Source: UK Charity Commission filings

In the wake of the FT’s bombshell report about the Presidents Club annual dinner, WPP’s Martin Sorrell has announced that he’s not going to attend any more. But he’s not happy about it:

“We issued a statement last night saying we won’t support the charity in future, which is regrettable because it is a charity that supports numerous children’s charities and has done a lot of good work,” the WPP chief executive told the BBC Today programme.

In some ways, Sorrell’s comment is even more infuriating than the lecherous and loathsome behavior displayed by the men invited to attend this year’s dinner. Those men were very clear exactly what they were signing up for: they groped the hostesses, asked them whether they were prostitutes, and invited them up to their hotel rooms for sex. For them, the “charitable” nature of the event was never anything more than the thinnest of veneers: an excuse to behave despicably in a private setting where no one dreamed that the hostesses had any kind of mind of their own, let alone might be a reporter for the Financial Times.

Sorrell, however, thinks it’s “regrettable” that he’s not going to support such depravity in future. Won’t anybody think of the children?

No, Martin, it’s not regrettable at all. What’s regrettable is that you willingly participated in this sexist bacchanal for many years, and that you only stopped when you were publicly outed as a key enabler.

What’s also regrettable is that, somehow, it is still acceptable to refer to the Presidents Club as primarily being a charitable organization, which just happens to raise most of its money at an annual event. Rather than the truth, which is that it’s an old-fashioned debauch for the British upper classes, so indefensible on its face that the only way it can even survive is by trying desperately to paint itself as a force for good rather than evil.

Certainly, if the men attending the dinner really wanted to funnel their money to children’s charities, there are thousands of better ways of doing so. Check out the chart at the top of this post, which I put together from UK Charity Commission data. For at least five successive years (I don’t have data going back further than that), the Presidents Club spent more on its annual event than it gave away to charity. That alone should give a pretty good indication of where its real priorities are.

This is, clearly, just about the most inefficient way possible of giving money to charity. (See also: Eric Trump.) If Martin Sorrell or anybody else wanted primarily to help children, they wouldn’t be overindulging at the Dorchester first. But of course that’s not what they primarily wanted. Just as in the Eric Trump case, children’s charities were chosen mostly because the cause is utterly inoffensive: it’s a way of giving vaguely “to charity” more than it reflects any kind of specific desire to help a certain cause.

One of the foremost children’s charities in the UK, Great Ormond Street Hospital, has already announced that it will return all the money it has received from the Presidents Club. Normally, I would have mixed feelings about such a move: Great Ormond Street is a much better place for the money to be than the Presidents Club bank account whence it is returning.

In this case, however, there’s a good chance that Great Ormond Street can start a broader trend of children’s charities (or any charities, for that matter) refusing any money from the Presidents Club. If no one will take their money, then the thin ice they’ve been skating on until now will crack beneath them: you can’t have a charity dinner which can’t give any proceeds to charity. And if this particular dinner finally came to its long-overdue end, that wouldn’t be regrettable at all. It would be a triumph.

Oxfam’s excellent inequality report

It’s the first day of the World Economic Forum, in Davos, which means that Oxfam is releasing its annual shame-the-rich report. I’ve been rude about this report in the past, because I don’t believe that statistics of the form “the top X has as much wealth as the bottom Y” are particularly enlightening or helpful. After all, according to the standard methodology, my niece, who just got her first 50 cents in pocket money, has more money than the poorest 2 billion people in the world combined.

This year, however, Oxfam has switched tack. While their 76-page reportdoes spend a little bit of time adding up the wealth of the poor, that’s not the focus, and as far as I can tell they’re no longer putting a huge amount of marketing muscle behind viral images featuring misleading statistics.

I give them a lot of credit for this, because outrage does sell. The annual Oxfam inequality report is one of the organization’s most significant global fundraisers, and by making it more serious and less virally punchy, they’re potentially leaving many millions of dollars on the table.

Maybe Oxfam is realizing that substance beats sound bites. This annual briefing has never been anything like 76 pages long before: as recently as 2015, it was just 12 pages long. Most people won’t read the whole report, of course, but they should, because it’s a powerful indictment of the forces exacerbating global inequality, backed up with real on-the-ground reporting.

Oxfam has also changed the main frame of the report: rather than concentrating on the total amount of wealth being held by the rich and the poor, they’re looking at the increase in the total amount of wealth held by the rich. I’ve always been OK with adding up the wealth of the rich, and looking at an annual increase is a great way of demonstrating just how enormous the returns to capital were in 2017. Of course, if stocks had gone down instead of up, those returns would have been negative, and Oxfam would have concentrated on something else. But at the end of this crazy bull market, it’s always worth remembering just how enormous the big winners’ gains have been.

Specifically, the world’s billionaires – the richest 2,000 people on the planet – saw their wealth increase by a staggering $762 billion in just one year. That’s an average of $381 million apiece. If those billionaires had simply been content with staying at their 2016 wealth, and had given their one-year gains to the world’s poorest people instead, then extreme poverty would have been eradicated. Hell, they could have eradicated extreme poverty, at least in theory, by giving up just one seventh of their annual gains.

Oxfam is absolutely right, then, to shine a light on the extreme inequality of the world in 2017. Wealth creation is all well and good, but giving new wealth primarily to the world’s billionaires is literally the worst possible way to distribute it. Oxfam’s longstanding proposal for a wealth tax on billionaires makes perfect sense. They don’t need the money; the world’s poorest do. What’s more, as the Oxfam report details, the top 1% too often make their money by exploiting the very poor. Nothing about this is just, especially when a good 35% of billionaire wealth was simply inherited.

It’s also good to see Oxfam looking at various measures of income inequality, rather than concentrating overwhelmingly on the more problematic wealth inequality figures. (Wealth, after all, is basically deferred consumption; there’s no good reason why anybody would want most of the world to be deferring significant amounts of consumption, especially if they’re poor.) I’m also heartened to see the organization being very open about the fact that global inequality is going down, even as national inequality, in the overwhelming majority of the world’s countries, is going up.

