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Source: Whole Earth

Democratic Foundations: The future's best way to transfer wealth?

By Mark Dowie

The moral challenge facing organized philanthropy, now a growth industry in America, is how best to use surplus wealth in service to our civilization. Should the rich keep and invest it? Should we encourage them (through tax laws) to create new charities and foundations? Can we promote a religious revival that enjoins them to give it away? Or should we have our government confiscate and redistribute all inheritance? A timely economic expression of the last question might read something like this:

What if all the personal wealth that is expected to transfer from one generation to another over the next twenty-five years or so, now estimated to be around $10 trillion, rather than being passed from rich to rich, as will almost certainly occur, was instead given directly and immediately to the neediest?

"Great idea, get on with it," whispers the soul of my paternal grandmother, who sowed leftish seeds in the minds of her three grandchildren while their father was at work, and years later, on the coast of Scotland, introduced this child to Antonio Gramsci, the Italian anarcho-syndicalist imprisoned by Mussolini for economic heresy. I would have agreed with her then, and for many years hence. Now I'm not so sure. There may be a third and better way. How about democratic foundations?

But before exploring this new hybrid, arguing along the way with Gramsci and Gramma, let's examine the real economic consequences of suddenly transferring ten trillion dollars from the richest to the poorest sectors of society. It's an outrageous proposition, of course, but so is transferring the largest corpus of private wealth ever accumulated in human history to a relative handful of privileged children.

Stretch it out, it looks like $10,000,000,000,000. Laid end to end in one-dollar bills it will reach to the sun and back five times. And it will buy a lot. It's almost 1.5 times the GDP, twice the national debt, and about half the value of all land and financial assets in the country. You could run the federal government for seven years with that much money. If it were distributed evenly among the thirty-eight million people in the United States now existing below the poverty line, at a rate of about $400 billion a year, each would receive about $10,500 per year for the next twenty-five years. Then what?

Once the poor had new refrigerators, dental work, and a rec-room over the garage, would they be more secure than they had been before the windfall? Would their work be more fulfilling, their souls enriched? Would the social conditions that made them poor in the first place have disappeared? Would their children be better educated?

Redistributing surplus is not a new idea, incidentally, nor has it been proffered only by Marxists and radical grannies. Midway through World War II, Yankee Republican James Conant, former President of Harvard and overseer of the US nuclear weapons program, called for just such a confiscatory inheritance capture. Democratic meritocracy, he averred, demanded nothing less. Inherited wealth made ruling class children lazy and indolent. A threat of poverty would drive them to excellence, Conant believed, and democracy would thrive. Conant bolstered his argument with the works of a mathematical economist named Irving Fisher, who, as President of the American Economic Association in December of 1918, called upon all economists to support a gradual transfer of economic ownership from the top few percent to the rest of us.

Liquidating $10 trillion worth of real estate, securities or any other kind of capital would liquidate capitalists as a class. So it's meaningless to talk about the economic effects of such a transfer because it would mean turning society "upside down." My Gramma would say "right side up." But were she alive I'd have to ask her how far up it would lift the poor and for how long? And would it really create new and improved stewards of industry? Or would the poor, being numerically a so much larger class than the super rich, quickly spend their windfall on needed goods, and starve the economy of finance capital? Or, if instead they decided to invest, rather than spend, and became the new class of capitalists, would they be any more democratic or sensitive to workers, consumers, or their community than today's capitalist class? So why bother to exchange one class of capitalists with another, particularly when the experiment seems doomed to fail? Why not do something truly imaginative with surplus capital? Like use it to strengthen civil society.

Democratic Foundations

All this leads to the third way, a path between outright wealth confiscation and the re-enrichment of the already rich. As fate would have it, American ingenuity has already invented a pretty good engine for the third way, although as it exists today it is woefully inadequate to the task of solving the ever-widening problem of incomes and poverty. I refer, of course, to the philanthropic foundation.

