Negotiating with Terrorists: Campus Edition

T he campus protests of the past semester have for the most part died down — until the fall at least. The pause gives us the opportunity to reflect a little more analytically and a little less emotionally on the position of the protesters. One can’t help but begin with the simplest question. What were they hoping to accomplish?

Columbia University, to pick a major target, could not possibly influence Israeli policy toward Gaza. The students, then, must have had some other goal. One, which they clearly accomplished, was to make the campus horribly inhospitable to Jews. While that might have given the most antisemitic among them some joy, the truth is that students across a large number of schools continued long negotiations and presented university officials with a set of demands, which, if met, would have presumably induced the students to suspend the protests. So, antisemitism for its own sake was likely not the only animating factor. Chief among the demands nationwide was that universities “divest” their endowments from Israel and perhaps from oil companies as well. The students appeared to believe that this would benefit the people of Gaza.

From news coverage at the time, it seemed clear that if universities had agreed to divest, things may well have settled down. But what else would that have accomplished?

First, consider that global capital markets for the most part are efficient, and equity prices are a risk-adjusted expectation of their future free cash flows. If every university in the U.S. dumped Israeli equities all at once, it would in all likelihood have no effect on the price of Israeli equities or on their future performance — in other words, it would do no harm to Israel — as other buyers would swoop in. Assuming the endowments were also invested in some other equities that were priced in an efficient market, universities’ portfolios would be expected to have the same risk-adjusted return going forward. So, the students demanded something that would have had no effect on the situation in Gaza or on their universities, and the universities refused.

On the other hand, perhaps the students believed in the very unlikely possibility that they could convince a large number of global investors to boycott Israeli equities. In that case, the market price of the equities would drop right away below their expected future profits, and they would therefore be expected to outperform relative to their price. So, an opportunistic Warren Buffett–like investor could swoop in and buy the undervalued stock and make outsized returns. But notice, since only “bad people” who support Israel hold or would be interested in buying Israeli stocks (or oil stocks), the effect of the change would be to take money that should have gone to “good people” and hand it over to “bad people.” From the students’ perspective, it would achieve the exact opposite of their goal.

The students’ final objective, perhaps, beyond proclaiming their own (supposed) virtue and establishing leadership positions for themselves on the campus left, was to “send a message” to Israeli firms that their government’s actions should be opposed. In this case, divestment would be exactly the wrong thing to do. Consider a careful and clever study by economist Matthew Kahn and his co-authors, who found striking evidence that firms whose equities were purchased by green activist funds reduced their pollution emissions relative to those not targeted. The logical conclusion, then, is that if the activist students wanted to affect the behavior of Israeli firms, they should have advocated that university endowments load up on Israeli equities.

In other words, the major demand of these fools, fanatics, and those who exploit them makes absolutely no sense whatsoever. Many employers have announced that they will carefully examine job applicants and disqualify those who participated in the protests. Even abstracting from antisemitism, a college student who thinks poorly enough to make divestment his No. 1 issue has no place in a position with any material decision-making responsibility.

If I were a university president, I might have been tempted to divest because the cost of doing so would be equal to the effect: that is, zero. But it would set a bad precedent. One really shouldn’t negotiate with terrorists, or their dupes.