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Jens 'n' Frens
Idle thoughts of a relatively libertarian Republican in Cambridge, MA, and whomever he invites. Mostly political.
"A strong conviction that something must be done is the parent of many bad measures."
-- Daniel Webster
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Wednesday, July 09, 2003 :::
Tyler Cowen, also at the Conspiracy, addresses the proposal to change the rules for minimal foundation giving that Dean mentioned a few days back. He suggests four ways of looking at it, in two pairs. The first pair plays with discount rates, and the second pair looks at how much an intelligent actor should be bound by unintelligent rules (to clarify -- I'm not using the word "unintelligent" to mean that the rules are ill advised -- I'm literally pointing out that the rules have no intelligence or judgment, while the trustees do (one hopes)).
1. Simple models from capital theory -
Does the risk-adjusted, expected rate of return on assets exceed the social rate of time preference for foundation spending?
Cowen comes to the conclusion that it does, perhaps because he's discounting risky investments at a risk-free rate -- I'm not sure I'm reading that paragraph correctly. At any rate, I'd think any model that doesn't assume efficient markets doesn't count as "simple", and any model that does assume efficient markets would have to call the spending vs. investing battle a draw (i.e., the appropriate discount rate to use is in equilibrium with the expected return on the market).
2. Macroeconomic growth theory -
If the rate of growth of the economy exceeds the real interest rate, the present value of future wealth is massive, possibly infinite.
I.e., if you use a silly discount rate, you get a silly result.
3. Agency theory, or don't trust them -
Perhaps the people who run foundations spend all the money on plush carpets, unconstrained by market forces. If we make them spend down their corpus, they will be forced back into the market for funds, which will improve accountability and improve the quality of their giving. Starve them of cash, and make them compete. Make them spend more.
This, as Cowen suggests in his last paragraph, might be why the rule exists in the first place. It's a compelling idea to me. Whether for-profit or not, a management that has to get a majority vote from shareholders to stay in place will have some accountability, but management that has to justify itself to new investors will have more.
4. Trust them
Foundations are remarkably wise and far-sighted. Why constraint such smart people? They know best how to spend or save the money. And it is best if they are insulated from marketplace constraints, that is the whole point of the non-profit sector. Of course this contradicts #3, directly above.
The contradiction is wholely caused by contradictory assumptions -- the balance between trusting foundation managers to do "the right thing" (or defining "right" to mean whatever they want to do), vs. requiring them to be able to get new funds or die out.
Most rules share a problem which Cowen is pointing to here -- specifically, that if a 5% annual distribution is required, and an honest and wise trustee observes one year that the opportunities to donate are temporarily meager, they are bound to take an inferior path.
Cowen goes on:
Note that before the five percent requirement existed, many foundations were mere storehouses/tax shelters for private wealth. Many spent nothing at all each year. Is this so terrible? Isn't it just like burning the money? Is that what a wise philanthropist should do, simply burn his or her money, and make the money of others worth that much more? Why should a philanthropist think he can spend money more effectively than other people can? Is the philanthropist simply finding a socially acceptable way of being a paternalist? Should he get out the matches instead?
First of all, I'm neither going to concede, nor going to contest, that burning money causes the rest of the money supply to increase in value by exactly the same amount -- i.e., that wealth is neither created nor destroyed, but simply redistributed.
I will assert that the paternalism isn't dangerous, unless it's terribly concentrated, and I'll point out that it's useful. The managers of a successful philanthropy will tend to be better than the average person at determining how to allocate their funds because they concentrate on the subject matter, and if they don't concentrate on it very well, they are likely to attract less funds than those managers who do.
I might have had an other point or two, but my brain is tired, and I shouldn't be blogging in my current state (which would be Massachusetts). [See? Doesn't that joke prove my point?]
::: posted by Steven at 3:16 AM
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