Why Should Academic Physicists and Chemists Learn Some Econ 101?
The Trump Administration Understands Fungible University Budget Constraints
Ivy League researchers in Physics, Math, Chemistry and Biology are enraged that their labs are threatened by the Trump Administration’s cancellation of grants and cuts to the university’s indirect rates from roughly 50% to 15%. Here, I want to discuss fungible budget constraints and offer an Econ 101-based theory of what is happening here.
Let’s return to 1993 when I was an Assistant Professor of Economics at Columbia University. I taught Econ 101, and I would ask my students the following budget constraint problem.
A poor nation in the developing world consumes food and wants to have more weapons to fight its local neighbors. In the absence of aid from the United States, here is its original budget constraint.
Do you see the downward-sloping production possibility frontier (PPF)? The “price” of one weapon is two food. The nation can choose any point on this PPF. Suppose it chooses 75 weapons. In this case, it can buy 50 food.
Now suppose the United States offers this developing nation food aid. The U.S President says that there is a humanitarian reason to help this nation. Recall that Ronald Reagan made this announcement that he was providing food aid to a specific side (the Contras) in Nicaragua.
To keep this simple, suppose the U.S offers the developing nation 40 units of food. Let’s draw the new budget constraint and the old budget constraint.
Do you see that the new budget constraint is now the yellow line? The key point I want to convey to you is that by receiving food aid, the developing country can now spend more on weapons. This is the fungibility point that I wanted my Columbia Freshman to understand.
If the developing country now spends all of its own $ on weapons, it can buy 100 and still have 40 units of food!!
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With this warmup completed, let’s now return to the modern University’s fungibility issue. For decades, the Deans understood the logic I presented above. The Federal Government would pay overhead $ on Biology grants and the Deans would redirect some of this $ to other favored units.
The University Deans have had the discretion to allocate the overhead funds from Math and Physics grants to their pet projects, such as the English Department or Sustainability Studies. Deans have their priorities and their own career concerns. The University Leadership has tended to ignore the flypaper effect and instead has redirected funds to its own priorities.
The Trump Administration is implicitly claiming that there is a fundamental principal-agent problem at modern Universities. The Trump Administration appears to be saying that it doesn’t trust University Leaders to wisely use taxpayer funds. Why? Universities are redirecting $ generated by the scientists (and the economists!) to other units on campus. I posit that if this redirection had not taken place, the Trump Administration wouldn’t be so tough on universities right now.
What is the Dean’s best response to this credible threat of cutting off federal subsidies? A time consistency issue arises. If future Deans could commit not to redirect funds to slightly wacky units on campus then the “real scientists” on campus would face lower funding cuts. Will the “real scientists” on campus step up and start to push back against the radicals on their own campuses?
Should each department on campus have its own budget constraint such that each department gets to “eat what it kills”? An economics department that attracts many majors and self funded graduate students would benefit from these rules. Let’s have the departments compete against each other for students and allow the departments to keep their overhead grant funding and their tuition from enrolled students. Deans have always redistributed $ across departments and units and now the Trump Administration is pushing back. Death to fungible budget constraints?
So, in the graphs above; substitute the words; “Physics Department for Food” and “English Department for Weapons”.
Hiya Matt... Have you ever tried to run an organization doing research on 15% overhead? Good luck to you -- it doesn't work if you'd like to have buildings, research labs, fiscal compliance systems, legal compliance systems, and keep the lights on and the water running. The amount of transferring to subsidize other efforts you imagine is, I would venture, grossly overstated. Scientific research is expensive and requires a large infrastructure that is reflected in very robustly substantiated indirect cost rates (aka overhead). But more broadly, the idea the administration is going after medical research to get at sociology departments is laughable. This attack is on universities, experts, and those who can speak with authority, and it is a textbook authoritarian move. The vice president said it out loud, and I quote -- "The universities are the enemy." He meant it -- this is the American Cultural Revolution not an attack on cross-subsidies from physics to English.
This still implies a very odd utility function by the Administration in the amount of harm it is willing to do to STEM departments in order to harm the others.