How Long Till the Long Term?

Thursday, December 18, 2008

In the recession of the 1990s, the impact was particularly tough on real estate. Today it's much broader. But, in the '90s, "We had a pretty good sense of the extent of the liability," said Tufts University president Larry Bacow. "Today nobody knows the extent of the liability. It's actually quite scary."



The good news, said Bacow, an economist trained at MIT, where he was also chancellor, is, "Things will get better. Just don't ask me when."

Bacow spoke to a couple of hundred NAIOP Massachusetts members at the organization's annual meeting Tuesday at the Hyatt.

The underlying strength of the New England economy is its ability to produce brains, ideas, and new technology, he said.

"Boston is blessed to be the most densely populated city in terms of knowledge-based industry."

The only truly scarce resource in the world is human capital, as proved by the successes of the likes of Singapore, Hong Kong, and the Netherlands.

"What's important is the capacity to aggregate and concentrate human capital. We do that phenomenally well in New England."

We don't have the Big Dig and the Boston Harbor cleanup now, as we did to stimulate the economy during the last sizable recession. But we have "a remarkable and attractive and livable city."

That said, the early-1990s saw a recession in the United States. "Today we have the first global contraction the world has seen since the Great Depression."

Economies are ever more linked than in the past. "Policy response needs to be similarly globally coupled. That's actually quite difficult," he said.

Because the extent of the losses are not yet known, "It's difficult to price risk."

"People have fundamentally lost confidence" in the ability of government to deal with the current situation.

"That may change on Jan. 20," when President-elect Barack Obama is sworn in. But, Bacow said, Congress is not generating any confidence.

Bacow's talk was "Research Universities and the New England Economy: The Outlook for the Future."

"These are really, really tough times for us," he said.

(We noted in the Globe the other day that one Harvard department, which usually buys $1 million a year in historic literature, will only be spending $850,000 because of the current recession. That didn't strike us as critical.)

Bacow noted that of the four sources of university income -- tuition and fees, gifts, endowment income, and research money -- all will decline next year.

"We are far more exposed to this downturn because we are wealthier," he said, particularly because endowment income has become a larger source in relative terms.

In 1990, 2-3 percent of Tufts' operating revenue was from endowment income. It's grown to 12 percent.

MIT had an endowment of $1 billion in 1990, and less than 10 percent of operating income came from that.

Today that endowment is more than $10 billion -- and the share of operating is more than 30 percent.

Harvard, Bacow said, relies on endowment revenue for more than 50 percent of the cost of its faculty a the College of Arts and Sciences.

"We're more dependent on endowment, so we're more subject ot fluctuations in the market."

When the way-overspent US budget is eventually balanced, or more balanced, sometime down the road, research may take a hit, Bacow said.

Tufts is cutting costs 6-7 percent for next year, Dartmouth 10 percent, Stanford 12 percent, MIT 15 percent.

Harvard's endowment had an $8 billion decline, as reported, but with mark-to-market calculation included it was more like 22 percent, Bacow said.

Arts and Sciences is cutting 15-20 percent, but 65 percent of the budget is salaries. "The highest-paid faculty you can't touch."

"There'll be layoffs," he said, "but they will be relatively modest."

Universities are freezing salaries, putting capital projects on hold.

"I don't think we can raise tuitions even to the extent we have in the past," he said. "We can't afford to zero it out, but it's going to be less than in the past."

"We'll see double-digit increases in the public schools," because government funding is decreasing.

Massachusetts ranks 49th in the nation in public support of higher education, Bacow said.

The good news on the campuses is students are still coming, the higher-education institutions "aren't going anywhere" and won't close their doors, like some challenged businesses might. Of the top 30 industrial firms at the turn of the century in 1900, few exist today. Not true with universities.

(Tufts gets 65,000 visitors a year to its admissions office.)

"We still are the sink at the end of the rest of the world's brain drain," he said. Traditionally, Tufts drew from New England. Today, its third largest source of students is California -- and the fastest growing source state is Texas.

"It's not an accident," he said. Universities are recruiting more than ever.

"Many of the small private colleges in New England are going to have a hard time. Those institutions are exposed."

