Writes an important professor at a famous university:

Just discovered your podcast archives: What a treasure. After listening to the Celente interview I thought I would give you a bit of a view of what's happening at my university right now. I happen to be up to my neck in the budgeting process, and I can assure you it is getting very bloody with no end in sight.

We had expanded slowly, methodically over the years to create a system that was profoundly dependent on inflows of revenue from rich alums, tuition payments that are largely funded by loans, and, of course, government payouts. We had received more than a billion dollars from a single donor in portions over the years. Others donated $500 million a year or two before their personal fortunes contracted. How could one possibly not get giddy under these circumstances? We started anticipating revenue flows rather than using savings. They built buildings before the donors showed up. They turned to the short-term debt markets in a big way. They "swept" short term accounts into the endowment to maximize gains. We institutionally acted as though the good times would never end. During the summer of 2008 I had lunch with a high official and discussed whether our endowment was secure. I asked him if we were marking to market, and he assured me we were on it. I let it drop, but parted ways by saying to him "Endowments are going to blow up." I was thinking Harvard and Yale because it was patently obvious that they were being run as hedge funds; apparently my university is on the list. The situation has changed radically.

We are going through rapid budget contractions in a way that most cannot really understand. I tell my colleagues to imagine that you slowly over eat for decades--the weight distributes evolutionarily over your ever-fattening torso. Suddenly, the doctor says you are a hundred pounds overweight and, moreover, you must lose it immediately or you will die. You do not have the luxury of evolving it back off. You cannot simply reverse the process that got you there. You find that liposuction, stomach stapling, and limb amputations are the only means of rapid weight reduction. Any Austrian would understand this.We are cutting 5% per year for three years. Sounds trivial on the surface, but it is not. First, we are restricted by parameters being passed down from the top. We are told to maintain our national ranking (seems unlikely; vide infra). Do not cut faculty salaries. (Scandal may ensue at some point, but the idea is that faculty salaries are demanded to maintain prominence.) We are ramping up tuition while ramping up financial aid; there goes the middle class.

So what is happening at the local level of my department? We are a big operation. Our current trajectory is that we will lose any staff line that isn't mission critical. We will, if we continue as told, lose half of our teaching assistant lines. Loss of half of our teaching assistants leaves some combination of three tactics:

(a) Cut spaces in lab-intensive courses (essentially all large courses). We would be forced to tell hundreds of kids they must chose a major that does not require our subject. (We teach several thousand kids per semester.)

(b) Double the work demanded of teaching assistants. This is actually quite possible except we will not get any English-speaking students into the program until other PhD-granting institutions make the same cuts. Hard to argue that this would help the quality of education.

(c) Cut the laboratory experience for each student in half, once again virtually guaranteeing a mediocre education.

Some changes will ultimately be positive. Others will be scarring because of the misallocation of resources. We are in a mad scramble to reallocate the much more limited resources, but the damage has already been done--the bell cannot be unrung (as any Austrian economist knows). As you can imagine, I find it profoundly frustrating not fully understanding how we blew it so badly, whether the course of action--the blanket budget cuts in lieu of surgical cuts--is the best course of action, and having to wrestle with colleagues who must be part of the solution but do not understand the problem.

There are so many seemingly foundational tenets of modern economics that are demonstrably wrong. I have repeatedly wondered and asked others whether the pros know they are not right or if they are delusional. Probably both.

Just pondering on a quiet Sunday morning...

PS--William F. Buckley's autobiography includes a chapter describing why he refused to donate to Yale. He describes in detail the process by which Yale prostituted itself to the State. He also discusses why Yale should not simply become a ward of the State (become a state school). Interestingly, he shoots down all the obvious reasons pertaining to money and quality. He concludes the essay with a simple concept. Every once in awhile the interests of the Yale and the interests of the State diverge: "That is why."