liberal-arts schools, take education very seriously as a primary mission. This is by no means incompatible with being a top-notch research institution — the physics departments at places like Berkeley or UC Santa Barbara would be the envy of almost any private research university. But those places also take their educational mission very seriously, which Harvard, honestly, does not.
Of course, certain individual faculty members at Harvard might be great teachers and care deeply about their students; but that’s a bonus, not a feature of the institution. (Harvey Mansfield, to a visiting colleague: “You should close your door. If you don’t, undergraduates may wander in.”)
None of this is necessarily good or bad; it’s just a recognition of the state of affairs. Harvard et al. judge themselves by the research and scholarship they produce. Students will always keep applying to those places and trying to get in, because the aura of intellectual attainment produced by precisely those scholarly accomplishments will always act as a powerful draw. Such students are by no means making a mistake; the intellectual atmosphere at such places truly is intoxicating, and if nothing else the interaction with your fellow talented students can be a life-changing experience. But to try your best to get into Harvard and then complain once you are there that the professors seem interested in their own work rather than in teaching is to utterly miss the point. And to complain that Harvard has a giant endowment that it chooses to use for purposes other than educating more students is equally misguided.
“CIP” and Sean are both ignoring what is really the central issue in academics today, and since Harvard is a leading U.S. academic institution, and is deeply involved in “technology transfer” and patent licensing efforts. However, CIP’s claim that this is a “private” phenomenon is misleading. The big public universities are just as deeply involved – take a look at the the University of California’s Technology Transfer Office, for example. It sure would be interesting to hear what CIP and Sean think about the role that Bayh-Dole has played in creating the current situation.
It is also worth noting that Harvard itself seems to disagree with the title of this article – see what Bloomberg has to say: http://www.bloomberg.com/apps/news?pid=20601109&sid=aq77eJfrlZm8
“Harvard, Yale Boost Engineering in Race With China (Update1)
By Brian Kladko
May 30 (Bloomberg) — Harvard and Yale are boosting their engineering programs because of increased demand and competition from China, where more engineering degrees are awarded each year than in the U.S…
The growth in engineering reflects increased hiring needs of companies as diverse as biotechnology developer Genzyme Corp. and solar-cell maker SunPower Corp. The Labor Department anticipates an 11 percent rise in engineering employment in the U.S. between 2006 and 2016. While China says it annually turns out seven times as many engineers as the U.S., a Duke University researcher says that number is inflated, though the Asian nation does outpace American schools.
U.S. engineering and technology degrees peaked at 97,122 in 1986, and fell 16 percent to 81,610 in 2006, according to the Web site of the Washington-based National Center for Education Statistics.”
By the way, the claim that “it’s not about teaching, and it’s not about money; it’s about research” ignores the obvious point that one cannot do research without funding. How much does it cost to run a small research group, after all? A PI, a few technicians, a few postdocs, grad students, equipment, overhead, salaries? We are talking hundreds of thousands to millions of dollars per year – and high-energy physics experiments these days cost quite a bit more than that… Of course, we all like to portray ourselves as the modern equivalent of high priests, unsullied by venal monetary concerns, and focused on a higher, more noble mission… 🙂
Scientists who want to preserve their reputations as “independent scientific researchers” really do have an obligation to roll back the Bayh-Dole makeover of academic institutions, and also to oppose the corporate takeover of public academic institutions in the U.S. The first step will be to repeal that bill.
Amen it is, but actually I am not concerned with godliness here, maybe I should, I am concerned here with Indian youth as in Native American or American Indian among other appelatives. Indian youth has remained the lowest achieving group in science and else in all categories forever.
One wrinkle is that the money in the endowment cannot be spent in the same way as “real” money. A large fraction (and perhaps the majority) of the money is in the form of gifts tied to specific purposes. When a donor gives one million dollars to Harvard, they rarely just give that money outright, leaving it up to Harvard to decide the best way to spend it. Instead, they usually give the money to a specific purpose that resonates with causes they believe in (the rowing team, daily tea in a specific dorm, the biology department, etc). Legally, this ties the money to a limited use in perpetuity. If someone has endowed a professorship in railroad technology, then that money (and the money earned by that money) cannot be spent on scholarships or gardening or middle eastern studies or whatever other needs are more pressing. So sometimes, it becomes almost _impossible_ to spend down your endowment.
I’d also like to point to the Carnegie Institution for Science as an effective version of “Harvard without the students”, at least for the sciences.
Let’s not kid ourselves. Harvard has only one purpose, but they’ve been neglecting their duties ever since President Eliot reformed the curriculum.
