ONE OF MY OLD law school classmates pledged at least $250,000 to Stanford Law School this year. Another gave at least $100,000, and 12 others donated $10,000 or more apiece. Then there's Philip H. Knight, the founder of Nike, who pledged $100 million as the lead gift for a new, $250-million campus for his alma mater, the Stanford Graduate School of Business.
I too feel privileged to have attended Stanford. But, as the end-of-year charitable-giving season is upon us, I question whether the hundreds of millions of dollars donated to major law and business schools couldn't be better spent.
To borrow a phrase I learned in property law class: Is donating money to a law or business school really the "highest and best" use of one's charitable contributions? And, more generally, are income tax deductions for such donations leading to some perverse results, like subsidizing "endowment races"?
There are just so many charitable dollars to go around. Even assuming that training college graduates to be lawyers is a net benefit to society and that most legal scholarship is socially useful — premises that are at least debatable — it's hard to argue that law schools at already wealthy universities are more deserving of support than a host of underfunded charities. The same goes for business schools.
Most major law and business schools simply don't need the money. Stanford University is sitting on an endowment of $15.2 billion. Harvard's is nearly twice that. In 2004, the endowments of the 10 richest American universities were worth $78 billion — more than the gross domestic product of the world's 75 poorest nations combined, according to a study by the Institute for Jewish and Community Research.
Endowments have grown considerably since then. In fiscal year 2006 alone, the top 25 university endowments grew an average of about 16%. These large endowments often seem to serve little purpose other than to grow larger still (while paying hefty fees to money managers).
Not surprisingly, these universities often neglect to mention their healthy endowments when soliciting the taxdeductible donations they "need." Despite Stanford's huge endowment, last month the university announced a campaign to raise a record-breaking $4.3 billion by 2011, joining Columbia and Cornell in the select club of universities with $4-billion fund drives. Not to be outdone, Harvard is expected to launch a $5-billion campaign once it has a new president.
As part of Stanford's campaign, its graduate business school is seeking a stunning $500 million, half of that for the new campus. (The current one is pretty nice.) The school also wants $30 million for student financial aid.
But if these wealthy universities won't tap their endowments to provide adequate financial aid for law and MBA students, why should alumni and other donors fill the gap? It may make sense to subsidize students who are going into public interest law because of their relatively low earning potential, but it's another thing to make taxpayers (through deductions) subsidize law students who will earn starting salaries of $150,000 a year at big law firms or MBA students who will go to work for Goldman Sachs.
A large chunk of the money raised by law and business schools goes to "faculty support." But boosting the compensation of already well-paid law and business school faculty members (who often consult on the side) is of dubious social value.
The competition for faculty talent often doesn't benefit the students because the most promising or prolific scholars frequently aren't the best teachers. And at a societal level, little or no benefit results from this competition. For instance, whether Internet-law star and Stanford professor Lawrence Lessig, who previously taught at Harvard, teaches in Cambridge or Palo Alto makes little difference to society. His work will be published, and it will have influence, regardless.
In fact, financing professor poaching feeds a vicious cycle of ever-increasing faculty salaries. As business journalist Joe Nocera noted recently, competition usually causes prices to go down, but competition among universities for faculty and students actually causes prices and costs to rise because "the ever-upward spiral of bigger salaries and better facilities and all the rest of it makes the running of the university that much more expensive." In the words of John V. Lombardi, chancellor of the University of Massachusetts, "It's an arms race."
Our tax policy is upside down here and needs review. Taxpayers have an interest in supporting education. They do not have an interest in subsidizing "endowment races" that suck scarce philanthropic resources from underfunded charities. They do not have an interest in helping any one school snatch a professor from another. And they do not have an interest in driving up the already high costs of higher education.
GRANT-GIVING foundations are required to pay out a specified minimum percentage of their assets annually to maintain their taxexempt status. Congress should consider revising the tax code to impose a similar requirement on nonprofit universities as a way to discourage them from hoarding tax-deductible dollars that are needed elsewhere. It will have the opportunity to consider such steps when the Senate Finance Committee holds hearings next month on whether universities are abusing their taxexempt status.
Alumni should also take note. The point of charitable giving is to benefit society, not to buy favored admissions for your kids. There are 1,000 good ways to improve the world through philanthropy, but building fancier lecture halls and boosting law or business professors' salaries probably aren't two of them.