The Economics of Everyday Things - 48. College Fraternities

Episode Date: May 13, 2024

A fraternity’s budget includes broken windows, liability insurance, chili dog breakfasts, and the occasional $40,000 DJ. Zachary Crockett crashes the party. SOURCES:Anthony Anderson, member of the Sigma Alpha Epsilon fraternity.Danielle Logan, owner of Fraternity Management.Charlie O’Neill, member of the Sigma Alpha Epsilon fraternity.Stephen J. Schmidt, professor of economics at Union College. RESOURCES:"If Student Deaths Won't Stop Fraternity Hazing, What Will?" by Ben Kesslen (NBC News, 2021)."Social Animal House: The Economic And Academic Consequences Of Fraternity Membership," by Jack Mara, Lewis Davis, and Stephen Schmidt (Contemporary Economic Policy, 2018)."How Fraternities Exacerbate Inequality," by Jillian Berman (MarketWatch, 2017)."18 U.S. Presidents Were in College Fraternities," by Maria Konnikova (The Atlantic, 2014).Inside Greek U.: Fraternities, Sororities, and the Pursuit of Pleasure, Power, and Prestige, by Alan D. DeSantis (2007). EXTRAS:"Freakonomics Radio Goes Back to School," series by Freakonomics Radio (2022).

On the outskirts of the University of Illinois Urbana-Champaign campus, you'll find a stately brick mansion built in 1907. The porch is flanked by a pair of ornamental lions painted in gold, and the property's craftsman architecture has earned it a place in the National Register of Historic Places. But the things that go on inside are a little less dignified. We get like chili cheese dogs for breakfast. Oh yeah, just partying. It's a pretty fun time. That's Anthony Anderson. Anthony, we call double A. I call him Tross because we called him like, it was like double

Albatross. I don't even really know where that came from, but I just call him Tross all the time. And that is Charlie O'Neil. He has a few nicknames of his own. Chuck Chaz. Yeah, Chaz is definitely stuck. Bro O'Neil is in there. I think that's like my Snapchat username. Albatross and Chaz are members of Sigma Alpha Epsilon,

the country's largest college fraternity. Its purpose, according to its mission statement, is to make its brothers into true gentlemen. Gentlemen who may or may not shatter an occasional window while hosting a rager. There's just a lot of things that we don't necessarily break. Other people break when people come over. Chairs, beds, tables, windows, mirrors, I mean,

anything and everything. And it turns out that all that partying can pay off. And it turns out that all that partying can pay off. Alan Ross College students who joined fraternities had substantially higher incomes than those who did not. And this occurs despite the fact that they have lower grade point performance in college. The decision to specialize more in building social capital is probably the right strategy for who they are. For the Freakonomics Radio Network, this is the economics of everyday things. I'm Zachary Crockett. Today, college fraternities.

College fraternities are structured kind of like franchises. At the top, there are over a hundred national nonprofit organizations. Each one has its own Greek letters, insignia, secret handshake, and set of bylaws. Some are organized around particular religious faiths or professional aspirations. But most are what you'd call social fraternities. The type that throw big rush parties and tailgate at football games. Those national organizations oversee individual chapters, more than 5,500 of them in all, on 800 college campuses around the country.

And being a member of one isn't cheap. Fraternity chapters are run by students who are initiated as brothers and assigned roles within the house like president and treasurer. At the Urbana-Champagne chapter of Sigma Alpha Epsilon, Chaz is the head of recruitment and Albatross helps plan meals. These students are responsible for raising the chapter's funds and managing the budget, which can range from tens of thousands of dollars to over a million dollars a year. Which is a lot to ask of frat boys.

I would definitely say our house is a little disorganized when it comes to those kind of things so there's definitely a big variety of where our money might go. If I had a great understanding of where all of our money went, you know, I would be very happy. When a chapter needs help, it often turns to a specialist. I'm Danielle Logan. I'm the owner of Fraternity Management. Logan offers services like accounting, budgeting, debt collection, and property management to

fraternities at the University of Florida. And it's not always a pretty job. When I get a new client and I walk in, it is a huge mess usually. I don't know about you, but 19, 20 to 21 year olds managing over a million bucks scares me. That money comes from dues paid by fraternity members. A brother at the University of Florida might pay around $400 per year directly to the chapter, $200 to the national organization, and $100 or so to the Interfraternity Council, or IFC. That's the governing body for all the frats on a campus.

They'll pay around $2,000 for meals, $1,500 for maintenance and utilities, and another $1,500 in maintenance and utilities, and another $1,500 in social and activity fees. That's almost six grand, and it doesn't include rent for those who live in the house. Some frat houses are owned by the university or by individual landlords, but it's also common for properties to be owned by the national fraternity itself through a housing corporation run by alumni. In the U.S., fraternities collectively own around $3 billion worth of real estate. All those mortgage payments and property taxes are covered by the fraternity brothers who

live there. The chapter has to pay rent to the housing corporation no matter how many guys are living in the house or not. So it's in their best interest to fill the house and make sure that they have enough rent. Albatross says that his total cost to be a member of Sigma Alpha Epsilon at the University of Illinois runs around $15,000 a year. And if a fellow brother doesn't fork over his share of the costs, others in the house might take vigilante action.

