The Economic Crisis - II

Some perspective on history and economics may assure colleges that while there is cause for concern, there is no reason to panic or make irrevocable decisions, writes Joel Seligman.

October 23, 2008

Like other college presidents, I am deeply concerned about how the economic crisis will affect our students, our faculty members, and our staff and alumni. Having spent my academic life studying financial markets and financial regulation, I know that it is unrealistic to make promises about the national economy when so much is uncertain. But with some pundits predicting very difficult times for higher education, prompting fears from students, parents and those who work in higher education, some perspective is in order. There are both reasons to worry and reasons to be hopeful right now. This nation has pulled through worse crises before, including the stock market crash of 1929-1933, and we will pull through this one.

Make no mistake; this is a real crisis. If history is a guide, it is likely to come in two waves. The first is the crisis in the credit and stock markets, where credit has recently been generally unavailable and equity values have plummeted.

The second wave of an economic crisis is often the more serious. That wave will affect the “real economy,” everything from consumer demand to unemployment to the possibility of substantial business failure. These can in turn affect the ability of colleges to raise funds, launch new initiatives, and maintain enrollment in less competitive, tuition-driven schools. It is difficult to predict the magnitude of this second wave.

But whatever its magnitude, this second wave likely will reduce some of our revenues and increase our costs. The revenue loss may be particularly significant in New York State, which relies heavily on the financial community to provide a substantial portion of its tax revenue.

The federal government is also likely to face larger deficits, with the consequent risk that less federal money will be available. An exception to that shortfall may be research funding. That will depend to some extent on the nature of the next administration in Washington, but there is growing awareness that support for scientific training and research is an investment in the nation’s economic future. Both presidential candidates recognize the link between scientific research and economic development and both have pledged increased support for the National Institutes of Health and the National Science Foundation.

Most colleges rely to some degree on tuition revenue, and some rely on it very heavily. As families see the wealth in their homes decline, as some begin to feel the pressure from a likely business slowdown, and if student loans become less readily available, students who previously strained to afford college will find it more difficult to do so. This may mean institutions will need to dip deeper into their budgets to provide aid to needy students, and perhaps to those who previously did not need financial assistance.

Given these strains on family budgets, it also may become more difficult for universities to raise tuition at historical rates. Universities that operate teaching hospitals will likely see a decline in Medicare and Medicaid revenues, whichever way the election turns out.

There may be a few silver linings in this rather dark picture. An economic slowdown may reduce utility costs in much the same way it has already reduced the cost of oil and gasoline. Interest and construction costs might also decline.

There are other reasons for optimism. Last week, in the midst of the market turmoil, Harvard University received the largest single gift in its history. Just this week, Rochester received its largest ever single gift commitment of $30 million from Edmund Hajim, which will support our School of Engineering and Applied Sciences.

What should we make of these competing forces, most of which are still playing out in uncertain ways? The history of the market persuades me that it is never wise to make irrevocable decisions in times of economic panic.

As an example, just this week our trustees approved ambitious strategic plans that will guide Rochester until the year 2017. These plans articulate our long-term goals. While the pace of implementation may be slowed, our ultimate goals have not changed. Given the long time frame over which universities plan, periods of retrenchment historically inevitably have been followed by periods of growth.


Joel Seligman, an authority on securities law, is president of the University of Rochester.


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