Intro. [Recording date: August 21, 2017.]
Russ Roberts: Rob Reich... has written a number of provocative articles on the role of foundations and philanthropy, which will be our topic for today and which we [?].... I want to start with the history of foundations which you touch on briefly in your papers. I was surprised at some of the things I learned from that. Talk about how Rockefeller started, and some of the issues that came up with Congress and the decision about Federal versus state establishing of a foundation.
Rob Reich: Sure. Well, begin with a kind of ordinary observation, which is that philanthropic activity or behavior is time-immemorial: people have been volunteering or giving away money [?] or doing something altruistic or other-oriented since the recorded history that we have. But, the creation of a legal entity known as a foundation, a private foundation that directs private resources for some public purpose, is a relatively new phenomenon. And so the history of foundations in the United States, which really pioneered the form of a private foundation, is, I think, a lost history, unappreciated by contemporary voices today. So, John D. Rockefeller, one of the wealthiest people of the first gilded age in the United States 100-plus years ago, had a mountain of wealth, so large that he decided--as did some of his contemporaries like Andrew Carnegie--to devote a considerable portion of those resources for some public benefit: to become a philanthropist. And, the way to create some kind of charitable trust or entity that had some capacity to direct money for some public purpose was to go off to a state legislature and ask to be incorporated. At that point in time, we were just beginning to see general incorporation laws passed in various states, which allowed either for-profit or non-profit entities to incorporate. At that point in time, in the early 1900s, even the distinction between a for-profit and a non-profit was not a universal or Federally-recognized distinction. So, any incorporated entity needed to seek legislative approval. And, the typical way that any entity [?] profit purposes would be to go off to a state legislature. And, Rockefeller was in New York, so one consideration was to trot off to the New York legislature. But, because he had so much money, and because his preferred philanthropic mission was the very general purpose of trying to improve the prospects of humankind, he was worried that the New York legislature wouldn't look favorably upon incorporation, because the New York State legislature was accustomed to approving philanthropic entities primarily for the benefit of citizens of New York State. So, the attempt was to go off to Congress in Washington, D.C. and ask for a Federal charter to create the Rockefeller Foundation which would operate with this very general mission. And, partly because Rockefeller himself was not universally popular--he was viewed in many respects as having earned a good portion of his wealth through some nefarious means--and then partly there were concerns just about the size of the philanthropic entity he was hoping to create; and he encountered enormous resistance in Congress. So, the sitting President suggested that Congress should turn down the request to create the Rockefeller Foundation; Samuel Gompers, at that point the head of the AFL (American Federation of Labor), said that the only thing that Rockefeller could do in a philanthropic entity would be to create a foundation which would in the course of time teach people how to prevent themselves from becoming like Mr. Rockefeller. And then, from my point of view most interestingly, various people testified before Congress saying that even if Rockefeller had earned the money in a completely legitimate way, and even if you were to ascribe to Rockefeller the most beneficent and magnanimous intentions, that nevertheless, the creation of a large foundation was inimicable[?] to, or repugnant to, the purposes of a democratic society. And, in fact, Rockefeller had to create various types of accommodations in Congress to seek approval. He offered to have a Board of Governance that would include various elected officials as well as the presidents of several Ivy League colleges. He offered to cap the foundation at a certain amount of money--$50 million dollars, if I remember correctly. And he even offered to insist upon a spend-down requirement--that the Rockefeller would have to basically spend out, within 50 years. And this fight, having made various accommodations that would have created a kind of quasi-public-governance model, and a non-perpetual model, for a private foundation, nevertheless Congress still refused to approve the foundation. So, after several years of trying, he went back to New York State and got New York State to approve the foundation, and set up shop from there and more or less did what he wanted, despite the state-level incorporation.
Russ Roberts: I just want to clarify one thing you mentioned saying Gompers of the AFL--that's the American Federation of Labor, which later merged and became the AFL-CIO (American Federation of Labor and Congress of Industrial Organizations)--for people who might be more familiar with that. So, here's the thing I didn't understand; and it's a legal question, I guess. Now, why did he need a foundation? Why couldn't he just give away money? Right? He could just write a check, which I'm sure he did in his lifetime--he sees a charity that he likes; he writes a check. I guess there's a challenge after he dies--the check-writing activity. Why do you need an organized thing called a foundation with a legal structure? Do you know?
Rob Reich: Yeah. A couple of reasons. I can't speak definitively to Rockefeller's specific intentions here, but more generally to the views of various philanthropists of that day and I think, in certain respects, still today about why the foundation structure itself is important. So, the first is that there was an aspiration started by Carnegie and Rockefeller that the particular purpose of a foundation, as opposed to simply writing checks in a charitable donor form, was that charitable giving, or check-writing was for the direct relief of disadvantage or poverty, or the provision of social services of various kinds. Whereas philanthropic or foundation activity sought to get at the root causes of those problems. And so foundations were imagined as an attempt to try to undertake scientific or social-scientific solutions to the root causes of various social ills. And that was considered to require a professional staff. So, whereas any ordinary charitable donor could of course hire, at his or her own expense, a professional staff to help understand how best to give money away, creating the foundation form helped to make that into, not the effort of a private individual hiring people at private expense to direct philanthropic assets, but rather to create a philanthropic entity itself with the benefit of it being tax exempt, and signaling to the world a philanthropic intention rather than having, as it were, a family office--which wealthy people had then and still have today--to do that work. The foundation was a partially public-facing entity, unlike just a, you know, just a charitable checkbook or the family office of an especially wealthy person.
