Brad DeLong said we could understand Harvard as something like a worker-managed firm from Communist Yugoslavia, now Jim Manzi suggests we might understand it as a large tax-exempt hedge fund:
So if you just think about how much cash went into the shoebox and how much came out of it, a more accurate accounting for Harvard for FY 2007 would, in rough numbers, be a lot more like the following:
This explains why Harvard’s net assets increased about $7 billion in 2007, from about $35 billion to about $42 billion.
- Receipts = $2 billion of operating revenue + $7.3 billion of investment income + $0.6 billion of gifts to the endowment = ~$10 billion.
- Operating costs = ~$3 billion.
- Profit = $10 billion – $3 billion = ~$7 billion.
Viewed purely in terms of economics, Harvard is really a $40 billion tax-free hedge fund with a very large marketing and PR arm called Harvard University that has the job of raising the investment capital and protecting the fund’s preferential tax treatment.
I have no idea whether or not this endowment tax idea kicking around in the Massachusetts legislature really makes sense. My guess is that it may not since the flow of resources toward Harvard may well be good for the state in which it's located even if it doesn't particularly serve the public interest. But the people making additional gifts to Harvard and similar institutions really ought to rethink their giving strategy. Even in terms of helping your kids get in, if you're really rich and give a lot of money to deserving charitable institutions, the admissions office will still view you as a good development prospect and let your kid in. Then just don't pony up the money!