Felix Salmon

Alan Mutter is a genuine expert on newspaper economics, which is one reason why his bizarre blog entry today on the economics of non-profit newspapers is so puzzling. This has to be one of the most innumerate things he’s ever written:

The math, as detailed below, shows that it would take $88 billion – or nearly a third of all the $307.7 billion donated to charity in 2008 – to fund the reporting still being done at America’s seriously straitened newspapers.

The good news is that he does indeed detail his math, making it easy to see where he goes wrong.

Rick Edmonds, the estimable media economics expert at the Poynter Institute, calculated that American newspapers are spending $4.4 billion today on news-gathering…

If you wanted to sustain the current level of newspaper coverage by replacing for-profit funding with non-profit dollars, the typical approach would be to raise an endowment that would be invested conservatively to produce an annual return of 5%. The investment income would be distributed each year to provide the operating budgets for non-profit news organizations.

The endowment necessary to provide $4.4 billion in annual newsroom funding would be $88 billion.

There are two huge errors here. The first is the way that Mutter confuses stocks with flows. The $308 billion donated to charity in 2008 is an annual figure; he should therefore compare it to the annual figure of $4.4 billion, rather than applying a multiplier of 20 to that $4.4 billion first in order to convert it from a flow to a stock.

But even the $4.4 billion figure is far too large, since a non-profit needs to cover only a newspaper’s losses, not its total newsgathering expenditures. After all, it’s not like anybody’s suggesting that newspapers stop carrying ads the minute they get bought by a non-profit.

What’s more, a non-profit which owns a newspaper can, in theory, fund those losses out of future profits, in the way that for-profit newspaper owners find hard. In a capitalist system designed for the efficient allocation of capital, it only makes sense to fund short-term losses if the long-term profits will more than make up for them. If the long-term return on investment is lower in newspapers than it is anywhere else in the economy, then you should invest your money somewhere else, rather than covering near-term losses.

A non-profit, on the other hand, is interested foremost in the perpetuation of the institution, rather than the maximization of profits. Of course, the more profitable the newspaper is, the longer it will be able to survive. But if the non-profit sees a path to a sustainable model of small-and-steady profits in the future, it just needs to get the newspaper there from here: it doesn’t need a massive endowment.

Newspapers, just like websites, are in the business of monetizing readers. Historically, they’ve done that by selling advertising; in the future, they’d be well advised to develop other revenue streams as well. Their total readership is generally higher than it’s ever been, thanks to the internet, even if their print readership is down. And their readers are often well-heeled and very loyal to the newspaper brand: that’s a relationship which should be worth a lot of money, somehow.

If you found an inventive, business-savvy, and optimistic non-profit, then, I think it could in theory run a newspaper with a pretty modest sum in the way of up-front costs. Of course, it might fail — but any newspaper might fail. Non-profits should be allowed to fail just like anybody else. Which is another reason why raising a full endowment up front is not only unnecessary, but is also arguably counterproductive.

So while the non-profit route is probably not going to happen very often, it’s certainly an intriguing one which can make quite a bit of financial sense. It’s not remotely the impossible money-pit painted by Mutter.

Update: David Cay Johnston weighs in, along similar lines.

David Roodman has an interesting post saying that calls for debt relief in Haiti are misguided. He’s put together this chart:

Roodman’s point here is that we should concentrate political capital where it does the most good — by trying to reduce tariffs to increase Haiti’s exports, and by reducing barriers to immigration from Haiti, to boost remittances. Concentrating on debt relief is a distraction: Haiti had most of its debt wiped out in 2009, and most of the rest is being paid Haiti’s behalf for the US. What remains is mainly debt to Taiwan and Venezuela, the country which sent the first planes of humanitarian aid to arrive in Port-au-Prince, and which is unlikely to push for timely repayment for the foreseeable future.

Or, to put it another way, efforts to enable Haiti to pay its modest foreign debt are sure to be much more effective than efforts to simply eradicate it. The main task facing the developed world right now is to rebuild Haiti and its institutions; if it ever reaches the point where it’s capable of paying its debts, we will have succeeded.

But mightn’t wiping out debts help on other fronts too? Tim Harford wonders whether “one should seize on a simple focal issue and then once you have people’s attention, broaden the scope of political pressure”. My feeling is that in this case, that doesn’t work very well, since Haiti’s creditors are not the same institutions which can help on other fronts.

In general, debt relief is useful only insofar as it’s a solution to a serious problem — and since debt-service costs aren’t a problem at all in Haiti right now, debt relief isn’t much of a solution to anything. And it’s certain that the fiscal cost of wiping out Haiti’s debt — the write-off which Haiti’s creditors would have to incur if they did so — would be much better spent in other forms of aid.