Russ Roberts: So, today, the tax deductibility of a foundation's activity is very important.
Rob Reich: Okay.
Russ Roberts: And we're going to talk about that. But, in Rockefeller's time, of course, there was, I think, when he established it--the Rockefeller Foundation--there was no Federal income tax. Or am I--was it later than that?
Rob Reich: You've got it right. The proposal to create the Rockefeller Foundation and the actual creation of the Carnegie Foundation for the Advancement of Teaching, the Carnegie Corporation--well that all happened prior to the introduction of the Federal income tax--which came--it came on-line, I think if I recall correctly, 1916, 1917. So, you are right: The tax exempt/exemption for the direction of private wealth into a foundation didn't have any special tax advantages at the time.
Russ Roberts: At the time, couldn't they have just incorporated as a--I don't know what the choices were then, but you'd think they could just have incorporated as a company--
Rob Reich: Yeah--
Russ Roberts: that just happened to have these missions that you talked about. The idea that they would go to Congress for special permission, or the New York State legislature, it just seems weird. I don't mean to suggest there's something incredibly fascinating about it. But it's somewhat interesting.
Rob Reich: Yeah. Well, maybe, I should have mentioned earlier, one additional reason; you alluded to this yourself: Many people sought through philanthropic means to create entities which would last beyond their death. And the creation of a corporation, an ordinary corporate form, would not have allowed donor intent to have been protected in perpetuity. Whereas the--the creation of a charitable trust, but now converted into the form of a private foundation, did allow the legal obligation to honor donor intent even beyond the death of the donor. And, in fact, the default form, the default legal arrangement for a foundation is indeed perpetuity. You know, so, in the usual skeptical phrase: The dead hand of the donor reaches out from the grave to strangle future generations.
Russ Roberts: That's so--what's the right word? Generous on the part of the describer.
Russ Roberts: So, donor intent is an interesting thing. Let's digress on that for a minute, because it's hard to describe intent. And there's a lot of slippage 'twixt the cup and the lip, for a donor. And the foundation that the donor creates. A lot of people have remarked on the fact that the Ford Foundation and other foundations probably would not make their donors so happy--maybe they didn't describe their intent sufficiently, precisely.
Rob Reich: The Ford Foundation is a special case, because the Ford family formally renounced and removed themselves from the Board of Governance of the Ford Foundation, for a variety of reasons. But was otherwise entitled to a certain governance role. And as Darren Walker, the current president of the Ford Foundation, says, if the Ford family had known that 50 years after the creation or whatever it is of the Ford Foundation had known that a gay black man would be the head of the Ford Foundation, they would certainly be turning over in their graves.
Russ Roberts: So, but this is one of the challenges of donor intent, of course: which is that mores, norms, attitudes change. Rhodes--the one I was thinking of was the Rhodes Scholarship, which was designed for young men. At some point in the last 25 years, I don't know when--maybe you know, they decided to open it to women--even though it very explicitly says in the charter that it's for men only. There's no--this isn't a question of: 'I wonder what the donor would have wanted.' It's written down. And yet, either because--I don't know who would adjudicate such an issue--the heirs? Could the heirs sue to have the ancestor's intent changed? Could the heirs sue if they didn't like it, that it had changed? That the Directors are doing something different? Do you know the answers to those questions?
Rob Reich: Yeah. I think any of the above. So, if the current Board of Trustees of an entity wishes to change the donor intent, the Board of Trustees could, as it were, sue the heirs of the initial donor in order to re-direct the mission. My--I'm no legal scholar, but my loose understanding here is that such attempts are rarely successful, except in cases where, because of changing social conditions and indeed laws, whatever the initial donor intent had been, is now either illegal or perhaps socially frowned upon--as in the case of the Rhodes Scholarships. In other cases, various outside entities--say, the beneficiaries of the philanthropic entity--might sue the foundation or the trust to have the purpose changed somewhat. And then in that case the Board of Trustees could in effect defend the donor intent, honoring the mission of the donor.
Russ Roberts: So, one thing that we know for sure is that foundations have become a lot more common in the last couple of decades. And a lot bigger. So, talk about some of the numbers there.
Rob Reich: Yeah. So, the number of foundations has gone up dramatically over the course of the past generation. And, you know, here, I just think it's a consequence of the rise of inequality in the United States; and we are living in what you could call the Second Gilded Age. And, the number of people with extraordinary wealth has gone up dramatically. And, for, you know, familiar economic reasoning, the marginal utility of an additional dollar when you are a billionaire is pretty small for personal consumption. And people are inclined to direct a considerable amount of money for philanthropic purposes. So, my recollection of the most recent numbers is that, if you went back in time about 20 years ago, we had something on the order of between 20,000 and 30,000 private foundations in the United States. Now it's more than double. And the number of new foundations on the scene--like, for example, the Gates Foundation, but not only--new tech wealth has brought in a large number of donors who are giving at earlier stages in their careers, at younger ages. And often, trying to direct the wealth in more specific ways. So, the tech wealth has created--especially out here in the Bay area--a large number of new foundations with active and engaged donors at the helm of that money--so you can[?] create various forms of a public benefit or social policy change.
