Center for Business and Public Policy
at the University of Illinois, Urbana-Champaign

Yes, I know that credit cards have gotten a bad name given the fact that so many families have gotten themselves deep into personal debt by not managing them effectively.  But a couple of interesting ideas have come across my desk recently that have me thinking that a “health care credit card” is an idea worth considering as part of an intelligent health care reform.

As background, my colleague Nolan Miller made a post last week about “The Health Reform House of Cards” in which he highlighted the difficulties in tackling reform.  He walks through the steps that one could take in order to put together a reform that actually works, highlighting how one reform element must be accompanied by other reform elements if it is all going to work.

As luck would have it, I recently received a proposal from a good friend of the College of Business, Jerry Carson.  In his proposal, which is much more detailed than what I will provide here, he outlines a system that appears to have many of the elements that Nolan calls for - and his approach has a role for health care credit cards.  I probably will not do Jerry’s proposal justice, but here are a few of the highlights …

First, require that everyone purchase a catastrophic loss health insurance policy.  In Jerry’s proposal, anyone could sell this insurance, including private insurers or the government.  Premiums would be based on the risk pool of the entire nation, which, in Jerry’s words is “the only true economical form of insurance - the broadest possible base with high deductibles.”  Policy terms would be the same without consideration of pre-existing conditions, and premiums would be tax deductible.  if insurers want to provide policies that wrap-around this catastrophic coverage by providing benefits that are more generous, they may do so, but such policies would not be tax deductible.  This would help limit the “Cadillac plan” problem that leads to inefficient over-utilization of health care services.  It also limits the tax burden arising from the “tax subsidy” of these plans.

Second, Jerry suggests allowing individuals to use a “health care credit card” that can be used at point-of-service.  These cards are with full recourse to the individual.  Private lenders can issue the cards, and again, if someone cannot get one then the government can issue one.  In the case that the government issues one, all services would be reviewed by a federal agency, and unpaid costs would be deducted from federal/state benefits.  As Jerry puts it, it would be “socialized health care without the free lunch.”  

Jerry is certainly not alone in trying to come up with creative ways to solve our health care dilemma by providing incentives for individuals to care about the cost of care (a focus on incentives and individual responsibility) while still protecting them from catastrophic losses (a focus on social insurance).  A few months ago, the esteemed economist Martin Feldstein (former President of the NBER and former CEA Chair for President Reagan) wrote an op-ed in the Washington Post that called for us to replace the current tax subsidy approach with a health care voucher system.  Interestingly, he also calls for “the government to issue a health-care credit card to every family along with the insurance voucher.”  

Health care reform is an enormously complex topic, and as Nolan’s blog and Feldstein’s op-ed both suggest, the solution requires a number of inter-locking pieces to work.  Both Jerry Carson’s and Marty Feldstein’s creative ideas may be the kind of innovation we need to get out of the current health care reform quagmire.

(written with Eeshani Kandpal)

Background: Eeshani Kandpal just returned a couple weeks ago from initial field work in the small, rural state of Uttarakhand, which is nestled in the Indian Himalayas.  She’s studying the effect of a program geared at improving women’s empowerment in this traditionally conservative area.  It seems as if the program is having a remarkably positive effect on these women’s lives, which got us thinking about why and how it seems to be working.

[Note:  I originally wrote this last week and scheduled it to post today.  Yesterday I read Uwe Reinhardt's post on the NYTimes Economix blog that expresses much the same sentiment with more real-world input and fewer of the blow-by-blow details.  If I hadn't written my post already, I might have just linked to his.  But, since the work is already done, I'll leave mine here.  If you are at all interested in health, I highly recommend reading everything Uwe writes at Economix.  Even when you don't agree on the conclusions, he's right on the facts and identifying the key issues.]

