The Winter of Harvard's Discontent
December 22, 2001

“Uh, oh,” said Sylvia, reading the newspaper. “Trouble in paradise.”

Anand was immediately interested. Trouble always seemed to interest him. “What is it, Syl?”

“Harvard,” said Sylvia. “Looks like Mr. Lawrence Summers, president of the university, has a problem on his hands.”

“Larry Summers–hmm, wasn't he Treasury Secretary under Clinton?” said Anand. “He is also, if I am not mistaken, a very good economist. So what is behind the winter of Summers' discontent?”

You may recall, began Sylvia, when Clinton's Treasury Secretary Robert Rubin returned to the private sector (in order to augment his income, she added), he was replaced by his deputy, Lawrence Summers. Although the cerebral Mr. Summers was deemed to be lacking in tact--his responses to windbag Senators verged on the contemptuous--he managed to be quite effective, and in fact burnished his reputation with a resolute performance during the Asian financial crisis of 1997-98.

Earlier this year, Harvard University was looking for a new president. Al Gore, following his defeat in the elections, was mentioned as a possibility, but the job went to Larry Summers.

One can only surmise, said Sylvia (who was given to frequent surmising), that Summers would have regarded his latest appointment as a sinecure. After the travail he faced as Treasury Secretary, including the grim possibility of a global economic meltdown, the challenges posed by Harvard's top job paled in comparison. To be sure, running a university was no simple task, and this was no ordinary university–it was Harvard . But running Harvard had its advantages. Its sterling academic reputation attracted students and faculty from around the world, enabling the institution to charge steep tuition fees and virtually insulating it from the vagaries of the business cycle.

And then there was the endowment. Currently valued at $18 billion, Harvard's endowment is the envy of other academic institutions, and the substantial income it generates annually funds myriad academic programs, permitting Harvard to maintain its supremacy in higher education.

The gargantuan endowment, noted Sylvia, makes the President's life easier. He doesn't feel compelled, as his counterparts at institutions with smaller endowments might, to spend a considerable portion of his time hobnobbing with potential donors.

Sylvia paused to ask, “With the onerous fund-raising responsibility considerably attenuated, what might a Harvard president choose to busy himself with?”

“In the case of Summers,” responded Anand, “perhaps he contemplated writing academic papers in economics.”

Sylvia shuddered at the possibility.

“But did he,” she continued, “reckon with the evangelical fervor of Harvard Alumni for a Living Wage ?”

“Impecunious Harvard grads clamoring for an increase in their miserable wages?” enquired Anand.

Sylvia ignored the sarcasm. “It's an alumni group demanding that Harvard pay higher wages to its employees, especially those at the lower end of the spectrum. Recently, they released a report castigating the university for its stinginess and urged school officials to pay at least $12 an hour to its employees and subsidize their health insurance and child care expenses.

“The U.S. minimum hourly wage is $5.15, that in Massachusetts is $6.75. Harvard actually pays more, but the alumni group is not satisfied. It wants the university to offer a significantly higher ‘living wage' to its janitors and other workers.”

“But,” objected Anand indignantly, “that is in complete disregard of market forces. In a competitive labor market, wages are set in accordance with productivity levels. While market wages may appear to be unjust and exploitative, the alumni group appears to have overlooked a simple thing: Why do its employees continue to work at Harvard for supposedly low wages? Presumably because they couldn't earn more elsewhere.”

Sylvia was familiar with Anand's outlook on competitive markets. She noted that Larry Summers, during his Treasury Secretary days, was also an ardent advocate of free markets, frequently counseling governments on the perils of ignoring market forces.

“Now, with an implacable alumni group foisting its anti-market views on Harvard University, how will Summers respond?” she said musingly. “From a public relations standpoint, his course of action is clear. He should give in to the call for higher wages. But as a business decision, it would be sheer folly.”

“Life as a university president sure is tough,” remarked Anand. “Perhaps he longs for the good old days when all he had to was craft the country's economic policy.”