So, well done Oxfam for getting it right this year. Still, there is one thing I would have liked to see more explicitly. Oxfam’s wealth statistics come from Credit Suisse, and this year Credit Suisse found an extra $8 trillion of wealth, mostly in India, China, and Russia, that it hadn’t previously counted. A lot of that wealth, it turns out, is owned by people in the bottom 50%.

The result is that the net wealth of the bottom 50% of the world’s population, which was estimated at $4o9 billion this time last year, has now been revised up to an estimated $1.581 trillion. That’s a huge increase. Divided between 3.7 billion people, average net wealth for the bottom 50% is no longer $110 per person, as we thought last year, but rather $427 per person. That’s a really big difference, and it means that last year’s statistic of 8 men having the same amount of wealth as the bottom 50% of the world’s population is clearly not true.

Let’s pause for a minute, then, to celebrate the fact that the poorer half of the planet turns out to be not nearly as poor as we thought it was. But then, let’s keep on fighting inequality. Which remains one of the defining fights of our era.

BlackRock’s tiny nudge in the right direction

Andrew Ross Sorkin, author of the definitive financial crisis tick-tock, should know what a firestorm is. But when he says that an anodyne letterfrom BlackRock’s Larry Fink “is likely to cause a firestorm in the corner offices of companies everywhere,” you have to wonder.

The letter is Fink’s attempt to be a Good Corporate Citizen, just in time for Davos. There’s lots of talk about Strategy, Purpose, and the like – the kind of language that Davos Man is entirely fluent in. What there’s not is any baring of teeth, or any reason for CEOs to be worried.

Sorkin, having read the letter, has somehow come to the conclusion that Fink has “declared that he plans to hold companies accountable”. But I too have read the letter, and, well, I can’t find that bit. Maybe it’s hidden in the sentence where Fink talks about his actively-managed funds selling shares in a company “if we are doubtful about its strategic direction”.

As Sorkin says, however, Fink’s real clout comes not from his active portfolio, but rather from the trillions of dollars he oversees in indexed ETFs. And there, as Fink himself admits in his letter, his hands are rather tied. In those funds, he writes, “BlackRock cannot express its disapproval by selling a company’s securities as long as that company remains in the relevant index.”

So, what is Fink doing? Sorkin seems to think that he’s upping his activist game, voting against companies’ preferred directors more often, and generally throwing his weight around a bit more often than he used to. That’s true – but it’s also nothing new. And in fact, in this new letter, Fink says that up until now he has focused too much on proxy votes.

That leaves only one option: talking.

Just talking, no more, might sound a bit weak. Indeed, it is a bit weak. The fact is, though, that index investors by definition are negotiating from a position of weakness, since they have to hold on to their shares no matter what.

What’s more, index investors compete almost entirely on fees. Any money they spend on corporate-governance issues is money their competitors can save by simply sitting back and doing nothing. So any index-fund manager is going to have a strong bias towards doing nothing cheaply. That’s how you amass assets, and that’s what BlackRock used to do in the past.

The next step, if you want to be a little bit more engaged, is to wake up and start paying attention when there’s a proxy fight. Shareholders should take sides during such fights, as an index fund you’re a big shareholder, and so you really ought to vote one way or the other. Which is what BlackRock has started doing of late. The problem is that you end up putting all your corporate-governance energies into companies that activist hedge funds care about, which are always going to be a tiny minority of the whole.

Which brings us to the third step, the new thing which Fink is talking about in his letter. Instead of just engaging with companies in the middle of proxy fights, he wants to talk to those companies, and their board members, on an ongoing basis, and ask them questions about their strategy and sustainability.

Of course the companies will take those meetings: BlackRock is always going to be one of their largest shareholders, after all. But the big unanswered question is: Will all those meetings actually change anything?

I suspect that the answer depends on how you look at it. On an individual case-by-case basis, it’s going to be hard if not impossible to find any specific company which changes its ways after a meeting with BlackRock’s “investment stewardship” team. The team will ask big high-level questions, the company will give big high-level answers, everybody will feel that much better about themselves, and nothing visible will change.

On the other hand, on a global basis, the sheer weight of all those meetings, with all those CEOs and board members, might just nudge a few close board-level decisions one way rather than another. We’ll never know the counterfactual, of course, but it’s likely that simply talking about social issues with big shareholders will subtly change board members’ priorities somewhere.

A firestorm, then, this is not. It’s much smaller and subtler than that. But when you have $6 trillion of assets under management, even a gentle nudge, if sustained from quarter to quarter and from year to year, can end up making a real difference.

It’s certainly better than doing nothing.

Fighting polio with financial engineering

In April 2014, the Gates Foundation, as part of its charitable activities, wrote a $51 million check to the government of Japan. And earlier this month, they wrote an even bigger check – for $76 million – to the same recipient.

Does Japan really need the Gates Foundation’s money? What’s going on here?

The answer is fascinating, and a great example of how foundations can do things that normal charities simply can’t.

Both checks were the result of something called a loan conversion mechanism – one of the very few positive financial innovations that the world has seen in recent years. And both of them were designed to eradicate the last pockets of polio in the world.

Fighting polio, of course, is the kind of thing lots of foundations and charities want to do; there are few bigger wins in the public-health field than being to say that you helped eliminate this dreadful disease from the planet, once and for all.

If you’re going to fight polio, you have to do it where it still exists. Today, that means two countries: Pakistan and Afghanistan had 17 cases between them in 2017. That’s how close we are to eradication. Still, the difference between 17 and zero is enormous: As the WHO says,

As long as a single child remains infected, children in all countries are at risk of contracting polio. Failure to eradicate polio from these last remaining strongholds could result in as many as 200 000 new cases every year, within 10 years, all over the world.