In the wake of President Obama’s falling approval ratings and last month’s stunning upset in the Massachusetts Senate race, I hear a lot of people saying that this is the inevitable result of Democratic hubris, and in particular of Obama and the Democrats trying to do too much on health care too quickly, especially when the country has not yet bounced back from the current, severe recession, is (still) fighting wars in Iraq and Afghanistan, and faces an ongoing a real terrorist threat.

I’m willing to concede the points in the last paragraph.  Maybe this wasn’t the time to try health care.  Arguably, though, given the Senate’s anti-filibuster rules, the chance may not come again for a long time.  I’m also not a huge fan of the bill because I don’t think it went far enough to contain cost growth, which I (and others) have said is the real threat to the system in the long run.  But, I think that those who argue that Obama and the Dems should have taken a more incremental approach to expanding access to health insurance also miss the mark.  Here’s why.

Suppose that you want to extend access to the health care system to the roughly 46 million uninsured people in the U.S. (or just the 80 percent of them who are U.S. citizens).  The least obtrusive way to do this in the context of the existing U.S. health care system would be to either expand Medicaid to cover wealthier people or to bolster the dysfunctional individual (non-employment-based) insurance market.  Now, Medicaid does a good job of providing basic care to poor people, especially children and their families, but because of its low reimbursement rates is probably not a great way to extend care more broadly.  And, any broad expansion of this government-run program would surely meet with strong opposition.  So, this leaves us with bolstering the individual market.

The individual market is the insurance market for people who don’t get insurance through their employers.  To put it bluntly, this market doesn’t work very well.  Only about 5% of the U.S. non-elderly population gets its health insurance through this market.  There are several reasons for this.  First, coverage is expensive because those buying insurance through the individual market do not have access to the economies of scale and bargaining power of employment-based coverage.  Second, those who seek to buy insurance on this market tend to be sicker than the population as a whole.  Insurers respond to this by charging higher prices based on medical history (“risk rating”), excluding pre-existing conditions, charging higher rates for coverage, putting annual or lifetime limits on benefits, or simply refusing to cover the sick.  And, in many states they can cancel an existing policy with little or no justification.

All this translates into private, individual coverage being very expensive at the same time those who might buy such policies are relatively poor.  This leaves us in a situation where the sick can’t get insurance and the well do not want insurance because it is too expensive.  As a result, there are few people for whom buying insurance on the individual market is an attractive option.

So, how do you fix it?  The first step would be to prevent insurers from engaging in the types of practices mentioned in the previous paragraph.  So, let’s require that insurers charge everyone the same price for insurance and must enroll anyone who is willing to buy insurance.  Let’s also prevent excluding pre-existing conditions and lifetime limits on benefits.  In other words, we outlaw “abusive insurance practices.”

Fine.  Now anyone who wants to buy insurance can buy it at any time.  How does a reasonable person react to this?  Well, if you are currently sick, you buy insurance.  But, suppose you aren’t sick.  A reasonable calculation would be to not buy insurance while you are well and take advantage of the prohibition on denying coverage in order to buy insurance only if you become sick.  The result of this will be that only sick people will have insurance and that, without healthy people in the risk pool to balance them out, premiums will have to be high.  So, even though everyone will be able to buy insurance, it will still be expensive to buy, and many insurers will find that it is simply not worth the trouble of insuring an exclusively sick population.

So, how do you bring down the cost of insurance?  The way to do this is to bring the healthy people into the risk pool.  After all, even though they don’t buy insurance while well, they are already benefiting from the system which guarantees them access to health care if they get sick.  In exchange for this guarantee, let’s force them to buy insurance early.  So, we mandate that individuals buy insurance.

