Cut for the Future
By David Blanchflower, Guest Columnist
Published on Tuesday, November 10, 2009
College President Jim Yong Kim announced this week the need for further budget cuts ("College aims to cut $100 million over two years," Nov. 9). This seems entirely sensible when the College is faced with prospect of a deficit of $50 million next year and comparable or even bigger deficits for the years after that.
These difficulties have arisen in part because the world economy has been hit by the greatest financial crisis in a century. Stock markets are down around the world, which has hit the College’s endowment. Equities have risen recently as vast levels of monetary and fiscal stimulus have kicked in, but this may well be another bubble. Cash for clunkers programs and subsidies for first time homebuyers have helped to sustain the economy, as has the extension of unemployment insurance. The worry is whether the recovery in the economy will continue as the impact of these programs diminishes.
Unfortunately, there is little evidence that firms in the private sector are about to start hiring or investing any time soon. Credit is hard to come by, and investors remain unwilling to take risks. Unemployment hit 10.2 percent this week and will continue rising. Standards of living are going to fall.
One major concern is that this recovery may be W-shaped or even L-shaped once the stimulus ends. John Maynard Keynes, writing in 1931, warned of the long dragging conditions of semi-slump, which followed the acute phase of the cycle. Recovery could well be sluggish and last for many years before we get back to where we were before the crisis started. In such circumstances, the deficits President Kim announced may actually be overly optimistic if the economy turns down again, or if economic growth remains anemic, as it may well do. At the very least, we need to plan for these plausible possibilities.
Many global policymakers and financial regulators have called for macro-prudential instruments as a way of ensuring that banks are cushioned against economic shocks. These instruments would ensure that banks apply a modicum of sense in their appraisal of risk, by putting money aside in the good times to prepare for the bad. This softens the blow on the downside. The previous administration under former College President James Wright did not do this. It failed to set priorities and to choose, because it felt flush with money and behaved as if the good times would roll forever and a day. And we are all going to have to pay the price for that incompetence. Eventually, budget constraints will bind, and they now have. We must not repeat their mistakes.
The needed cuts must be made with the long term in mind. It might seem simple to make equal cuts across the board, but that will give everyone the message that performance does not matter.
It might seem tempting to make deep cuts in the faculty, but that would undermine the reputation of the College and make it unable to attract good students or good new faculty for decades to come. A high-quality faculty must be a priority.
Streamlining the administration will help the College operate more efficiently, which will reduce future crises while helping to solve this one.
It may well be that construction projects will have to be put on hold or canceled. We are also likely to have to reconsider our financial aid commitment at a time when median household income is falling. These decisions are complex and difficult, but these cuts can be viewed as an opportunity to make the College more stable and better for us all.
My advice to President Kim and the trustees would to be to err on the side of caution and reduce spending by more, rather than less. Assume the worst and hope for better rather than planning for the best and hoping for better as the previous administration did. We need to avoid having to repeat these rounds of cuts. We mustn’t be taken by surprise again. An important first step is for President Kim to set out his three or four main priorities, and then show leadership by making tough choices.
And we need to support him.
David Blanchflower is the Bruce V. Rauner Professor of Economics, a former member of the Monetary Policy Committee at the Bank of England and the economics correspondent of the New Statesman.