Fighting polio is incredibly hard work. It has to be done household by household, one country at a time, one vaccination at a time, including in some of the toughest, most war-torn regions of the world. What’s more, it’s expensive, even by Gates Foundation standards:

In 1988, when the Global Polio Eradication Initiative began, polio paralysed more than 1000 children worldwide every day. Since then, more than 2.5 billion children have been immunized against polio thanks to the cooperation of more than 200 countries and 20 million volunteers, backed by an international investment of more than US$ 11 billion.

Those billions are well worth it: Low-income countries are going to end up roughly $50 billion richer as a result of this program, which makes it an astonishingly effective form of wealth transfer from the rich world to the poor. And of course millions of families’ lives will be transformed for the better.

For many reasons, then, it behooves rich institutions and countries to pay for polio eradication programs in the few countries where the disease remains. At the same time, however, for reasons I explained in July, the actual work should be done by national governments, not by NGOs.

Happily, that’s exactly what’s happening. Rich governments and institutions are paying poor, largely war-torn countries to do the work of eradicating polio within their borders.

But it’s hard to do that just by writing a check. If you give tens of millions of dollars to a minister of public health in Pakistan or Afghanistan or Nigeria (where there were still polio cases as recently as 2016), it’s very difficult to ensure that the money will be targeted narrowly at polio programs. Specifically, while the Gates Foundation was happy to pay the cost of such programs, in Pakistan and Nigeria, they didn’t want to run the risk that their money would just go to waste, achieving nothing.

Thus was the loan conversion mechanism born. The money would be lent to the country by Japan: the first loan was to Pakistan in 2011, the second was to Nigeria in 2014. The loan would be in the form of official development assistance: it would be extended at concessionary rates, under a framework where the Japanese could be very confident that they would be repaid in full. (Defaulting on such a loan would not only imperil the country’s relationship with Japan, but also with all other sovereign lenders.)

Then, when the loan came due, it would be repaid not by the borrower, but rather by the Gates Foundation – if, and only if, the country had kept up its end of the bargain in terms of vaccinating children in hard-to-reach parts of the country against polio.

In both cases, happily, that’s exactly what happened. Pakistan and Nigeria did what they promised to do in terms of fighting polio, and the Gates Foundation picked up their tab to the Japanese.

At the end of the day, this mechanism is essentially a grant from the Gates Foundation to Pakistan and Nigeria, to help them fight polio. But a direct grant would have been tricky: they wouldn’t have had confidence that their money would be used for its intended purpose. So instead they paid after the fact, and the Japanese government provided the bridging loan. (It’s worth noting that the Japanese government has also been extremely generous in this fight, giving billions of dollars in outright grants on top of these kind of loans.)

There’s one more of these loans still outstanding with Pakistan, and if the other two are any indication, it too will be a success.

I hope that Warren Buffett knows about these things, because a lot of the money comes from him, and I think he’d enjoy the financial engineering aspect. It’s rare to see these schemes actually work in the wild, and I’m very glad that this one seems, to a first approximation, to be going to plan.

Crunching the Metropolitan Museum’s numbers

Met Museum president Daniel Weiss gave an interview to Hyperallergicexplaining why he’s being forced to implement a compulsory admission fee for out-of-state visitors. Basically, he says, revenues haven’t increased with visitorship:

For various reasons, over the past 10 or 12 years, the pay-as-you-wish policy has failed. It has declined by 71% in the amount people pay…

During the last period of time, we’re talking about, let’s just say, the last 5 years we’ve seen visitation increase dramatically. At the same time, the amount of money people are paying, has decreased dramatically. So that during the last 5 years, we’ve seen no growth in revenue. Our costs have grown, because, you know, we have to pay people, and be a functioning entity in the economy. But we’ve had no growth in revenue.

It’s worth fact-checking this, because it turns out that it’s not really true. The Met is very good at putting its annual reports on its website, which makes apples-to-apples comparisons very easy. And here are the numbers:

  • In fiscal 2017, the Met had 7 million visitors, up 11.5% from 6.28 million in fiscal 2012. (This is mostly thanks to the opening of the Met Breuer, which had just over 500,000 visitors this fiscal year.)
  • In fiscal 2017, the Met’s admissions revenue was $42.8 million, up 13%from $37.8 million in fiscal 2012.
  • In fiscal 2017, the Met’s total revenues were $385 million, up 16%from $332 million in fiscal 2012.

In other words, there hasn’t been a spike in visitation over the past 5 years; in fact it has risen more slowly than revenues. What’s more, those visitors aren’t paying less: admissions revenue was $6.11 per visitor in fiscal 2017, which is higher, not lower, than the $6.02 it was in fiscal 2012. So I don’t know where Weiss is getting his 71% figure, but at best it’s cherry-picked. (It’s not by including membership revenue: although that hasn’t risen as fast as admissions revenue, it too has risen over the past 5 years.)

So while it’s true that the Met has swung from a $153,000 profit in fiscal 2012 to a $10.1 million loss in fiscal 2017, it’s very hard to blame admissions revenue for that. Much more germane is the $63.5 million rise in annual expenses, including a $7.5 million spike in “financial, legal, and other administrative functions”, as well as $10.8 million in “restructuring charges”, which is a euphemism for layoff costs.

The big picture, says Weiss, is this:

We’re seeking a modest increase in the amount the public contributes to our budget. We are imagining, we are planning, that we’ll go from 14% of our budget, to about 16, or 17%. That will increase our revenues by somewhere from 6 and 11 million dollars.

Admissions, it seems, are being asked to pull much more weight than they are currently. In order for their share of the overall budget to rise by 3 percentage points, they’re going to have to rise in absolute terms by some 20%.

Weiss says that this is simply a fiscal necessity:

The practical question is “Who’s supposed to pay?” If the public doesn’t wish to pay, who should pay?

