Friday, January 11, 2008

Intangible Assets

One of the least covered but most serious crises in Israel at this moment is the strike by 4500 tenured professors. Sixty percent of courses at all the major universities have not been offered since the beginning of this academic year; laboratories have been hobbled; department chairs have been falling out of touch with their administrations. This has been going on for nearly 80 days. It comes on the heels of an equally fierce strike by public school teachers. The gains from that action would not exactly encourage our best and brightest students to consider going into teaching.

Most presidents of the universities have now sided with treasury officials to secure an injunction from Israel’s highest Labor Court to force the professors back to work. They have set a deadline of this coming Sunday, January 13th., warning that the semester and possibly even the academic year would have to be canceled if professors are not back in class by then. Hebrew University president (and mathematician) Menachem Magidor—who in turning to the Labor Court seems to have alienated most of his faculty—has projected that the cost to the economy of a lost academic year would be something approaching a billion dollars. A moment’s thought about the implications of a cancellation for current students on tight budgets, incoming students next fall, students who have made plans to attend graduate school, and so forth, boggle the mind.

THE SENIOR PROFESSORS are, in effect, employees of what in America would be a great state university system, like California’s, and they have the union to prove it. The Hebrew University, which has a modest private endowment, is the Berkeley of the lot; Tel Aviv University is the UCLA, etc. All universities are almost entirely dependent on annual government budgets, which have not been kind in recent years. Tuitions remain low, even by the standards of public universities in the West, about $3000. But this is consistent with the lower earning power of Israeli students. Successive governments have not made up the inevitable operating deficits—a couple of years ago, Tel-Aviv’s was over $40 million—and salaries have suffered in consequence. One senior professor of literature I know very well indeed takes home something around $2400 per month. This is not funny anymore.

The professors claim that the erosion of their income has been around 35% since the late 1990s. They are striking not only to make up for lost ground, but also to put in place a mechanism that would prevent erosion in the future. Demands of this kind would seem unremarkable, but the professors have made (most would agree) some tactical mistakes, the most important of which was not including junior and part-time faculty in their action. Scholars are always vulnerable to the silly charge that their few classroom hours mean a cushy job; now some charge that the professors care little about younger colleagues who carry water for the university under greater stresses (including the anxiety of being judged by the senior faculty when tenure reviews come around).

And I think it is fair to say that Israeli professors have been conservative—at times in the best sense of knowing they are custodians of civilized life, but also in the sense of being unadventurous regarding the extraordinary changes in the technologies and delivery of higher education since the information revolution began. Few would concede that real graduate school is the continuous training taking place in high technology companies. One sees few online and distance learning initiatives, like the ones at MIT or Duke. Dozens of private colleges have opened up here over the last ten years, offering professional degrees in business administration, law, psychology, and education. These institutions have been a positive force, on the whole, but it is not unusual for friends of mine at the Hebrew University to express skepticism about them, grumbling vaguely about the forces of globalization, which are presumably turning colleges into businesses, and thus against the humanities—as if business executives have turned against the erudition and critical thinking one acquires studying the humanities, which is as silly as the idea that professors don’t work hard.

Still, the mistakes of the professors are, on the whole, trivial as compared with the justice of their case. Their despair will only lead to an even greater brain-drain than Israel already has. Over 3000 Israeli academics already work abroad. Do Treasury officials not see this? Or are they really turning against classical education in the public sphere, trying to privatize it, or turn higher education into a big trade school?

TO ANSWER THE question, I think we need to enter the mist-enveloped regions of our most conservative social science, the one businesspeople are supposed to worship but increasingly doubt. I mean economics, or at least the standard microeconomic assumptions that inform capital budgeting, along with the macroeconomic assumptions that purport to project growth. I haven’t been in touch with people at the Treasury recently, but I’ve known plenty of them over the years. I bet the last thing on their minds is a desire to thwart educators, or academic freedom, or the humanities in particular. Rather, the conversation at the Treasury would be conducted in front of an (imaginary) Excel spreadsheet and go something like this:

“We have laid out a budget of over 300 billion NIS (about $75 billion) for 2008, which is already just under half of this country’s GDP. Our national debt is over 70% of GDP, about 10% higher than the limits set by the EU’s Maastricht Treaty. Our debt service is something like 22%; our budget deficits have been running at way over 3% of GDP over the past ten years, which is also higher than what would, say, allow us to participate in EU institutions. We now have a small surplus, because of unexpected 6% growth, but 40-45% of the budget already goes to our social services like education. The pie has been sliced; there is simply no place to take this money from, unless we raise tuitions, which the students (and professors, to their credit) refuse to allow.