The Massachuesetts General Court chartered Harvard “To advance Learning and perpetuate it to Posterity; dreading to leave an illiterate Ministry to the Churches.”
“Let every student be plainly instructed and consider well that the main end of his life and studies is to know God and Jesus, which is eternal life. And therefore to lay Christ at the bottom as the only foundation of all sound learning and knowledge.”
So what the General Court giveth the General Court can take away… 😉
–Beo
There are several different issues that have entered this discussion. As to how the money should be spent, I don’t care to comment. Harvard has its own priorities, and historically these have defined its success. I see no reason why Harvard should limit its priorities to those outlined in its charter, as some posters seem to think. If this were required by law, I’m sure Harvard would simply amend its charter. Another poster excuses Harvard spending by noting that endowment income is typically not discretionary. I do not think this is a valid excuse. Harvard is not obliged to accept gifts — it can select among donors to ensure that gifts appropriately reflect its priorities. If Harvard has accepted gifts that direct funding away from its priorities, for example putting it at risk to lose tax-exemption, that’s Harvard’s problem.
A separate issue is how much of its endowment should Harvard spend. Certainly, it has been to Harvard’s advantage to not spend all of its money, but invest in industry instead. But investing in industry is the job of industry, and is not a tax-exempt business. Harvard obtains tax-exemption via the promise that, ultimately, its revenues will be spent on other priorities. However, this promise loses meaning the less of these revenues are spent on a regular basis. Consider, for example, if Exxon announced that in the year 2500 it would liquidate its capital to feed the poor. Should this grant Exxon tax exemption? This possibility for ambiguity is resolved for charitable foundations by requiring they spend above a fixed fraction of their endowment to qualify for tax exemption. This seems to me to be a good rule for universities.
I think this is an important issue, because a large imbalance in the resources of Harvard (and peer institutions) with respect to other universities does not seem to be a public good. Although Harvard attempts to be an equal-opportunity institution, it is not (by this I mean Harvard students do not reflect the demographics of the nation). As such, the prestige of Harvard plays as a vehicle for an advantaged class to perpetuate its advantage. That is, it more benefits the priviledged to have rarer opportunity for early-career distinction, since the priviledged start with a competitive advantage. The cure for this is greater parity — and competition — among a larger set of institutions. Part of achieving greater parity is inhibiting wealthy institutions from increasing the wealth divide. Among individuals in society, this is attempted with the progressive personal income tax. I think the philosophy behind this applies to universities as well.
If one finds it impalatable to tax an research/education institution, this isn’t really necessary. These institutions are, of course, heavily subsidized by government, and this subsidy could just as well be used to accomplish the desired end. In practice, grant administration fees are probably more valuable to any institution than tax-exempt endowment revenues. As it stands, the federal government is a major enabler of institutional wealth inequality, as elite institutions generally get away with higher administration fees than other institutions. Tying these fees to endowment payout seems an effective means to encourage high endowment payout.
As a former student of both Harvard (which supposedly doesn’t take teaching seriously) and Berkeley (which apparently does) I can say that the worst, most apathetic teachers I ever had were at Berkeley. I don’t think we should kid ourselves: there’s not a particular sense of mission that sets Berkeley or UCSB professors apart from Harvard professors. Both are mainly concerned with their own careers and their own research. You’ll find both terrible people and gems in both places.
I am pointing to the first paragraph of the anno 1650 Harvard chapter and Indian youth. The shadowing and fencing about teaching, taxes, patents, research, Nobel prizes and else is irrevelant for Indian youth. Most of them cant get an education. Nonetheless, Harvard tries and is trying harder and I was trying to concite your interest in this unusual opportunity to bring forth the inimaginable circumstances of Indian education and research, mostly unknown and purposefuly ignored. One example: the 100 buck laptop program could have started here AT HOME.
Well it does say on the entrance to the Emerson building – “What is man that thou art mindful of him?”
#30 LOL indeed.
and…”What is the son of man, that you care for him?”
It is beyond me as to why no one on this thread wants to talk about corporate university patent & licensing policy as it relates to Harvard’s endowment. I would take a look at this story for a good intro:
http://www.nytimes.com/2007/06/04/technology/04nano.html
“Today, Harvard and Nano-Terra Inc., a company co-founded by Professor Whitesides, plan to announce the exclusive licensing for more than 50 current and pending Harvard patents to Nano-Terra. The deal could transform the little-known Nano-Terra into one of nanotechnology’s most closely watched start-ups.”
