Thursday, June 19, 2008

How Should the Harvard Endowment Be Used?

NY Times reports on Harvard Alumni for Social Action's idea that the Harvard Endowment should be used for more than just enriching Harvard.

For three years, a handful of Harvard University alumni have waged a quiet effort to persuade the university to expand its mission far beyond its Cambridge campus, the students it educates there and the multitude of research labs, libraries and other facilities available to them.

They call themselves Harvard Alumni for Social Action, or HASA, and their goal is to prod the university to use its vast wealth, including its $35 billion endowment, in unprecedented ways, like supporting struggling colleges in Africa.

“There are large amounts of money being given to Harvard and other wealthy universities every year by classes like ours, and they don’t really need it,” said Jennifer Freeman, part of the HASA outreach committee for the Class of 1983. “They should be thinking of new things they could do with it, which would re-energize alumni and be good for the university, too.”

Both Drew Gilpin Faust, Harvard’s president, and her predecessor, Lawrence H. Summers, have been unwilling to even discuss the proposals. The development office, as fund-raising operations are known in the charitable world, politely refuses to share its list of alumni, frustrating HASA’s recruiting ability.

HASA reflects the growing debate over university endowments and whether their continued accumulation of assets — Harvard is expected to have $100 billion at the end of the next 10 years — serves a charitable purpose.
The amount of money in the endowment is truly staggering, $35 billion now and $100 billion in 10 years. For comparison, the Gates Foundation endowment is only $37.3 billion.

Not only is there a lot of money in the endowment, but it has also been making outsized returns:
The 23.0 percent return for the last fiscal year brings the endowment’s annualized 10-year performance to 15.0 percent and the 5-year annualized return to 18.4 percent. Since its inception, HMC has averaged an annualized rate of return of 13.3 percent.
Even if it were to just net 10%, that would more than cover Harvard's entire operating costs of $3 billion a year. But, it is not clear that that would be a good use of money, as they already offer free tuition to those who parents make less than $60,000 a year. Reducing tuition further would just be giving money back to rich parents who are sending their kids to Harvard, not exactly a needy bunch.

The endowment has more money than Harvard currently spends. How then should it be used?

1) Continue with the status quo. The money continues to be invested like a hedge fund adding value to society by making capital available. Because the endowment has a long time horizon and lots of money it can take risks that almost no one else can. These can lead to large financial rewards for the endowment, the businesses they capitalize and society from the goods and services produced. They could also continue to use the money primarily for investing, but shift their investment philosophy to take social and environmental issues into account.

2) Enlarge the size of the campus taking in more students. While Harvard gets the best students which leads to its high reputation, it is not clear that the education itself is superior:
The question of how Harvard should expand if indeed it should expand: it doesn't seem to be nearly as good as the small liberal arts colleges or even its rivals Yale and Princeton at undergraduate education; the medical school and the biomedical complex that surrounds it appears to do very well indeed as research institutions; the public policy school seems to have been an experiment worth trying that did not fulfill Derek Bok's hopes; few of the many people I know who went to the law school say many good words about it; et cetera.
3) Create new campuses in the US. Brad DeLong recounts how Clark Kerr, the president of the University of California in the 60s, expanded from serving 5,000 students a year to 40,000 by adding 8 new campuses. Not clear that there is a large need for additional universities in the US at this point, or if, for reasons stated above, Harvard would be particularly good at this.

4) Create campuses outside the US. Looking at the enrollment rates throughout the world, there is lots of opportunity for more colleges and universities to be created, especially in Africa. HASA's idea of supporting struggling colleges in Africa has the potential for a large impact. Patrick Awuah left a comfortable life in Seattle to return to Ghana and co-found Ashesi, a liberal arts college. The endowment could allow a thousand Ashesis to bloom.

5) Subsidize primary education throughout the world. I always have found this quote by former Harvard president Larry Summers to be instructive:
Lawrence Summers estimated that an investment of $2.3 billion to educate girls in primary and secondary schools would yield 20% annually. Each additional year of female education reduces fertility by roughly 10%. It would take adding 25 million girls to current primary education at $938 million/year and 21 million girls to secondary school at $1.4 billion/year.
That 20% rate of return is higher that what the endowment has been averaging. The endowment could cover the entire $2.3 billion a year bill. What better way for Summers to refute the allegation of his sexism than to suggest that the endowment be used to ensure every girl on the planet has access to education?

6) Fund more research. Harvard is a research institution and could fund all types of research at both their school and beyond. They could tackle the 14 grand engineering challenges of 21 century. Re-fund the research on food production that has been cut over the years and is needed now more than ever. Help fund research where the US government isn't putting enough money.

7) Quit fundraising and reduce the endowment's size. Tell alumni that no more money is needed and that they ought to give to another non-profit that can do more good with their money. But, I think that the alumni want to give back to Harvard to help it keep its spot as having the highest endowment of all schools (and of course they want to maximize the chance that their children can get into Harvard). So why not allow them to continue giving $600 million a year and have the endowment use that money for the good of all humanity?

Those are my suggestions. Anyone else have any others?

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