The mandate puts healthy people into the risk pool, so now we have a mix of sick and healthy buying insurance from the individual market.  This should bring average prices down.  How might insurers react?  Well, all else equal, the insurer does better if it attracts a relatively healthy pool to its policies.  While the regulations above prevent insurers from explicitly excluding sick people, they can try to design policies that are implicitly more attractive to the healthy than the sick.  For example, they may exclude mental health benefits, refuse to cover weight-loss surgery, put their offices on the third floor of no-elevator buildings, etc.  But, these “dumping” practices are wasteful.  So, let’s prevent insurance companies from engaging in these practices by standardizing benefits.  This will have the additional benefit of making it easier for consumers to shop for plans since it will be easier to compare apples to apples.  And, if consumers become more sensitive to quality and price differences between plans, this will encourage plans to improve quality and lower price, which is an added bonus.

In fact, let’s push that idea further.  In order to encourage insurers to compete more vigorously, let’s set up insurance markets, or “exchanges,” where people can easily shop for plans.  This will also help people choose a health plan, an extremely complicated decision.

Finally, we need to face up to the fact that the uninsured are primarily poor.  This means that many of them will not be able to afford coverage no matter how well the individual insurance market works.  If we want to them to have access to private insurance, we’re going to have to help them pay for it.  So, let’s subsidize poor people to buy insurance through the private market.  We can do this in two ways.  We can either directly subsidize purchases of individual insurance policies or force employers to expand their insurance offerings by requiring employers to offer insurance or pay a penalty if they don’t.  But, if we’re going to subsidize individual insurance purchases, the money is going to have to come from somewhere.  So, we’ll have to increase taxes in one way or another.  (Aside: Clearly, the best way to do this is through a tax on tanning salons, as proposed in the Senate Bill.  The only question I have is why we didn’t come up with such a brilliant idea sooner.)

And there you have it.  If you want to expand coverage and you want to use the private market to do it, you quickly find yourself with a very big piece of legislation.  It’s a house of cards, and without any of the pieces it will quickly fall apart.  (Another aside: many people feel the penalties paid by individuals and employers who choose not to buy/offer insurance are insufficient in the current legislation, so the house of cards may be destined to tumble, anyway.  See this op-ed by Martin Feldstein.)

While going all the way may be too far, it is unclear whether there would have been a way to ease into reform.  Unfortunately, the one part of the bill that can be chopped out without jeopardizing the short-run goal of covering more people is the one that we really need to address to ensure the long-run viability of the system — the cost reduction part.  Even if we expand coverage in the short run, without addressing cost and especially the rate of cost growth, we’ll be right back in the position of insurance coverage being unaffordable for an ever-increasing segment of the population in a matter of years.

Just a quick note: Today, Treasury Secretary Geithner, in response to a question from Rep. Pomeroy (D-N.D.) about DB pension funding relief, stated that “We think there’s a good case for targeted pension relief … and we’d like to work with you on doing that.”

For my view on why I think pension funding relief is both unnecessary and undesirable, see my prior blog on this point by clicking HERE.

Hollywood is abuzz today with the news of the 2010 Academy Award nominations.  If there were a category for “Most Frightening,” surely the newly released 2011 federal budget would be the odds-on favorite.  Released yesterday, the budget contains some difficult-to-swallow news about the difficult choices ahead of us.  

 Let me just highlight some of the more frightening numbers – all of which can be found in the proposed budget.  

• Even with the President’s proposed tax increases and spending cuts, the projected single-year deficit never falls below $706 billion (that, in year 2014).  Indeed, it starts with a projected FY 2011 deficit of $1.566 trillion, and ends in 2020 with a $1 trillion deficit.
• The debt held by the public is projected to roughly double over the next decade, from $9.3 trillion in 2010 to $18.57 trillion by 2020.
• Of course, the economy is growing over this time (at least we all hope), so more meaningful numbers are relative to GDP.
  • The 2011 deficit is projected to be 8.3% of GDP
  • The debt held by the public will rise from 63.6% of GDP to 77.2% of GDP over the next decade.

 Of course, this may be a best-case scenario (in terms of deficits) because it assumes the President gets what he wants, including (as reported in today’s Wall Street Journal):

• $175 billion rise in personal income taxes
• $117 billion rise in corporate income taxes

 I’ve written previously about why deficits matter, primarily because they serve as a drag on long-term economic growth.  President Obama’s very talented budget director Peter Orszag understands this as well as anyone.

