Violating Donor Intent, Taxpayers Take Warning

A new paper from the John Pope Center for Higher Education by Martin Morse Wooster looks at how universities have used funds or property bequests by large donors in ways that violated the donors’ intent.

The paper, “Games Universities Play: And How Donors Can Avoid Them” proceeds through a series of case studies exploring the several different kinds of mismanagement. Some examples:

— A Yale alumnus gives $20 million to his school for the teaching of Western Civ classes. Faculty resistance waylays the project and eventually the donor pulled his money.

— Boston University hit up to renovate a library named for David Mugar’s grandfather. The university subsequently realizes that the project will cost more and therefore cancels it. Mugar sues and has his money effectively shifted to other non-profit causes.

— The Robertson family creates a foundation to support the training of government foreign policy experts at Princeton. The university uses hundreds of millions of dollars from the endowment on projects other than that specified.

— Art given to Brandeis University for perpetual display may be sold to make up for budget shortfalls elsewhere in the university budget.

When we consider that this is the treatment that is received by major donors who were very specific about how their money should be spent, it seems obvious that money given to public institutions from tax revenue and assigned to nebulous purposes, will often be contrary to the wishes of taxpaying public.


4 Ways to Spend Money and the Wastefulness Inherent in the Current System

Milton Friedman told us there were four ways to spend money:

1. Spend your money on yourself 2. Spend your money on someone else
3. Spend someone else’s money on yourself 4. Spend someone else’s money on somebody else

It seems reasonable to assume that the first way to spend money will be the most efficient — the spender considers his own budget and his own interests in the choosing of a market basket of goods and services. The second kind of spending is less efficient — this is why economists might say that Christmas-gift-giving is inefficient — because the recipient of a good or service might rather spend the money on something she values more highly. The gift-giver necessarily attempts to please the recipient, and succeeds to the degree that he has correctly mentally modeled the recipient. The third kind differs from the first because the spender doesn’t necessarily consider the difficulty of obtaining the money in the first place and therefore doesn’t consider the “replacement” cost of the money (which serves as a sort of intertemporal budget line. The fourth kind combines the paths of inefficiency of both the second and third ways — both in the cost and the benefit the spender is removed from the

Clearly, most bureaucratic actors within public colleges are operating in the third and fourth categories. We question how well motivated the spenders of college funds are to make a correct decision about what projects should be green-lighted. Even those persons with impeccable ethics will inherently be less careful in decisions that do not involve their own money.


“Many Oxen Will Be Gored” or Not?

When responding to an early draft our proposal one of my colleagues remarked that “many oxen will be gored” if the program got through and became reality. What he meant was that many vested interests in the establishment have something to lose by changes being made to the status quo.

While I agree that there are undoubtedly persons within the New Mexico higher ed establishment that won’t be as secure in their jobs and that some of these folks will have to accept lower salaries for the same work in a competitive environment, I don’t agree that their oxen will simply fall off and die, once gored.

There are a several ideas from economics that can help us think about how individuals might respond to changes in a system.

It is true that with any given set of policies, the persons under those policies react so as to maximize their own welfare, regardless of the consequences to others. It is not that people are all terrible narcissists, but that usually they cannot see very far beyond their own actions. We all know that if we drive our cars at a group of pedestrians and smash down on the accelerator, we are likely to hurt or kill several people. But, what if we just drive a little faster on the highway, every time we drive?

The current higher education institutions are largely the result of the latter kind of optimization. While every department seeks to grow and every member of the faculty and staff seeks better benefits, the costs of education increase and increase and the state support grows to meet these pressures. How else can we attract top talent? To get into the system, graduate students suffer for years, and once in, they claim their just reward — tenure. The job security and life-long benefits are rationed by the enormous hurdle job market candidates must jump over to get in. If tenure is taken away (the ox gored), the professor rightly feels wronged.

This is almost a perfect analogy to Gordon Tullock’s transitional gains trap in which gains that were at one time given as a windfall, are now fully incorporated in the cost of acquiring some sort of monopoly status. The standard story is that of New York City’s taxi cab medallion monopoly. To operate a taxi cab, you must have one of a limited number of medallions. I think there are on the order of 10,000 medallions (I didn’t fact check this number). When these were first issued, the initial owners were able to earn monopoly profits from their mere possession of this government granted privilege. But, as soon as the first owner sold the medallion, it earned its full market price — future earnings from the medallion were factored into its sales price. Thus, the current possessor of the credential only earns accounting profits, with the price of the medallion as a fixed cost in the accounting.

To drop the requirement for medallions would surely harm the medallion owner, because now he finds himself competing with people who didn’t have to fight their way into the system by making the upfront purchase.

To stop funding the institution called “University of New Mexico” implicitly imperils tenure-track jobs at the institution, if in fact, the university is uncompetitive in College Competition. All those folks who took positions at this institution, compared to lesser positions elsewhere, find themselves with a family and a mortgage here in Albuquerque, wondering how things turned out so poorly.

But, let’s remember some other economics that help us see this conundrum in fuller light.

There’s also the idea that because of moral hazard, subsidized institutions become more inefficient and that inefficiency drives them to orient themselves more and more to securing further subsidies (a process called rent seeking), which of course leads to more inefficiency.

Can we tell any other story about our bloated higher education system? Probably, but this is a pretty good one.

The more of the productive economy that is devoted to supporting the unproductive educational bureaucracy the worse a drag the bureaucracy is to the engine that is pulling it.

The state government simply cannot afford continually increasing costs. Tenure will be cut and schools will be shut down if the trend doesn’t reverse itself anyway. If College Competition is not threatening someone’s job security, economic inefficiency will be. We should repair the system itself so that instead of a drag, higher ed is a boon to New Mexico. The bigger the boon, the more capital is available for paying for educations.

Supposed vested interests will hopefully see the full story and realize that the oxen will only remain unbloodied when they are living within a well-kept pasture.