Russ Roberts: You say, in 1930 there were about 200 private foundations, and their assets were less than a billion dollars. Of course, there's been a lot of inflation, but it's now over 100,000 foundations as of 2013, and they are worth more than $800 billion. I just want to--a pet peeve of mine is a precise use of the word 'inequality.' So, you mentioned inequality: but it's really just that the richer people are richer than they were before. It doesn't necessarily mean there's more inequality. There is, probably. But it could have been we all got a lot richer but it didn't turn out probably to be the case. But it's true that the most successful people are more successful than the most successful people generations ago, and therefore there's a lot of extra money that they are willing to give away. Which is, one would think would be a good thing.
Rob Reich: Mmmhmm.
Russ Roberts: But you raise the possibility it's a bad thing. Which I thought was really interesting; which was why I wanted to do this interview. So, what's--it sounds great: all this generosity. As you write, in your article in the Boston Review you say:
Shouldn't we be grateful to the person who devotes his private wealth to public purposes, rather than consuming conspicuously or passing his wealth to children and relatives?
And so, what's wrong with that?
Rob Reich: Right. Certainly, I think the natural attitude today is that what citizens or ordinary folks owe big philanthropists is a simple gratitude. Because, even if the money were somehow to be wasted philanthropically, what the philanthropist always can say, in her defense, is that, surely it's better to have tried to have done something philanthropic than to have simply engaged in more private consumption. Especially--
Russ Roberts: than a yacht[?]--
Rob Reich: Especially if you are a billionaire. Yeah, and you know, so I have a couple of Reponses. In certain respects the overarching ambition of the stuff I've been writing is to try to sweep away that very attitude. I don't believe that what private philanthropists or, excuse me, what philanthropists are owed is nothing but gratitude. And so, I'll tick off a couple of thoughts about that. So, the first is that, especially when we are talking about big-philanthropy people with extraordinary wealth who attempt to convert private assets into some public influence: Um, philanthropy constitutes an exercise of power. And in a democratic society, power deserves scrutiny, not simple gratitude. Now, notice I haven't said that that power is illegitimate to wield, or that that power can't be used for good purposes. I think it can be used for good purposes. But the relevant question is to pay attention to the power and to direct some, um, questions and various types of scrutiny rather than just simply congratulate this exercise or be grateful for its exercise. Beyond that, I think that private foundations in particular are rather idiosyncratic, very peculiar organizational forms or corporate bodies, because they are marked by almost complete lack of accountability. So, just because it's the most familiar thing to refer to these days, the largest foundation in the world is the Bill and Melinda Gates Foundation. Foundations--unlike their corporate peers within ordinary marketplace, for-profit firms--foundations have no marketplace competitors. There's no rival foundation attempting to put the Gates Foundation out of business. To the contrary: there's no competitive dynamic from rival firms. Or, for that matter, from consumers, who could fail to purchase the products that a for-profit firm has on offer. In the case of foundations, there's no consumer: there are supplicants. There are people who are clamoring for the attention of the donor, rather than potentially seeking to hold it accountable in the ordinary marketplace ways by not purchasing something. And then, the alternative here to the marketplace would be various public agencies or government. And government, which spends a budget money and in various ways has familiar systems of democratic accountability through the ballot box, so that if any of us citizens, we don't like what the local school board is doing with public funds for education or the, our state legislature in terms of its allocations for education--we can elect some new people at the next electoral cycle and try to put people in place who have our preferred preferences. But, you can't do that with a foundation. So, you know, as the critic Diane Ravitch says, at the Gates Foundation: Bill Gates serves as the unelected school superintendent.
Russ Roberts: Yeah--it's--I had Diane on as a guest a while back. And it's a great line. It's a little bit misleading. I want to just respond to your point about accountability. Which is: It's clearly true--that there's not much accountability in a foundation if you don't like it. You can refuse to accept gifts from them. You could argue that that's a sufficiently high level of accountability, since they have no power to take money away from me. They only have the power to give it away. Which is somewhat different, I would say, from a competitive enterprise in a free market system, which has the accountability of consumer choice, and the freedom not to buy the product. So, it's a little bit different. And then, in the case of the School Superintendent--of course, an actual school superintendent doesn't have that much accountability, unfortunately. My vote at the ballot box is an incredibly weak reed to lean on. We did have Chris Blattman on recently complaining about some of the initiatives of the Gates Foundation--he wrote an open letter, which disappeared into the ether. And we joked about that. So, the ability of people to influence the Gates Foundation is--there is some ability, but it's very limited. And it's more limited, I would accept, than the ballot box. But it is different, because that school superintendent forces me, through my taxes, to pay for the education of the children around me; but if I don't agree with it--whereas, Bill--Bill only exploits me in another way. Which you wisely point out. Which is, he forces me to--he can force me to subsidize his foundation through tax-legal--the way the tax system is set up: through a tax subsidy. So, respond to me if you'd like, to that little rant. And then talk about why the tax issue makes it a little more relevant.