 But as bad as things look over the next few years, we need to recognize that the really long-term budget forecasts are far worse.  

 It is no secret that the biggest drivers of increased government spending over the long-run are the “Big Three” (meaning entitlements, not the auto-makers).  Growth in spending on Medicare, Medicaid and Social Security are projected to outpace overall economic growth for as far as the eye can see.  Unless these programs undergo structural change to rein in costs, the implications for our economy are enormous.

Consider this: for most of the last 50 years, government spending has stood around 20% of GDP (yes, it is higher now, but I am taking a longer-term view).  According to the Congressional Budget Office, by the year 2035 (about the time today’s newborn children are starting their own households, when today’s college graduates are in their middle ages, and when today’s middle-agers are set to retire), spending on Medicare, Medicaid and Social Security will be 16% of GDP all by themselves.  By 2080 (when today’s newborns are retiring), these programs will comprise nearly a quarter of GDP – a higher fraction than ALL government spending today.  So unless we change these programs, the rest of the government would need to cease operation, tax rates will have to skyrocket, or we are going to watch our debt grow to unprecedented levels relative to GDP.

The main drivers of these trends are rising per capita health care costs and population aging.  We have so far been woefully unsuccessful at dealing with the first, and we may not want to do anything about the second (after all, most of us like living longer).

In short, as bad as the short-term budget outlook is, the longer-term budget outlook is even worse. 

Sorry to be so pessimistic … but sometimes the facts speak for themselves.

Airline travel used to be so expensive that is was considered a rare luxury. Now we fly all the time, and it seems to be cheap. Is it? Has the price really fallen so much for the same quality-adjusted product over time?

Mention airlines to a group of people, and the usual response is a collective groan, rolling of eyes or a chorus of “Do I ever have a horror story for you…” (At least in regard to North American airlines – I have heard people wax poetic about various East Asian carriers, mostly in comparison). So why is travelling such a pain these days, to the point where we consider an extraordinarily good flying experience to be one where we actually were able to get where we wanted, on time, with our luggage? One would think this should be a bare minimum – isn’t this the basic good that we’re buying?

After having 3 flights cancelled on me recently, only one of which was for weather reasons (I won’t even get into the seemingly arbitrary and often mysterious definition of what compromises a ‘weather delay’. ), I’m beginning to think that we’re actually purchasing something that was equivalent to the old standby tickets. Years ago, you could buy a guaranteed seat, or for cheaper you could buy a stand-by seat. It gave you the right to use an open seat on a flight, and if one couldn’t get on that plane, one tried with the next one. Usually you could be pretty sure to get where you were going within half a day of your first attempt. These tickets made sense when airlines were flying at 50% capacity, and before they adopted the ‘hub and spoke’ system, so there were actually direct flights from A to B. The whole standby thing got a lot iffier as soon as you were trying to link up 3 or more segments. This approach makes sense as a form of price discrimination, which you might expect in an industry with substantial fixed costs and relatively low marginal cost of letting one more person onto the airplane.

But compare that scenario to Thursday where my “guaranteed” flight was cancelled, and I, along with 100 of my new closets friends were on the standby list for the next three flights (I was number 72 – yeah for me!). These are over 100 people who have paid for a ticket on some other flight, and either had that flight cancelled, or missed it because of a late connection (in this case, they were not allowing people to go standby who were already booked on a later flight). Next to me in the crowd was a super platinum member who was not even allowed to get his name on the list, since the airline decided to cap it at about 105. This scene was repeated for the next flight which had already been oversold. In short, most of us ended up spending $100 for a hotel and cab, or spending even more for a one-way rental car, and arriving at least 12 hrs after scheduled. I admit I was particularly peeved since, on the same trip, on my way out, I had also had a cancelled flight, resulting in an 8 hr delay. Add in an overpriced airport meal and just for the one-way trip back, the real price of the plane ticket was at least $150 more than the initial purchase price, even without counting a value of time. Now multiply that by 100 stranded passengers for this one incident, and that’s a lot of economic surplus lost.

