May 14, 2018
- Universities face serious threats to academic freedom from outside pressure groups
- Some Donors have made demands that can undermine university provision of unbiased, high-quality research
- Accommodating ethically questionable Donor demands can undermine public confidence not only in individual researchers, but in entire institutions and even in the broader academic enterprise
- Stronger, more secure, and more stable funding for universities—without strings attached—would help insulate universities from undue pressure by outside groups
- Universities should work together to secure their financial and intellectual independence, articulate clear ethical standards, and enforce those standards
I recently documented efforts by a well-organized network of libertarian and conservative academics, advocacy groups, and media organizations to foster resentment toward universities and then gain control over them, under the pretense of supporting free speech. These efforts continue a decades-long assault on higher education, and have been remarkably effective at tarnishing universities’ reputations. This has paved the way for legislation that further undermines universities’ intellectual and financial independence.
A complementary threat to academic integrity comes from powerful outsiders exploiting universities’ financial needs to leverage relatively small donations into enduring influence over faculty, curriculum and student life. Such money-for-influence arrangements could alter what research gets produced, and by whom.
Outside funding can increase research output and impact in media and policy circles. It can fund great research that might not have been produced otherwise. But funding under inappropriate terms risks undermining the central and unique role that universities play in society as providers of high quality, reliable, and unbiased information. This could quickly destroy the goodwill and trust that universities painstakingly cultivated over decades (in some cases, for centuries).
This issue has come to a head recently with press coverage of some financial relationships and recently disclosed contracts between conservative and libertarian donors (including foundations and re-granting organizations funded by the prominent Koch family) and George Mason University. Much of the controversy relates to a libertarian / free-market embedded think tank at George Mason, The Mercatus Center, which provides supplemental compensation and resources to GMU’s economics faculty and some law faculty members, as well as opportunities to produce commissioned research on timely policy issues. Through Mercatus, the university has received tens of millions of dollars in donations.
GMU faculty members’ chances of obtaining funding and resources apparently did not depend exclusively on an unbiased assessment of their intellectual rigor and academic contributions, but rather appear to have depended at least in part on the political implications of their research. In contravention of academic ethical norms, donors had substantial influence over which faculty members would receive compensation supplements known as “chairs” or “professorships.” Donors maintained control through representation on selection committees, evaluation committees, rights to recommend removal of chair holders, gift rescission rights, and key-man clauses for senior executives, including the dean of the law school.
“The objective of the Professorship is to advance the . . . acceptance and practice of . . . free market processes and principles [as] promot[ing] individual freedom, opportunity, and prosperity . . . The occupant of the Professorship (“Professor”) shall . . . be qualified and committed to the forgoing principles.”
Rudy Fichtenbaum, president of the American Association of University Professors said “When you start getting into a study of free enterprise then you’re really, I think, stepping into a territory where you’re promoting a political agenda.” Donors may specify a topic of study or type of expertise for a holder of a chair; but they should not specify the chair-holder’s politics.
Critics say Mercatus’s ideologically based funding tips the playing field at GMU in favor of the production of economically right-wing scholarship and the retention of economically right-wing scholars and instructors. Neither Mercatus nor GMU appear to have imposed any limits on the fraction of a faculty member’s total annual compensation that could come from non-state sources such as Mercatus. This is unusual—many funders and universities worry that too much outside funding creates the appearance of impropriety. At least one prominent member of the GMU faculty with a Mercatus affiliation derived over 40 percent of his compensation in 2016 from “non-state” sources, according to public records.
Without supplemental compensation from Mercatus, GMU faculty compensation appears to be uncompetitive with comparable institutions. Thus, working at GMU may not have made sense financially for economists or law professors who were unlikely to obtain Mercatus compensation supplements—i.e., those whose scholarship might support increases in taxes, an expansion of public investment or social insurance, or more stringent regulations of business. At least one moderate economics faculty member says that she “carefully chose [her] research so it wouldn’t be objectionable” to her more conservative colleagues.
August 21, 2017
Vanderbilt Tax Professor Herwig Schlunk wants the federal government to tax university endowments, preferably out of existence. He writes: “In the best of all possible worlds, the federal government could and probably should . . . confiscate[e] all private university endowments . . .”