Being debt-free isn’t some halcyon state to which any successful nation aspires: even net creditor countries tend to have significant amounts of debt. Asking for Haiti’s debt to be wiped out has undertones of paternalism and even imperialism, and while I wouldn’t say that it was harmful, I do agree with Roodman that there are much more important things to concentrate on.

Update: Annie Lowrey responds to Roodman.

Between the Twitter campaigns and the telethons and the corporate donations and the record sums raised through text messages, you can be sure that an enormous amount of cash is going to end up being raised to help Haiti. This is not necessarily a good thing.

For one thing, right now there’s very little that can be done with the money. There are myriad bottlenecks and obstacles involved in getting help to the Haitians who need it, but lack of funds is not one of them. For the next few weeks, help will come largely from governments, who are also spending hundreds of millions of dollars and mobilizing thousands of soldiers to the cause. But with the UN alone seeking to raise $550 million, it’s going to be easy to say that all the money donated to date isn’t remotely enough.

The problem is that Haiti, if it wasn’t a failed state before the earthquake, is almost certainly a failed state now — and one of the lessons we’ve learned from trying to rebuild failed states elsewhere in the world is that throwing money at the issue is very likely to backfire.

What’s more, charities raising money for Haiti right now are going to have to earmark that money to be spent in Haiti and in Haiti only. For a Haiti-specific charity like Yele, that’s not an option. But as The Smoking Gun shows, Yele is not the soundest of charitable institutions: it has managed only one tax filing in its 12-year existence, and it has a suspicious habit of spending hundreds of thousands of dollars on paying either Wyclef Jean personally or paying companies where he’s a controlling shareholder, or paying his recording-studio expenses. If you want to be certain that your donation will be well spent, you might be a bit worried that, for instance, Yele is going to be receiving 20% of the proceeds of the telethon.

Meanwhile, none of the money from the telethon will go to the wholly admirable Medecins Sans Frontieres/Doctors Without Borders, which has already received enough money over the past three days to keep its Haiti mission running for the best part of the next decade. MSF is behaving as ethically as it can, and has determined that the vast majority of the spike in donations that it’s received in the past few days was intended to be spent in Haiti. It will therefore earmark that money for Haiti, and try to spend it there over the coming years, even as other missions, elsewhere in the world, are still in desperate need of resources. Do give money to MSF, then, but if you do, make sure that your donation is unrestricted. The charity will do its very best in Haiti either way, but by allowing your money to be spent anywhere, you will help people in dire need all over the world, not just in Haiti. Here’s the message on MSF’s website:

We are incredibly grateful for the generous support from our donors for the emergency in Haiti.

MSF has been working in Haiti for 19 years, most recently operating three emergency hospitals in Port-au-Prince, and is mobilizing a large emergency response to this disaster. Our immediate response in the first hours following the disaster in Haiti was only possible because of private unrestricted donations from around the world received before the earthquake struck. We are currently reinforcing our teams on the ground in order to respond to the immediate medical needs and to assess the humanitarian needs that MSF will be addressing in the months ahead.

We are now asking our donors to give unrestricted funding, or to our Emergency Relief Fund. These types of funds ensure that our medical teams can react to the Haiti emergency and humanitarian crises all over the world, particularly neglected crises that remain outside the media spotlight.

The last time there was a disaster on this scale was the Asian tsunami, five years ago. And for all its best efforts, the Red Cross has still only spent 83% of its $3.21 billion tsunami budget — which means that it has over half a billion dollars left to spend. Not to put too fine a point on it, but that’s money which could be spent in Haiti, if it weren’t for the fact that it was earmarked.

It’s human nature to want to believe that in the wake of a major disaster, we can all do our bit to help just by giving generously. And if there’s a silver lining to these tragedies at all, it’s that they significantly increase the total amount of money donated to important charities by individuals around the world. But if a charity is worth supporting, then it’s worth supporting with unrestricted funds. Because the last thing anybody wants to see in a couple of years’ time is an unseemly tussle over what happened to today’s Haiti donations, even as other international tragedies receive much less public attention.

Update: Saundra Schimmelpfennig has a great list of what to do and what not to do when you’re making donations in the wake of a disaster; it includes, of course, that donations should be unrestricted. And the Philanthrocapitalists suggest that you “match fund what you have given to Haiti with a gift to someone suffering just as much, but less dramatically, elsewhere in the world”.

