By Richard Vedder
Economic downturns probably have less real impact on universities (e.g., on output --enrollment, research activity) than they do on the private business sector. But they do hurt --state appropriations fall, private donations turn down, etc. We may be going into a recession --who knows? No one, however, believes 2008 will be an average or above year for the economy. In other words, the short-term fiscal prospects for American colleges are not particularly good. The dazzling endowment returns of the last few years are over for a while, for example.
However, I am worried that funny money monetary and fiscal policy of a quasi-Latin American variety is about to cause longer term damage to the economy. Ben Bernanke is no Paul Volcker; and George Bush, Nancy Pelosi and company are not the match of the typical political leader of either party of even 20 years ago. We are forgetting the lessons of the past, engaging in reckless and self-defeating economic policies that typically result in stagflation --remember the 1970s?
To stimulate the economy, we are dropping dollars out of airplanes (tax rebates), financed by borrowing funds and/or printing money. On the monetary side, Ben Bernanke panics every time Bob Rubin or others of his ilk plead that the New York financial center is in precarious shape. Bumbling Ben's solution is to turn on the monetary spigot, ordering the fed to buy bonds to lower the federal funds interest rate. This will allegedly help those poor speculators who bought million dollar houses with a nickel's down payment, those stupid bankers (e.g., Rubin) who promoted go-go banking practices at places like Citigroup, etc. But it will also raise inflationary expectations, interfere in market processes, lead to malinvestment (to use the Austrian economists' favorite term), ultimately lead to greater uncertainty, higher interest rates, and stagflation. Already, the inflation rate is creeping up as an academic (Bernanke) disregards the real world wisdom of his predecessors (Volcker and Greenspan). Unemployment is also creeping up. The Phillips Curve is shifting rightward, a sign of stagflation. The Fed's and Administration's answer so far is vintage Juan Peron --cut interest rates more, drop more dollars from airplanes, and turn the world's leading economy into the economic equivalent of a Banana Republic. Is it any wonder that the dollar is tanking worldwide?
Stagflation hurts colleges in numerous ways. Of course, real resources decline (which does not probably impact proportionately on quality, but leads to anguish on the part of the campus communities used to continuing rising opulence). During the 1970s unanticipated inflation actually muted the real increase in tuition prices because colleges did not move fast enough to keep up with rising prices (partly because they only change their prices once a year). Real faculty salaries actually fell for a while. Contributions tanked. Real university endowments fell as the decrease in the value and increase in uncertainty about the future led bond and then equity prices to tank. The go-go endowments managers at Yale, who thrived on multiplying the increments of growth, may have vital body parts removed (figuratively) in coming years as the nation moves into an unanticipated downward spiral.
Am I being too pessimistic? Maybe --probably, even. But I am rapidly becoming pessimistic, not because of the stupidity of our private business leaders or the alleged imperfections of markets, but because of deterioration in our macroeconomic policy in the direction of the failed Keynesian policies of a generation ago.