A foundation endowment is a receptacle of wealth, intentionally withheld from the United States Treasury and the profligate mittens of the indolent rich. There are today over 50,000 private, community, operating, and corporate foundations in existence. Their total assets exceed $180 billion and they are growing faster than almost any other financial sector in the country. But it's only a beginning. They are still minuscule�they hold just over 1.8 percent of that $10 trillion sitting in the portfolios of soon-to-expire post-war boomers. Foundations are required by law to spend down only five percent of their assets every year, and a portion of that requirement can be charged to operating expenses and trustee remuneration. But if only ten percent of the proposed massive wealth transfer finds its way into foundation endowments, and financial markets remain strong for another decade or two, foundation assets will expand by a factor of nine before 2020 AD. Now that's real money.

The foundation is a financial institution with some interests beyond, though not neglectful of, prudent financial management. It is neither government nor industry, though it lives off one's tax breaks and the other's largesse. The right overseers of this captured wealth can actually do remarkable things with it, as they already demonstrated. Hookworm was eliminated from the South by foundation-funded scientists. Other foundations built public libraries, minority colleges, great museums; the civil rights movement was heavily financed with foundation philanthropy. This country has the most remarkable independent sector in the world, as de Tocqueville discovered more than 150 years ago. Much of it was seeded, and continues to be supported, by foundation philanthropy. Those, of course, are only the good deeds.

Some damage has been done by foundations�the enhancement of prison labor, the creation of the Heritage Foundation, and the social dislocation caused by the well-meaning Green Revolution, to name three. And billions have been squandered on over-endowed Ivy League alma maters, profit-motivated science, hospitals where the rich and famous go to die, overpriced art collections and architectural ego-spasms like the Getty. An overall assessment of twentieth century foundation philanthropy would probably give it C- at best.

But things could improve, helping to resolve income disparities and resulting social injustice. The money wasted has only been investment earnings. To the endowment, no harm has been done. Assets are intact and growing, and new foundations are being created at the rate of about 3,000 a year. At the same time foundation professionals are getting better and better at leveraging money. All that remains is for them to spend it right. Of course what "right" means is the subject of fierce debate among philanthropoids, which is good. "Right philanthropy," like "right living," needs to be re-evaluated, and not only by folks with lots of surplus wealth.

The End of Plutocracy?

It seems the only way to be certain that foundations become true and effective servants of civilization, and cease being stewards of plutocracy, is to democratize them. Add provisions to the tax laws that force private foundations to expand their universe of trustees beyond the family, friends, lawyers, and fiduciaries of millionaires. Bring community activists into the management of community foundations and invite some of the folks who might benefit from corporate philanthropy into the board room�for more than a catered lunch.

A handful of bold, though admittedly small foundations�Ashoka, New World, Tides, Flow Fund Circle, Threshold, Vanguard, Haymarket, to name a few�have found that boards made up of ordinary folk tend to be more street-wise and responsive to social or economic crises than traditional foundation boards, populated as they still are by comfortable elites, willing to wait twenty years or so for demonstrable results. Multi-racial and bi-gender as many mainstream boards may now be, they are still dominated by academic, political, scientific, social, and, God help us, economic elites. And it still adds up to plutocracy.

Democratic foundations would also be more likely to vote to increase giving above the five percent requirement during dire times or when markets were producing double-digit returns. And more of them might even vote to spend out the entire endowment of their foundation in, say, twenty-five years or so, as only a handful of private foundations have done over the past century (e.g., the Rosenwald Foundation).

The bottom line (back to realoekonomics) is that the contemporary structure of organized philanthropy makes a certain amount of sense. And here I mean moral as well as economic sense. In foundations the wealth accumulated by the capitalist class remains invested, albeit in land and securities, not necessarily in productive capacity. Still, rather than liquidate all that wealth, and along with it the potential for progressive philanthropy, would it not seem more sensible to encourage the formation of more foundations (with tax incentives), democratize them, and tax more income of the uncharitable rich, and transfer that, not stocks, bonds, and real estate, directly to the neediest?

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