But there’s a very clear answer to that question: Big donors! In the last year alone, the Met received $232.2 million in public and private donations. As the CFO says in his report:

The Met’s net assets grew by $399 million in fiscal year 2017, from $3.0 billion to $3.4 billion. Investment returns of 14.1% drove a substantial part of this improvement, coupled with $106.5 million of endowment gifts.

That’s right: Never mind the hundreds of millions of dollars that the museum is making just in investment returns, it also managed to rake in $106 million in new gifts to beef up the endowment even further. The Met now has some $2.9 billion in its endowment, of which $1.6 billion is entirely unrestricted.

So here’s the question: You’re already receiving over $100 million a year in gifts from big private donors, much if not most of which is going into a general endowment which can be used for anything you want. If you want to increase your revenues by $10 million a year, why not just take it out of that endowment?

After all, in the past 5 years, the value of the Met’s investments has skyrocketed: it was an already-enormous $2.58 billion in fiscal 2012, and it has risen to an eye-watering $3.43 billion now. That’s an increase of $854 million in just 5 years, or $170 million a year. I’m not buying cries of poverty. If that sum rises, going forwards, by $160 million a year rather than $170 million a year, the Met will be just fine.

If the Met didn’t have a multi-billion-dollar endowment, if it was really near insolvency, then it would be much easier to feel sympathy for its decision to raise admission prices. But in fact it’s one of the richest museums in the world. If anybody can afford a pay-what-you-wish policy, the Met can.

Update: The Met responds:

Mr. Salmon’s analysis misses the point: as costs have risen, admissions revenue has not kept sufficient pace.

Over the past 13 years, costs at all museums have risen, and while the admissions price has increased at all these venues (suggested for The Met, mandatory for others), the percentage of those paying full price at The Met has declined, plus the amount paid per visitor has declined. In 2004, 63 percent of paying visitors contributed the full suggested price of $12. Today, 17 percent pay the full suggested price of $25. In 2004, the average per visitor contribution was $7.39 ($9.58 adjusted for inflation). Today, the average contribution is $9.13 and our overall operating costs are substantially higher than they were in 2004.

Therefore, the policy has declined in two ways: people don’t pay what is expected and they are paying less than they did in the past. A healthy museum requires co-investment: from government, donors, and the public. We are seeking a modest adjustment in our revenue model to reset the admissions component of our overall revenues.

Finally, we disagree with Salmon’s suggestion of asking our generous contributors to offset an admissions policy that is not performing as intended and that is not meeting the institution’s needs.

This is obviously a significant shift from Weiss’s original comments to Hyperallergic. But one thing remains the same: a visceral aversion to the idea that big donors might want to subsidize admissions (more than they already do). In the original interview, Weiss said he had a moral objection to asking David Koch to do such a thing. But surely subsidizing admissions is pretty much the best and highest use that donor money can be put to. After all, the whole point of a museum is to show art to the public. Art without viewers is nothing.

Mark Eisner’s posthumous self-sabotage

Every so often, a charitable donation comes along which is so atrocious, on so many levels, that it deserves to be aired out in public as a prime example of what not to do.

So let me introduce you to Mark Eisner Jr, an animal lover and car-dealership magnate who drew up a doozy of a will in the years before he died. Under the conditions of a trust he created to give away his money, $750,000 was to be donated to the Anne Arundel SPCA, where he had previously been a board member. But there was a catch: the charity must have “substantially completed a new building from which to conduct its principal activities in Anne Arundel County” by 10 years after his death, or it would forfeit the donation, and the money would go to five other charities instead.

This is legit bonkers, not least because it violates one of the first laws of philanthrophy, which is, don’t fund architecture. The purpose of the SPCA is animal welfare, and in any given time period, that purpose is generally going to be better served by concentrating on animals, rather than contractors and architects. Constructing a new building is a very expensive, time-consuming process, which diverts management attention away from its core purpose and which also invariably ends up costing a lot more than anticipated, not only in terms of initial construction costs but also in terms of annual upkeep.

Eisner’s condition also violates another key law of philanthropy, which is don’t give money to people you don’t trust. If you believe in the mission of the Anne Arundel SPCA, and believe in its officers’ ability to deliver, then by all means give them your money. But if you don’t, then there are lots of other charities which do have your trust and which you’d be better off supporting. Clearly Eisner didn’t trust that the SPCA would do what he wanted them to do; that alone should have been enough for him not to give them money. But don’t try and make other professionals jump through hoops to do what you think they should do rather than what they think they should do. That’s just a dick move.

While we’re tallying up broken philanthropic laws, here’s another: frontload, don’t backload. Your money can do more good today than it can in a decade’s time, and the only people who benefit if you just sit on it for ten years are money managers. The $750,000 grew to $1,022,832.06 over ten years, which is an annualized growth rate of a pretty unimpressive 3%.

Worse still, Eisner managed to posthumously waste a whole bunch of money on entirely predictable and avoidable shenanigans surrounding his bequest. There’s now a whole lawsuit surrounding this money, with lawyers fighting it out on both sides, and a judge whom I’m sure has much more important things to worry about. Plus there are a bunch of trustees, tasked with second-guessing Eisner’s intentions. Those trustees, like many trustees, turned out to be hopelessly otiose, and rather than making a simple decision one way or the other, have decided that they’d rather punt the whole thing to the courts. None of this was necessary: Eisner could and should have simply given his money away, which would have obviated the need for trustees entirely.

In general, the thing to remember is that once you’ve given your money away, it’s no longer your money. And once you’re dead, it’s similarly no longer your money. Don’t try to control it, in either circumstance. No good can come of that.

