Philanthropy and Inequality: What's the Relationship?

Philanthropy and Inequality: What’s the Relationship?

By Kevin Laskowski

“Should a private foundation be more than a private investment company that uses some of its excess cash flow for charitable purposes?” —F.B. Heron Foundation1

This is supposed to be a “golden age of rules of an unfair global economy that What has the philanthropic sec- philanthropy” in the United States. is foreclosing on our future.”5 tor been doing, and why has it had so In 1999, Boston College researchers The protestors have a case: After little success in combating persistent John Havens and Paul Schervish esti- World War II, workforce compensation inequality? mated that, from 1998 to 2052, some paralleled increasing productivity until Part of the answer can be found by $6 trillion of a $41-trillion intergen- the late 1970s when, in what has been looking at the growth in philanthropy erational wealth transfer would make called the “Great Divergence,” those at as part of a broader economic trend its way to charity.2 In the decade fol- the top, especially the top 1 percent, of financialization. While grantmakers lowing that prediction, the number of began to capture a steadily increasing can function in ways significantly dif- U.S. grantmaking foundations grew by share of American income.6 By 2007, ferent than investment firms, as the F. more than half; total foundation assets the richest 10 percent of Americans B. Heron Foundation and others have increased by a third, and total grant controlled two-thirds of Americans’ net pointed out, foundations and similar dollars doubled.3 The philanthropic worth.7 In 2008, the wealthiest 10 per- giving vehicles are indeed investment growth is not limited to foundations. cent earned almost the same amount of vehicles that use excess cash flow for The number, total giving and contribu- income as the rest of the country com- charity. Without a robust set of nor- tions to donor-advised funds and other bined.8 mative expectations about how that giving vehicles have increased dramati- Commenting on the OWS protests, wealth is stewarded and eventually dis- cally, and new hybrid organizations – Albert Ruesga, president and CEO of tributed, these vehicles default to the low-profit limited liability corporations the Greater New Orleans Foundation, short-term financial interests they are (L3C) and benefit corporations, among wondered what a growing philanthrop- designed and marketed to serve. them – are attracting attention. ic sector had to say for itself: Foundations and other philanthrop- This “second great wave of philan- ic vehicles are simply tools that can be thropy,”4 however, has occurred amid “Whereas taken together the put to any number of uses. If we care increasing economic and social in- collective actions of 90,000+ about our democracy, we have to en- equality in the United States. The Oc- foundations in the United States sure that reducing inequality is one of cupy Wall Street (OWS) movement have failed to eliminate the most them. has succeeded in drawing attention to basic injustices in our society. another wealth transfer, one perhaps Whereas after decades of work Philanthropy and Inequality more relevant to philanthropy’s growth foundations have failed to alter Philanthropy’s golden age did not in recent years: the transfer of a growing the most basic conditions of the emerge fully formed from the wallets share of national income and wealth to poor in the United States…Be it of a new breed of strategic grantmak- those at the top. Drawing inspiration therefore resolved that the 99% ers. The forces that drove increasing from the Arab Spring, OWS asserts that should ask: ‘What the **** y’all inequality similarly powered philan- the richest 1 percent “are writing the been doin’?’”9 thropy’s rapid rise.

6 National Committee for Responsive Philanthropy Responsive Philanthropy In some ways, this is to be expected: cent years. It “refers to the increasing economy create a demand for more people often are generous. Rising in- importance of financial markets, finan- promising investments. The recent equality increases the likelihood of sur- cial motives, financial institutions, and “innovations” in derivatives, collater- plus wealth and the chance that some financial elites in the operation of the alized debt obligations and credit de- of the surplus wealth held by the richest economy and its governing institutions, fault swaps implicated as fundamental among us will exchange hands as char- both at the national and international causes of the current financial crisis ity. Economist Edward Wolff found that level.”11 Since 1980, between 5.8 and and recession are thought to result from inequality explained “changes in con- 6.6 trillion dollars were transferred to this trend.14 tributions relative to personal wealth, the finance sector.12 Not only does fi- What does this have to do with phi- but the strongest effect is from the nance make up an increasing share lanthropy? The field has begun to show wealth share of the richest 1 percent.”10 of gross domestic product (GDP), but signs of the financialization affecting At the same time, we should expect even nonfinancial firms have increased the rest of the economy. inequality to decrease somewhat as the portion of their businesses involv- There is increased emphasis on fi- philanthropy increases. The increase in ing financial services. Furthermore, financial intermediaries. For nearly five philanthropy should mean an increase nancialization has played an important decades, charitable giving as a share of in at least some exemplary founda- role in the decline of labor and the rise GDP has remained around 2 percent.15 tions addressing inequality explicitly in in executive compensation, both impli- Charitable giving has not increased their grantmaking, or at least becom- cated in the rise of inequality. Accord- from this vantage; it has instead shift- ing more effective at achieving broad- ing to sociologists Ken-Hou Lin and ed. In 1978, foundations received 4 based impact. Grantmakers can priori- Donald Tomaskovic-Devey, financial- percent of charitable dollars; by 2010, tize the needs of the most vulnerable ization can explain “more than half of foundations were receiving 11 percent and support programs that might not the decline in labor’s share of income, of charitable dollars.16 In effect, the rise otherwise be available to communi- 10 percent of the growth in [execu- of philanthropy means that less is go- ties in need. Foundations can directly tives’] share of compensation, and 15 ing “directly” to charity as a share of challenge systemic inequities and fund percent of the growth in earnings dis- GDP, and more is moving to a larger advocacy or community organizing. At persion between 1970 and 2008.”13 and larger set of competing financial the very least, philanthropy can serve to The resulting inequality, in turn, intermediaries. Additionally, more and direct private wealth to public purpos- further drives financialization. The more nonprofit organizations are of- es; it can increase social capital and top-heavy rewards of a financialized fering to serve as these intermediaries. eases class tensions by putting dispa- rate groups in touch with one another. The New Gilded Age of Philanthropy We should expect the relationship between philanthropy and inequality to 45 change and for inequality to decrease 18% with philanthropic giving framed by these values.