“It’s the largest patent portfolio I remember, and it may be our largest ever,” said Isaac T. Kohlberg, who has overseen the commercialization of Harvard’s patent portfolio since 2005. Nano-Terra, based in Cambridge, Mass., said that the patent filing and maintenance costs alone top $2 million.”
“Terms of the deal were not disclosed, but Harvard said that it would receive a significant equity stake in Nano-Terra in addition to royalties.”
So, how does that fit into the “non-profit” picture here? Is Harvard just another corporation, and are its professors just tightly controlled industrial scientists with little or no “academic freedom”? Seems like it – and that is all due to Bayh-Dole.
Every major university bases tenure decisions on the amount of research performed ( exhibited by published papers) and the amount of grant money obtained. Harvard is not unique in this regard. The sad truth is no research university grants tenure to a good teacher. Tenure goes to people who bring in the big grants – period end of story.
Recently David Rockefeller stated that it was due to Harvard’s language requirement he went to Germany to study and was there to witness the rise of Fascism..
So there you’ve got it folks right from the horses mouth..
It’s Harvard that is to blame for the rise of The International Corporate Fascist Conspiracy..and here all along I thought it was Yale..
Sean,
Whether Harvard’s goal is to educate students or to produce research, it’s sitting on a pile of 35 billion dollars that it’s not using for *either* purpose. That’s what an endowment is: money that hasn’t been spent. As commenters above point out, standard foundations have a requirement to spend X% of their endowment each year in order to justify their tax-privileged status; universities are exempt from these rules.
Brad DeLong wonders why Harvard can’t spend that money to teach more students today. Don’t you wonder why Harvard can’t spend that money to produce more research today? If Harvard refuses to spend its money on either purpose but rather acts as an endowment-maximizing bank, it’s not clear why donations to the Bank of Harvard should be tax deductible.
Sean, I don’t have a stake in this argument one way or another. I would, however, be interested in hearing some concrete numbers regarding your implied claim that Harvard’s endowment is intimately tied to its research.
At one level I’m guessing this is obviously true. My suspicion is that tuition fees and similar such (whatever per student money the state provides etc) do not fully cover the costs of running the place. Thus some fraction of the interest generated by the endowment every year is being spent on the salaries of researchers, and that is good. Some fraction is also being spent on buildings, and that’s also good.
Some fraction may also be being spent on library materials, and the goodness of that is debatable. By making a larger amount of money available for this purpose, purchasing a monopoly commodity whose prices have no anchoring in reality, Harvard is probably ramping up the profits of Elsevier and similar parasites, and making the world a whole lot tougher for every other university.
But what about beyond this? Are there substantial scientific facilities on campus, elsewhere in the world, or in space, that were funded by Harvard rather than by NSF, DOE and the usual suspects? Are there huge arrays of gene sequencing machines that were not paid for by NHS? Are there archeological expeditions to Peru that are funded directly by Harvard rather than having the university simply act as a facilitator?
These are not rhetorical questions; I honestly don’t know the answer.
It does seem strange, however, that at a time when, for example, most Harvard faculty would regard it as a matter of vital importance than the US engage in something like an energy Manhattan project to look into ways of dealing with peak oil and greenhouse gas emission, Harvard is sitting on a massive pile of cash rather than, eg, funding a center for this subject, seeding it, and basically trying to start some momentum (that can then be augmented by federal government and industry money).
If something like that is not considered an important enough way to spend the money available, one does have to ask exactly what DOES qualify as important enough.
Harvard may seem to be a research and education non-profit institution, but if you actually look at their books, you’ll see that they are basically an investment house which operates a research and education institution to provide them with a tax exemption. That $35 billion endowment did not come out of cash flow. The endowment was about $500 million back in 1970, so the growth rate has been on the order of 12%. Of course, a lot of that gain was in the form of tax free donations, including appreciated stock, but Harvard is noted for producing an excellent return on its portfolio.
Tax law in the US draws a distinction between a tax exempt foundation and a nonprofit organization. Foundations are subject to stricter rules. For example, they are not allowed to accumulate income, and are required to distribute a certain portion of their income every year. If Harvard were a foundation, it would have to spend most of its portfolio income on education and research, and if they made more money, they’d have to increase their spending on their stated mission.
A non-profit organization, however, is allowed to accumulate income. In fact, it may hold for-profit assets, but it needs to have a distinct wall isolating its business operations from its tax exempt operations. The case law is fascinating. If you think the folks at Cosmic Variance are clever, you should check out http://www.irs.gov/irm/part7/index.html and see human ingenuity red in tooth and claw. (Or perhaps, that’s green, not red).