“So there is nothing we can do. If we don’t get our budget under control, world bond markets will simply not believe in the value of our paper. We have already cut services to pensioners, hospitals—cut family allowances. What do our professors expect? Do they want us to cut more from the sick or the elderly, or cut down on national defense, which is 20% of our budget? Do they simply want us to bust it, and prompt world capital markets to regard Israeli bonds as junk? We can’t go to America for more loan guarantees, when they are in the beginning of a recession. Where can we possibly get—and fund into the future—just the first expenditure of $54 million, which would pay for, say, a $1000 a month raise?”

THIS IS NOT an easy argument to refute, if you trust the professionals. I bet the political leadership has bought it, though they do not like the implications: what politician would not prefer to appear generous to professors? (The minister of education is a professor, after all.) Unfortunately, as with the 2006 Lebanon War, the politicians are listening to a professional staff who know how to win the last war, not the next one.

The Treasury's argument hinges on two very misguided assumptions. The first is that spending on education is the same thing as adding an expenditure for the “social safety net” as a whole. Actually, spending on (especially) higher education should not be thought an expenditure at all, but as a revenue-generating capital investment, like an airport. It requires separate accounting treatment. Magidor’s projections regarding the loss of an academic year makes this point nicely, if inadvertently. By the same token, what would be the net gain of getting some of the 3000 expat scholars back here, of keeping existing scholars and making them that much more productive: willing to mentor students above and beyond the call of duty, contributing their time voluntarily to commissions and non-profits, and so forth. The chemistry that evolves within a community of scholars, who have gotten to know one another intimately over many years, is extremely valuable. Companies call this investing in “retention.”

Which brings me to the second mistaken assumption, namely, the anticipated reaction of bond markets. The people who run global businesses today know very well what I’ve just been talking about. So do the people whose investments in them are what we mean by capital markets. They both know that the value of any major technology company today is perhaps 80% intangible assets—what is usually called intellectual capital, or the sheer capacity for productive innovation itself. (One expat Israeli, NYU’s Baruch Lev, has been a pioneer here.) If you looked at the relationship between, say, Google’s stock price, its earnings, and its balance sheet (the assets it owns, its cash flows as compared to its investments, etc.), the company’s financial profile would look as out of whack as Israel’s. But investors know that it is Google’s capacity to innovate—to grow from its stream of products and their anticipated cash flows—that make Google worth the risk. Similarly, Israel is credited in world capital markets for being an engine of innovation—and for good reason. It has been a seedbed of intellectual capital. The real question is, can it keep this up?

So the professional conclusion that Israel would spook international bond markets by running a slightly higher deficit—when it would do so to retain and inspire university professors—borders on incompetent, because it assumes international investors are incompetent. The latter don’t care if Israel’s deficit is higher than the European average. This is not 1984 anymore, when inflation here was Argentinean, and a browser was someone who didn’t like to pay for magazines. This is 2008, and Israel has engendered over 3000 start-ups. Investors care if Israel promises to grow 6% next year, and the year after that.

They care, mainly, about two things. One: will Israel continue be an entrepreneurial powerhouse, sprouting new business technologies, and team-building managers, the way trees give apples. This causes investors to look at the performance of Israel’s defense industries and its national service for youth, but even more at the brilliance of its university system; it causes them to research Israel’s arts and design skills, which win international awards, or medical and biotech facilities, which lead to healthcare breakthroughs. Two: will Israel be more or less at peace, so that Israeli businesspeople will be welcomed around the world, and not have their plans disrupted by violence at home and disdain abroad?

If the Treasury and the university presidents knew their jobs, in other words, they’d worry mainly about one convention of accounting, which is a semantic, not a quantitative one. It is that when assets are intangible, they may be written down as “goodwill.” It is almost too late to retrieve that crucial value. But not quite.