Update 2: Sophie Delaunay of MSF USA responds in the comments. And in case this blog entry isn’t clear, let me be explicit: DO give lots and lots of money to MSF’s Emergency Relief Fund. Give now, because the tragedy in Haiti is in the news and because you want to do something to help; MSF is there and is helping and is a great cause. And then continue to give in the future, because there are many other equally tragic situations elsewhere in the world, where MSF is doing just as great a job, but there isn’t the same degree of media coverage and there’s much less money flowing in. Earmarking your funds for Haiti in particular is not helpful. But that’s no reason to give nothing at all.

Tim Ogden is on the warparth, blogging and tweeting and putting out press releases all trying to “kill the myth of overhead ratios”:

The month between Thanksgiving and Christmas is often known as giving season, not just for Christmas and Hannukah gifts but because many people make major donations to charity this time of year.

Given the global recession, it’s more important than ever to make those charitable dollars go further by putting them in the hands of charities that do the most good. For years, donors have been relying on one measure to evaluate charities—the overhead ratio.

I’m with Tim on the importance of looking at outputs rather than inputs — although of course that’s harder than just looking at a single unreliable metric.

But is it really true that donors in general have been relying to a great degree on overhead ratios? Allison Fine seems to think so. If it’s really the case that large number of philanthropists have been using overhead rates as a proxy for effectiveness, the world of corporate philanthropy clearly needs much more shaking up than I’d thought.

On an individual level, I think that people generally give to causes they believe in, or because of some personal connection to the non-profit in question: I can’t believe that overhead ratios play a huge role in the decision-making process, although once you’ve started supporting a certain charity, looking at a low overhead ratio can help you feel that much better about your decision.

But if you are one of the people for whom overhead ratios are very important, then go read Tim’s post. You’re part of the problem, providing incentives for charities to spend extra effort fudging their numbers, as opposed to actually doing good in the world. And you’re also contributing to the slightly poisonous idea that there’s something morally dubious about non-profit workers being paid for what they do. This Christmas, I’m even thinking of giving money straight to non-profit employees, rather than to the charity itself, as a way of saying thank-you for all the amazing (and extremely underpaid) work that they do.

Goldman Sachs has provided Reuters with a copy of the Goldman Sachs Foundation’s 2008 tax return. Why the NYT didn’t just put it online I have no idea, but in any case here it is, all 297 pages of it.

The bottom line is that the Goldman Sachs Foundation did very badly in 2008. Here’s the way it’s all summed up:

The fund started the year with $269 million in assets, and ended with $161 million. The amount it made in charitable disbursements was $22 million (that’s the last number on line 25 of the first page), which means that the charitable disbursements aside, the fund managed to drop by $85 million. That’s 32% of the amount it started the year with, and almost four times the amount of money it actually gave to charity.

The big losses are a capital loss of $15 million on the sale of assets, and a whopping $75 million unrealized loss on investments. And then, just for good measure, we find out on page 68 of the PDF that the foundation paid Goldman Sachs Asset Management $3,864,540 for “investment management”. Gee, thanks for the service, guys.

If the Goldman Sachs Foundation put all its money in cash, earning 0%, and wrote checks over the course of the year totalling $100 million, it would have done better than this. Instead, it managed to give away less than a quarter of that, to recipients like the Foundation for Teaching Economics ($333,333) and $2,550,000 to the Institute of International Education “to support the expansion and enhancement of the Goldman Sachs Global Leaders Program in building a strong platform for the Program’s 10th anniversary activities in 2010.”

The Goldman Sachs Foundation also spent $230,000 on various Davos-related donations, in the form of gifts to the Schwab Foundation for Social Entrepreneurship and the World Economic Forum itself.

Maybe that’s what Lloyd Blankfein had in mind when he talked about doing God’s work.

Geraldine Fabrikant gets her hands on the 2008 tax filing for the Goldman Sachs Foundation today, and it’s pretty astonishing stuff:

The latest tax filing for Goldman Sachs’s foundation is as thick as a phone book. The list of trades is more than 200 pages, single spaced. Goldman, it seems, invests like no other, even for its own charity.

“I have never seen anything like it,” said Verne O. Sedlacek, president of Commonfund, when shown the 2007 filing, which was nearly three inches thick. He has a good overview from the Commonfund, which manages more than $25 billion for universities, foundations and other not-for-profit groups.

What good does all this extreme trading do? Not very much, it would seem, according to Fabrikant’s numbers:

• Goldman has given $501 million to the Goldman Sachs Foundation since 1999
• The present size of the foundation is $404 million
• The foundation gave away $12.6 million in 2007 and $22 million in 2008.

