> I’m skeptical both that: Lower tuition would make taxing endowments more likely
Yes, if the tuition were reduced by increased endowment subsidy, the political cover for the endowment would not be much affected.
But that strategy would limit the value of that cover (for the university staff) by 1) ultimately limiting the size of the "politically justified" endowment and 2) limiting the overall resources they control.
Re: 1), if the university contains cost inflation below endowment retained returns, the endowment eventually grows to fund 100% of tuition. At that point, the question "why do they need more?" becomes obvious and unanswerable.
Re: 2), note that the article implies an "agency" effect with university personnel, in that they benefit by their control of the institution's resources. In companies, such effects are seen in executives taking higher than market salaries and excess perks. All that diverts income from equity owners to managers. In a university these might be above-market salaries, research budgets, job security, prestige, trips, subsidized housing, etc etc etc -- diversions of endowment returns from "teaching" to the staff.
The agency model argues that university staff benefit from _growing_ costs, which give them more resources to control. The story that education costs rise faster than inflation and middle class incomes removes the limit on the size of the cost base / resources controlled. It also "politically justifies" an ever-growing endowment.
Thus lowering tuition simply by paying ever increasing portions of tuition does not serve the university staff. The point of the article, I believe, is that those staff have an ongoing interest in _increasing_ the costs to be subsidized by the tax-free growth of their endowments.
(It is also worth noting that such arguments justify more than protection of endowment returns: state funding for public schools, federal "overhead" payments for research grants, etc. We might even wonder if the endowed universities play a "cost-setting" role for higher education generally. They operate at ever-higher cost, sustained internally by the endowment returns; those costs then help justify the budgets of unendowed schools. "Hey, if you want the kids of Michigan to have a first-rate education, this is what it costs, just look at Harvard." If so, and MIT, Harvard et al began controlling costs, those controls would then ripple over time throughout the whole system through those benchmarking effects. Thus even unendowed schools would have long-term political interest in protecting those endowment returns.)
Note that we don't have to fully believe the whole story to learn from it. The "market" for higher education market is clearly pretty weird, and explaining that will require so pretty involved stories.
"...the endowment eventually grows to fund 100% of tuition. At that point, the question "why do they need more?" becomes obvious and unanswerable."
This is a very good articulation of my points, thanks for laying it out so crisply. Worth noting that this is already a reality at a select few places. While there is continual agitating in America for our Gov. to provide free college, it turns out that some elite private institutions are already in a position to do so, or will be in the next decade. Food for thought, including the follow-on social implications of the headline: "Tuition Now Free At Harvard! Still $50,000/year At Your Local State University Though"
Regarding agency effects / moral hazard:
Someone asked me on another forum what predictions, if any, I would be willing to make in defense of this article.
I tried to rattle off a few off the top of my head with low conviction. One that I comes back to me still is:
"Professor Salaries will have an increasing Gini coefficient vs. today (i.e. profs at Harvard make a higher multiple of Profs at State Colleges 25 years from now)"
Given that the Top institutions will be competing for talent with Compound Returns while everyone else must compete with Tuition increases, I think this would be interesting to study & observe. I have zero data on this unfortunately, so it's just an unsupported hypothesis for now...
> Professor Salaries will have an increasing Gini coefficient
I think your own model says this is too noticeable. Better strategy would be harder-to-notice changes, like smaller teaching loads, more sabbaticals, earlier retirement, travel abroad to conferences, etc.
Yes, if the tuition were reduced by increased endowment subsidy, the political cover for the endowment would not be much affected.
But that strategy would limit the value of that cover (for the university staff) by 1) ultimately limiting the size of the "politically justified" endowment and 2) limiting the overall resources they control.
Re: 1), if the university contains cost inflation below endowment retained returns, the endowment eventually grows to fund 100% of tuition. At that point, the question "why do they need more?" becomes obvious and unanswerable.
Re: 2), note that the article implies an "agency" effect with university personnel, in that they benefit by their control of the institution's resources. In companies, such effects are seen in executives taking higher than market salaries and excess perks. All that diverts income from equity owners to managers. In a university these might be above-market salaries, research budgets, job security, prestige, trips, subsidized housing, etc etc etc -- diversions of endowment returns from "teaching" to the staff.
The agency model argues that university staff benefit from _growing_ costs, which give them more resources to control. The story that education costs rise faster than inflation and middle class incomes removes the limit on the size of the cost base / resources controlled. It also "politically justifies" an ever-growing endowment.
Thus lowering tuition simply by paying ever increasing portions of tuition does not serve the university staff. The point of the article, I believe, is that those staff have an ongoing interest in _increasing_ the costs to be subsidized by the tax-free growth of their endowments.
(It is also worth noting that such arguments justify more than protection of endowment returns: state funding for public schools, federal "overhead" payments for research grants, etc. We might even wonder if the endowed universities play a "cost-setting" role for higher education generally. They operate at ever-higher cost, sustained internally by the endowment returns; those costs then help justify the budgets of unendowed schools. "Hey, if you want the kids of Michigan to have a first-rate education, this is what it costs, just look at Harvard." If so, and MIT, Harvard et al began controlling costs, those controls would then ripple over time throughout the whole system through those benchmarking effects. Thus even unendowed schools would have long-term political interest in protecting those endowment returns.)
Note that we don't have to fully believe the whole story to learn from it. The "market" for higher education market is clearly pretty weird, and explaining that will require so pretty involved stories.