Rob Reich: Let's get to the taxes thing in a minute. Let's just go with the completely appropriate observation you make, an important observation, that perhaps a sufficient form of accountability for foundations is that the actual transfer of philanthropic assets from a foundation to a grantee is an ordinary contract. And at the moment of contract, the recipient is voluntary and can refuse to accept the donation. So, I grant that entirely. I wouldn't say, however, that that's a sufficient form of accountability, in part because let's call it a power imbalance that exists traditionally between especially large donors and the array of needy nonprofit recipients all clamoring for the attention of the donor. In other words, here's, I think, a roughly analogous situation: Imagine a case of a wealthy person now not interested in philanthropy but interested in transferring money to his or her kids; and so the parent sets up a trust for the child, which unlocks over various life stages with some strings attached at each point. And says to the kid: Here's what I'm going to make available to you. Here's some money at the age of 18, the age of 25, the age of 35--whatever it turns out. And, sure, the kid could refuse that paternalism exercised over him or her by saying, 'I don't want any of your inheritance,' because that's a similar moment of contract. But, the power that a parent wields over a child, especially, as you say, where the benefit is money that would be difficult to come by otherwise, is rather large. So, one nice thing would actually be empirically: how often does it happen that a grant offered or extended by a foundation is at the moment of potential contract refused by a recipient? I don't have that data. I'm not sure anyone does. But my guess is it happens with extraordinary infrequency.
Russ Roberts: Of course. I agree with that. I think the issue is: What strings come with it? And that would be true of the parent, too. The parent, through the prospect of making a bequeathing someone's estate to a child, has influence over them long before the gift is made.
Rob Reich: That's true.
Russ Roberts: A friend of mine--his father--and he's a listener to EconTalk, so I don't know if he'll catch this--his father allegedly kept a loose-leaf notebook for his children's inheritance for the will, and if any of his children misbehaved, he would just shuffle some pages out of their section into one of their siblings. Now, I don't know that--I love that; I think that's hilarious--and I don't know if that's apocryphal or true. But perhaps he'll let me know. Maybe he doesn't know if it's apocryphal. Maybe it's a threat you had to wonder about. So, it's true that the prospect of money changes people's behavior. And, you allude to it in one of your articles. I heard it firsthand from a foundation officer who said, after rising to his position he was told, 'Congratulations. You'll never get an anonymous compliment; and you'll never pay for dinner for the rest of your life.' Yeah--I ruined that joke because it should be the other order. But--
Rob Reich: Exactly. But I wanted to add that, you know, another kind of anthropological or sociological observation that people who previously were the grantee side, working for a nonprofit who crossed the street and become the program officer at a foundation, is that overnight they become much more intelligent, much [?], better looking than anyone in the room.
Russ Roberts: Yep. Jokes get funnier. It's incredible. Must be something about the position. As we know it is.
Russ Roberts: But, it raises a very interesting thought which I hadn't had until we talked about it. Which is: Now, I can't choose--I can't go to a different parent. But I can go to a different foundation. And, it's an interesting thing--we were talking about strings earlier--if the foundation puts strings on their money and the recipients don't like those strings, they can go to other places. There is competition in that sense. So, that's some of the--that insulates the recipients from the coercive power of the foundation to some extent. But having said that, there's no doubt that the prospect of getting money changes your behavior and gives power to the donor. I would also add, however, that I've seen some very wealthy people in my time--not very often; a couple I've--I've probably stood next to a couple of billionaires in person. And, one that I'm thinking of was extremely uncomfortable being out in public, because he must get asked constantly for money. Because he's very generous, and he's very philanthropic. And I just noticed how uneasy he was. And, it's interesting, right? It's sort of the flip side of power. You'd think having money gives you power--and of course it does. But it also comes at a price.
Rob Reich: I agree. The social awareness that people who are philanthropists have an extraordinary capacity to give money away creates a social dynamic of people who are supplicants, for the most part. Or, just as you said before, you are always uncertain who is being honest with you and under what circumstances. All things considered, you know, I'd say I have only tiny violins to play for [?]. But, I don't deny the observation.
Russ Roberts: Yeah. I think I've read it before on the air, but Franklin P. Adams wrote a very nice poem about this. I think it's called "The Rich Man," and I will not try to read it live from memory. But, we'll put a link to it.
Russ Roberts: At any rate, so there is some power. But it's only the power of being a fount of money. And the question then is the tax issue. So, talk about how the tax issue comes into play and why for some people that gives us some, as a society, some ability to regulate or at least to have some say in the way foundations are run.
Rob Reich: Right. So, if it were the case that philanthropy--and here, I'm talking about both big philanthropy and a private foundation, but also ordinary charitable giving of the sort that you or I do, making a $100 donation to our preferred nonprofit recipient--if it were the case that such giving were just the exercise of our liberty to dispose of our legitimately-earned assets or money, how we saw fit, then, you know, whatever your preferences, Russ, about the array of organizations you want to support, and whatever my preferences were, we could just say we were exercising our liberty to do with our wealth what we wish. But, given that there are tax incentives attached to the creation of a foundation or the donation of charitable dollars, the existence of tax expenditures for a philanthropy makes it not quite the case that we are simply exercising our liberty. I think it's more accurate to say that there is a tax incentive to stimulate the exercise of our liberty; and, then our charitable donations or philanthropic gifts are partly public and partly private. So, let's just be concrete about this. The way the tax incentive works is a deduction, not a tax credit, means that the higher up the income scale you are, the greater the public subsidy attached to your charity. So, if you are in the 30% tax bracket, if you make a $100 donation, it actually costs you $70; and $30 of your tax burden would be foregone. Which is to say: the IRS [Internal Revenue Service] collects less money; and, whatever fraction of the benefit that each of us receive as an individual from the spending of public dollars, we receive less of it. So, every single one of us as citizens subsidizes the exercise of philanthropists of all stripes. And that gives the public, it seems to me, an interest in what philanthropists do with their money. I haven't said it's obvious what that interest amounts to, but I think it is obvious when people say, 'God damn it, it's my money and I'm going to do with it what I want'--well, only if you are not taking any tax advantage for the philanthropic direction of that money. Because when you get a 40% tax break--or more in some cases--then it's not quite accurate to say that it's just your money and you can do what you want with it.