DAFs: The best worst idea in philanthropy

Donor-advised funds, or DAFs, are the duck-billed platypus of the philanthropic world: a very weird creature that shouldn’t, by rights, exist. When described, they make very little sense, and it’s easy to get angry about them as a result. But you shouldn’t. Because, weirdly, for all that they are bad things in theory, they turn out to be good things in practice.

If you want to know why DAFs are considered evil, look no further than an article which appeared in the New York Review in 2016, by Lewis Cullman and Ray Madoff, entitled “The Undermining of American Charity”. As Cullman and Madoff explained, quite correctly, DAFs “give donors all of the tax benefits of charitable giving while imposing no obligation that the money be put to active charitable use.”

A plutocrat can take a million dollars today, or even a billion or more, put it into a DAF, invest it in the stock market, watch it grow, control how it’s invested, and never give a penny to charity – all while taking a massive up-front tax deduction. If the charitable tax deduction is supposed to encourage and reward the donation of money to charitable causes, it’s perverse to see it used in a context like this, where the primary beneficiary would seem to be the big asset management companies (Vanguard, Schwab, Fidelity, and the like) who get to manage the funds.

And yet.

For all that no one would have deliberately designed a system which worked like this, the rise of the DAFs has turned out, improbably, to be good, not bad, for America’s charitable sector.

To understand why, let’s look at Helaine Olen’s recent attempt at picking DAFs apart. The big argument is a pretty simple one: DAFs act like dams in the stream of funds flowing to charitable causes. Instead of the money going to straight to actual charities, it gets backed up into rapidly-growing reservoirs, where it does no good for anybody really except the people managing the funds. If you look at the money donated to charity every year, a growing chunk of it is going into those socially-useless reservoirs, instead of irrigating the genuinely charitable sector.

On the other hand, it’s impossible to know the counterfactual here. The amount given to charity every year has been going up impressively, even excluding the sums being sent into DAF reservoirs. There’s no particular reason to believe that charities would have received more money absent the DAFs, and it’s even possible that they would have received less. (After all, they are beginning to see significant flows from DAFs, now.)

What’s more, DAFs haven’t really been tested in an economic downturn. Reservoirs exist for a reason, after all: they supply liquidity when it’s needed most. Right now, during an economic boom with a soaring stock market, people are giving record amounts to charity. But booms come to an end, and when the bull market becomes a bear market, charities will naturally expect their income to fall. But the DAFs will still be flowing, and that money might help make up some of the shortfall. In lean years, it’s entirely predictable that DAF outflows will exceed DAF inflows – and that makes them a useful countercyclical smoothing mechanism.

After all, the normal way that a DAF works is that a donor funds it with some kind of windfall, and then withdraws money from it, at an average rate of about 20% per year, to give to charities over time. There have been a lot of windfalls in recent years, so DAFs have been growing quite quickly. But during an economic downturn, windfalls happen much less frequently, while there’s no reason for the withdrawals to decline very much. (If the DAF is invested in the stock market, and the stock market goes down, then that might reduce the amount available for charitable gifts, but they’ll still keep on flowing at some level.)

DAFs are, in large part, a way of gaming the US tax code so as to maximize the amount that Uncle Sam contributes towards your charitable giving. Here’s how Olen puts it:

These funds allow people who earn more money in one year than another to time their deduction, depositing money in the donor-advised fund in years when their earnings permit them to receive a greater tax benefit, and then donating the money to charities over a period of years. Those who are in favor of donor-advised funds suggest this incentivizes people to donate more than they otherwise would; detractors say it’s just another tax advantage for the wealthy.

Well yes, all tax deductions are tax advantages for the wealthy; poor people don’t itemize their taxes. But most DAF detractors don’t oppose the charitable deduction in general, just the DAF version of it in particular. The one thing everybody agrees on is that the DAF mechanism increases the size of the charitable-deduction tax expenditure – the amount that the US government is effectively giving to charities in the form of taxes it would otherwise have collected for itself. To be sure, in the short term, a lot of that money ends up in the stock market rather than in the pockets of charities. But over time, charities will surely be net winners, rather than net losers.

From a public-policy perspective, there are lots of reasons not to like the charitable tax deduction. I’d happily see it abolished, or scaled back. But that would be bad for charities, and if your main concern is the income of charities, then you should want it to be as big as possible. And that means encouraging DAFs, not fighting against them.

There’s another reason why DAFs are good at maximizing charitable giving, which has nothing to do with the tax code. It’s simple behavioral economics: the longer you’ve had a certain amount of money, the more normal it feels to have that much and not less. When people get a windfall (their company gets sold, perhaps, or they get an inheritance, or they sell their house at a large profit, something like that), they’re not used to having so much money, and they often feel that they should share some of their good fortune with those needier than themselves. A couple of years later, by contrast, that good fortune has just become a base-level amount of money in a bank account somewhere, and giving it up means giving up something they would normally possess.

As a result, a good way of maximizing charitable giving is to provide incentives to donate a large lump sum immediately when you receive a windfall, even if you don’t know exactly where or how you want to give it away. And that’s exactly what DAFs do.

But why do DAFs allow people to give no money to charity? Even foundations are required to disburse a pretty paltry 5%. Shouldn’t DAFs be required to do the same?

The answer is: they are, but they are only required to give out 5% on an aggregate basis, and they’ve never had any trouble meeting that bar. The problem with a mandated minimum is that it acts as an anchor: people start feeling weird about giving more than that. Just look at the world of foundations, where a vast majority give out almost exactly 5% of their assets every year. Then look at DAFs, where the amount given out is closer to 20%. Left to their own devices, it turns out, people are much moregenerous than they would be were they instructed to give away a minimum amount.

Olen raises a couple of other objections to DAFs. One is that they make it easier for donors to give anonymously, and that in turn makes it harder for charities to pester those donors for further gifts. Personally, I consider this to be a feature, not a bug: while it’s easy to drop a few anonymous banknotes into a collection bucket or a donations plate at church, it’s harder to give bigger sums anonymously, and people do, for many reasons like to give anonymously sometimes. I’m sure the charity would prefer it if they knew who the donor was, but ultimately it’s a good idea to honor donor intent. Anonymous giving has a long and honorable tradition, and if DAFs make it easier, that’s great.