You might well be thinking that you have several stories that are far worse than mine – and I’m sure you’re right. My point isn’t only to whine (which, I admit, I’m finding cathartic ) but to think out loud about the appropriate price comparison, particularly pre and post deregulation. Many other people have noted that the old tickets used to be refundable and changeable, and argue that the appropriate comparison is full-priced tickets, which have actually gone up in price. (Consumer Reports quoted by Unbossed 2008). This argument does not even touch the added fees for things like baggage (Consumer Reports 2008)

I haven’t done research on deregulation of the airline industry, and there are a number of papers that argue its success (see Smith and Cox for an overview). My only point is that I would be interested to see a deregulation study that quality-weights the services provided. Mostly I just want to not get stuck in seat 34 E next time…

Economists know there is No Free Lunch.  Nowhere is that more true than in financial markets.  Indeed, if I had to pick a single lesson in financial economics that is more important than any other, I would go with something along the lines of “if you are already holding an efficient portfolio, then you cannot generate higher expected returns without taking on more risk.”  

Yet, time and again, we see individuals and public policy makers act as if this were not the case.  This is especially true for managers of state pension funds.  The latest case – the State of Wisconsin Investment Board.  According to the Wall Street Journal, the Wisconsin public pension funds “are turning to one of the oldest investment strategies – using borrowed money to boost performance.”  In essence, they want to increase the leverage of their pension portfolio by borrowing money and investing it. 

You might be thinking “Leverage? Isn’t that what partly got us into the recent financial crisis?”  Yes, of course it is.  And that should definitely concern Wisconsin taxpayers. 

Let’s think about what SWIB officials are trying to do.  According to a story in Pensions and Investments on January 11, officials want to reach an investment portfolio that is 120% of plan assets by the year 2012. 

If you think about this for 2 seconds, you realize that this emperor has no clothes.  Consider a simplified example in which I have a $100 portfolio.  I invest $60 in stocks, and $40 in bonds.  Now, I borrow $20 by issuing a bond.  If I invest the $20 of bond proceeds in someone else’s bonds, then I now have $60 in stocks and $60 in bonds.  Therefore, it appears I have reduced my equity allocation from 60% to 50% of my portfolio, and that will reduce the standard deviation of my portfolio.

Of course, this only holds true if I ignore the $20 of debt.  If I account for it in my analysis, then my true portfolio allocation has not changed – I still have the same $60 equity allocation, and my NET bond portfolio is still $40 (I own $60 but owe $20).  If the risk / return characteristics of my own bond match those of the bonds that I purchase, I have done absolutely nothing to my portfolio! 

Of course, Wisconsin is unlikely to invest in identical bonds.  They might invest in bonds with different risk/return/maturity/liquidity characteristics, but if so, then all they are doing is trading off returns for some form of risk. What Wisconsin appears to want to do is simultaneously alter their overall investment allocation.  But the same basic lesson applies – they are simply trading off risk and return.  

To suggest that borrowing and investing creates value is inconsistent with both elementary and advanced financial market theory, principles and empirical evidence.  The best financial engineer in the world can not build a financial free lunch.  

So to Wisconsin taxpayers, I say “beware.”  You can dress up misleading financial alchemy as a sophisticated investment strategy, but dressing up a pig does not change the fact that it is still a pig.   

The worst of it?  Steven Foresti, managing director of Wilshire Associates, is quoted in the P&I piece that “we think this is the direction institutions will go.”  Personally, I hope that Wisconsin sticks with exporting cheese, rather than bad investment policies.   

Many college seniors are looking for a job.  They know that the first job may be important for their whole career path, because the quality of the experience on the first job may affect future prospects.  They also know that we now face a recession.  The economy is bad, and jobs are scarce.  What you may not realize, however, is that those two problems compound each other; the combination is even less than the sum of the parts.