Goldman doesn’t reveal the foundation’s investment returns, but clearly they’re negative: the amount of money in the foundation is lower than the amount donated to it, even after accounting for the sums it’s given away.

What’s more, Goldman seems to be giving away only the bare minimum of the foundation’s assets each year: just 5%, the level below which the foundation would lose its charitable status.

I’m going to take a wild guess here and say that the foundation’s counterparty, on its phone-book-sized list of trades for just one year, was always or nearly always Goldman Sachs*. And when Goldman Sachs trades with anybody, be it a client or the Goldman Sachs Foundation or anybody else, Goldman Sachs makes money.

Meanwhile, the foundation itself, as we’ve seen, has been losing money.

And who are the charitable recipients of the foundation’s funds? Entities like the Asia Society, on Park Avenue, which is a talking shop where Goldman bankers can schmooze important international clients. Or big universities like Johns Hopkins and Duke, which take charitable gifts and keep them in the market by adding them to their endowments and investing them rather than spending them.

All in all, the single biggest beneficiary of the Goldman Sachs Foundation would seem to be Goldman Sachs itself, while the amount of money which trickles down from it to genuinely needy charitable cases is minuscule. Goldman should turn its foundation into an arm’s-length institution, charged with giving money where it can do the most good, and allowed to give much more than 5% of its total assets if it sees the need to do so. Because right now the foundation looks mostly like an exercise in self-dealing.

Update: One other thing: why on earth couldn’t the NYT have either linked to the tax filing, or put it online? Most annoying.

*Update 2: Goldman phones to say that the vast majority of trades at the Goldman Sachs Foundation are not with Goldman Sachs.

Paul Steiger’s salary in 2006, his last full year as editor of the for-profit WSJ: $547,692

Paul Steiger’s salary in 2008, his first full year as editor of the non-profit ProPublica: $570,000

Update: ProPublica’s Dick Tofel points out that Steiger did get options when he worked for the WSJ, which brought his total compensation comfortably into seven figures. Steiger gets no bonus at ProPublica. Not that he really needs one, given that he’s earning almost $50,000 a month.

One of the Philanthrocapitalists (I believe it’s Michael Green, unless Matthew Bishop is prone to referring to himself in the third person) attempts a defense today of the $1 million salary being paid by the Gates Foundation to its new CEO, Jeff Raikes. It’s pretty weak stuff:

A cheap bad leader is much worse than a well-paid good one. Better pay could, with care, attract better leaders to the non-profit sector and enable valuable donations to be better used.

Well, yes, and a well-paid bad leader is much worse than a cheap good one. Is there any indication at all that increasing the pay of non-profit leaders increases their performance? I doubt it. (How well-run is MSF? How well does it pay its executives? Now, how about the Getty Foundation?) Unless and until such evidence emerges, this sort of thing rings hollow:

According to the sources quoted by the Chronicle, Raikes did not even want a salary (his predecessor and fellow Microsoft veteran Patti Stonesifer took no money) but the Foundation decided that paying the CEO was a point of principle.

Does Gates really think that Raikes will perform better now that he’s being paid a seven-figure salary? I very much doubt it. Instead, the salary just serves to underline Raikes’s position as a mere employee. As our blogger notes, the guy in charge is Gates, not Raikes, and the CEO position is clearly subservient to that of billg. If Raikes were working for free, he would surely feel more ownership of the Foundation than if all of his actions are bought and paid for.

What’s more, at a million bucks a year, Gates could have hired pretty much anybody he liked. If he wanted to demonstrate that the job would go to the best-qualified person, he could have found someone who was highly qualified, had a lot of leadership experience in the non-profit sector, and who wasn’t independently wealthy. Instead, he’s giving $1 million a year to a centimillionaire who doesn’t need the money and who joined Microsoft in 1981.

Why would he do that, beyond control issues? Bishop suggests that maybe he wanted to raise salaries all round — but it’s silly and anachronistic to assume that the CEO must always be the highest-paid person in any organization.

Bill Gates can and will, of course, pay anybody he likes however much money he likes. It’s his foundation. But let’s not turn his foibles into some kind of principled stand.

Lance Laifer is a good guy, with his heart in the right place and a history of raising millions of dollars for important causes. But I don’t think his latest idea is his best ever:

Hedge Funds vs. Malaria & Pneumonia is asking everyone in the hedge fund industry to wear blue jeans to work on November 2. The reason is simple. The two million children who die of pneumonia often turn blue when they get pneumonia. We believe that if everyone in the hedge fund industry wears blue jeans on World Pneumonia Day we will draw a massive amount of attention to the problem and encourage people all over the world to figure out how they can stop this massive killer of children. Surprisingly it is relatively cheap to diagnose and treat pneumonia (meds cost less than $0.50) and most pneumonia deaths can be prevented by vaccines, which are already on the market.