Just do things like go to their dorm room and take their Xbox, you know, kind of might take vigilante action. Just do things like go to their dorm room and take their Xbox, you know, kind of hold that hostage until they pay it. Like things like that, or just like, you know, every time you see someone at an event with a drink and just like slap it on their hand, be like, oh, sorry, didn't pay for that. Logan has a more formal approach for dealing with delinquents. We keep new member forms and signed documents when they join the fraternity. It says, hi, my name is Jo.

I agree that I want to be a member of this fraternity. I understand that I'm going to be paying dues my entire undergraduate career. And if I don't pay them, I realize I'm going to get sent to court. So as unfortunate as it is, if they don't pay their debt, we do the same thing that if you didn't pay, you know, any other debt would do. We'd have to send you over to the collections

attorney. Collecting dues from your bros might not be a chill vibe, but it's important because in a frat house there are always things to pay for. They punch a hole in the wall. Any houses that have drywall, that drywall gets repaired constantly. Doors get kicked in quite a bit. When we came back from winter break, the pipes bursted everywhere, flooded people's rooms. Someone set off a fire extinguisher as well, so that was also a big fee. Things get stolen from our courtyard all the time, too, like speakers. We have tables back there that go missing if people forget to put them back in.

The biggest expenses, though, are to cover a frat's liabilities. Insurance firms categorize fraternities in the same risk class as toxic waste dumps, carnivals, and amusement parks. There are only a few specialized firms that offer coverage to frats. It's not cheap, and each house has to cover its share. Typically, national organizations procure it and then bill it to the chapters. I've seen them as high as $700 per person per year and as low as $200 per person per year. It depends on how many times they've gotten in trouble, to be honest.

A fraternity is typically required to secure at least a million dollars in coverage to protect the fraternity, individual members, and the university in the event of an accident. So if somebody gets injured, say they're having a party at the fraternity house and somebody, I had a house that had an inflatable slide and too many guests were going down the slide at the same time, the slide deflated,

and we had a guest that had a severe head injury and had to go to the hospital. In that case, the national organization had the fraternities back. They're going to contact the liability insurance company, make sure that all the documents are turned in, help be the liaison between the chapter and the insurance provider. But if a chapter does something especially stupid and illegal, the national chapter will often try to distance itself. And insurance companies may refuse to pay out.

Over the past 50 years, hundreds of fraternity members and pledges have been killed or injured during hazing rituals and initiation ceremonies, which often involve heavy drinking. Fraternity members are also three times more likely to commit sexual assault than their peers. And fraternities can be held liable for offenses committed on their premises or at their events. Repeated lawsuits have collectively resulted in tens of millions of dollars in settlements. Fraternities have taken steps to curtail these risks. There used to be six or eight weeks that you could have the men be what were called pledges. And now for many national organizations, they're getting rid of the pledge period altogether.

And they're saying, you know, you need to initiate these guys and bring them in as brothers within 48 hours. That's to try to avoid some of these hazing allegations that have come out over the past several years. Most national organizations also forbid chapters from using dues to pay for alcohol, but frat brothers are resourceful. I'd say for the most part we usually just like kind of do a big slosh like everyone puts like $10 together and you know then comes a pretty decent amount. like everyone puts like $10 together and you know then comes a pretty decent amount. Logan says that after covering its expenses a well-run fraternity should have around $30,000 a year left over. Those funds are discretionary and social chairs like Chaz usually use them for

events. The vast majority of our fun goes toward barn dances, formal, and then if you're familiar with what block is, every Saturday we're paired with a sorority and paying for block would go toward free cover at whatever bar. There's a wide range in what a fraternity's discretionary budget might be. You'll have some fraternities who

have a discretionary budget for the entire semester that have some fraternities who have a discretionary budget for the entire semester that's 10 grand. And they'll have to figure out how to have those sorts of parties with that limited amount. I have a fraternity whose social discretionary budget this semester was $138,000. That kind of money can lead to some questionable decisions. I had a house that spent $40,000 on a DJ to have a party.

I'm like, $40,000 is a lot of money, man. Let's not do that again. There are contracts that they'll sign for buses to take them to a big national away game. And so they'll sign these $85,000 contracts for buses and hotels. But sometimes, a fraternity has to spend some money to maintain its place in the hierarchy of Greek life.

There definitely is a social order and a social ranking. If a fraternity throws the best parties and has the best homecoming courting and homecoming pair and all of these other sorts of small nuances, the fraternity can kind of change tiers. And that can extend to its members in their Greek life and in their real life later. All that partying, it's a kind of investment. The decision to join a fraternity is partly a decision to take some time away from your academic work, knowing that this will hurt your grades, but also knowing that the social skills, the social capital that you build will have value. That's coming up.