It has not, so Ruesga’s question re- Top 1% Income Share mains: what has philanthropy done? 30 12% Philanthropy as Financialization Philanthropy is far from insulated from the economic health of the private sector. It is a creature and extension of the market. Philanthropy is, in part if not 15 6% wholly, a product of the recent rise in Total Giving by Foundations inequality and the financialization that powered it. Financialization is the term given to Share of Total Annual Income Earned by Top 1% of Earners Annual Income Earned by Top Share of Total the decline of manufacturing and the Foundation Giving (in billions of inflation-adjusted dollars) Total rise of banking and investments in re- 1970s 1980s 1990s 2000s

Responsive Philanthropy Winter 2011/2012 7 Many charities, including community inequality to decrease as philanthropy work intentionally to disrupt inequal- foundations, churches, universities and increases. Otherwise, a foundation or ity. Leaders can do this, for example, hospitals, can sponsor donor-advised any other giving vehicle is little more through robust payouts and mission- funds.17 than “a private investment company related investing, and by funding advo- These developments are not, in that uses some of its excess cash flow cacy and organizing on behalf of and and of themselves, unwelcome: phi- for charitable purposes.” The public ex- by underserved groups. lanthropy is a form of financialization. pects more and we should expect more Ultimately, greater responsiveness Inequality drives financialization, and of ourselves as a field. Otherwise, as on these issues is also in philanthropy’s sometimes it takes the form of philan- Ruesga says, what are we doing? best interest. Without significant prog- thropy. Foundations, charitable trusts, Those who steward and manage ress in easing disparities, philanthropy donor-advised funds and supporting or- philanthropic vehicles should ensure will have a very hard time continuing ganizations are all financial instruments that more of their giving directly ben- to justify its tax-privileged place during marketed to the affluent as tax-advan- efits charities in ways that increase a time of economic struggle. Philan- tageous vehicles for surplus wealth. the public benefits of their work and thropy will be seen as emblematic of The problems come when short-term unjustified inequalities rather than the financial interests are prioritized over inspired and voluntary largesse it pur- the public interests for which these ve- ports to be. hicles are created and for which they The “natural state” of philanthropy are granted substantial tax privileges. is not “underperformance.”19 The de- If philanthropy as a field has had a fault is financial performance. All phil- difficult time combating inequality, it is anthropic products succeed on some partly because, much like firms in the level as donor-service products. The rest of the economy, a significant and question is whether the public gets a growing part of the sector is more re- similar benefit, and whether the prod- sponsive to financial rather than “product succeeds as a community-benefit. uct” considerations. The sector has From the perspective of inequality, phi- become more responsive to the finan- lanthropy does not seem to be doing cial health of some of its endowments that. On the contrary, it seems that phi- and some donors’ demands than it is lanthropy serves to reinforce inequality to some communities’ needs. In find- as much as – if not more than – it serves ing that giving varies with inequality, to disrupt it. Wolff also found – surprisingly and dis- Stanford professor Rob Reich wrote appointingly – that giving varies more that philanthropy has always had an with wealth than with poverty,18 a fact “uneasy relation to equality”: that would have been obvious to any nonprofit that solicits foundations after Philanthropy is not always a a dip in the market. friend to equality; it can be indif- Without the additional expectation ferent to equality and sometimes that philanthropy must do something to a cause of inequality … when disrupt inequality, a financialized phi- philanthropic activity actually lanthropy (one that increasingly gives worsens inequality, any justifica- to intermediaries as opposed to chari- tion for the state’s provision of ties directly) defaults to what finan- special tax treatment to philan- cialization does elsewhere: reinforce thropic organizations is consid- inequality. erably weakened and perhaps entirely eroded.20 Championing Equality While we should encourage philan- Absent significant progress in com-

thropy to increase with rising inequal- A protest outside Philadelphia City Hall dubbed bating inequality, the larger question ity, we should, simultaneously, expect Occupy Philadelphia. Photo by Jodi Jacobson. of what exactly it is that philanthropy