Russ Roberts: Yeah. I find that argument unconvincing in one dimension. In some dimensions it's absolutely right. And you tell that great story about George Soros saying, 'It's my money. I can do whatever I want with it.' And a staffer says--go ahead, tell the story.
Rob Reich: Yeah. So, in the final days of creating the Open Society Institute and associated foundations, there was disagreement amongst the staff that Soros had hired about exactly what their program areas, or areas of focus would be. And, to resolve a disagreement, Soros allegedly slammed his fist on the table and said, 'Well, at the end of the day, it's my money. We're going to do it my way.' And a program officer that he'd hired said, 'Well, actually Mr. Soros, about 30% or 40% of it would have been the taxpayer's money. So, I think some other people actually have a say in what you do, here, too.' And he was fired the next week.
Russ Roberts: Yeah. Not surprising. Because it was, at least in some dimension, his money, in terms of who he hired and fired in the [?]. But, I think it's a fascinating philosophical issue for me, because it opens the door to the argument that we--some measure of 'we'--should have a say in that money. And my view is, is that you either make it tax deductible or you don't. If you make it tax deductible, then it's a--what restrictions you put on the foundation should stand or fall on their own merit, not just on the argument, 'Well, it's our money, too. We get to have a say.' I think the relevant question is: Are those restrictions good or bad? So, for example, and we'll talk about them in a minute, various ideas of transparency, various ideas about accountability, various ideas about timing--whether it should be perpetual or not: those are all interesting questions that, I think are important and have impacts. But they aren't just in and of themselves by the fact that the political process has decided they should be tax deductible. Now, you could argue that if you want to have no strings attached--and no one's going to argue this, either, except maybe a few people--but you could argue that if you want no strings attached, then don't take the deduction. As you said. And so, in the old days, there was no tax deduction, because there was no income tax.
Rob Reich: Right.
Russ Roberts: And I think even though I'm a big fan of civil society and private initiative and voluntary solutions from the bottom up rather than the top down, I think, you know, I think there's a lot to be said for not subsidizing foundations, and not subsidizing charitable donations. I know there's an argument to be made for it. I know what the argument is--that it overcomes a free rider problem. And that's all true. But I think that's not--again, even that's not enough, either. That doesn't prove that it's good to have tax deductibility. As you point out, it gives very wealthy people large control over large amounts of money that are much larger than they otherwise would be, because of this tax policy.
Rob Reich: Right. And, I would say, the kind of conventional argument on behalf of the tax incentives is the deduction is that it will stimulate more philanthropy than would be the case without the deduction.
Russ Roberts: Yup.
Rob Reich: Well, that's not a question that's going to be resolved philosophically. That's an empirical question. And, to the best of my knowledge--and I've checked into this--economists who have studied this have a kind of mixed record to report on whether or not the tax incentive actually kicks out more money than we've given otherwise. So, it's an open question whether or not that particular defense will carry the day. Many people give money without even thinking about whether there's a tax benefit for it. And, you know, just one small thing here--this is less about big donors than about small donors--given the, you know, the complicated structure of the U.S. tax code, the ordinary person only itemizes after a certain level of income.
Russ Roberts: Correct.
Rob Reich: And it's only when you itemize your charitable giving that you can take advantage of the deduction. Otherwise you just take the standard deduction. So, my best recollection is that, as of a couple of years ago, something on the order of 70% of all tax filers just take the standard deduction. So, there's no incentive in place for them just for charitable giving in the form of a tax deduction. And yet, the overwhelming majority of Americans, something on the order of 90% of people, make charitable donations every year.
Russ Roberts: Yup. And I think the argument, which you started to elaborate on--you mentioned it but you didn't elaborate on it much--is that, 'Well, some charity is good; more charity is better.' And that just doesn't follow--again, even though I'm a big fan of civil society, if I don't like what Bill Gates is doing or Mark Zuckerberg, why do I want more of it? Why do I want a small group of people deciding where large sums of money go? Now, I happen to believe in the personal liberty side: I'd much rather see an elimination of the tax deductibility and let people be free to spend where they want. But, that's a philosophical question and let's put it to the side. Having said all that, you then talk about, I think, two very thoughtful and insightful arguments in favor of foundations. You call them pluralism and the discovery argument. Talk about each of those, please.
