Divesting from Israel Is Not Just Wrong but Stupid

Campus protestors are failing to grasp basic economic realities.

Clearly, the most newsworthy story in American collegiate life recently has been the widespread eruption of pro-Palestinian protests over the war between Israel and Hamas. A central demand of pro-Palestinian demonstrators has been that colleges divest themselves of investments in Israel, which presumably means not only Israeli-owned companies but also American firms doing business there.

This demand is inane on many levels, even if you accept (which I don’t) the premise that Israel’s determination to eliminate Hamas’s military capabilities is wrong.

Taking the “Divest from Israel” demand seriously would exclude a significant swath of business equities from university portfolios.First of all, many large American companies (McDonald’s and Coca Cola come to mind) do business in Israel, but that business is a minuscule part of the company. For example, McDonald’s has about 40,000 restaurants worldwide, most of them franchised operations with local owners (especially in its foreign operations). Looking through the company’s lengthy annual report, I could not even find information on precisely how many stores are in Israel. It is likely not many over 250, as Israel is a country with fewer than 10 million inhabitants. Let us assume that it is 250—a fraction of one percent of all McDonald’s stores, none of them actually owned by the company. Should major universities exclude McDonald’s, which has a market capitalization of nearly $200 billion, from their endowment stock portfolios because of a relatively minuscule Israeli involvement?

Probably, high-tech powerhouses like Microsoft or Apple have meaningful Israeli business dealings, maybe even direct investments given that country’s prowess in science and innovation. Would they therefore be ineligible for inclusion in university stock portfolios?

Universities have investments in mutual or indexed stock funds. Should they divest from them because some of the underlying stocks have an Israeli association? Appropriately, the typical endowment is invested to a considerable extent in equities (partial ownership of companies), more so than in bonds, real estate, commodities, Bitcoin, or other speculative investments.

Taking the “Divest from Israel” demand seriously would exclude a significant swath of business equities from university portfolios.

It gets worse. Presumably, the goal of university divestment is to hurt Israel because it is trying to destroy Hamas’s military capability. But how would Harvard or Columbia selling its stock in Israel-related firms hurt Israel? Some non-university investor would then buy those shares. College endowments together comprise less than one percent of the value of all wealth in the U.S. If Harvard, which possesses the largest single university endowment, sells its stock in Israeli-based companies, it is not likely to move the related equity prices more than one percent even in the short run—and even less in the long run, because other investors without anti-Israeli or anti-Semitic hang-ups will gladly invest. In short, neither Israel nor the American companies are materially impacted.

So those who want to punish Israel via divestment initiatives are going to fail in achieving their goal. They are engaged in a futile gesture, indicating that they don’t know how capital markets work.

American universities would be harmed if large areas of investment opportunity were cut off.What about the universities? American universities would be harmed if large areas of investment opportunity were cut off. Moreover, many of those endowment funds finance scholarships for students or research-enhancing professorships. The losers of a divestment policy in the long run would be members of university communities whose resources are reduced by curtailed investment opportunities.

To be sure, there are members of campus communities who agree with efforts to punish Israel, some of whom may be strongly anti-Semitic. But there are also Jewish students and faculty (and others) who strongly oppose the efforts of the protesters. I am thinking, for example, of the fraternity member at the University of North Carolina who protected the American flag from those wanting to replace it with a Palestinian one. Some would call him a “counter-protestor”; I would call him a patriot.

The economist in me says, “This is all about a question of ownership. Who owns the universities?” Can a group of students legitimately assert that they have the right to dictate the lives of students, faculty, and others who are stakeholders, if not stockholders, in the university?

This is truer when large numbers of demonstrators have no association with the campus. Estimates are that 30 to 50 percent of the Columbia protesters had no connection with Columbia. So-called professional agitators have scurried to Columbia, UCLA, Emory, etc. to disrupt the education of the paying customers. Isn’t it a breach of contract when university administrators lower the quality of student life by denying them in-person access to classes, or even the right to have a graduation ceremony? Protesters do not have “squatters’ rights” entitling them to disrupt the lives of those who pay tuition (thereby “renting” academic services) to the institution.

This whole springtime of protests has shown the general public the stark contrast between the Real World and the Academic World. The general public (“Real World”) has a different zeitgeist than that of the woke supremacists dominating some college campuses.

The woke campus community believes in a leftish identity politics that the general public detests. Yet it is that public that largely funds the universities with its taxpayer subsidies and alumni donations. The public is fed up with the universities, and American higher education is accordingly going to pay a price—a steep one. College applications and donations are down. When campus leaders tolerate disruptive campus protests and negotiate over demands for divestment from stocks that help to fund the university, they undermine their base of support.

The only explanation making some sense is that protestors realize that “divestment” is only a symbolic act.The legal owners of universities, typically the trustees making up the governing boards, generally need to assert more control over their unruly and destructive constituents. That may mean reading the riot act to milquetoast university presidents.

Sadly, the worst recent example of a spineless university president is at my own alma mater: Northwestern University’s Michael Schill, who agreed to provide a campus house for Palestinian students, make available full-ride scholarships for them, and even hire Palestinian visiting professors. I believe it’s not only wrong but blatantly unconstitutional (see Students for Fair Admissions v. Harvard) to evaluate students and faculty on the basis of their identity rather than their merit.

Returning to divestment, I ask myself, in light of the arguments made earlier about its total ineffectiveness as a means of achieving political objectives, Are the protesters all really that stupid? The only explanation making some sense is that many of them realize that this is only a symbolic act—a way of generating considerable publicity about an issue of the day. It has certainly worked but at a considerable cost to the universities.

Already, for example, Harvard acknowledges that its applications for early admission for the class of 2028 were down considerably. A once largely complacent or indifferent public has now developed greater interest in university affairs. Alumni are becoming less willing to hand over large donations to schools capitulating to campus radicals whose views are far out of the American mainstream.

Universities should transfer more of the cost of recent mayhem to the perpetrators themselves by having them expelled from campuses and/or arrested for disruptive behavior. And rather than acceding to their divestment demands, universities should ignore them.

Richard K. Vedder is distinguished professor of economics emeritus at Ohio University. His next book is Let Colleges Fail: Creative Destruction in Higher Education