University Research and the Great Mistake

This country’s public universities face the Trump administration in a weakened condition. That is partly because they have suffered years of state funding cuts and still aren’t back to pre-2008 levels. But it’s also because they have long embraced a private-funding model that doesn’t work and whose weaknesses Trump and his people can exploit.

A painful example is the proposed 18 percent cut to the National Institutes of Health, which Health and Human Services Secretary Tom Price has contended would not hurt research, as it would mostly focus on cutting back on overhead expenses to universities. An 18 percent budget slash sounds catastrophic -- until you remember that companies take these kinds of hits and survive. So do American families, where illness or job loss lead to cuts far greater than that.

The same goes for public universities: few have not had a cut on that scale sometime in the past 25 years, and still fewer have admitted that such losses hurt educational quality. Since universities survived the financial crisis with little damage -- that they have disclosed -- what would keep the citizenry awake at night about an 18 percent cut for medical research?

Research directors reply that it would be terrible indeed: National Science Foundation Director France Cordova, for example, has said the proposed cuts endanger the economy, since “half of our present GDP is due to investments in science and technology.” Researchers have noted that the current funding austerity already appears in the form of the declining average success rate for grant applications, which has been cut nearly in half since 2001, from 27 percent to 16 percent. Four in five applications go unfunded, with presumably valuable results to medical knowledge possibly lost.

Such arguments might work if voters thought science needed public funding to get to the public. But the unfortunate fact is that they have been taught otherwise for many years. Universities have taught politicians and the voters at large that they can and will deal with 5 percent, 10 percent or 20 percent public-funding cuts by finding alternative revenue streams, nearly all of which are private. Universities have asked people to marvel at their entrepreneurial prowess: they have raised tuition beyond inflation for decades, sought private donations, formed research partnerships, subsidized tech start-ups, outsourced room and board, built new buildings with promises of future lease revenue from private firms, and so on. Yes, cuts are a shame, universities seem to say, but we have liberated our inner Zuckerberg, and the public cuts haven’t hurt our excellence at all!

To take one example, Mark Yudof, a former president of the University of California, said during the financial crisis that while they struggled to pay salaries in English and sociology, the “medical business” was doing just fine. Such statements told the world that the public-good educational core lost money while edu-business meant profits. This undermined the voters’ understanding of the special role that public funding plays in public-good activities like teaching and research, in which few of the benefits can be captured as profits by the institution. Adding to the confusion, university officials insisted that their public mission remained as healthy as ever.

Universities thus arrive at the Mar-a-Lago policy house with a confusing mixed message: we do the public good with private money. This confusion is now haunting NIH research. Since medicine is the icon of knowledge transformed into business, why shouldn’t we cut NIH tax support and make big pharma -- that is, its long-suffering customers -- pay for research? If your arthritis meds cost you $3,000 per month, why should you pay taxes on top for research?

In short, the public university’s first private-sector lesson is that private funding serves the public interest as well as public funding. And the logical response is, great, let the public interest be defined by what the private consumer is willing to pay.

The second post-public principle is that the value of knowledge is its market value and can be measured as a return on investment. Although most academics would deny this in theory, universities adhere to it as a theory in use. Higher education institutions have become reliant on return-on-investment arguments to recruit students, and the science establishment, though aware that fundamental science takes decades to pay off economically, constantly dangles large gross research revenues, patent royalties, start-up ventures and trillion-dollar markets in front of the policy makers who allocate funds. Universities and policy officials have taught the political world that science has value because it will generate a positive market return. ROI calculations are used to cut through complicated expert beliefs in scientific use value, intellectual merit and long-term benefits to society.

This view was taken to its logical conclusion for me one day in 2004, when a young engineer at the University of California, Berkeley, announced to our statewide science policy committee, “If a project can’t get corporate sponsorship, it’s probably not good enough to be funded by a federal agency.” That statement ignored the analytical distinction between a public agency funding research for public benefit and a business funding research for its own ROI. When he collapsed public into private, the engineer claimed that, for policy purposes, all good science will have a positive ROI and quality can be measured by pecuniary returns.

Again, few people would accept such claim as economic theory, and economists like Kenneth Arrow and Richard Nelson discredited it in the 1950s. But politics yokes false yet expedient claims to powerful interests to generate practices that act as though intellectual value can be measured as market value. The prestige of market forces, working with misinformation from universities, has kept generations of political and business leaders from inquiring further. Hence, most nonacademics assume that if a university laboratory is doing good science then it is making money, and plenty of it.

The Achilles’ Heel

Enter HHS Secretary Price, who looked at medical research and asked “whether indeed we can get a larger return for the American taxpayer.” That is an entirely appropriate question within our private-sector paradigm of public knowledge, since that treats public funding like private funding and judges it by pecuniary returns.