8 National Committee for Responsive Philanthropy Responsive Philanthropy does for society and the communities it Without significant purports to serve will remain. Inequal- 10. Edward Wolff, “The Economy and Phi- lanthropy” in Charles T. Clotfelter and ity has risen to a level not seen since Thomas Ehrlich, eds. Philanthropy and the Gilded Age, the name some gave progress in the Nonprofit Sector in a Changing to American philanthropy’s first golden America (Indianapolis: Indiana Univer- age. It would be a pity if the second sity Press, 1999), p. 96. golden age of philanthropy proved as easing disparities, 11. Gerald Epstein, “Financialization, Rentier gilded as the first. n Interests, and Central Bank Policy,” (Man- uscript, Department of Economics, Uni- Kevin Laskowski is research and policy versity of Massachusetts at Amherst, June associate at the National Committee for philanthropy 2002), http://www.peri.umass.edu/ Responsive Philanthropy. He is grateful fileadmin/pdf/financial/fin_Epstein.pdf. to Samantha Davis and Chanon Bell for 12. Ken-Hou Lin and Donald Tomaskovic- their research assistance. will have a Devey, “Income Dynamics, Economic Rents, and the Financialization of the U.S. Economy,” American Sociological very hard time Review 76 (August 2011): 538–559. 13. Ken-Hou Lin and Donald Tomaskovic- Notes Devey, “Financialization and US Income 1. F. B. Heron Foundation, New Frontiers Inequality, 1970–2008,” (University in Mission-Related Investing (New York: continuing to of Massachusetts at Amherst , Novem- F. B. Heron Foundation, 2003), http:// ber 3, 2011), http://ssrn.com/ab- fbheron.org/documents/ar.2003.view- stract=1954129 . book_new_frontiers.pdf. justify its 14. U.S. Congress Joint Economic Commit- 2. John J. Havens and Paul G. Schervish, tee, Income Inequality and the Great Millionaires and the Millennium: New Recession (September 2010), http:// Estimates of the Forthcoming Wealth tax-privileged place jec.senate.gov/public/?a=Files. Transfer and the Prospects for a Golden Serve&File_id=91975589-257c-403b- Age of Philanthropy (Boston: Social Wel- 8093-8f3b584a088c. fare Research Institute, Boston College, 15. Giving USA Foundation, Giving USA 1999, October 19), http://www. during a time of 2011: The Annual Report on Philanthro- bc.edu/content/dam/files/research_ py for the Year 2010 (Chicago: Giving sites/cwp/pdf/m_m.pdf. USA Foundation, 2011), p. 297. 3. The Foundation Center, “Number of economic struggle. 16. Giving USA Foundation, op cit., p. 296. Grantmaking Foundations, Assets, Total 17. Department of the Treasury. Report to Giving, and Gifts Received, 1975 to Congress on Supporting Organizations 2009” (New York: Foundation Center, and Donor Advised Funds (December 2011), http://foundationcenter.org/ 7. Dave Gilson and Carolyn Perot, “It’s the 2011), http://www.treasury.gov/ findfunders/statistics/pdf/02_found_ Inequality, Stupid: Eleven Charts that Ex- resource-center/tax-policy/Documents/ growth/2009/04_09.pdf. plain What’s Wrong with America,” Moth- Supporting-Organizations-and-Donor- 4. Sean Stannard-Stockton, “The Second er Jones, March/April 2011, http:// Advised-Funds-12-5-11.pdf. Great Wave,” Tactical Philanthropy [blog] motherjones.com/politics/2011/02/ 18. Edward Wolff, op cit. (2006, October 12), http://www.tacti- income-inequality-in-america-chart-graph. 19. Thomas J. Tierney and Joel L. Fleishman, calphilanthropy.com/2006/10/the- 8. Alicia Parlapiano, “(Not) Spreading the Give Smart: Philanthropy that Gets Results second-great-wave. Wealth,” Washington Post. June 18, (New York: PublicAffairs, 2011), p. 2. 5. Occupy Wall Street, “About,” retrieved 2011, http://www.washingtonpost. 20. Rob Reich, “Philanthropy and Its Uneasy January 5, 2012, http://occupywallst. com/wp-srv/special/business/income- Relation to Equality,” in William Damon org/about/. inequality. and Susan Verducci, eds., Taking Philan- 6. Robert B. Reich, “The Limping Middle 9. Albert Ruesga, “Occupy Philanthropy,” thropy Seriously: Beyond Noble Inten- Class,” New York Times, September 3, White Courtesy Telephone [blog] (2011, tions to Responsible Giving (Indianapolis: 2011, http://www.nytimes.com/image- October 8), http://postcards.typepad. Indiana University Press, 2006), p. 28. pages/2011/09/04/opinion/04reich- com/white_telephone/2011/10/ graphic.html?ref=sunday. occupy-philanthropy.html.

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