Certainly there’s no indication that anonymous giving reduces the total amount that donors give; just that it reduces the amount they get pestered by the recipients of their largesse, and possibly helps them spread their giving around more than they otherwise might. That’s all fine by me. The charities which get my dollars shouldn’t be the ones which pester me the most.

Olen’s other objection about anonymity is that there’s a public purpose served in knowing who the donors are to certain charities, especially charities which align themselves with political causes. But in this she’s confusing two different things. DAFs allow donors to be anonymous to the charity; but even if the charity knows exactly who its donors are, it has no obligation to make that information public. The Form 990 tax filings that all non-profits need to make public give a lot of information about where charities’ money goes, but none about where it comes from. Changing the rules about DAFs would have no effect on that.

So don’t worry too much about DAFs. Indeed, they’re one of the few areas where unintended consequences seem to have worked out very well.

How to optimize America’s charitable giving

I had a fascinating conversation a couple of days ago with Charlie Bresler, the executive director of The Life You Can Save, a nonprofit which he started with Peter Singer, the godfather of effective altruism. The charity’s purpose is not really to evaluate charities; they mostly outsource that work to GiveWell and ImpactMatters. Rather, the idea is to effectively communicate the idea that certain charities are the best places to give, and to try to move money towards those charities.

The big question facing The Life You Can Save, then, is not the question of which charities are the most effective. Rather, it’s the question of how to change human behavior: How to get people to donate less money to less-effective charities, and more money to more-effective charities.

Importantly, this means effectively ignoring the kind of people who have read their Peter Singer, or who are otherwise already persuaded by the Effective Altruism movement. Preaching to the converted won’t help, since most of those people are already giving most of their charitable donations to efficient and effective causes.

GiveWell mobilizes tens of millions of dollars every year from such people, for instance, which is great – but most of that money comes from a single source, Good Ventures, and in any case even $100 million is tiny in proportion to the $400 billion or so that Americans donate to charity, or the $280 billion that’s donated by individuals.

The big picture, when it comes to charitable giving, is that religious charities get the largest chunk, with educational institutions in second place. International charities, which comprise almost all of the top-recommended charities from the likes of GiveWell, receive only about 6% of the total.

That number represents an enormous opportunity: If people simply gave 88% of their money domestically instead of 94%, then that would mean a doubling of donations to international charities.

The problem is that simply announcing a list of effective international charities doesn’t work – not at scale, anyway. It will appeal to the people who are already predisposed to give to such causes, and it seemingly has no real effect on anybody else.

Which makes sense. Charitable giving doesn’t change very much, over the years: it stays pretty constant at about 2% of GDP, and it generally goes to causes where people have strong personal ties. If you go to church regularly you’re likely to give quite a lot to your church; if a loved one died of a certain disease, that makes it much more likely you will give to a charity devoted to that disease. And, of course, if you went to a certain university, that makes it vastly more likely that you will donate to that university.

On top of that, people tend to give where they’re being nudged to give, not by top-ten lists but rather by their friends, family, and other people of influence. If your niece is running a half-marathon for charity and asks you to donate, you’re going to donate; you’re not going to give her a lecture on effective altruism and tell her that her pet cause is suboptimal. Similarly, if a company announces a matching-gift program for its employees, those employees are going to end up being nudged into the CEO’s pet cause. And if a bunch of television networks organize a telethon, the people watching aren’t going to calibrate their donations on the basis of the exact charities receiving the money. What matters is the cause, much more than the specific destination.

Here, then, is my very badly-drawn attempt at visualizing what needs to be done. You can’t easily redirect heartfelt donations to something bloodless and rational: David Roodman’s amazing two-part series on Worm Wars, for instance, is going to persuade exactly zero people to stop giving money to the United Way and start giving money to the Schistosomiasis Control Initiative instead.

To put it another way: You can’t drag money down from the top-left to the bottom-right. The heart says no.

Instead, the job facing The Life You Save is to focus on the big prize at the top right. The trick is to create social feedback loops which make people feel great, on a practical and emotional level, about doing things like buying anti-malarial bed nets.

That’s not an easy job, but I think there are two promising avenues worth exploring. The first is for The Life You Save to expand their list of charities to include areas beyond just international health and development. If they started rating religious charities, for instance, many of which are very good, then maybe they could help to optimize some of the hundreds of billions of dollars which flow into that space. Pushing a lot of dollars a little bit to the right is probably even more effective than pushing a few dollars a lot to the right.

Secondly, they should concentrate on the askers, rather than the givers. While hundreds of millions of Americans give to charity every year, the number of people who ask for donations is much smaller. And a relatively small number of askers drive a huge proportion of all donations.

The trick, then, is to focus on a relatively small number of individuals: the CEOs announcing matching-giving campaigns, the TV executives running telethons, the celebrities tweeting out links to donate, the people who decide which disaster-relief charities pop up on ATM screens when you try to take cash out of your bank account.

It’s commonplace to bemoan the fact that Americans often don’t do their homework before they give. But I don’t think that’s ever, realistically, going to change. What can change, I hope, is that Americans might be persuaded to do a bit of homework before they ask for donations, and go around pestering their friends and family to give to a certain cause.

So here’s a job for The Life You Save, and similar organizations: Find those askers, talk to them one-on-one, and don’t give them a very short list to choose from. Instead, give them some relatively simple tools which will allow them to optimize the charities they’re picking. For where those askers lead, millions of their friends and family will follow.

It’s fine if the charitable sector shrinks a little

Ray Madoff’s NYT op-ed, entitled “Congress’s Assault on Charities,” has been garnering praise from luminaries like Ben Soskis and Rob Reich, but I don’t really understand why.

