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Is Wealthy Philanthropy doing more Harm than Good?

Ten years ago, the authors Matthew Bishop and Michael Green coined the term “philanthrocapitalism” in a book that described “how the rich can save the world”. By applying their moneymaking acumen to social investing, people such as Bill Gates, the founder of Microsoft, could help rid the world of disease, want, exclusion and ignorance. The authors made a seductive case that appealed to both sides of the spectrum. On the right, philanthrocapitalism chimed with the libertarian view that the creators of wealth know best how to dispose of it. On the left, its biggest cheerleader, Bill Clinton, through his Clinton Global Initiative, argued that you could “do well by doing good”. The more companies invested in tackling poverty, the bigger their customer base. When he was president, Clinton proclaimed “the era of big government is over”. He has spent most of his time since then arm-twisting the world’s richest people to make pledges to worthy causes. How much has it changed the world? Not much according to the authors of two new books, Anand Giridharadas, a New York-based journalist, and Rob Reich, a scholar at Stanford University. If you break down US giving, two things leap out.

First, America continues to lead the world in charitable donations. At roughly two per cent of its gross domestic product, it has remained remarkably constant. Second, about 60 per cent of America’s annual individual donations go to religious organisations, mostly churches. Much of the rest goes to education. Of the latter, a large share consists of wealthy people donating to their children’s schools, or alumni giving to their alma mater. Ken Griffin, the billionaire hedge fund manager, gave $150m to create scholarships in his name at Harvard University. Sandy Weill, the former chief executive of Citi, has given $250m to Cornell University for a medical school in his name. Harvard’s endowment is worth $39bn, which is more than most states spend on their schools. Do such gifts change the world? Both authors conclude that modern philanthropy largely reinforces the world as it is. Donors never talk about inequality. They prefer to tackle poverty. Big philanthropists are never part of the problem. They are always the solution. “Inspire the rich to do more good, but never, ever tell them to do less harm,” writes Giridharadas in Winners Take All of how to approach wealthy donors. “Inspire them to give back, but never, ever tell them to take less.” In contrast to previous ages, today’s America is broadly accepting of big money’s role in shaping democracy. When John D Rockefeller tried to set up a national foundation in the early part of the 20th century, the US Congress turned him down. Teddy Roosevelt, the ebullient former president, said of the robber barons: “No amount of charity in spending such fortunes can compensate in any way for the misconduct in acquiring them”. A defeated Rockefeller went to the state of New York, which gave him the legal terms he wanted.

The case against perpetual foundations was well-grounded. John Stuart Mill, the English liberal, pointed out that the dead had no property rights: “No founder could ever be so wise as to infallibly predict the future.” Gradually, philanthropy’s critics lost their case. Over the decades, the US developed a tax system that gave charities a uniquely prominent role in public life. In contrast to previous eras, in which charity was smiled upon but not subsidised, the US now has a system of tax deductible benefits for all types of charity, regardless of whether they are effective. Moreover, the wealthier your tax bracket, the greater the subsidy. “The opportunity cost of virtue falls as one moves up the income scale,” writes Reich in Just Giving. There are now 1.5m charities in the US. None are subject to tax on their investment income. Nor do they pay property taxes. On top of this, the US government gives them $50bn in annual tax breaks. This is about the same as Washington’s combined spending on energy, the environment, food and agriculture. Is this money well spent? Libertarianism offers no defence of tax subsidies. The answer, therefore, depends on philanthropic outcomes. One defence is that it offers what Mill called “experiments in living” — a case for pluralism in a thriving democracy. The US government gives charities $50bn in annualtax breaks — about the same as its spending on energy, the environment, food and agriculture Another defence is that the makers of great wealth can apply their unique business skills to society’s deepest problems. In theory, this is a testable claim. The results are not that encouraging. Data from sources cited in Reich’s book show that the wealthier the donor, the less goes to the needy. Barely a fifth of philanthropy from the richest Americans goes to the poor. A lot goes to the arts, sports teams and other cultural pursuits. In addition to naming rights, these tend to bring front-row seats, premium access and private guided tours. A large share goes to religion. Mormons who tithe — give a tenth of their income to the church — do so with a nice pay off from Uncle Sam. For a nominally secular country, the US government spends a lot of tax dollars on worship. But it is America’s schools that offer the most troubling pointers. Most educational giving either goes to wealthy public school districts, or directly to private fee-paying schools. This only worsens the already “savage inequality” in US education. California’s wealthiest school district raises more private donations per child than the state’s poorest districts spend in total on their pupils. Such philanthropy worsens existing social problems. Why should the taxpayer subsidise my $1,000 donation to my daughter’s thriving private school? I am highly unlikely to donate to one on the wrong side of the tracks. The system enables such schools to charge less in fees and make up for the rest in tax-subsidised donations. It is hard to think of this as anything other than pro-rich. Meanwhile, many foundations, particularly the burgeoning number under $1m, which have doubled in the last decade, are thinly disguised tax shelters. “The practice of state-supported philanthropy, especially in the United States, is indefensible,” says Reich.