Those who graduated last year and those who graduate this year during the recession might experience trouble finding their first job or may take an initial job that is less than they had hoped, because of the recession.  Moreover, they may experience long lasting effects of the recession, even after the recession is over.  The evidence is presented by Lisa B. Kahn, a professor at Yale University, in a research paper called:   “The Long-Term Labor Market Consequences of Graduating from College in a Bad Economy”.

She studies job market outcomes and educational attainment for a sample of individuals over time, using data from the National Longitudinal Survey of Youth (NLSY).  In order to avoid various complicating factors, she limits the study to a sample of white males who graduated from college between 1979 and 1989.  The main event at the time of graduation for some of them is the recession in the early 1980’s, but then she follows all of those individuals for the next 20 years.

She uses variation both in the national unemployment rate over time and in the local unemployment rates across states, and she finds that higher unemployment rate at the time of graduation has persistent, negative effects on wages of those individuals.  The initial wage loss is 6 to 7% for an extra 1 percentage point in the unemployment rate. This effect falls by approximately a quarter of a percentage point for each year after graduation, but it is still a 2.5% wage loss even 15 years after college graduation.

In other words, seniors who graduate in a bad economy are unable later to shift after the economy improves into the jobs they would have had without the recession.  For all of these reasons, a higher proportion of graduates during a recession choose not to look for a job right away, but to stay in school and go for a graduate degree.

I’m not sure what the individual senior can do about this problem, but it certainly has implications for government policy.  In particular, it means we ought to try even harder to avoid recessions similar to the one in the early 1980’s, or the one now in progress.  The costs are greater than the temporary unemployment.

Following up on a post from last month on the public option and health insurer stock prices, here’s a chart of the price of CIGNA, Aetna, WellPoint, Coventry Health, Humana and United Health (along with the DJIA and Nasdaq Composite Index) from Friday until now.   Due to the Martin Luther King Holiday there was no trading on Monday, which means that Tuesday morning was the market’s first chance to react to the series of reports over the weekend that Democrat Martha Coakley’s bid to take over Ted Kennedy’s seat in the Massachusetts special election on Tuesday appeared to be in trouble.  In fact, in the Tuesday special election Coakley was beaten by Republican Scott Brown who campaigned on a vow to oppose health care reform.  Due to the fact that Brown’s victory will result in only 59 Senators in the Democratic camp, preventing them from defeating Republican filibuster tactics, the media has speculated that Brown’s victory will spell the end of health reform.

(Source: Google Finance.  Click here to make your own graph.  The original idea came from the Huffington Post, here.)

The impact on stock prices is striking.  See the two flat curves hovering around zero?  They are the DJIA and Nasdaq Composite Index.  The other lines (the ones that jumped up Tuesday morning) are the major insurers CIGNA, Aetna, WellPoint, Coventry Health, Humana and United Health.  As to what this means for the prospects of health reform (and what health reform means for insurers), I think the graph speaks for itself.

By the way, Coakley, Brown and their families kept robo-calling me over the weekend despite the fact that I don’t live in Massachusetts anymore.  I hope they figure that out before this seat comes up again in 2012!

Professor Brown poses an interesting thesis that universities like Illinois should consider eating more of their seed corn by spending deeper into their endowments during times of economic stress. What better time than now to invest in our future, might be the argument. 

While I am no expert on the subject let me for the sake of debate share some thoughts.  I actually agree with many of the points Jeff raises, yet let’s consider a counter argument.

Most endowments use spending rules that are in effect a function of trailing three- to five-year market valuations.  With well diversified portfolios, these spending rules if managed wisely can have the effect of providing a smoothed stream of revenues, thus dampening the impact of economic shocks from other revenue streams of the sort we are experiencing today.  Many schools do have modest discretion in “tweaking the dial” on endowment payouts in some years, yet those changes are subtle.