If you skimmed the op-ed a little bit too quickly, you could be forgiven for thinking that Madoff is writing mainly about the tax bills in the House and Senate, and how charities will be hurt if and when some kind of big tax cut passes. A lot of the op-ed’s readers will surely add it to their long mental list of “reasons to oppose the tax bill”. But of the three main issues Madoff brings up, only one is directly related to the tax bill. And she ignores one of the biggest ways that the bill, if passed, will hurt charitable donations.

The tax bill certainly isn’t good for charities, even though in the end both the House and Senate decided to keep the charitable tax deduction. For one thing, a lot of very rich people are going to see their taxes cut, and at the margin, the less you pay in taxes, the less incentive you have to try to avoid them through mechanisms like charitable giving.

Then, as Madoff notes, there’s the increase in the standard deduction. The higher the standard deduction, the fewer people who will itemize, and therefore the fewer people who can get any benefit from the charitable deduction. Madoff says that “a recent report by the Lilly Family School of Philanthropy estimates that charities could lose as much as $13 billion in donations if the standard deduction is increased,” but that’s a bit of an exaggeration: the $13 billion is a top-end figure which also includes the effect of lowering the top marginal tax rate. A more realistic estimate would be in the single-digit billions, which is real money, but which also has to be placed in the context of total donations rising by more than $10 billion last year alone, to an all-time high of $390 billion. Charities always want more money than they have, but no one can with a straight face say that the charitable sector in America is suffering.

A bigger problem for charities, and one Madoff doesn’t mention at all, is the prospect of the estate tax being abolished. The estate tax is great for charities: rich people give money away before they die, because they afraid of having to pay the estate tax when they die, and then they give even more money away in their wills, for the same reason.

Certainly many fewer people ever pay the estate tax than itemize their tax returns, but those few people are extremely rich, and are liable to give billions of dollars to charity. At the margin, if they’re nudged away from doing so by a more generous tax code, that’s bad for the charitable sector broadly.

But most of what Madoff talks about has nothing to do with the tax bill – and also has very little bearing on the health and wellbeing of the charitable sector. Madoff spends a lot of time railing against donor-advised funds, a favorite hobby-horse of hers. But there’s no evidence that the rise of DAFs has in any way decreased the flow of funds into charities. Indeed, there’s plenty of evidence that DAFs spend a much higher proportion of their assets every year than foundations do.

At the margin, it’s reasonable to believe that people will give more money to charity if they’re spending out of a DAF than they will if they’re spending out of their personal savings account. So while DAFs are problematic in theory, so far I suspect that they’ve been a net positive for the charitable sector as a whole. As long as that remains the case, it’s a bit of a stretch for Madoff to say that the existence of DAFs means that Congress is preventing charities from continuing to do their work.

Finally, Madoff worries that charities will soon be allowed to – wait for it – have political opinions. She worries that charities might be “pressured by donors” (which, yes, always happens anyway), and that the whole sector would be “polluted” if it enters “the realm of politics”.

This is silly: to a first approximation, all charitable activity is political. Are you funding a charter school? Fighting climate change? Working to eradicate HIV/Aids? Trying to reshape the American criminal justice system? Whatever you’re doing, chances are that there are enormous political forces at play in your world, and that your greatest hope for long-term success is that you manage to persuade a government or two to back your vision.

Even under the current constraints on political speech, the Koch brothers and their fellow travelers have done an astonishing job of using a broad and deep network of right-wing think-tanks and other nonprofit entities to reshape the Republican agenda and, ultimately, radically change civic life in America. One can and should bemoan that activity, but let’s not pretend that charitable organizations have been studiously apolitical up until now.

The big picture here is that Congress is not assaulting charities. (In fact, it should probably assault charities more, by attacking the charitable deduction directly, but that’s another argument.) Many people, including Ray Madoff, simply assume that charities are a Good Thing, that they should be supported by tens of billions of dollars in federal and local tax expenditures, and that (say) it’s better for New York University to pay no tax on its vast property portfolio than it is for the City of New York to be able to collect those property taxes and spend them on all of its millions of citizens.

So maybe it’s worth considering that Madoff is exactly wrong, and that far from assaulting charities, Congress has mollycoddled them and given them a pass for far too long. The charitable sector is enormous, and only ever seems to grow; it has already expanded to include most tertiary education in America and a huge chunk of the health industry, along with many other massive employers in the cultural world.

Look at the big picture: Nothing that Congress has done to date seems to have harmed the charitable sector in the slightest. And if the tax bill does make a small change at the margin, it will be still be tiny in comparison to the growth we’ve seen in the industry as a whole. Frankly, it’s about time that the charitable sector, which has done so well in recent years, gave back a little.

On helping

Charity comes from a deeply human place: When we see others in trouble, most of us want to help out if we can. It’s not helping which needs to be learned: all those explanations we give our kids as to why the homeless guy on the corner can’t come stay in our house, or the perverse financial reasons why, if you’re hit by a car in China, the driver might well try to kill you. It’s shocking precisely because it’s unnatural.

Small acts of human kindness happen almost automatically: we come together to help each other as needed, because that’s what people do. Zadie Smith has a great passage about this in a recent essay for the NYRB, where she talks about how, on the corner of Mercer St and 3rd St in Manhattan, twice in one week she and others came together, quickly, to help a woman in temporary need. First there was a young mother with a disintegrating stroller; half a dozen people, “white, black, Asian, tall, short, male, female, young, very young, and old,” put it back together in a shot. Then there was an older Chinese lady who fell over; again, an instant community was formed to help as necessary.

Such groups can be found all over society, at various levels of size and formality. Churches, in particular, do quiet sterling work on a daily basis, checking in on their parishioners and extending a helping hand as needed. I was recently in Texas, looking at the post-Harvey disaster relief operations there, and evidence of charity was everywhere, from FEMA tents all the way to hand-drawn signs offering help with laundry.

