Schadenfreude Alert: Harvard edition

July 22, 2009

There’s a good piece by Nina Murk in this month’s Vanity Fair regarding Harvard’s troubled finances.  It’s full of lessons for the rest of us.

The size of Harvard’s endowment is still huge, but it has shrunk dramatically….

[At 6/30/08] Harvard’s endowment stood at $36.9 billion, way, way up from $4.8 billion in 1990. [By December it] had lost $8 billion, or 22 percent….financial journalist Edward Jay Epstein argued that, adjusted for the true value of Harvard’s illiquid assets—that is, its private-equity partnerships and other assets that don’t sell on the open market—the endowment’s losses for those first four months alone were closer to 50 percent, or $18 billion.

…and the University’s spectacular growth (6.2 million square feet of physical plant–the size of the Pentagon–added since 2000) has jacked up operating expenses….

During the boom years, it was assumed without question that the value of Harvard’s endowment would keep rising. Trusting in that false certainty, the already profligate university went wild, increasing its annual operating budget by 67 percent, from an inflation-adjusted $2.1 billion in 1998 to $3.5 billion in 2008.

That operating budget will drain the endowment to zero in less than 10 years.  It’s clearly not sustainable.

This gets back to my thesis about demolition as stimulus.  The fundamental problem facing the U.S.—every Western economy for that matter—is over-expansion.  We’re too big and collapsing under our own weight.  The real cost of all the space that Harvard has added isn’t just the debt incurred to finance construction.  It’s the ongoing operating costs.  The university simply doesn’t have the income to support itself anymore.  It needs to shrink itself drastically in order to avoid bankruptcy.  As does America…

Meanwhile, students are protesting budget cuts, even as they continue to receive spectacular tuition subsidies:

…Only a small number of students actually pays [full tuition].  Back in 2004…students whose parents earned $40,000 a year or less would be able to attend Harvard gratis. Two years later, that cutoff was increased to $60,000, a figure well above the median U.S. household income….In December 2007…students whose parents earn as much as $180,000 a year would pay no more than 10 percent of their family’s annual income in tuition fees.

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