The Initiative to Accelerate Charitable giving is not without merit, but it does little to accelerate charitable giving.
The past year has been a master class in the law of unintended consequences. No one intended, while trying to stop the spread of COVID-19, to stimulate an increase in suicides and overdoses (among children and adults), force thousands of small businesses to close, or stymie the fight against global poverty.
With well-meaning goals, politicians and regulators across the country and the globe took measures—wise or unwise—that led to widespread unintended consequences, many of which won’t be seen for years to come.
A healthy respect for the law of unintended consequences lies at the heart of the conservative disposition. That’s not to say that conservatives are always nostalgic or opposed to change, but as Saint Thomas Aquinas teaches, changing the law should be undertaken only cautiously and with very good reason—for order is itself a good, not to be disrupted except for the sake of a significantly greater good.
It’s the law of unintended consequences—and a preference for the goods of the current order over the potential goods of a new order—that gives me pause when I look at the Initiative to Accelerate Charitable Giving from billionaire John Arnold and law professor Ray Madoff.
America today has a charitable sector that is both flawed and thriving. The most charitable nation in the world, Americans reliably donate 2% (+/- 0.1%) of the nation’s GDP each year—through times thick and thin, such as the 2008 financial crisis and, it appears, the current Coronavirus crisis.
At the same time, much of that money is tied up in behemoth perpetual foundations that wreak havoc domestically and internationally with their superhuman scale and outsized influence. Those same foundations, and many more besides, are notoriously stingy when it comes to giving nonprofits what they actually need, often creating more work than necessary for already understaffed organizations. And they frequently support organizations with complete disregard for their forebears and no sense of decency to the donors who founded those foundations.
Furthermore, Ray Madoff pointed out—during a webinar that she did with the American Enterprise Institute—that while American philanthropy remains around 2% of the GDP each year, an increasing amount of that money is getting tied up in donor-advised funds (DAFs). In other words, the philanthropic sector is growing with the economy, but that doesn’t mean the money is making its way to actual nonprofits at the same rate.
None of this signals a healthy philanthropic sector. American charity is thriving, yes, with hundreds of billions of dollars donated each year. American charity also suffers from stinginess, hubris, and an obsession with “impact,” to say the least.
And yet, I worry at the Arnold-Madoff proposal. The recommendations from the Arnold-Madoff Initiative may not be world-historical in their scale, but that does not make them “innocuous,” as William Schambra and Craig Kennedy allege in a recent piece for the Chronicle of Philanthropy (re-published here yesterday).
Schambra and Kennedy suggest, right in their title, that “Conservatives should applaud … efforts to change philanthropic giving rules.” But why? I agree with them that the “philanthropic world has become politicized and self-interested,” but what is at the heart of this self-interest? It’s not, I suspect, government regulation.
Take the most obvious example: foundations don’t give only 5% of their assets because of government regulation. We all know that the 5% “ceiling” is actually a minimum that has transformed into a ceiling for most foundations. The 5% payout requirement initiated a “race to the bottom,” not because that is the obvious logic of the regulation, but because that is the obvious logic of an alienated, fragmented, overly rationalistic society. We are a parsimonious people, and the payout requirement gave form to this parsimoniousness.
It is a common response from defenders of DAFs to point out that DAFs have a much higher payout rate than foundations—some 20% compared to their 5% (not to mention that much of that 5%, as Arnold and Madoff note, is paid to expenses, not charities). However, in that same AEI webinar, Madoff points out that this is skewed by the many small donors who use DAFs simply as a pass-through, giving most of their fund each year. Many larger donors do store their resources in DAFs for the long-term. While this is not a virtue to celebrate, do we think that a government regulation will solve the problem of storing away their resources?
Here’s another issue: as defenders of the Initiative point out, the small donors who use DAFs as a pass-through won’t be affected by required pay-out terms. Those, mostly larger donors, who do store funds away in DAFs for long periods will be affected. But the trouble is, if hoarding money in a DAF is a vice, then it is the vicious fruit of a character flaw, and one that won’t be remedied through government regulations.
It is not obvious to me that DAFs are good for the philanthropic sector, but it is certainly the case that disrupting DAFs will have unintended consequences that we may not want to unleash. To channel St. Thomas: is the situation with DAF reserves so dire that we should disturb their reasonably healthy functioning right now? Madoff is correct that less money is making its way to nonprofits, even as the charitable sector lingers at 2% of the GDP—but is the situation so dire that we are seeing or projecting a vast shrinking of nonprofits and their services? Not that I am aware of.
Elise Westhoff of The Philanthropy Roundtable and Lawson Bader of DonorsTrust have alleged that the Initiative presents “a solution in search of a problem.” I suggest that there is indeed a problem and this is a solution—but it is a policy solution to a cultural and character problem. Ours is an alienated and stingy society and much of modern philanthropy attests to this. But how would the Initiative actually increase the flow of dollars to charity? Certainly it would force the movement of money currently held in DAFs to move to nonprofits, but would it actually encourage an increase in the flow of new dollars? That seems particularly unlikely, insofar as none of the suggestions address the cultural or social failings of Americans today.
Moreover, the proposed reforms make DAFs neither more nor less desirable to some people, while making them less desirable to others. I don’t see anyone for whom the reforms make DAFs more desirable. That makes the Initiative, in my estimation, not innocuous and not commendable. (Some of the recommendations around foundations, however, seem not unreasonable, but going after both of these giving vehicles at the same time is bold, risking too much disruption for too little gain.)
PHILANTHROPY AND POLITICS
Finally, Schambra and Kennedy tell us that philanthropic freedom “is limited by what politicians and regulators believe is appropriate.” This is not correct. Politicians and regulators in America answer to the will of American citizens. That’s a minor distinction, perhaps, but an important one.
Politicians and regulators exist to make policies that serve the interests of the American people—and on this Schambra and Kennedy are right to raise concerns about the illicit marriage of philanthropy and politics.
My earlier line of questioning wondered whether the situation with DAFs is so dire that we should introduce new government regulations to control them. These would intend, of course, to strengthen the philanthropic sector, but they would risk the inevitable unintended consequences that come from government regulation. Even if DAFs are a vehicle to manipulate the charitable deduction, the manipulation is far from destructive.
This is not the case with political activism, as Schambra and Kennedy note, and on this they are right to raise questions about how regulating charitable giving might remedy this problem. I don’t see the connection, however, between the Arnold-Madoff Initiative and the issue of politics and charity.
In Shattered Consensus, James Piereson points out that progressives claim that to be conservative is to insist upon defending the status quo—a criticism Schambra and Kennedy make of the Roundtable. On the contrary, Piereson argues, conservatives may work to undermine the status quo for a better set of policies or regulations.
And so Schambra and Kennedy are right that conservatives should applaud efforts to change philanthropic giving rules—but not just any efforts. Efforts to limit the role of philanthropy in politics may be good and warranted; but efforts to transform ills in the American social fabric by way of narrow regulation don’t warrant the support of conservatives. I don’t entirely disagree with the Initiative, but it does not command our full-throated support, especially as it lacks recommendations to reform the biggest problem—marrying politics and philanthropy, two cousins that oughtn’t to get together—even as it endeavors large changes to the two main giving vehicles for philanthropic Americans.