Subsidizing The Gated Communities of Higher Education

By Richard Vedder

A big part of the difference between liberals and conservatives is that liberals get angry and resentful over great wealth, while conservatives grow envious and desirous. Liberals fixate on redistributing the income pie, while conservatives fixate on growing it.

Yet there is one trend in higher education on which both conservatives and liberals can join hands. The richest schools are getting richer, and tend to have few poor persons in their midst. That angers liberals. Much of the increased wealth of the Uber Rich Universities (URUs) is created by public policies, especially tax policies that ultimately burden taxpayers. That angers conservatives. The perfect storm is created, and the URUs better watch out.

In the last two days, there were great stories in both the Wall Street Journal (quoting our CCAP colleague Lynne Munson) and Business Week on the growth of rich colleges relative to poor. Whiz Kid Gordy Ruchti has documented that the inequality in endowment size amongst American institutions is on the rise. As Business Week points out, Princeton spent roughly a quarter of a million dollars per student on its new Whitman residential college with a dining hall with a 35 foot ceiling that outshines those found in all but a few of the nation's finest mansions. Whiz Kid Matt Denhart has regressions hot off the press showing that the salary of full professors at most Ivy League schools is far higher than that predicted from a sample of about 150 schools (the top 100 on the US News& World Report national university list, plus the top 50 liberal arts colleges).The employees at the URUs are not beyond taking a little of the money being dropped out of airplanes over their campuses for themselves.

The Ivy League, according to the last data we saw, had 11.7 percent of its students with Pell Grants, well below the national average or even the average (18.1 percent) of 103 schools with the largest endowments. While it is true that these schools will give a lot of money to poor kids who meet the extremely high academic standards, they are nonetheless wealthy elitist bastions that are the academy's equivalent of gated communities. They do not share the American egalitarian ideal of using higher education to promote economic success for all to the same degree as poorer schools do. It does not have to be that way. Berea College, for example, excludes kids that are rich, using its large endowment to lower student costs rather than to raise per student spending. It is dedicated to using education as a pathway for economic success for poor Appalachian Americans. No one would ever say that Harvard, Yale and Princeton do the same.

Where does the government come in? They subsidize these rich schools vastly more than the poor ones. When Meg Whitman of eBay gives $30 million to Princeton to pay for luxury housing, she gets a tax deduction worth probably at least $10 million. When Harvard makes $4-5 billion last year in capital gains, dividends and other income from its endowment, it pays no taxes, even though if Bill Gates made that same money he would face a tax liability of hundreds of millions of dollars. When a wealthy plutocrat leaves $100 million to Princeton, there is no estate tax, but if that plutocrat left the money to his own son, the feds would demand tens of millions. Giving to children is bad; giving to country club universities is good, at least in the eyes of the feds. Finally, research grants per student are vastly greater at Harvard, M.I.T., Stanford, etc., than at less rarified public institutions such as the one I teach at, in part because of the huge salaries the URUs pay to get the best and the brightest. Federal higher education tax policy is thus brutally regressive, probably more so than if we financed higher education with a head tax on every American regardless of economic circumstance. Liberals should be up in arms over the unfairness of it all; conservatives should be mad about the inefficiency, the extravagance, the lack of transparency, and the contempt for the taxpayer.

In Going Broke By Degree, I said current trends in higher education are unsustainable, and when change comes, it may not be pretty. The wealthy privates who are belatedly reducing the financial aid expected from lower income students and admitting a few more kids (e.g, Whitman College at Princeton), are going to face a political pounding only marginally more nuanced than the aristocracy suffered during the French or Russian Revolutions if they don't change their ways --starting new colleges, creating ‘sister’ schools that they aid and mentor, eliminating tuition for all but the uber rich etc. URUs --don't say you haven't been warned.