I travelled to Texas in order to take a closer look at the work of GiveDirectly, which was handing out $1,500 prepaid debit cards to the residents Rose City, of one of the poorest and worst-hit towns in the state. It’s a project I support, both in theory and with my own cash: I am convinced that individuals in need are the best arbiters of their own need, and that charities second-guessing what’s good for them, and spending money on those things, will rarely be more efficient than a simple cash transfer.

There’s a lot of need in Rose City, and a lot of gratitude for those $1,500 debit cards. The people there lost everything, across the board: not just the poorest folks in the trailer park, many of whom literally lost their homes, but also local authority figures like the mayor and the pastor. (Pastor Tony’s story was like something out of a Hollywood disaster movie, just without the happy ending.) The mayor passed her annual budget the evening before I interviewed her, and the total amount she had at her disposal for the year, including salaries for herself and her police deputies, came to about $300,000. That’s almost exactly the same amount that GiveDirectly handed out to Rose City’s residents, household by household, in just a couple of weeks.

So: Cash works. We should do more direct giving, and less indirect giving.

But, that’s far from being the end of the story. For one thing, we’re alreadygiving out cash, in enormous quantities. The two big disaster-relief organizations in the US are FEMA and the Red Cross, both of them massive organizations set up to respond quickly and effectively when needed. Both of them are now mostly in the business of giving out cash, partly because they’ve been starved of resources to do anything else. And neither of them gives out cash very well.

This is something which has largely been missed in the conversation about disaster relief generally and about cash transfers in particular: how you do it matters, a lot. One of the best aspects of cash transfers is that they preserve dignity: the person receiving the money is explicitly being trusted to know what’s best for them, rather than having to rely on someone else’s idea of what they probably need. But if you talk to people who have received cash handouts from FEMA or the Red Cross, it’s clear that no one in those bureaucracies cares about preserving the recipients’ dignity. The experience of applying for money ranges from the dehumanizing to the kafkaesque, and it’s not just money where that’s the case – just about everything that FEMA and the Red Cross do, including the basic provision of food and shelter, seems to be done in a heartlessly industrial manner.

Disaster relief when it’s done right always comes from deep human compassion and desire to help. It might be individuals cooking up fajitas or offering free laundry services; it might be organizations which spring up semi-organically like Occupy Sandy or the Centros de Apoyo Mutuos in Puerto Rico; it might be well-established local organizations like Baker-Ripley, in Houston, which proved much nimbler and more effective at creating shelters than the Red Cross was; it might well be faith-based organizations like Southern Baptist Disaster Relief and any number of other church-based operations.

In Rose City, for instance, pretty much every single home was mucked out by church-based volunteers – an urgent and necessary job which simply couldn’t be done by paying a contractor money. (The contractors were all busy on other jobs, as you might expect, and even if they were willing to do it, they would charge so much that no one in Rose City could afford their rates.) In many ways, the $1,500 from GiveDirectly is being put to its best possible use only because Christian volunteers managed to lay a lot of the groundwork and at least allowed the Rose City residents to start from zero. Before those volunteers arrived, Rose City was not only physically but also financially underwater, and GiveDirectly’s money would have gone much less far.

GiveDirectly, it turns out, is very good at the nuts and bolts of giving out money. They make it very clear what they’re doing, and they put the onus on themselves, rather than the recipients, to ensure that everybody who’s eligible ends up receiving what they’re due. When the actual transfer happens, it’s done with friendliness and respect and joy; the non-financial aspects of that moment are an important part of the transaction.

In a sense, of course, GiveDirectly has it easy: they can pick a manageably-sized population they want to give money to, where FEMA and the Red Cross aspire to helping everybody. But even accounting for that, goodwill is incredibly important. If you give me $100 in the spirit of friendship and compassion, I am likely to value that more highly than if you give me $200 while in a dead-eyed bureaucratic stupor. Which means that if the Red Cross and FEMA were friendlier and more respectful in their dealings with disaster victims, the inevitable bureaucratic snafus would be forgiven much more quickly. One simple tip for the big guys, which the little guys understand intuitively: if someone is complaining that they haven’t received their money, don’t tell them that they must have done something wrong. Instead, take it on yourself to fix the problem and make sure that they get what they’re owed.

A similar story is playing out in Puerto Rico. GiveDirectly isn’t the only disaster charity I gave to this year; I also donated to World Central Kitchen, the organization which has served some 2 million meals in Puerto Rico, largely under the aegis of celebrity chef Jose Andres. In that case, the contrast with FEMA is unavoidable, and not only because of the bitter feudbetween the two. After all, food is qualitatively different when it’s made with love and compassion. World Central Kitchen’s meals tasted better, and were more nutritious, than the offerings from FEMA and the Red Cross, just because Andres and his team cared deeply about their craft and about the people they were feeding.

It’s worth noting, too, that World Central Kitchen has a deep enough understanding of how Puerto Rico works that it knows not only where the need is, but also where the need isn’t. The organization understands that wherever it gives meals away for free, it’s hurting local businesses. As a result, as and when those businesses can start operating again, it scales back and allows them space to start rebuilding.

The big lesson here is that even with something as ostensibly simple as cash transfers or cooking meals, you still need to see how an organization comports itself on the ground in order to be able to judge whether it’s doing a good job or a bad job. You need to see not only what the organization is doing, but how it is being received.

Wellbeing is, in large part, subjective. As any mother knows, sympathy is just as important as medicine when your kid is sick or injured. It’s relatively easy to measure calories going into bellies, or dollars going into bank accounts, but if you want to measure the degree to which your actions make people feel better off, then you need to ask the people being helped. Insofar as those people feel seen, and respected, they will invariably respond more positively. No matter what form your aid takes.