Massachusetts legislators, demonstrating a growing resentment against the wealth of elite universities in tight economic times, are studying a plan to levy a 2.5% annual tax on the portion of college endowments that exceed $1 billion. The effort takes aim at one of the primary economic engines of the state, which is home to nine universities with endowments that surpass the $1 billion level, led by Harvard University's $35 billion cache, the nation's largest... Supporters said the proposal would raise $1.4 billion a year. Based on the most recent size of Harvard's endowment, the university would have to shell out more than $840 million annually.
Greg Mankiw, "Time for Harvard to Move?":
1. Instead of expanding the university into Alston, Harvard could create a second campus in another state. Call it Harvard South. (Put it in a better climate than Boston, and I would be one of the first faculty to volunteer for the move.)
2. Transfer much of the endowment to Harvard South. Support Harvard North by slowly selling off land in Massachusetts.
3. Eventually, make Harvard South the main campus, and Harvard North the satellite. If Massachusetts state lawmakers remain hostile, close Harvard North down entirely.
Brad DeLong, "Alma Mater Blogging":
Somebody last week--was it Jan de Vries? John Ellwood? Somebody else? I forget who, but it is not original to me--said that the right model for Harvard over the past century is Yugoslavia. Remember the story of the Yugoslavian socialist worker-managed firm? If you add another worker to the firm, that worker gets a pro-rata share of the firm's value added. The firm's value added has a component attributable to the firm's capital stock, a component attributable to the ideas embedded in the firm, a component attributable to the firm's market position, and a component attributable to the workers. Hire another worker, and only the last of these goes up: the first three do not, and so average compensation falls.
This means that a worker-managed firm is likely to shrink whenever it gets good news that makes it more productive--the larger is the value added due to ideas, capital, or market position, the more expensive does it become for the existing workers to replace workers who leave, let alone hire enough workers to expand. While a competitive market capitalist firm responds to good news about its productivity and value to society by increasing employment, a Yugoslavian-model market socialist firm responds to good news about its productivity and value to society by shrinking. On this analysis, the very success of Harvard over the past two generations together with its degree of worker management has created enormous internal pressures not to expand, the better to share out the surplus among the existing stakeholders.
Jim Manzi, "Is Harvard Just A Tax-Free Hedge Fund?":
[Harvard] claims to be in the business of serving humanity through the creation and dissemination of knowledge, but Biogen claims to “transform scientific discoveries into advances in human healthcare”. That sounds pretty good, too...
Receipts = $2 billion of operating revenue + $7.3 billion of investment income + $0.6 billion of gifts to the endowment = ~$10 billion.
Operating costs = ~$3 billion.
Profit = $10 billion – $3 billion = ~$7 billion.
This explains why Harvard’s net assets increased about $7 billion in 2007, from about $35 billion to about $42 billion.
Viewed purely in terms of economics, Harvard is really a $40 billion tax-free hedge fund with a very large marketing and PR arm called Harvard University that has the job of raising the investment capital and protecting the fund’s preferential tax treatment.
I have no idea whether or not this endowment tax idea kicking around in the Massachusetts legislature really makes sense. My guess is that it may not since the flow of resources toward Harvard may well be good for the state in which it's located even if it doesn't particularly serve the public interest. But the people making additional gifts to Harvard and similar institutions really ought to rethink their giving strategy. Even in terms of helping your kids get in, if you're really rich and give a lot of money to deserving charitable institutions, the admissions office will still view you as a good development prospect and let your kid in. Then just don't pony up the money!Personally, I think that a hedge fund or investment bank outside of MA should start their own university. You'd have a great initial core of investors to fund the endowment (whose relatives would get free tuition, of course), plus the additional revenue streams of tuition, grants, and donations, and your tax benefits would be huge. Plus, you could actually put a fraction of your wealth to work doing some pretty worthwhile (and potentially high-yield) stuff, from education to medical and scientific research.