Garret Nelson writes about the perversity of rich private universities trying to pile their endowments as high as possible rather than serving the public interest:
The economist Brad DeLong pointed out last May how, on a public budget, the University of California system expanded from teaching 5,000 undergraduates a year in 1960 to 40,000 a year today. During the same time, Harvard grew from 1,200 to 1,600 a year, despite accumulating billions in private donations. It is hard to argue that those additional funds for Harvard were effective on the margin. Harvard has a vested interest in keeping its student body small, since what it produces is essentially a luxury good in the form of Harvard diplomas. As one commenter on DeLong’s article pointed out, “the rationale for Harvard is not the education of young people. It is to produce a certain class of educated person who will go on to fill a certain role in society.” The University shouldn’t be ashamed of this, but it also ought to admit that, in the end, it is a privately-interested organization which happens to have quite a few socially beneficial consequences.
That’s not to say Harvard should be taxed at standard corporate tax rates and its funds be deposited into the government’s general accounts. One good compromise would tax the endowment at a lenient rate and use the funding exclusively for public higher education. Such a program would redirect a sliver Harvard’s income in a way that would still, in Faust’s words, “enable students and faculty of both today and tomorrow to search for new knowledge.”
His proposal is that these kind of endowments should be taxable. I think an arguably easier change would be to say that university endowments should be subjected to the same payout requirements as exist for the endowments of ordinary foundations. Basically the idea is to force institutions to actually use their money on something rather than just try to accumulate it.
Beyond the specifics of the endowment issue, the larger perverse issue here is that in education you normally see bigger returns to investment when you work with less-prepared students. The kind of students who are in pretty unselective programs at non-flagship state university campuses, in other words, would benefit a lot from having more money spent on them. The students who are already doing well enough to get admitted to the fanciest schools — private and public — don’t really need the extra resources. But higher education is systematically structured so as to ensure that those who are in the least need get the most.