The first college fraternity in the United States was established at the College of William and Mary in 1776. It was originally a secret society, and its purpose was to help members form deeper social and professional networks. But the fraternity system we know today didn't really take shape until 50 years later at Union College. My name is Stephen J. Schmidt, and I am the Kenneth B. Sharp Professor of Economics at Union College in Schenectady, New York. Schmitt's school is often called the mother of fraternities. In the 1820s, it was the birthplace of Kappa Alpha, Sigma Phi, and Delta Phi, the first

modern frats. That heritage is partly what inspired Schmitt and several of his colleagues to write a 2018 paper exploring the economic and academic consequences of the Greek system. The big question that this paper is about is if you join a fraternity, will that be financially beneficial to you for a prolonged period of time after you graduate the college. S. Schmitt surveyed more than 3,700 alumni at a liberal arts college in the northeast, some of whom were in fraternities and others who were not. He collected data on GPA, income, and a variety of other criteria. He also used a bunch of fancy econometrics to limit

selection bias, because it's possible that men who join college fraternities tend to be from wealthier families than those who don't. What Schmidt found was surprising. The finding is that college students who joined fraternities had substantially higher incomes than those who did not. We find an effect of about 36%. And that this occurs despite the fact that they have lower grade point performance in college.

Their grade point averages when they graduate are about 0.25 lower on the traditional 0 to 4 scale. So almost a plus minus of a grade. That 36% boost in earnings is quite substantial. If you think of a graduate of a college typically going out and making something like $60,000 a year, then if you get a 36% increase, that's more than $20,000 a year every year for your career. So, if you make $20,000 extra a year and you do that for 40 years, that's $800,000. There is an enormous financial incentive to join

a fraternity. Greek members make up less than 3% of the US adult population. Yet they've historically accounted for 85% of Fortune 500 executives and three quarters of U.S. senators. They've made up 85% of Supreme Court justices since 1910. And the representation in Washington doesn't stop there. They even have their own political action committee dubbed the Frat Pack.

It's raised millions of dollars over the past 30 years to lobby for pro-Greek causes, like fewer hazing restrictions and more tax breaks for fraternities. So how is it that fraternity members have amassed so much money, power, and status? Schmidt has a few guesses. The first is that navigating the constant problems that arise in a house with

30 or 40 other people helps them develop soft skills that are highly valued in business and politics. Are you good at working with other people? Can you get a group of people together to work on a common objective? Those kinds of things don't usually show up in your grade point average. It could also be that fraternity brothers are just feeding off of each other's shared interests. If you're around a bunch of other guys pursuing a career in banking, you're more likely to pursue that path for yourself. But there's another theory. Alan Ross Being in a fraternity brings you into a network of other people all across the country, all around the world these days, when you get into the workforce, that access to that fraternity network may be making you a more valuable

employee than you would be otherwise. It may be that the fraternity brother who's giving out the promotion is gonna choose someone from his own fraternity rather than someone who is not in a fraternity at all. So, there may be some extent to which the gains from the fraternity are not because workers are more productive. Some of it may be redistributing the pie from people who are outside the network to people who are inside the network. Jared Sussman Danielle Logan has witnessed these kinds of hookups firsthand. Danielle Logan If you are moving out of state and you say, I am a Delta Delta brother,

the national organization holds the list of every brother that was ever initiated in every chapter. And that helps to connect and add that extra layer for interviews and job opportunities. I have students that get jobs just because of their letters. I have two boys. I hope that they will decide that they want to be Greek. They learn so much about running a business,

about owning and operating a home, about communication. And then afterwards they have these lifelong friends and networking opportunities to move forward with. ["I'm Not a Man"] Chaz is still just a sophomore at the University of Illinois Urbana-Champaign, but he's already reaped professional benefits from the Sigma Alpha Epsilon Network. He recently landed an internship at IBM for the summer through one of his fraternity brothers. I mean, I wouldn't have gotten an internship for the summer if it weren't for a senior

in SAE who has helped me grow myself a ton professionally. And I think without having the community I have on campus, like, I wouldn't have any direction where to go for the most part. He hopes that one day, when his early morning chili cheese dogs and late night escapades are a distant memory, He'll return the favor. Hopefully, maybe I can see myself in the future coming back, you know, talking to the SAE guys in 2030. If you were like the CEO of a company someday and a younger SAE brother walked in the door

to apply for the job, do you think you'd give him a shot? Might hit him with our handshake. Ha ha ha. Ha ha. For the economics of everyday things, I'm Zachary Crockett. This episode was produced by me and Sarah Lilly and mixed by Jeremy Johnston. We had help from Daniel Moritz-Rapson.

Most of the members actually hate me. I have a house with a fence right now that has my name spray painted on it. That's kind of terrifying. Yeah, yeah. It's all of terrifying. Yeah, yeah. It's all good. I can take them. The Freakonomics Radio Network.

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