Philadelphia Reflections

Financing a Research University

Harvard

Fifty years ago, only three American universities, Harvard, Yale and Princeton, were considered world-class. The benchmarks for them were Oxford and Cambridge Universities; both British universities had long history and great prestige. Making allowance for wartime disruption, it was also considered pretty classy to study at the Sorbonne, or Humboldt University in Berlin. Sweden, Vienna, Rome were right up there in prestige.

Oxford

By 2004, a London magazine was offering its view there were thirty American Universities better than anything in the European Community, in particular, Oxford and Cambridge. We'll pass over the Economist's anguished analysis of what's wrong in old Europe, and focus here on what American universities are doing right. They certainly do seem to be doing something right, but nevertheless, it's still possible to be uneasy about where they are going.

Cambridge

For example, the top three all have more than ten billion dollars apiece in their endowment funds, and thus each perpetually generates roughly half a billion annually in disposable income from passive sources. You can accomplish a lot of worthwhile academic things with that much money. Operating revenue like student tuition, fees, research grants, and royalties should support normal running expenses, so endowment income is available for new frontiers of learning, research, and social endeavor. These well-run institutions unquestionably do accomplish many innovative and important advances, to the point where it is simply trivial to point out a few areas of waste or misjudgment. Multiplying their annual discretionary funds by thirty offers an overwhelming force for good in the nation, and in the world.

British

The other twenty-seven premier research universities may not all have ten billion dollars apiece, but they have the Avis or we-try-harder motivation that may make up for it. The nation really does appreciate its worth. Applications for admission outnumber available places twenty to one, would be even greater if more people thought they had a chance to get in. Outstanding professors are in scant supply, commanding higher and higher salaries. In fact, a patient of mine who is a trust and estate lawyer tells me he gets a little uneasy about the growing number of university professors he sees with million dollar estates. A calm view would be that the nation recognizes the value of superior education, and is forcing the pace for a greater supply of it. Unless our economy experiences a disastrous decline, it is reasonable to expect a hundred universities to migrate up the quality chain in the next generation; most of those eligible for it are grimly determined to see it happen. China can make all the widgets it pleases, but that won't make them catch up with this champion competitor. The French can maybe make better wine, but unless they pep up their schools, they're going to have no shot at glory.

Whew. That's intentionally laying it on thick because American academic triumphalism has a darker side to give one pause. In the first place, the arrogance of it shows. Even the European aristocrats, formerly world experts in flaunted put-downs, are irritated; and red America is really sore at blue America. Sprinkling a few research universities into Arkansas and Idaho might relieve regional divisiveness somewhat, but lasting social peace can only derive from starting in the third grade of, say, North Philadelphia, Kensington, and Norristown. In economic downturns, the country would have big trouble financing universal, bottom up, academic excellence. The tragedy is that money isn't the main problem in the science classes of the thirty research universities we already have; an alarming number of those seats are filled with foreign-born students, not even to mention the honors students.

Secondly, the system is already under strain. The families of students are hard pressed by tuitions of fifty thousand dollars a year, and increasingly ready to complain about the inability, of classes of three hundred taught by non-tenured teachers, to justify to them such breath-taking fees. They may not understand educational financing, but they can count, and then multiply two numbers together. Faculty rewards favor research, not teaching, and teaching is what the students think they are paying for, their parents think they are sacrificing for. If what they are truly paying for are just credentials, they worry that affirmative action will cheapen the credentials. One clear sign of unease is the tendency of children from wealthy families to walk about the campus in torn overalls. This may be more than just a fad, it may be a sign they hope to hide from the university's system of redistributive taxation. Some people pay those high tuitions, but mostly tuitions are discounted for the eager family's ability to pay. Wearing blue jeans won't help, the universities demand to see the family's audited tax returns. In my presence, a university president remarked that the system was designed to extract the last dime from every student. The whole middle class is being asked to give until it hurts, for the unspoken goal of elevating a hundred more research universities to world class. Very few question the premise that unmatchable universities are the key to American world eminence. Quite a few, however, have anxiety that it may not work out for each individual. It may only be a lottery with slightly better odds.

Now, let's get to the research part of the research university. In the past ten years, American universities have collectively received six or seven billion in commercial patent royalties; the aggregate now runs appreciably more than a billion dollars a year and it's growing.

The normal arrangement is to give 20% of royalty income to the professor whose name is on the patent. Since most research is performed by large teams, it is possible to imagine considerable inequity and academic bad feeling in this system. In other walks of life, striving for a bigger share of two hundred million a year would cause differences of opinion about fairness. Here and there, you read articles by participants in this system who are concerned over the message it is sending to the students about personal values. Universities that began with a mission to educate the clergy are now seemingly overpraising the big payoffs.

Many business analysts feel that a successful corporation needs to spend 10% of its revenues on research and development. Behind that is a realization that prices and profit margins are largest for new inventions, steadily declining as the new invention attracts competition and eventually becomes a mere commodity. The scientific term entropy is a perfect description of the way world economies seemingly work, like clocks gradually winding down. So businessmen get rid of old products and look for new ones, and the universities are the source of most new ideas and products. Put every last cent into R & D for new products, while the developing countries grind out widgets. If we eventually graduate hundreds of thousands of Americans from unmatchably excellent research universities, the outcome will take care of itself. Even flying airplanes into our tall buildings can't make much difference in this academic arms race. It's essentially how Ronald Reagan defeated the Soviet Union, and it's discouragingly difficult to argue it is totally wrong.

However, you can imagine ways that it might all fall apart. The source of at least half the capital now pouring into the research universities comes from the federal government, particularly the National Institutes of Health, the National Science Foundation and the Department of Defense. It only takes fifty-one votes in the U.S. Senate to change that suddenly, for reasons of national defense, to defend the value of the dollar, to combat inflation, or lots of other reasons. Even now, universities often face annual crises at the end of a funding cycle, when projects have been awarded, people hired, but funding is delayed for uncertain periods of time because of distant political wrangles within the budget process.

That's known as a cash flow problem, and even it is trivial compared with what would happen if federal research funding were delayed a full year. Just look at any university and see all the big tall buildings. They have largely been built to house research activity, and the university would have big difficulty selling them if they were empty. They've usually been paid for with mortgages, and it costs a lot of money to heat, air condition, clean and repair them. Just cut off the cash flow long enough, and you will see how risky it was to get into the research arms race.

Originally published: Thursday, June 21, 1990; most-recently modified: Friday, May 17, 2019