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Princeton and Urbana Universities: a Tale of Two Schools

I am writing this missive from the campus of Urbana University, a liberal-arts college founded in 1850 that serves an audience of generally first-generation students mostly from nearby its Urbana, Ohio campus. A goodly proportion of those enrolled (41 percent of first-year students) are on Pell Grants. I find the students vastly different than those from the last couple of campuses I visited (Princeton and Dartmouth): probably not as knowledgeable, certainly not as polished, but arguably every bit as much inquisitive.  While the Ivy League may be educating the best and the brightest, I suspect that at the margin, a dollar spent at Urbana has a far greater return to society than an additional dollar spent at Princeton. Princeton’s per-student endowment is north of $1.5-million; Urbana’s is less than $3,000. Because of this Princeton will be alive and well 50 or even 100 years from now no matter what it does, while Urbana’s future is more problematic. It has no endowment cushion and does not have fancy buildings allowing it to compete vigorously in the academic arms race.  Its extremely able president, Steve Jones, freely acknowledges that it faces a struggle to survive, as the $21,000 sticker price and even the $12,000 or so average net tuition, while rather modest for a private school,  is a good deal of money for kids from small towns and farms and limited incomes.

I have said before and will say it again: the process of creative destruction is integral to the success of western capitalism, and dynamic, productive change involves creating losers as well as winners. I think it is good for universities to know failure is a real if not welcomed option. The fear of failure and closure stirs institutions to be more innovative, more open to change than otherwise would be the case. And if Urbana—and the hundreds of other schools like it—cannot generate the student demand to be viable, than closure would likely lead the reallocation of resources to more productive uses.

At the same time, however, public policy has not created a level playing field: arguably it favors Princeton relative to Urbana. The value of tax subsidies given to Princeton donors and the advantage its endowment funds receive from tax-exempt status are much greater than the value of any implicit government subsidies given to Urbana. Princeton has luxurious country club-like facilities built in part with public subsidies (the tax-exempt feature of public gifts), while Urbana has no climbing walls and only the most utilitarian student center. And small liberal-arts colleges serving first-generation students probably achieve the egalitarian objectives that many desire far more than Princeton, an elite school that draws heavily from upper-middle- and upper-class kids from affluent backgrounds.

My guess is that federal subsidies are distributed in a highly regressive fashion—the rich schools get more than the poor. They get more research overhead money, for example. The dispersion in spending and wealth (endowments) between the elite private schools and others has grown dramatically over time with the help of tax policies that aid rich schools more than poor.  Moreover, often inane accreditation procedures that are minor annoyances to Princeton can be significant cost factors to a school like Urbana.  On balance, I would like the federal government to disengage from its involvement in higher education, but if that relationship is going to continue, at least it should level the playing field so the financially struggling schools are not put to added disadvantage from what already exists.

I am not a Robin Hood policy wonk in the Obama image—far from it. It is the inequalities in life, not the equalities, that make the world go around and provide incentives for productive behavior. Nonetheless, many view higher education as a vehicle for improved economic and educational opportunity. Therefore,  given the huge public subsidies to rich schools, it is surprising to me that someone has not proposed something like this: remove tax-exempt status on all institutions with more than $500,000 in endowment per student; give only partial tax exemptions for donors to schools with $300,000 or more in endowment per student. Perhaps even use any revenue generated from restricting tax deductions to have the government supplement private gifts to donors to schools with less than, say, $25,000 per student in endowment. If at the margin, dollars do more for the poorer schools, than this a justifiable policy change, albeit perhaps not the optimum one. There are alternative ways of achieving the same thing, including a progressive tax on endowments and endowment incomes, with proceeds reallocated to poorer schools.

I tend to oppose high taxes, government intervention, and government-directed income and wealth redistribution. At the same time, the pathologies of current tax policies might provide justification for some such scheme.

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