January 30, 2009

Breaking open the piggy bank

Rather than pinching pennies, the University should go on a spending spree

If you need any evidence that the recent economic recession has and will affect the University of Chicago in a profound way, consider this: Over the past few months, the U of C’s endowment has lost an estimated $1.6 billion in value, an amount greater than the total pre-recession endowments of all but 45 American universities. In response to this, Provost Rosenbaum has asked academic departments to slash between two-and-a-half and five percent of their spending, while the Medical Center plans more than $100 million in budget cuts.

Instinct would dictate that such a conservative financial strategy is the proper one, protecting the endowment from further erosion as the University grapples with the realities of one of the country’s greatest financial crises. But recessions actually provide opportunity for those with ambition and enough money to spend. While peer institutions cut budgets, freeze administrative and faculty hiring, and lower financial aid, the U of C should consider tapping into its still sizeable endowment to take advantage of a market with plenty of bargains.

Take campus construction. With the price of raw materials at its lowest point in years and construction workers and architects eager to secure jobs even at discounted rates, it is a huge mistake for the University to hold off on planned projects in the hope that the economy (and by extension, the price of new buildings) will rise. By signing contracts and laying cornerstones now, the U of C could lock in low prices while continuing to improve the services and facilities available to students.

The same is true of departmental budgets. With nearly every university in the country scaling back, it makes sense for the U of C to exploit the financial advantage of its still massive endowment to an even greater degree. With fewer and fewer options available, talented professors and graduate students are more likely to forgive the unbearable winters in Hyde Park in favor of job or stipend security. Similarly, by continuing and expanding comprehensive financial aid, the University can attract top-tier students who might otherwise be tempted by peer institutions.

There’s also an obvious cost to reducing budgets and cutting jobs. In addition to the stifling effect such measures could have on academic pursuits, professors and students alike will feel less loyalty when they are asked to shoulder the burden of economic uncertainty. By maintaining and improving upon everything from office supplies to aid packages, the U of C is buying a flock of evangelists and future donors.

And while spending through a recession might not be popular, the practice is hardly unprecedented. Andrew Razeghi, a professor at Northwestern’s Kellogg School of Management, found that pouring money into innovative spending and research while improving accessibility during recessions improves the relative strength of businesses and organizations. Those who refocus, rather than reduce, general spending and significantly increase investments in research and administration are able to maintain and improve upon their positions. On the other hand, old bears who simply cut costs tend to see their influence and future potential decline. “Contrarian spenders” also reap the advantages of low interest rates that rise when economies rebound.

Of course, the problem with spending through a recession is that doing so puts the University at greater risk if the economic pain remains for years to come. But realistically, if the country’s fortunes continue to decline as rapidly and pervasively as they have in recent months, the effects will be so catastrophic that five-percent spending cuts likely won’t matter at all. Moreover, most economists seem to believe that the economy will stabilize to some degree in 2009. In last month’s Wall Street Journal, 55 professional and academic economists forecast the coming year; of the 55, the most pessimistic thought GDP would drop only two percent, while most believed that GDP would likely just remain flat. While this news is hardly encouraging, between these forecasts, decent employment numbers, and the likely passage of President Obama’s bailout, betting on depression seems shortsighted.

It’s also important to remember that the University endowment is still worth a not unsubstantial $4.8 billion. Even after incorporating recent history, the endowment has actually gained value over the past four years. Unlike most families, small businesses, or even universities, the U of C can—and should—exploit the advantages of spending against the grain.