Tuesday, December 23, 2008

Necessity Is the Mother of Invention

By Richard Vedder

My new mantra is that economic downturn provides us the "necessity" to be inventive --find new ways to do what we are doing with fewer resources.

I read today in INSIDE HIGHER ED that the University of South Carolina is about to receive a $6 million annual increase in athletic television revenues, and is going to "tax" the athletic department for one-sixth of the incremental money to fund various university scholarship type programs. I have predicted that as revenues get squeezed, the lavish funding of athletic department would come in for more fire, and these programs would in a few cases be expected to actually provide some funds to general university operations, and in other cases, be forced to operate on a reduced subsidy. The South Carolina action is a early sign that this is beginning to happen. My own university, Ohio University, massively subsidizes athletics and a militantly anti-academic administration has so far opposed any reduction in those subsidies even as other programs are cut. I suspect that policy will have to change --imagine a football program with only one weight and conditioning coach!! Horrors of horrors!! Before long someone may want to only allow 60 football scholarships for a sport where only 11 persons play at one time. Maybe it is time to restore some sanity to intercollegiate athletics --or to divest those operations from the universities and give them professional status as minor leagues preparatory to the Big Leagues of the NFL and NBA.

Another problem that is arising is over the dubious financing schemes followed by universities in modern times. In the last decade or two, they have largely abandoned conservative, staid, boring, moderately low return investing for more go-go investing --meaning taking more risks. As the economy tanks, victims are becoming more commonplace in the academy. Yeshiva and Tuft universities got burned by the Bernie Madoff Ponzi scheme. Whereas before these schools might have bought Procter & Gamble and Coca Cola stock, now they turn to a guy who says "let me invest your money --I will deliver big returns."

Moody's says that a majority of American colleges have variable interest debt obligations. If my hunch is right and we enter an era of accelerated inflation prompted by a monetizing of the massive new federal debt, interest rates will soar and some schools will get clobbered with much higher debt service charges, all avoidable if they had engaged in fixed interest financing. By the way, as a general proposition I think colleges should use very little debt financing.

The colleges are, of course, seeking federal bail-out money to avoid doing things that they should have been doing decades ago to reverse declining productivity. University presidents want corporate type salaries --but don't want to do what corporate leaders have to do regularly --make thoroughly unpopular decisions like slashing staff, closing plants, and ending product lines.

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