By: Matt McDonald

The debate over tax reform has highlighted many quirks of the tax code, but in some instances it has also highlighted quirks of the economy. Such is the case with university endowments.

What you do with regard to debt and savings can reveal much about your beliefs about the future. If you are a young person and you believe your future will be improved by getting a higher education, it makes sense to borrow money to pay for that education.

If you are later in your career and you don’t expect to work forever, it makes sense to be saving or to have saved money.

This is also true at the firm level. Companies without compelling investment opportunities may retain cash until there is a good deal in front of them. The reverse is also true. Many of the prominent tech companies that we see in the headlines take outside investment and don’t make money for years in part because it is so valuable to invest their resources in more growth.

Even countries operate in this way. Nations that have significant natural resources often establish a sovereign wealth fund. With the influx of significant money, these countries can’t always invest in ways that make sense today, and by using up resources today, they have an obligation to future generations. When a country can borrow at a low rate to invest in their economy and produce higher rates of growth, they generally do.

In other words, saving money implies that you don’t have a compelling growth opportunity available, and running a deficit or taking out debt means you (and those who lend to you) think you do have significant opportunities to make a compelling investment in yourself or your organization.

This makes it strange to contemplate the trend in higher education over the past several decades. The joke is that Harvard is an investment fund running a university. But that structure of high rates of savings and broad lending to other entities implies something that is less funny than strange.

It indicates that there are not more compelling investment opportunities within the university itself. This despite the fact that we hear all the time about the increasing returns to education and value of a college degree.

The new tax on large endowments is a result of a number of political dynamics, perhaps most importantly a search for revenue. But it also begs the question of why these piles of money are accumulating and why schools don’t have a better use for the funds internally.

One could argue that there is a reasonable need for a rainy day fund, or that alumni often want to help those who come after them. But an endowment didn’t save Sweet Briar College from nearly closing, and many times, restrictions on gifts make the gifts irrelevant over time as society and research changes.

The other real pressure for some of these large endowments is the prestige factor. Sitting on a big pile of money factors into rankings and perceptions. Also related to prestige is selectivity. One of the ways that investment would make most sense for universities is to expand their student body, but this can lead to higher admissions rates or a less personal experience for the students.

There are many critiques of higher education today, from the roiling debates over free speech to costs that continue rising to adaptation for the students of today. Add to that list the perpetual growth of perpetual endowments in a context where they should have compelling investment opportunities in the present.

If one day we can just download knowledge to our brains and a university degree is unnecessary, some of those piles of money may seem pretty silly. Maybe we should be spending them today to get to tomorrow faster.

Link to the original article here.