Paulson Is A Mensch For Giving Harvard $400 Million — It Keeps The Feds At Bay

John Paulson, the hedge-fund manager who rode the housing bust for a tremendous profit in his “big short,” recently announced that he was endowing the Harvard school of engineering with a gift of $400 million. Historically, such bequests have produced great bounty. Andrew Carnegie’s charity of a century ago (and that of Paul Mellon in 1967) gave us Carnegie Mellon University, today so successful that Pittsburgh is somehow the nation’s second Silicon Valley. Stanford Provost Frederick Terman’s encouragements of gifts from David Packard and others, in the 1950s and 60s, set up Silicon Valley in the first place. The Internet, computers, cell phones, GPS, robotics, and advanced medical science are inconceivable without such places.

Yet Paulson was the subject of Bronx cheers from public intellectual Malcolm Gladwell and tut-tutting from the Chronicle of Higher Education. Gladwell tweeted, “If billionaires don’t step up, Harvard will be down to its last $30 billion.” The Chronicle implied that Paulson’s money could be better devoted to saving the University of Wisconsin from Governor Scott Walker’s people in the legislature.

It is an interesting question: could Harvard, with its circa $40 billion endowment, possibly make good use of another 1/100th of that?

The distressing answer is that Harvard needs more money. The reason is the government.

One of the saddest developments in university research over the past fifty some years is how co-opted it has become by the federal government. Beginning in the 1950s, agencies like the National Science Foundation started a takeover of academic-research funding, displacing private sources whose victories included the conquest of polio. By the 1970s, universities were dependent on the federal dole. These days, NSF gives out about $7 billion per year. If such money came from an endowment, it would have to be in the neighborhood of $175 billion.

In a concurrent development, the feds loaded up all the science-research dollars with strings. In order to be eligible for the science grants, universities have to comply with federal regulations so extensive and indeterminate that it is impossible to list them in full. Classic examples: if the feds don’t like how you regard (or do not regard) the amorous trysts of undergraduates on campus; or how you collate incidents of teen drinking on campus; or how you drug-test university employees; or how you respond to thousands of pages of unclassifiable regulations (as here)—they quite clearly threaten to yank your science funding.

It is imperative for a place like Harvard to have a mega-endowment, so that the feds themselves are cowed into compliance. The bigger Harvard’s endowment, the more credible is the implicit threat that Harvard can walk away from federal research dollars if things get too hairy. Federal officers know that if they come down on Harvard for a violation of one of the regulations, Harvard has the financial capacity to cease participating in the federal research-money scam.

Indeed, Grove City and Hillsdale Colleges, and now Wyoming Catholic, have begged off federal funding so as to free themselves from having to be compliant in all the weird ways. (The federal government sued but lost.) The impetus Harvard has to keep increasing its endowment is to maintain the possibility that it could follow Grove City and Hillsdale. The $40-billion-plus is necessary to pressure the regulatory state from asserting all of its claims.

In this one way, we can say that Paulson’s gift is a waste. Federal compliance rules compel the richest schools to strive to become ungodly rich, so as to convince the federal government that they have the power not to dance to its tune. The effect is a muting of federal enforcement at these places—see, for example, the Education department’s soft-pedaling of its own report on how the Harvard admissions system, in the 1980s, did not produce Affirmative-Action worthy class cohorts.

If Harvard did not have megabucks, and thus the capacity to walk away from the federal money-pot, the government would run the place by fiat. It is the fiduciary duty of the Board of Overseers, in deference to this reality, to expand Harvard’s endowment into uncharted territory.

Malcolm Gladwell and the furrowed-browed ones at the Chronicle do have grounds for complaining. Their complaints should be leveled at the funding source that is striving to dominate American higher education: the federal government. If we privatized research-finance, as was the rule in stupendous periods such as the era of the applied-science revolution of 1880-1950, the far greater part of research money would flow to actual research, as opposed to compliance and the warding off of the compliance system, and would probably be distributed more evenly.

This is not to mention the tiny fraction of today’s tuition that universities charged back then: a tenth of what they do today, in real terms. The idea that private money conduces to economic inequality is a canard—a claim bereft of evidence.

Owing now to John Paulson, Harvard’s war chest will be a little heavier the next time the feds go nosing around the place and find a ramp that doesn’t seem to participate fully in the spirit of the Americans with Disabilities Act. Here’s to him.