By Richard Vedder
Our CCAP colleague Lynne Munson has been screaming at anyone who will listen: colleges should spend more out of their endowments. Now Yale is, effectively, adopting the spending rule that applies to private foundations, spending about 5 percent of endowment income instead of less than 4 percent at present. Yale announced that it was going to increase spending by $300 million, which I think is something like $30,000 for every student attending the institution (one option: eliminating tuition fees, is financially feasible but obviously not on the table).
My read of endowment spending is that universities have been extremely conservative. To some extent, that is good --it would be wrong to go on a spending splurge at the expense of future generations, like they are doing with fiscal policy in Washington, D.C. At the same time, when inflation-adjusted rates of return are in the double digits for a decade or more, and real endowment funds are growing obscenely large, it is time to make an adjustment, and this Yale has done. This is good news. A cynical person might say Yale is doing it because of pressure from people like Senator Grassley, Lynne and me, but whatever the reason, the move is welcomed.
At the same time, however, I worry about the Law of Unintended Consequences. It seems like most of the new spending is NOT going for reduced student costs, but to furnish and fund a spify new science campus. That could add to the academic arms race, where schools engage in massive capital spending to stay ahead of competitors in a world where competition is mostly of the non-price variety.
One thing Yale is considering would be good: expanding enrollment by adding two new residential colleges --600 students. If they did that, a good bit of the incremental spending legitimately would go to expanding the undergraduate experience. The inelasticity of supply of prestige higher education is causing all sorts of problems, not the least of which is rising costs. Let us hope Yale expands enrollment a bit.