Among the most common phrases heard at Clinton’s annual donor conference was: “The right thing to do is also the smart business thing to do.” Reich judiciously weighs the philosophical pros and cons of tax-subsidised philanthropy. Giridharadas offers a stinging jeremiad. In his view, we live in an age that enables the rich to keep more and more of their gains, many of them ill-gotten. Then we flatter them for money and advice. “Today’s elite may be among the more socially concerned elites in history,” he writes. “But it is also, by the cold logic of numbers, among the more predatory in history.” Words such as “revolutionary”, “disrupter” and “win-win” are tossed like confetti by the “robber barons of technology”. Few question the system that made them rich. By all means, ask them how to change the world. But to do so such in a way that leaves things “like taxation, redistribution, labour laws and mining regulations off the table”, Giridharadas writes. Anyone who enjoys acute observation will appreciate Winners Take All. The social critic Maciej Ceglowski, quoted in the book, observes how “investing has become the genteel occupation of our gentry, like having a country estate used to be in England.” Giridharadas’ book is worth its weight in prose. But it is ultimately a polemic against a culture that invites society’s biggest winners to tell the rest what they are doing wrong. We seem to have lost our understanding of what it means to have a conflict of interest. Little wonder western electorates are behaving so erratically. “Trump is the reductio ad absurdum of a culture that tasks elites with reforming the very systems that have made them,” Giridharadas writes.

Talking of which, Trump’s campaign economic advisers, Stephen Moore and Arthur B Laffer, have brought out a timely defence of the president’s policies, Trumponomics. Laffer is associated with the “trickle down” theory of tax cuts popularised by Ronald Reagan. He is back in that mode today. It is as though America’s wealthy divide into two camps. One spends its time lobbying for tax cuts. The other spends them on philanthropic causes. In practice, they are rowing in the same direction. Trumponomics is largely a defence of Trump’s $1.5tn tax cut, which deepened US inequality but has also helped to lift growth. It was also a shot in the arm for the philanthropic sector. What is bad for equality is good for giving. “I want this to be bigger and more beautiful than Reagan’s tax cut — the biggest ever,” Trump said to the authors. “Can you guys help me to do that?” What follows is mostly a history of how they did. Along the way, they extol the virtues of Trump’s pro-energy “Saudi America” policies, “the art of the Trump trade deal”, and his connection with real Americans. But the book is really about the tax cut. The authors say the tax bill unleashed an “artesian well surging up”, rather than a trickle-down effect. Mr Trump simply called it “the greatest tax cut ever.” Given the size of the conservative bulk book market, Trumponomics is destined to sell many times more than the other two books combined. But sales are no indicator of worth. Whichever party is in office, the rich are usually in control. If you are wondering why, turn to Reich and Giridharadas. Trumponomics: Inside the America First Plan to Revive Our Economy, by Stephen Moore and Arthur B Laffer, All Points Books, RRP$28.99, 304 pages Winners Take All: The Elite Charade of Changing the World, by Anand Giridharadas, Knopf, RRP$26.95, Allen Lane, £12.99, 304 pages Just Giving: Why Philanthropy is Failing Democracy and How It Can Do Better, by Rob Reich, Princeton, RRP£22/$27.95, 256 pages Edward Luce is the FT’s Washington columnist and commentator This article has been amended to clarify that the observations on investing were made by Maciej Ceglowski and quoted by Anand Giridharadas.


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