One popular approach in the 1940s was a real estate transfer. For example, Yale created the Boola Corporation to buy the land under the Macy’s in San Francisco, hold it as a nonprofit, and lease it back to Macy’s. That and a number of similar deals were struck down. The Muller noodle company was actually a wholly owned subsidiary of NYU, and attempted to operate as a tax exempt, nonprofit noodle company. This led to changes in the tax code and they still teach the Muller Noodle case at NYU law school. (One doctor actually transfered his practice to a nonprofit and hired himself as a research employee whose job was to see patients). If you wonder why our tax code runs thousands of pages, look no farther.
Are the big nonprofit organizations pulling a fast one? Are they basically pulling a Muller Noodle company scam, except operating as a financial firm, tax exempt under cover of their research and education arm? Shouldn’t they be treated more like a tax exempt foundation and be required to keep their spending on their pro bono mission proportionate to their income?
I think that an awful lot of nonprofits have crossed the line. The mission for which they have been granted a tax exemption is no longer a central part of their economic make up. Harvard and its ilk should be restructured as two entities: a foundation to manage the investment fund and produce income and a non-profit research and education organization funded by the former, government grants and tuition payments. The folks at Harvard, if you haven’t noticed, are recognizing the issue. They’ve been extending financial aid up the income ladder, and it is costing them peanuts out of their investment income.
But if it is a scam, who is the criminal mastermind who is benefiting? Surely, this argument that Harvard is subverting a noble educational cause for evil capitalist ends only holds water if there is an evil capitalist behind the scenes creaming off the profits.
Mike M
Not every law in society, even those to do with taxation, is about restraining evil capitalists. There are other issues like efficiency and fairness that are also relevant.
In Harvard we have a situation where Harvard, through the existence of this pile of cash, is making decisions that affect the economy. We can ask
(a) is this efficient? Does it make sense to give Harvard a greater leverage (through its tax exempt status) in its degree of control over the economy than other actors (it has this control through its investment decisions) and
(b) is this fair? It is, after all, allowing very wealthy people to avoid paying some taxes. We allow this tax avoidance in the case of “genuine” non-profits because we believe in the value of the good works being done. But when the primary good work being done is to grow the endowment ever larger, we can ask why the money so donated should be non-taxed.
Just to enter some facts into the discussion, according to the Harvard Fact Book, Harvard has been spending 4.3% of its endowments market value the last couple of years.
This spending comprises about 31% of Harvard’s revenues, which total very nearly $3B. If Harvard had spend 5% instead of 4.3% in 2007, its revenue would be larger by $150M. Although this could fund a tremendous amount of research, it also seems that even if Harvard had been spending 5% of its principle each year, the endowment still would have ballooned (over the last few years, it has been increasing by over $3B a year — having to draw an additional $150M would not have significantly hampered that growth). This is to say, treating Harvard’s endowment like a foundation would not have significantly inhibited its enormous growth in the last couple decades. On the other hand, it would have funded billions more in research/education.
It is tempting to criticize Harvard for not spending much more than 5% of its endowment, given its performance has been so strong. But it doesn’t seem appropriate to *require* such high spending, as investment performance at other institutions wouldn’t support higher rates. And such criticism would be quite speculative — clearly Harvard is still the premier university in this country and the world, so it’s hard to argue it has suffered for ‘holding back.’
Still don’t think I quite follow the logic here. The reason why investment funds are taxed is because their profits are ultimately realized for the direct financial benefit of individuals. That is not the case here.
So, yes, it gives Harvard a larger fund to invest, and hence more influence on the market, but what of it? There are always funds with more or less money that have more or less influence. Personally, I have no problem with extra clout being given to one where that clout cannot be used for the financial benefit of the already-rich.
And, yes, it allows rich people to avoid paying tax, but only by giving untaxed money away, so they end up less rich than they would have been if they hadn’t made such a donation. So, again, where is the inequity?
Re: “But if it is a scam, who is the criminal mastermind who is benefiting? Surely, this argument that Harvard is subverting a noble educational cause for evil capitalist ends only holds water if there is an evil capitalist behind the scenes creaming off the profits.”
The issue isn’t good or evil. There is no criminal mastermind. There is no issue of conversion. The issue is government spending. Tax exempt organizations are granted their status because they are providing some societal benefit, often a benefit which cannot be funded as a capitalist enterprise. Since our society has both capitalist and non-capitalist organizations, it is important that the government provide a level playing field and not provide tax exemptions for one noodle maker as opposed to another because the former is owned by a university. In my town we have a YMCA which runs a health club. This health club basically subsidizes a good bit of their charitable operations: youth outreach, subsidized day care, fitness for the disabled programs and so on. I also know a couple that has started a 24/7 health club, and they hope to make money on it, but they are concerned that they have to pay taxes, but the Y does not. (Washington State has really nasty business taxes. It’s the price we pay for not having an income tax).