Toward that end, Schlunk recycles arguments that were discredited years ago.
Professor Schlunk is famous for asserting that law school is a bad investment. Schlunk’s bold claim—based on back of the envelope calculations and highly unscientific website surveys—was popularized by the Wall Street Journal and echoed by sympathetic media outlets. Peer reviewed research by labor economist Frank McIntyre and me—using high quality nationally representative government data and well-established econometric techniques—subsequently demonstrated that Schlunk was mistaken. (See here and here).
This post critiques Schlunk’s recent work on endowments for misuse of discount rates, overlooking the importance of educational quality, mismeasuring student earnings and higher education expenditures, selectively targeting higher education, supporting policies that undermine economic growth, and overlooking stark differences between popular votes and political power.
Misuse of discount rates
To arrive at his headline-grabbing law school result, Schlunk relied on some spectacularly unrealistic assumptions. As Frank McIntyre and I explained four years ago:
“Professor Schlunk’s analysis assumes astronomical discount rates, low earnings growth rates, and zero inflation for thirty-five years. None of these assumptions are empirically or theoretically justifiable.
Most studies [of higher education] by economists have generally used a discount rate between 2.5% and 3%. . . . Compared with the 3% discount rates applied in labor market studies by economists and suggested by the real (net-inflation) costs of financing a law degree . . . Professor Schlunk applies real discount rates of between 8% and 27%.
If Professor Schlunk had used comparable assumptions about discount rates to evaluate the value of a college degree compared to a high school diploma, he would have reached the conclusion that few should go to college. Indeed, given a 30% nominal discount rate, whether it makes financial sense to complete high school might be debatable.”
Undeterred, Professor Schlunk once again relies on unrealistically high discount rates and overlooks differences in completion rates, this time to argue that private non-profit universities provide little value when compared to leanly funded, politically vulnerable public universities. Based on this analysis, he concludes that the federal government should tax universities more heavily than it already does. Higher discount rates mean that future cash flows have a lower present value. Thus the value of a lifetime of higher earnings from higher quality education is diminished by choosing a higher discount rate.
Schlunk’s justification for using such high discount rates is that higher education “puts me in mind of income streams I confronted when advising investors in the private equity sector [where] discount rates of as high as 30% were generally applied.”
For the record, peer reviewed research generally finds that private equity returns net of fees are close to or less than those that can be found in the stock market—not remotely close to the 30 percent returns assumed by Schlunk. (In addition, discount rates are supposed to reflect the weighted average cost of capital, NOT the (higher) returns to equity). If P.E. investors were applying high discount rates to cash flow projections, this likely means that investors believed that P.E. cash flow projections were over-optimistic.
Overlooking college completion rates
In his latest critique of higher education, Schlunk also overlooks large differences in completion rates. Four-year completion rates for bachelor’s degrees are almost twice as high at private non-profit universities as at their more leanly funded public counterparts. If one accepts Schlunk’s assumptions of extremely high discount rates, even a modest delay in completion would have a dramatic impact on value.
Overlooking effects of increased educational expenditures and educational quality
Peer reviewed studies that control for differences in student characteristics consistently find that higher expenditures per student lead to significant increases in student earnings and likely contribute to higher completion rates. (For brief reviews of the literature, see The Knowledge Tax and Populist Outrage, Reckless Empirics; See also here).
Professor Schlunk overlooks these studies.
Mis-measuring student earnings and educational expenditures
Schlunk overestimates the difference in expenditures and resources at elite public and private universities, which leads him to over-estimate the earnings premiums necessary for more resource-intensive private education to be worthwhile. Schlunk assumes incorrectly that all students at elite flagship state universities pay low in-state tuition, when many students at these institutions pay much higher out-of-state or international student tuition. He overlooks the extent to which expenditures per student at elite public universities exceed in-state tuition because of state subsidies and cross-subsidies from out-of-state students. He overlooks the extent to which differences in financial aid affect net-tuition—and therefore educational resources and expenditures—at different universities.
The elite public universities that Schlunk presents as controls that he sees as similar to private universities, but without endowments, actually have larger endowments than many private universities.