Rob Reich: Yeah. Good. So, to put this provocatively, perhaps especially for folks listening who are engaged in philanthropy themselves, I front-load an awful lot of the things that I've written with deep skepticism that big philanthropy can be made compatible with the expectations of democratic governance. Why is that? Well, for the kind of trivial reason that big philanthropy represents a plutocratic element--by definition: you have to have large wealth in order to create such an entity if you want to[?] a large private foundation. And when you are converting your private assets into some sort of public influence, you are just inviting, now with the tax subsidy on top of it, a relatively unaccountable, non-transparent, powerful form of foundation activity in a democratic society. And so, what I think is possible is that plutocrats can be domesticated to serve democratic purposes. So, that's the orientation I take to the question. Another way to approach this is just to say that large inequality is just a standing feature of any political order; and in a democratic society, one task of democratic institutions is to try to make the wealthy elite serve democratic aspirations rather than subvert them. And, I think that there are certain ways in which private foundations and philanthropy can in fact serve democratic purposes; and it's through the mechanisms you just alluded to earlier. Namely, a pluralism argument and a discovery argument. So, let me take those in order, very briefly. If philanthropy amounts to the creation of various forms of public benefits or social benefits through private means, it's a healthy thing in a democratic society to partially decentralize the production of social benefits, so that it's not only legislatures spending the money of taxpayers through ordinary democratic means that creates public goods or public benefits. Those are important mechanisms, but they shouldn't be the exclusive mechanism for the production of social benefits, for a variety of reasons. Most cheaply, in a democratic society where legislatures operate through majority vote, you'll have minority preferences permanently disenfranchised from their preferred social good production if they always have to assemble a majority in order to get the expenditure of taxpayer dollars. So, by partly decentralizing the production of social goods to philanthropists who are given the permission to have their idiosyncratic donor preferences manifested in what gets funded, then minority groups or minority preferences will have a means to see some of their own social good production. And, when you aggregate that across all donor preferences, you get pluralism in civil society. And that is, in my view, a very healthy thing--possibly even a foundational constitutive element of a flourishing democratic order. So, that's the pluralism argument. The discovery argument has to do with large foundations in particular. And here, it again starts from the apparent vice of unaccountability foundations have. And what I try to do is find if there's a way to convert that vice into a certain type of virtue. So, the vice is that there's no marketplace accountability for a foundation, and there's no democratic or public accountability in the form of elections: no one can unelect Bill Gates or any other board of trustees from the foundation, and there's no marketplace competitors, as we said before. So, in practice what that means is that foundations have, if not the unique permission, at the very least an incentive structure that makes them distinctively able to pursue very long time-horizon social experiments. Things that would take 10 years, 20 years, or longer, where you'd see the benefit of some, you know, social investment or innovation. That time horizon is ordinarily not available in the for-profit marketplace or the ordinarily short-termism of the stock market and investors' patience. Similarly not available in public agencies because of elections, where people have to show, elected officials have to show, typically some benefit to citizens within the cycle of election in order to be re-elected. And the short-termism that's present within the marketplace and in government is not present in foundations--in virtue of their unaccountability. They can take a long time-horizon view. So, if foundations were to be one site in which there's experimentalism around social policy, where successful innovations are subject to social scientific testing, they are demonstrated to be useful in some important way or effective, and then presented, as it were, to a democratic public for scaling up to the benefit of all citizens, or many citizens--that's a completely salutary mechanism for a democratic society. It's a way of insuring that democracies are currently alive to new social conditions and experimenting so that social policy can adapt to change in conditions. And, if we can partly decentralize that experimentation, that's a healthy thing for democratic order.
Russ Roberts: And you give a couple of examples of where private philanthropy brought about some really dramatically great things.
Rob Reich: Yeah. The classic example is the Carnegie Library system. Andrew Carnegie didn't say, 'Hey, here's a great idea: I'd like to fund libraries open to the public in perpetuity for any citizen or, you know, community that wants one.' He pilot-tested a whole bunch of them, partially funded them along with various, you know, cities. And then, after citizens experienced them, the Carnegie Foundation doesn't fund every single public library across the country now in perpetuity. It's now an ordinary public expense. It's been taken often by taxpayers as an ordinary public good that cities or states should fund. And there's other similar examples of that particular kind.
Russ Roberts: I can't help but note, however, though, that as we get much wealthier as a society, and as unfortunately, I think, or maybe not--I don't know--but we seem a little less interested in books. Some of us.
Rob Reich: True.
Russ Roberts: We still have libraries. I'm not sure there's a good case for a public library any more. It's now really a place for people who have trouble getting Internet access. Which is a nice thing. It's not the worst thing in the world. But, the book part of public libraries has fallen apart, fallen down.
Russ Roberts: I want to come back to your point about pluralism, because I thought that was really beautifully said. And it reminded me of a couple of things; I'd like to get your reaction. One is--it reminded me of how we make the case sometimes for capitalism or for socialism. You don't want just a few kinds of cars. Some people argue capitalism gives us too many choices. I'm not one of those people. But, it's really a remarkable thing that, if you have a large family, there's a car for you; if you want to drive a sports car, there's a car for you. If you want gluten-free bread, it's there for you. So, there's lots of choice in a free market society. And similarly the foundations add to the choice: that, for socially beneficial activities, and minority preferences, it's a really cool thing and extremely important. It also reminded me of the fact that--I think I heard this from Milton Friedman--that, in an authoritarian state, wealth is dangerous because it allows the funding of alternatives to the state; it allows the funding of threats to the state. So, there's a certain protection from authoritarianism in the form of wealth. I never thought I'd make that argument. And it's a little bit creepy. So, I just think it's a variation on your point--I think, if I understood it correctly.
Rob Reich: Yah--
Russ Roberts: It's a little bit of a bulwark against tyranny.
Rob Reich: That's right. Private wealth, in that very narrow sense you just described, can serve as a form of countervailing power to a tyrant.
Russ Roberts: And yet--and you make that case, and it's beautifully made--and I think that I also love your point about innovation--at the same time, you also recognize that I would argue this is a big concern for those of us like myself who think that philanthropy could have a much larger role: if government stepped out of the way, there'd be less crowding out of private charity; there'd be more giving if government did fewer things. One has to confront--I have to confront--the reality that a lot of foundations don't seem to make that big a difference.
