Thursday, July 16, 2009

Vanity Fair's Article on Harvard

I'm writing this on my flight back from California, where I've just been reading the August Vanity Fair article on Harvard's endowment situation. (It does not appear to be available online currently.) The cover blurb is Harvard's Big, Dumb Financial Train Wreck, and the actual title seems to be Rich Harvard, Poor Harvard, so you have some idea where it's coming from.

The article has its ups and downs, its mild exaggerations and understatements. But overall it's interesting reading. One interesting point is that it starts and ends with none other than our own Michael Smith, computer science professor currently on loan as Dean of the Faculty of Arts and Sciences. The article begins with Mike calmly addressing undergraduates and trying to forthrightly explain the financial situation. (Of course, the undergraduates are up in arms, insisting on things like no layoffs, as one would expect undergraduates everywhere to do, regardless of the actual situation.) The article ends with Mike talking to the reporter on the way back to Mike's car at the end of the day; the reporter describes a lack of success in otherwise getting information or meetings with Harvard's standard PR organization. (Strangely, I've also multiple times caught Mike heading for home, and chatted with him about various Harvard happenings at those times. He needs to change his car routine.) While this impromptu chat didn't seem to reveal significantly novel information -- Mike's smart enough to keep his cards close to his vest as needed -- it shows Mike talking more openly than one might naturally expect from a Dean in his situation. He's not a "no comment" kind of guy.

This, to me, highlights some of Michael Smith's strengths as a leader. He talks, and he listens. He sees the numbers, and doesn't hide from them, but thinks clearly and calmly about where we go from here. I'm happier knowing Mike's helping steer the ship here. (And I continue to wish him the best of luck.)

The article nails some things squarely. The fall in the endowment will have significant effects. Fewer TAs, fewer support staff, closed libraries, fewer perks all-around for students and faculty, and less money for all sorts of projects and initiatives. All this is, naturally, not good, but perhaps the article overstates the effects all this will have on Harvard as an educational institution. I, for instance, was a Harvard undergraduate in what must now appear to be the dark, dreary days of 1987-1991, when Harvard's endowment was just over 1/10 th the size it was before the crash, and I still liked the place and thought I received a good education. Harvard's resources are still remarkable, and I feel lucky to teach here; I'm sure we'll still manage to provide a high-quality education.

In terms of the question of how we got to this point, the article considers two main thrusts: the Harvard management company and how the endowment was run, and Harvard's unsustainable spending spree as the endowment increased. The first I don't feel qualified to talk about; it seems that Harvard's investment portfolio has become more risky over the years, but it's not clear to me how far the risk-reward ratio was out of whack, or that performance was out of line with other institutions. (It's hard to know what the right comparison is, given the flaws that seem to have been underlying the financial system of the last several years, of which there are several victims beyond Harvard.) It seems to me that more information is needed, and the article suggests that Harvard is not particularly transparent about these sorts of things.

On the spending side, I think it's clear Harvard went too far too fast in its spending plans, particularly under Larry Summers, who I think if anything gets insufficient blame in this article. It was under Summers Harvard dramatically increased spending on new buildings (financed by debt, and sometimes without getting sponsorship from donors first), faculty size increased, and financial aid plans zoomed. I have to admit, all of these things, particularly at the time, I thought of positively, at least in theory. Of course (duh), increasing space/faculty/aid money all always sound good. But it was also fairly clear at the time (and much clearer in retrospect) that Harvard was doing too much too fast and assuming the money would come from somewhere down the line. While my standing far outside the inner circles of Harvard administration means I can't claim to know who holds responsibility for this, from my standpoint Summers seemed to be leading the call for an overly ambitious agenda, never mind the costs.

(Indeed, the most rankling part of the article for me was the following quote: "The fact that they fired him is a symptom of everything that's wrong with Harvard," one of Harvard's big donors told me. "He's not politically correct or diplomatic -- he's incredibly provocative. What he really got fired for was attacking waste and abuse in the Faculty of Arts and Sciences." I don't think this donor knows what he/she is talking about, and no evidence in the article suggests otherwise. First, Larry Summers wasn't fired, he resigned. The faculty does not have the power to fire him; we did take a vote of no confidence, which had no formal power, but was a statement of how the faculty as a whole felt about him. Second, I'd enjoy hearing more about the waste and abuse he was attacking; in terms of profligacy, I think it's clear his tenure as president was a net negative. The previous paragraph of the article has a different take. "In reality, however, when Summers was president of Harvard, he alienated just about every faculty member who crossed his path. Instead of being admired as a visionary, he was said to be arrogant. Instead of being recognized as a bold and fearless leader, he was perceived as a cerebral bully." The current administration, under the gun, is dealing with financial waste through serious budget cuts, apparently more effectively than Summers ever did. And through a quite difficult situation, they appear thus far to have maintained the strong respect and support of the faculty.)

