PAAAHK THE CAAAH

John Paulson’s $400 million Harvard donation just reinforces inequality

This could take a second.

Billionaire hedge fund manager John Paulson’s decision to donate $400 million to Harvard University to support the School of Engineering and Applied Sciences—the largest donation the university has ever received—struck many people, including me, as strange. After all, Harvard’s endowment already has more than $36 billion simmering away and quietly generating giant returns.

It’s hard to argue that Harvard needs this money. After all, its investment returns of more than 15% between 2013 and 2014 (actually considered somewhat subpar for Harvard) amounted to somewhere around $5 billion. In other words, all Harvard had to do was sit still and manage its money, and it got a payout last year roughly the size of 12 gifts from Paulson.

As for Paulson, why is it any of my business what a rich guy does with his money? Many people would say it isn’t. Among them is influential venture capitalist Marc Andreessen, who seems to think any donation to a research institution is an unmitigated good thing.

Me, I don’t know from moral virtue. So it’s a good thing this isn’t a morality play. This is about policy. Maybe Paulson’s gift wouldn’t be any of my business, if I and other US taxpayers weren’t subsidizing it with tax breaks. (Indeed, we are.)

But truth be told, I think this is also about more than tax policy. Paulson’s donation to such a well-heeled institution also says a lot about what’s wrong with the structure of the US economy.

Since the surprise success of French economist Thomas Piketty’s Capital in the 21st Century last year, it’s become widely accepted that rising income inequality in the US is a fact. And one of the cornerstones of Piketty’s arguments is based on the massive growth of US college endowments.

Because detailed public data on large private fortunes is hard to come by, Piketty examined the performance of college endowments—which must report their performance. After studying the returns of university endowments, Piketty finds simply, “the greater the endowment, the greater the return.” Between 1990 and 2010, investment returns for Harvard, Yale, and Princeton—real returns minus the costs of money management—averaged 10.2%, twice as much as smaller endowments. He uses these results to buttress his now famous argument that the rate of return on capital tends to outpace overall growth, leading to a concentration of wealth among those with large fortunes.

How do they do it? Well, Piketty argues in part that it’s because they can pay for better-quality investment management. But in practice, what that seems to mean is that the largest college endowment funds more often invest in “alternative investment strategies.” Piketty writes: “The available data, which are both public and extremely detailed, show unambiguously that it is these alternative investment strategies that enable the very largest endowments to obtain real returns of close to 10% a year, while the smaller endowments must make do with 5%.”

Alternative investments include things like hedge funds, venture capital, and private equity. So, large endowments are very much in the interest of people who are involved in these industries. For the record, a spokeswoman for Paulson says the firm runs no money for Harvard Management Company. (I also put in a request to Andreessen Horowitz to see if they manage money on behalf of Harvard Management Company, but I haven’t gotten an answer.)

In any case, the point isn’t that there’s anything improper going on. Rather, the idea is that the Paulson donation offers a unique chance to look at what’s happening to the large chunks of capital clustering at the top of the US income distribution.

Let’s think about it. A billionaire is socking away tons of cash. (It’s not like Paulson is a miser, he’s a well-known art collector for example.) But it’s actually really, really hard to spend all the money he’s made. He reportedly earned roughly $2.3 billion in 2013 alone, and is worth more than $11 billion, according to Forbes.

And so he’s making a donation—a tax-advantaged one that burnishes his connection to one of the wealthiest, most well-connected institutions on Earth. But still a donation. The money likely won’t be spent instantaneously. Instead, it’ll be channeled back into the kinds of investment funds run by people like Paulson, whose expensive services drive both the fast capital accumulation that results in income inequality and the outsized incomes that also result in—wait for it—income inequality. Wash, rinse, and repeat until society is sufficiently stratified.

Well, what about the kids at Harvard? It’s true that poor kids that can get into Harvard can go for free, which is great. (Roughly 20% of undergrads at Harvard College do, officials say.) But Harvard already has the money to make that happen. Meanwhile, there are plenty of funding struggles to be found at slightly less august institutions all around the country.

The bottom line? It’s hard to escape the conclusion that the Paulson donation to Harvard captures the essence of the way American inequality operates. It siphons many billions of dollars out of the operational economy and directs them to a rarified world of finance, influence, and affluence.

There is something we can do about it. There’s always the option of imposing an excess endowment tax, for example. But given the aforementioned amount of money and influence involved, I wouldn’t advise holding your breath.

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