By Richard Vedder
I have known Senator Chuck Grassley, albeit not intimately, for many years. He is the quintessential Senator who has "grown" on the job, to use liberal parlance --meaning he makes most decisions based on trendy politically correct ideas of the moment and less based on bedrock principles. In short, he has moved to the left politically more than his pal Max Baucus (chair of the Finance Committee) has moved to the right.
The Wall Street Journal reports Grassley still is pushing colleges to spend five percent out of their endowment annually. It is an idea that I once thought had some merit, but, like the Journal, I increasingly think is a turkey of a proposal. I was convinced of that in part at an AEI conference that I presided over, where Charles Miller (former head of the Spellings Commission) and Terry Hartle (of the American Council of Education) made compelling arguments.
The irony of it is that the proposal to increase spending from endowments is coming as endowment returns are sharply declining. My guess is some endowment funds showed low single digit or even negative growth over the 10 month period in the current fiscal year (beginning for many colleges on July 1), after adjusting for inflation (which is increasing because of bad public policy). In other words, some of these schools are actually eating into principal after adjusting for inflation. Compelling higher spending in such an environment is not prudent financially.
However, this is not my major objection to this idea, which is articulated in a dialogue between Charles Miller and Lynne Munson in a study that CCAP is soon releasing. Universities are severely constrained by donor intent on the use of endowment funds, and an automatic payout rule in some cases is inconsistent with donor intent.
It is probably true that during the great endowment run-up between, say, 1982 and 2007, schools on average spent less out of endowment than necessary if the goal of treating different generations alike is accepted. Put differently, returns were so high that real endowments grew, benefiting future generations at the expense of current ones, and arguably in some cases violating donor intent to serve various missions now as well as in the future. But the reasons for this conservatism are understandable if one looks at the period from, say, 1960 to 1982, a period in which real per student endowments fell at many institutions during a period of very low returns on endowment investments (in large part a consequence of a crazy Keynesian-style macroeconomic policy that may be returning in this era of the Bernanke Fed and a Congress/President that believes in runaway spending).
The most frightening statements come from the IRS, which is talking about what kinds of spending IT will permit with tax exempt funds. I do think a very good case can be made for not allowing tax exempt contributions to essentially nonacademic purposes of universities --stadium sky boxes, luxury dormitories, etc. But that determination needs to be made by the Gang of 535 (Congress) and the president, following the provisions of the U.S. Constitution, not by power hungry tax collecting bureaucrats.