From time to time, it makes sense for our society to examine our spending in the form of tax exemptions. Do we have the right mix or rules and restrictions to get a good societal benefit, without raising every one else’s taxes to cover the relevant exemptions?
As for Harvard; I’m not picking on Harvard. They are just one of the largest nonprofits. I’m not surprised that they could be run as a foundation, since in many ways they are structured as a foundation with a university built around it. Harvard actually takes its educational mission pretty seriously. They frequently tweak their core curriculum, and their more successful changes are often copied. Of course, Harvard does have some of the best students, so not all of their ideas are transferable, or scalable. Can you imagine Harvard with 10,000 or even 30,000 undergraduates? They would have to become a fair bit less selective, and I could imagine the uproar from the Ivies and other elite schools. When tweaking things, we have to be careful what we wish for.
This is a minor point, but #46 Kaleburg writes “Can you imagine Harvard with 10,000 or even 30,000 undergraduates? They would have to become a fair bit less selective, and I could imagine the uproar from the Ivies and other elite schools. When tweaking things, we have to be careful what we wish for.”
In fact Harvard has some 6500 undergraduates. The number of applicants has been steadily rising in recent years (in large part due to their increasingly sweet student aid policies). As a result, the acceptance rate has recently been 7-9%. Double the size of the school to 13,000, and you’d end up with an acceptance rate around 15-18% – right back where it was when I was admitted myself in the mid-90s. And nobody then would’ve called Harvard “less selective”! I suspect that Supersized Harvard would end up looking very much like Harvard does today – only with even more student groups and activities, and ten extra undergrad Houses crammed into Allston somewhere…
I’m not disagreeing with your overall point. But the detail-oriented scientist in me couldn’t resist the temptation to inject some more numbers into the discussion.
Again, I am not sure I follow the logic here. I understand why your health-club friends might be annoyed that the YMCA offers similar services in a tax-exempt manner, which could be seen to be distorting a commercial market place.
However, for the most part education is not a commercial market place. Indeed, society has recognized that there are serious problems in exposing it to such commercial pressures (“buy one degree, get one free,” etc). Aren’t Harvard’s tax-exempt privileges available to all educational establishments?
On the investment side, they are in some sense competing with investment funds, but again not in any commercial sense since they aren’t pulling potential investors away from other funds.
So, what is the issue?
Mike M (#48): It seems to me there are many issues.
(1) Tax exemption is granted to charitable gifts, and charitable organizations, because they are seen to provide a public good. Growing capital is NOT one of those public goods, or else we’d grant tax exemption to that in the private industry. Thus, when charitable organizations divert resources to growing capital, they are diverting resources away from the public services that motivate their tax exemption. One can imagine an extreme situation, where society becomes socially/culturally impoverished because all of its charitable organizations are diverting their resources to growing endowments, and not to their primary missions.
(2) One can argue that Harvard is better at what it does because it competes with other elite universities. Historically, we have done just fine with the set of elite universities we have. But our society is growing, and growing more advanced, and it might be argued the circle of ‘elite’ academic institutions should grow to maintain healthy competition across the depth of academic endeavors in our advancing society. This requires inhibiting ‘advantaged’ institutions from too powerfully leveraging their advantage.
(3) As much as Harvard strives to provide equal opportunity to its resources, as an elite university it still serves to perpetuate the advantage of a more privileged class, because it provides a means for those starting with an advantage to increase that advantage merely by institutional affiliation. I don’t think one can really blame Harvard, who simply seeks the most qualified students (and perhaps even sacrifices this aim in order to open its doors to at least some disadvantaged students) — but as a society we can try to muffle this trend by increasing the circle of elite universities. This requires inhibiting ‘advantaged’ institutions from too powerfully leveraging their advantage.
All this said, I do think we (as a society) should proceed cautiously with such forms of ‘social engineering.’ As much as is wrong with our society, we’ve certainly got a lot of good things going for us, when you compare to the scope of human history. The Harvards of our society are among its most valuable resources, and it is important not to put those resources in jeopardy with speculative policies to improve the situation (or prevent a possible problem).
Thoreau, an 1835 graduate of Harvard, said his real
education didn’t start until after he left college.
He also said of his diploma: “Every sheep should keep
its skin.”
Major universities are mainly there to crank out
corporate drones – and this applies to science as well.