GREG MANKIW is

angry

with the state of Massachusetts, and I don't blame him. Seeking a new source of revenue, the government has begun thinking of ways to squeeze its golden goose. The

Wall street Journal

reports

Massachusetts legislators, demonstrating a growing resentment against the wealth of elite universities in tight economic times, are studying a plan to levy a 2.5% annual tax on the portion of college endowments that exceed $1 billion.



The effort takes aim at one of the primary economic engines of the state, which is home to nine universities with endowments that surpass the $1 billion level, led by Harvard University's $35 billion cache, the nation's largest....



Supporters said the proposal would raise $1.4 billion a year. Based on the most recent size of Harvard's endowment, the university would have to shell out more than $840 million annually.

This move strikes me as very ill-considered given Harvard's role as a jobs-creation machine. It's odder still considering that the university just announced a bold new financial aid regime, under which families earning under $60,000 will pay nothing to attend the school, and families earning under $180,000 will be asked to pay at most 10 percent of their incomes.

Mr Mankiw urges the school to begin considering a relocation if such a program passes, first establishing a satellite campus elsewhere in the country and then slowly tranferring resources to that campus until the original can be shut down. One suspects that such a threat might make the legislators think twice.

But is the threat credible? Mr Mankiw says he has often wondered about the efficient scale of a university, but to me the key question is to what extent does the university benefit from the agglomeration externalities to which it also contributes?

Cambridge and nearby Boston are home to some 50 institutions of higher education. This deep pool of resources and intellectuals adds value to the Harvard experience for both its students and its employees, including professors. What's more, the presence of these many colleges and universities has contributed to the establishment of a deep and tightly connected network of related concerns. There are non-profit research organisations and for-profit businesses and consultancies, which contribute to the university experience and provide faculty with additional resources and side-employment. They also deepen the local job market for students who wish to stay in the area.

The greater Boston area has also developed other service businesses specifically to cater to this collection of academic talent. There are excellent primary schools for children of the faculty. There are excellent cultural facilities. There is an entire infrastructure built up to support and serve the academic industry that drives the Boston economy.

There is no doubt that $840 million per year is a steep additional tax burden. But Boston and Cambridge are already very expensive places to live and work. Housing in the area is very costly--a factor for which employees must be compensated. One suspects that if taxes were all there were to it, Harvard could easily move elsewhere and save much more money than $840 million. That this is not even considered within the university is a testament to the value of the academic agglomeration built up in greater Boston.

The situation is analogous to finance in Manhattan. Despite the tax burden, despite the exorbitant rents, financial firms all crowd atop one another in the center of the city. The reason is that the very concentration of those firms and ancillary businesses and institutions creates a great deal of value, making it very unattractive for any one business to leave.