Price went straight for the Achilles’ heel of the whole operation: “I was struck by one thing at NIH,” he said, “and that is that about 30 percent of the grant money that goes out is used for indirect expenses, which as you know means that that money goes for something other than the research that’s being done.”

On the theory that universities are grossing huge research revenues, this 30 percent spending on peripherals was like bonus pay. All the proposed cuts would mean, then, is that NIH will reduce university profits. Federal dollars will go farther, the taxpayer saves, and universities just have less NIH money to spend on their favorite stuff.

Fine, except for one thing: universities lose money on IDC payments, which don't cover costs. And universities, instead of bragging that their research losses are a donation to the welfare of humanity, have covered them up for decades.

Indirect costs are infrastructure, not gravy that gets spread around. They cover the facilities and administration that support the specific research, which could not take place without the general staff, buildings, utilities and everything else that houses the research. All this costs more than any collection of research sponsors want to pay, even over many years. So universities lose money on indirect costs paid by NIH and every other sponsor under the sun.

Universities on average pay over 20 cents of their own institutional funds to support every dollar of research. A Nature study confirmed a large gap between calculated need and actual reimbursements: “The average negotiated rate is 53 percent, and the average reimbursed rate is 34 percent” -- a difference of nearly 20 points. Two hundred million dollars of research expenditures at a good-size research university costs that university $40 million of its own money, which it mostly gets from student tuition and state funds.

Even the most successful, best-compensated universities in the country have some version of this problem. “We lose money on every piece of research that we do,” comments Maria Zuber, vice president for research at the Massachusetts Institute of Technology, which has negotiated an IDC rate of 56 percent. Were MIT to keep grossing around $500 million in federal grant income, and all federal agencies came to imitate the Price practice of zero IDC funding, MIT would need to come up with an additional $150 million of its own money (to replace the 30 percent average of cut IDC funds) -- just to keep losing what it already loses on federal research.

Price’s policy would be a financial disaster for research universities: they would need to cut the amount of research that they can support, which would wreak havoc on the production of knowledge and on scientific personnel. It would deepen the existing fear that a generation of scientists is already imperiled by inadequate funding. It would force universities to take even more money from students and from faculty in disciplines without large extramural grants. Parts of an already unstable research ecosystem could collapse.

Cutting Our Losses

Although we can and must condemn Price’s cynical, destructive proposal, we need to face the fact that universities have set themselves up. They have treated research costs as a trade secret: neither faculty members, nor well-intentioned legislators, nor the public know that science loses money for universities, or how much. The Nature study got its data only through Freedom of Information Act requests. I had the same experience while doing my own research, which is that public universities treat actual reimbursement rates and IDC spending in the same way that private businesses do -- as proprietary.

Why do universities not disclose financial information that would improve their case for stable or even increased funding? Custom and fear of backlash play their roles. But the decisive factor is the private-sector framework. University officials now treat research as a business activity that is managed as though it were commercially sensitive and should run in the black. They do not want to disclose their large and routine outlays to cover shortfalls on that research, since in a private-sector model such losses signal failure. In addition, the biggest percentage losses come from private foundations and corporate partners that often bring the most prestige. Universities are caught in a privatization trap that they built themselves, and that will be difficult to take apart.

But take it apart they must, and the good news is that research losses can be cut. A fuller program can be found in my new book, The Great Mistake, but the elements can be summarized.

First, universities must go beyond current reporting categories to analyze and disclose how they use indirect cost funds. That disclosure will fan suspicion and resentment into anger and recrimination. But that is normal when issues that have been removed from the political life of a community are reinstated, and various grievances will need to be worked through. Such a move will tax the political skills of university administrations, but until disclosure and discussion occur, most people -- from Tom Price to academic scientists -- will continue to assume that much IDC feathers nests far from the laboratory and can be cut.

Second, universities must admit that the old deal on research funding was ended by state cuts, and then ask for a new deal. They must ask for full coverage of indirect costs. That means going in the opposite direction of Secretary Price and demanding that sponsors stop expecting universities to subsidize them with less money than they used to have that they must increasingly extract from undergraduates. Universities need to start making the full ask to partners, as Price is now doing to them.

Most important, universities need to embrace the public-good definition of research and higher education that turns private losses into public gains. Universities lose money on research in order to benefit the entire society. Since the whole state gains from a great medical center and museum and sociology department’s expertise on racial stratification, the whole state is legitimately asked to pay for it through taxes.

Universities have tried the soft privatization of revenues. That has failed to stabilize university finances and miseducated people about the nonmarket and social value of the university. Universities have also squandered the philosophical and social foundation of their public benefits and lost much general goodwill. But it is not too late to get it back -- starting with the re-education of Tom Price.