And, "The public institutions won't be able to absorb all the students" who want to go there because it's cheaper.

The universities face more competition, largely of their own making.

"We have educated the leaders of the next generation of research universities around the world," creating their own competition as they've helped established campuses in places like Abu Dhabi.

"It has created a cadre of imitators around the world that are all trying to eat our lunch."

Eight local research in the Boston area used to get 10 percent of National Institutes of Health budget, for federally funded health research. Now it's 7.5 percent.

"We've lost market share, but we continue to lead the world," he said. Some $2.5 billion in federal research money comes into the region.

Some advantages of being home to universities get overlooked. The economic impact of commencements alone is like having two Super Bowls a year, Bacow said. (Now, which would you rather have?) "We will continue to the be flywheel in the region's economy."

"It's incumbent on this region to create a nutrient-rich environment in which to grow new companies and new ideas," Bacow said.

*******

Maybe it's because somebody real smart was talking, but people weren't thumbing their Blackberries and chomping to get out of there on Tuesday.

There were lots of good questions -- not a few from Tufts grads, like former Boston city councilor Paul Scappichio.

The Green Line extension of the MBTA, which might be considered a good piece of the infrastructure a new president could use to stimulate the economy, will be "a long time coming," Bacow said. "There are still deep divisions in Medford about where it goes.... I'd like to see it happen tomorrow."

Asked about housing, Bacow said the market is structurally different in Boston than other markets -- people have longer tenure here than in places like Denver, Houston, and Atlanta.

"People come here and they stay."

So, even as prices move in a "sticky downward" way, they are "more sticky here."

"The market does not clear until it has to clear."

In the early '90s prices fell and took a decade to get back where they were.

"We've got a long way to go here," he said, and could see declines as steep as in some other parts of the country.

"If so, there's a silver lining. It's much easier to recruit people to Boston," he said. That would offset a trend of more and more students who come to the Boston area not staying, but returning to their home states.

"A little bit of a break in housing prices would not be all bad for this region."

Asked about the federal bailout of banks and financial institutions, Bacow said, "Not a huge amount has been spent to buy troubled assets."

"We're all lucky Summers is back," he said, referring to former Harvard president Larry Summers, not good enough for Cambridge but apparently acceptable as a White House adviser.

Bacow said he hopes there will be some optimism about the economy in January. "The question is whether or not markets have already priced in that optimism." Let's hope they haven't.

"There's not a tremendous amount of confidence in either Congress or the administration."

Institutions should seize the moment if they can. (Recently we heard University of Miami president Donna Shalala talk about the importance of that. When others pulled back and waited after 9/11, her institution ramped up planning for expansion and building of new medical, life-sciences, and research facilities, so Miami can compete with the Research Triangles and the Cambridges.)

Bacow endorsed that view. "Now is the time we ought to be building, because you can purchase construction services much cheaper than when the economy is booming."

Addressing climate change and possible new technologies, Bacow said Tufts became the first member of the Chicago Climate Exchange, committing to Kyoto protocols.

Tufts has grown since 1990 but reduced its carbon emissions, he said.

Government should be funding research, increasing options but not telling the country where to go, he said. "Whether or not government is good a picking technologies -- I candidly don't think they are."

For the moment, we rejoice at the pump when we fill up. But, Bacow said, in the long run, "$47 a barrel gas is not going to help us."

"I would love to see a carbon tax. Do I think that's going to happen in my lifetime? Probably not."





Off With Their Heads








One of the great opening scenes was in "Cool Hand Luke," when a drunken Paul Newman was moving down a small-town main street, systematically lopping the heads off parking meters with his pipe cutter.

We were reminded of it recently, when along Boylston Street early one morning two Boston city workers were using a pneumatic saw to eliminate the one-per-space parking meters.

They've been replaced, of course, with sophisticated kiosks that take your money in a variety of ways.

You pay up, then put the receipt -- proof you've paid, with the time you have to park noted -- on your dashboard for the meter folks to see.

We hope they prove more durable than the old parking meters, which were often out of service.

One small problem is when it's dark there's no way you can negotiate all the slots and buttons on the front of those new machines.

As a friend advised, a little flashlight on your keychain is required.