Rob Reich: Yeah--
Russ Roberts: They don't seem to perform so well. And you raise that issue. Talk about that.
Rob Reich: Yeah. Well, so, one of the consequences of the view I just described, and particularly this discovery argument, is that the role of foundations, perhaps against expectations now, is precisely not to try to fund ordinary social services that--especially in the case where they were once provided by the state. So, as the state has budgetary problems and seeks to offload some of the provision of public services to private means, in particular philanthropy--well, that's not social innovation, or experimentation. That's just finding a different way to, to, divert the cost of a social service to some type of private means. And, what that means in practice for me is that foundations--if you have a foundation and you are making a grant of money to the local soup kitchen, or, you know, to, I don't know, some type of--in my case, I've written about the use of private money going to already-wealthy public school systems, local education--
Russ Roberts: yep--
Rob Reich: foundations and the like: that's in my view an example of the most regrettable kind of philanthropy. Because it's philanthropy in the service of exacerbating existing inequalities at the level of social services, where the public has already assumed a responsibility for their provision--the public school house. And so, what that's a case of, is that, you know, parents take a tax deduction for the worsening of an inequality that the state in my view is already responsible for remedying. And, in so doing, think that they are noble for having engaged in the activity--
Russ Roberts: yep--
Rob Reich: --a kind of psychological perversion on top of it all. So, when foundation money goes toward this genuinely long-time horizon, risky undertakings of new social experimentation, that's a salutary thing. But not in the form of public service provision of the kind that's familiar already. Charitable giving might be fine for that: You know, the hundred-dollar checks that you and I write. But we're not exercising huge power in doing that. But, if you have a foundation, you shouldn't be doing that type of work. Let me try an analogy on you that I've given on a couple of occasions. So, when I give a talk to people who work in foundations, there's ordinarily some who are quite resistant to the criticisms I have to offer.
Russ Roberts: Huh. You're kidding.
Rob Reich: [?] Stop it[?]. Um, I've tried, sometimes, beginning in a different direction. I'll say to people I want to talk about the very eccentric organizational form of the private foundation, the legal codification, promotion of voices in a plutocratic voices in a democratic society. Before I get to that, let's talk about an organizational or institutional design that I, as a professor, enjoy, that most people think is indefensible. And that's the existence of tenure.
Russ Roberts: Yeah.
Rob Reich: Which is job unaccountability for the rest of my working life. So, you know, short of breaking criminal laws or somehow abridging my contract--which requires me to teach a few classes--you know, nothing that I do with my research career could cause me to lose my job at this point. And, again, I think the ordinary attitude that most people have is that that's a preposterous institutional design, to be unaccountable for your job performance for life. And, what I often say to people is like, is, 'That's basically the institutional design of an endowment.' And, in fact, the design is not for life but for perpetuity. No accountability for the performance of the endowment over the course of eternity. And donor direction, just as I have, you know, just as intellectual direction of my own research interests. So, what I ask people to be the defense of tenure? And there, I think the answer might have something to do with free speech protections--but leave that aside for the moment. And it has something to do with the kind of long-time horizon research experiments that scholars will take with the protection of tenure. So that if I want to try learning two different languages, immerse myself in some other, you know, environment for a long time, or study for 20 years to try to solve some mathematical proof, or, you know, become the world's expert on a single animal species--then, you know, write up my work, in a peer-reviewed way that contributes to humanity's storehouse of knowledge: That's the kind of research activity that's not likely to be undertaken in the private marketplace or in public governments. A lot of it will amount to nothing. I'm not, you know, wildly optimistic that all of the research activity of tenured professors is a truth-tracking or a contribution to knowledge. And, let's say 75% of it amounts to nothing. But the 25%--or pick a number of your choosing, that does, is an important contribution. Now, here's the rub: If what I did as a tenured professor was to do small-ball[?], modest incremental contributions to knowledge or commentary in this paper, an additional little thing here and there--well, just put me on a 5-year renewable contract and nothing about my output or anybody's output changes. If tenure is a justifiable institution, then, um, I've got to be engaged in risky, long-term-horizon research projects. A lot of which will fail. But the design of tenure, for some people, will prove to be quite socially useful. So that's the analogy I draw to a foundation. If foundations are doing really tiny, risk-averse, you know, modest social contributions that aren't especially innovative and aren't long time-horizon, then you don't need the institutional design of the foundation. Just make a donor [?] and write some checks. So, tenure and the form of private foundation are justifiable in light of their long time-horizon, experimental permissions.
Russ Roberts: Yeah. And as somebody who is not particularly a big fan of tenure and who really likes the idea of a foundation, I'm in trouble either way. I'd have to--I think--when I look at the empirical evidence--I don't see a lot of evidence that tenure actually generates those long-horizon projects. In fact, it tends to induce the opposite. To get tenure, you have to publish a lot of articles, and try to be influential as quickly as possible.
Rob Reich: Right.