Suppose, though, for the sake of debate that we consider spending into endowment principle in a meaningful way to replace at least some portion of lost state support – not a tweak, but rather a material change in endowment payout policy. 

To implement this, we need to first be relieved of a few constraints.  Perhaps foremost is that the vast majority of the endowment pool has spending agreements which define how earnings should be spent.  Few donors provide unrestricted funds of the sort that could be considered “financial reserves.”  That pool of assets we think of as a potential resource to tap into is instead a blending of thousands of little agreements.  To implement aggressive spending of the endowment, one first needs to be freed of these legal restrictions to redirect money from supporting project X to hiring faculty member Y.  (True, with a “quasi-endowment” as Jeff mentions we have modest ability to accelerate payouts within a given academic area, yet the scale of those investment dollars is often relatively small and unstable.  From a policy perspective I am not sure this would be a wise expenditure for what is otherwise a “long-horizon” investment in human capital).

Next, we might consider the second order effects of such an action. Does the near term gain from the redirection of endowment funds outweigh the chilling effect this action might have toward future donors who might be concerned as to how their designated gift is honored?  This argument has two sides of course, yet this policy does set a tone that a donor’s fund agreement may not be the last word. 

For the sake of argument though let’s avoid dwelling on these legalities.  Jeff makes brief reference to a key insight that unlike most corporations whose operations are exposed to the capital markets, universities generally do not share the same depth of exposure to these important economic disciplinary forces. Universities for example do not have clear, easily identifiable equity holders. While universities like Illinois can and do issue debt and manage a capital structure, it is hardly fair to say that these external entities have a meaningful impact on academic decision making at the margin.   

And this creates the rub.  Universities face only a limited number of natural forces which constrain inefficient academic investment. Tough economic times present one of the few disciplinary forces that require universities to define their academic priorities in a manner consistent with their organization’s economic viability and sustainability. 

I do not wish to advocate the Rahm Emmanuel doctrine here: never waste a good crises. One never hopes for difficult times to beset an organization. Yet by eating into our endowment, do we not avoid the difficult questions of asking who are we and what are our academic goals and priorities?  Stated differently, how can we distinguish a temporary shock to our income from the more serious concern that today’s economic stress is the result of long-term structural problems?

While endowments create a funding stream that insolates to some degree a given academic activity or program from transient levels of support from other sources, to dig into those endowments in a material way opens up the possibility of perpetuating or accelerating inefficient academic investment.  How can we commit to our donors that their gifts which were offered to provide perpetual support toward a particular mission will not be inadvertently redirected and squandered (those are my words) on inefficient academic activities that might potentially drag down the overall institution?

Does that mean each academic program must float on its own fiscal bottom or each faculty member “earn their keep?”  Of course not. Universities, for better or worse, cross subsidize various academic activities in pursuit of their missions all the time (another point Professor Brown laments above!). Yet it also seems clear that reduced exposure to external economic pressures allow universities to evolve into administratively inefficient structures, perhaps for long periods of time.  

Jerry Carson responds above with a call to arms saying now is a time to redefine the university’s business model. I cannot disagree with his refined stakeholder definition of the board.  Digging into our endowment base, as repulsive as that might be to our donors, allows one the pleasure of delaying the day of reckoning for poorly structured academic organizations.

Of course, Jeff raises a good point that surely now must be a terrific time to hire great academic talent in the marketplace.  Good point.  If we assume a benevolent and well informed administration willing to identify which units to support and which to avoid, these would indeed be good if not great outcomes.  Yet one problem with a decentralized decision making environment (one without a clearly defined ownership structure) is that inefficient or ineffective academic units can often make similar claims on the central campus, thus potentially perpetuating their status. 

If Adam Smith’s invisible hand is limited to but a few invisible fingers in the context of universities, should we restrain those disciplining forces even further at this crucial time when clear headed decisions today are perhaps our best shot at a brighter future?