Anyhow, I encourage everyone to read the article, and to comment on the issues raised by the article -- both in terms of Harvard's situation and the corresponding situations at other universities -- as you like.


Anonymous said...

I don't get it. Harvard lost 20-30% of its portfolio. It still has ~$30 billion. Sure, much of it isn't liquid and that creates problems, but in no way is Harvard in real danger.

I think it is great that Summers increased spending substantially. The endowment grew by at least 100% during his tenure (from memory, I haven't looked up the numbers). How big is big enough? He could have spent even much more money.

I think almost every other US university has bigger financial problems than Harvard. Harvard just has the brand name.

Unknown said...

No, Anonymous, these numbers make sense only as ratios. Given what Harvard has to pay for, and the fact that large parts of the total are restricted funds that can't be used for financial aid and the like, Harvard is in trouble. Of course there are places that are in worse trouble.

I ran across this priceless passage from the minutes of an Arts and Sciences faculty meeting in May, 2004. It paraphrases Summers's remarks to the Faculty, and is a good summary of the attitude of budgetary recklessness he brought to the university.

The President hoped that the Faculty, in reflecting upon these matters, would not be preoccupied with the constraints imposed by resources, for Harvard was fortunate to have many deeply loyal friends. For a compelling definition of what would provide the optimal educational experience for Harvard undergraduates, and the most attractive environment for its faculty members to carry out their missions of research and teaching, Harvard would be able to generate adequate resources. The only real limitation faced by the Faculty was the limit of its imagination.

Harry Lewis said...

Sorry, that was Harry, if anyone couldn't guess.

Michael Mitzenmacher said...

Thanks for commenting Harry. I was going to comment on Anon #1 as well. (The argument doesn't make sense -- a person making a million a year can go bankrupt just as well as a person making $40,000 a year, if each loses 20% of their income, and each does not have enough savings or room in the budget to cut 20%.) And I appreciate the "evidence" backing my recollection that Summers's tenure was one where it was assumed that we could (and should) spend freely, without budget concerns.

I thought I'd also point out I (after writing my blog entry) saw further conversation on this article -- including several insightful comments by Harry Lewis and several other Harvard faculty -- at Richard Bradley's blog:

Anonymous said...

"(The argument doesn't make sense -- a person making a million a year can go bankrupt just as well as a person making $40,000 a year, if each loses 20% of their income, and each does not have enough savings or room in the budget to cut 20%.)"

I don't see the comparison. The FAS, for example, had an annual budget of $1.15 billion, and now should have about a $14 billion endowment. (It is hard to find exact numbers, but this is what I can see from Google.) Harvard can cut some spending, but it is in no danger of going bankrupt.

Unknown said...

Harry, considering that Summers is now tasked with the nation's finances rather than just Harvard's, the attitude revealed in your quote is rather chilling, although his being an "intellectual bully" explains a lot. I think after this I might need to reassurance, and I'm not even associated with Harvard!

Unknown said...

If I seem a bit anti-Summers now, it's because I just read this:

Anonymous said...

Sorry, I should also have said that about half the annual budget for FAS comes from the endowment typically. If the other sources stay stable and the endowment only grows to match (educational) inflation, there is still twenty years' worth of money saved up!

I could certainly be wrong, and no I don't have the precise numbers or details, especially about liquidity and about other parts of Harvard.

harry Lewis said...

I believe that the FAS is 60% endowment dependent actually. And again, only a minority of the funds are unrestricted, in the sense that the administration can choose how they should be spent. One of the things you get by creating an endowed fund, let's say to support applied science professorships, is an assurance that the money won''t in a pinch be diverted to fund financial aid or debt service on a building. Even if a perfectly rational case could be made that one less applied scientist over the next decade would hurt Harvard a lot less than a cut in some other budget, it wouldn't matter, if Harvard made a deal with the donor that the funds would be used only for applied science faculty. The image of the endowment as a big checking account is quite misleading.

Harry Lewis said...

Hope folks followed M's Politico link, here it is in cli clickable form. I am not sure I would draw as much comfort as Summers does. Look at this, for example, the last 12 months of searches for "bankruptcy." Incidentally, shows an interesting weekly rhythm if you change the time frame to 30 days.

anamak said...

I don't think the arrogance was confined to Summers. His successor is not exactly a shrinking violet, at least until not so long ago as, for example, evidenced by this:

"Not that Faust seems worried about Harvard or other top-tier research schools. "They're going to be—we hope, we trust, we assume—the survivors in this race," she says. As for the many lesser universities likely to lose market share, she adds, they would be wise "to really emphasize social science or humanities and have science endeavors that are not as ambitious" as those of Harvard and its peers."

From this article:

anamak said...

Sorry, to be fair, Ms. Faust had responded to the article I linked above. Her response is at the link below:

Anonymous said...