Russ Roberts: So, certainly, when you are pre-tenure, you tend to do very unambitious things. And now, once you have it--now it's suddenly: 'Oh, turn that switch off.' And it seems to me that a lot of academics don't get out of that habit. But, even, I think--that's just a cheap shot--not a cheap shot, just an easy form of low-brow scientific observation. I think the much bigger problem is that the people who go into academic life are not particularly risk-taking. The idea that they would find this post-tenure environment or the life-with-tenure environment exhilarating for the freedom to do bold and brash things clashes with the psychological makeup of most academics. There may be an exception or two, or ten, even, maybe, in which case it may be that those 10 do enough that's worthy that it--
Rob Reich: Justifies the whole--
Russ Roberts: Justifies the whole thing. Although it may also be the case that their passion would be fulfilled no matter what: they would work in some garret out of love for their subject and a pittance without the need for tenure.
Russ Roberts: And so to come back to foundations--and, by the way, I love the analogy. I think it's very clever--forgetting to open their mind to your ideas. But I think, similarly, there's a problem with foundations that it can often attract people who are not risk-takers, who aren't entrepreneurs. They are doing something else, typically. And I've talked about this before on the program. I think a lot of nonprofits struggle with mission creep. They start off passionate about the goals of the foundation, and about the power of innovation. But, after a while they tend to focus on just getting their budget larger. And, I think the challenge for those of us who think that foundations could play a much larger role in civil society, is to think about ways to innovate their performance. Someone who works on that, I think, in a very thoughtful way--I don't know if you've read his work--is Dan Pallotta, who has been a guest on the program.
Rob Reich: Yep. Yep.
Russ Roberts: And so, I think we really need to try to try to revolutionize something of this world for it to have the impact it could have.
Rob Reich: Yeah. I agree. I'm also, um, like you, not optimistic about the actual performance or behavior of most foundations. Especially, as you drop out of the largest and most familiar. I mean, the vast majority of foundations are relatively modest in size--you know, a million dollars or less. And those tend to be entities which are mainly ways of employing your children or your extended family, um, to bring together your relatives for intergenerational family value transmission. And, to have some, you know, enhanced social standing. I'm being a little bit skeptical or cynical there. But, if you have a million-dollar foundation which has a 5% annual payout rule, where you are employing a bunch of relatives, the amount of money actually going out the door annually for social good production is pretty modest. And you could accomplish it just by writing charitable checks every year, and forego the form of the foundation. And I think that could be socially better, um, um, um, than the existence of foundations.
Russ Roberts: Let's close with any observations you might have about what else we might do to improve performance, in your view. So, you just mentioned something we hadn't talked about before: I think all foundations have to spend at least 5%--what is it? 5% of what?
Rob Reich: Yeah, 5%. Administration counts in that 5%, however. Administration of the foundation.
Russ Roberts: The estimate[?] 5% of their?
Rob Reich: Endowment. The value of their endowment.
Russ Roberts: So, it allows for the possibility of growth, because most of the endowment is presumably invested. So--and of course some foundations are larger than when they started, because they earn more than 5%; and they only adhere to that 5% rule. And they tend to be very focused on keeping the principle intact.
Rob Reich: Yeah. They seek to exist in perpetuity.
Russ Roberts: But, we should mention, there are foundations that do establish themselves with a write-down and death-date, to make sure there is no drifting of donor intent. Right?
Rob Reich: That's right. The Gates Foundation is perhaps most prominent. It has declared that it will go out of existence--I think I have this right--within 40 years of Bill and Melinda's death, the Atlantic Philanthropies just close shop, sun setting--one of the larger foundations that existed. And then is it the Olin[?] Foundation that did something similar?
Russ Roberts: Yep.
Rob Reich: So, we do have some examples of foundations that sunset entirely. Sometimes, because, as you say, donor intent is the chief thing; and even a relatively narrow board of governance, of, you know, chosen successors is not trusted to honor donor intent. But, also, for the ordinary, and to my mind, much more persuasive reason, that there are sufficient social problems worth working on today and which future rich people can take care of--unspecified future problems.
Russ Roberts: Yeah. I think it also prevents what we might call calcification, which is the phenomenon I'm talking about, where, it becomes a pleasant place to work rather than a way to save the world.
Rob Reich: Right.
Russ Roberts: But, going back to the policy issue: Is there anything that you particularly think we ought to be doing differently in this area, to increase accountability? And if so, what might it be?
Rob Reich: Sure.
Russ Roberts: And performance, not just accountability.
Rob Reich: Okay. So, start again with a kind of counterintuitive point: I think there should be floor on the size of foundations, not a ceiling. I don't have a particular number, but let's say, $10 million or $25 million dollars. If you don't have that much money, then just create a donor-advised fund and make some distributions from that. In terms of performance and accountability, I'd like to see more transparency in the reporting that's done about grant-making. In particular, if your foundation is large enough to have a professional staff that's making evaluations of the grants out the door, and perhaps you even have a larger strategy that you are trying to deploy--so, it's not just the effectiveness of any particular grantee that you are measuring, but you are measuring the effectiveness of your strategy as a whole: Well, now you are engaged in something like knowledge production, yourself. And, too many foundations house their evaluations as, you know, kind of proprietary information, only occasionally to the benefit of the grantee and almost never to the benefit of the public. So, I'd love to see foundations that made annual reports that shared their own organizational learning on the basis of what they've been trying to carry out. And then, even more dramatically, I would love to see some experiments--here, I am taking advantage of the analogy to tenure--I would love to see some experiments with peer review. Not a--you know, not a legal accountability structure that's demanded. But, I'd love to see some large foundations experiment with various forms of peer evaluation of how the grant-making strategies of how their peers are going, using, you know, various forms of ordinary social science to make that public.