Over the last few years, I have noticed a rising angst in some left-leaning thinkers about the roles played by the largest private foundations in the U.S. It may seem odd that the same people who rail against the rich and powerful as being “selfish and “greedy” would now begin to do the same against those who have given away billions to fight disease and poverty around the world. So what are their arguments against “Big Charity” and do they have any merits?

Robert Reich, writing in the Boston Review a year ago, built his case on two major critiques. The first is lack of accountability:

… foundations have no electoral accountability. Don’t like what the Gates Foundation did with its $3.4 billion in 2011 grants ($9.3 million each day of the year), or what it has done with $25 billion in grants since its inception in 1994? Tough, there’s no way to vote out the Gateses. Referring to the Foundation’s considerable and influential education grants, critic Diane Ravitch has called Bill Gates the nation’s unelected school superintendent.

Moreover…foundations lack marketplace accountability. In the commercial marketplace, companies routinely face competition from rivals seeking to take away customers. Don’t like or want what a company produces? Then don’t buy it. If most consumers think this way, the company disappears. This is the accountability logic internal to the marketplace—meeting consumer demand. It does not always work this way, but the logic has some real force.

Foundations, in contrast, do not sell goods and face no marketplace competitors. Instead of selling anything, foundations give money to other organizations. Don’t like the grant-making decisions of a foundation? Tough, there’s nothing to buy, no investors to hold them accountable.

His second critique is the lack of transparency in the way Big Charity operates:

… foundations are often black boxes, stewarding and distributing private assets for public purposes, as defined by the donor. And that donor’s intent may hold sway forever. Foundations are legally designed to enshrine the donor’s wishes in perpetuity, allowing the donor’s dead hand to extend from the grave across generations. Foundations must be governed by a board of trustees, but the donor and her family or trusted associates can serve in this role; there is no requirement of community or public governance. The Gates Foundation’s board, for example, is Bill and Melinda Gates, William Gates Sr., and Warren Buffett. The governance arrangements of countless smaller family foundations look similar. Financial advisors who set up family foundations routinely market them as vehicles for the intergenerational sustenance of family values.

Reich, however, presents the arguments on behalf of the philanthropies as well. Noting the unique way in which they can move quickly and effectively, he goes on to make the case for foundations in a democratic state:

… when it comes to the ongoing work of experimentation, foundations have a structural advantage over market and state institutions: a longer time horizon. Once more, the lack of accountability may be a surprising advantage. Commercial entities in the marketplace do not have an incentive structure that systematically rewards high-risk, long time horizon experimentation; they need to show quarterly results. Similarly, public officials in a democracy do not have an incentive structure that rewards high-risk, long time horizon experimentation; they need to show results quickly from the expenditure of public dollars in order to get re-elected. In contrast, foundations are not subject to earnings reports, impatient investors or stockholders, or short-term election cycles.

Foundations, answerable only to the diverse preferences and ideas of their donors, with a protected endowment permitted to exist in perpetuity, may be uniquely situated to engage in the sort of high-risk, long-run policy innovation and experimentation that is healthy in a democratic society. Some foundations experiment in just this mode: seeking, as the Gates Foundation does, the development of medicines for poor people; seeking, as the Hewlett Foundation does, innovations to address climate change.

Though Reich’s is a nuanced position, ultimately he comes down against the current model of “plutocratic philanthropy,” for one reason above all: that they may be failing in what he sees as their core mission:

From the perspective of a foundation, successful philanthropic giving consists not in funding social innovations and then sustaining the most successful of them forever. Because the assets of even the largest foundations are dwarfed by the assets of the marketplace and of rich states, success consists in seeing proven policy innovations “scaled up” by private firms or by the state.

The greatest accomplishments of American foundations fit in this model. The creation of public libraries, the funding behind the Green Revolution, the development of Pell Grants in higher education, the coordination of a national 9-1-1 emergency response system, the emergence of micro-lending—all are the result of foundation-funded innovations brought to scale by either firms or the state. Carnegie successfully stimulated interest in public libraries, which over time generated demands for state and local government funding. The Ford Foundation helped to fund Nobel Laureate Muhammad Yunus’s Grameen Bank, the success of which brought many commercial banks into the micro-lending industry.

In short, unlike business and the state, foundations can “go long.” They can be the seed capital behind innovation in effective social policy in a democratic society. This, I believe, is the stronger argument on behalf of foundations.

Reich is critical but hedges his position by saying the jury is still out on the overall impact of Big Charity. Other writers, like Joanne Barkan, writing in Dissent, don’t hold back and take an even stronger stance against Big Charity:

Big philanthropy is overdue for reform. The goal should be to reduce its leverage in civil society and public policymaking while increasing government revenue. Some possible changes seem obvious: don’t allow administrative expenses to count toward the 5 percent minimum payout, increase the excise tax on net investment income, eliminate the tax exemption for foundations with assets over a certain size, and replace the charity tax deduction with a tax credit available to everyone (for example, all donors could subtract 15 percent of the total value of their charitable contributions from their tax bills). In addition, strict IRS oversight of big philanthropy—especially all the “educating” that looks so much like lobbying and campaigning—is crucial.

Another reform would require private foundations to “spend down” their endowments over a designated number of years. They would no longer exist in perpetuity. This idea has some promise of success: the living donors of several mega-foundations, including Bill and Melinda Gates, have already decided to spend down and are recruiting others to do the same.

I find this attack on philanthropies disappointing. In most of these pieces, the writers struggle to show any real negative outcome from the activities of these large foundations. Barkin lays out a series of critiques of various educational activities funded by the Gates Foundation, but her case seems ideological and driven by a disagreement over agenda, rather than a substantive critique. Never does she lay out any actual harm done to students or schools by the work of the philanthropies she attacks. That’s not to say she may not have a point in criticizing their methods or aims. It is to say that if one is going to attack institutions that have done an overwhelming amount of good globally, one should do it with more than just disagreements about what the foundations should consider important. In other words, had Gates used the same methods to advance ideas that Barkan supports, would her conclusions be equally damning?

That said, there is one point where I agree completely with Barkan and it’s her position that philanthropies should not be tax-exempt, since there is no reason for poor and middle-class tax-payers to be subsidizing the social projects of the mega-rich:

In a free society, the super-rich can spend their money in any legal way they want, including endowing huge organizations to try out pet theories and promote personal projects. But those organizations shouldn’t be tax exempt. The super-rich don’t need billions of dollars in tax relief annually to exert their will in the public sphere. They can, and most will, engage in the same activities without the government handout. Although redistributing power more fairly throughout society will require campaign finance reform and rigorous progressive taxation, there’s no reason to continue to subsidize big philanthropy.

In the end, while I disagree with this emerging wave of critique, I do think Reich and Barkan bring up a real issue: as government deficits cut discretionary spending, which is, as Barkan points out, where change is funded, this decrease in public funding gives a proportionally larger influence to private money in effecting social change. This relative increase in power should be scrutinized carefully and shaped by those people and institutions Big Charity impacts, and that may have already started in places like Gates and Rockefeller. But accepting the need for some reform is a long way from concluding that Big Charity is a negative force that needs to be reigned in for the good of democracy.

Read more:

http://www.bostonreview.net/forum/foundations-philanthropy-democracy

Plutocrats at Work: How Big Philanthropy Undermines Democracy

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Posted by Carlos Alvarenga

Carlos Alvarenga is the Executive Director of World 50 ThinkLabs and an Adjunct Professor at the University of Maryland's Smith School of Business.

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