Wearing blue jeans to the office is an easy (and free) way to help change the world for the better.

Hedgies wearing blue jeans to the office because that’s the color that children turn when they die? On a scale from “ineffectual” to “downright offensive”, where would you put this one?

Pockets has a spectacularly good comment on my blog entry about the charitable status of private schools which would more than deserve elevation as an entry of its own were it not for the fact that (s)he has gone into even more detail here and here. The main insight is that the “top” schools tend to advertise themselves and compete on the basis of how well their pupils do in exams, what universities they get into, that kind of thing. And that they can boost those numbers substantially by giving scholarships and bursaries to super-smart poorer kids:

UK private schools are among the best schools on the planet, and I was lucky enough to attend one. Saying that they maximise profits isn’t saying that they’re manipulative or evil or bad (I wonder if this is what’s annoying people?). They’re staffed with many lovely, caring individuals (like lots of other profit-maximising companies!), and through scholarships/bursaries they offer a great trade to smart poor kids – we’ll give you an amazing education, if you allow us to charge other kids to sit next to you.

Given that the schools would do this even if they didn’t have charitable status, it’s not clear why we’re giving it to them. As Pockets writes:

If you wanted to convince me of a private school which is acting charitably, not profit-maximising, then you’d have to describe a system where pupils take the entrance exam – and then the low-scoring poor children are offered bursaries. That’s a school which is gambling on its ability to raise standards among disadvantaged kids. But no private school does that, and with excellent reason: the cost could be lower league table results for the school.

Matt Yglesias also makes a point about private schools which I should have made initially:

They’re certainly not charities. And as best one can tell, their main impact on the common weal is negative, drawing parents with resources and social capital out of the public school system and contributing to its neglect.

You’d have to believe that New York City’s public schools would be both better funded and free of this kind of nonsense if a larger portion of the city’s elite were sending their kids to them.

There’s an analogy here to the studies showing the beneficial effects of homeownership. The problem is that two effects get mixed up: on the one hand, people who own their own homes do tend to live better lives. But on the other hand, those are the kind of people who would probably live better lives anyway, and by moving away from rental neighborhoods they effectively ghettoize those left behind. Similarly with private schools, especially in areas where a high percentage of local kids gets educated privately (like where I grew up, in Dulwich): the local public schools can be very bad indeed, despite the huge number of rich and highly-educated parents in their catchment area. To put it in economist-speak, private schools inflict a negative externality on the quality of education in the neighboring state-run schools.

Incidentally, pace another comment in the original thread, Greenpeace is not a registered charity in the UK — at least the headline organization which most people think of when they think of Greenpeace, Greenpeace Ltd, is not a charity. Not everybody in the non-profit space is a charity, and there’s no particularly good reason why all private schools should be charities, either.

In the US, I’m still holding out hope that university endowments will be taxed unless they can demonstrate that they’re actually spending their money on the public good. Thanks to the philanthrocapitalism blog, I now discover that a similar move is now afoot in England, which has told two independent schools that they will lose their charitable status unless they start educating poorer kids as well as those of the rich. The whines from the head of the Independent Schools Council are not very moving:

Private schools were already providing a public benefit by educating children who would otherwise be in state schools paid for by taxpayers, he said…

Without private schools “the public would have to pay between £3bn and £4bn a year in extra taxes,” Lyscom said.

No one’s asking to abolish private schools, or even proposing that most of them lose their charitable status. They’re just asking that they do a bit more to earn it, which seems right to me. But as ever, there’s an endowment effect: it’s orders of magnitude harder to strip charitable status from an institution than it is to confer that status in the first place. So this is going to be a long, tough fight. But it’s one worth having.

Why is the Gates Foundation speculating in distressed UK equities? The foundation has received a lot of criticism for the way it invests, but put that to one side — it seems to me that charitable foundations in general should be pretty risk-averse, even when they have tens of billions of dollars. The Gates Foundation is praiseworthy in that it has a mandate to spend down its principal quite quickly. But as a result, its investment arm should be a boring place; it certainly shouldn’t be gravitating towards the riskiest parts of the capital structure of overleveraged retailers in overleveraged economies like the UK.

I suspect that the problem here is one of incentives, and that the people running the foundation’s money will get substantial bonuses if they take big risks which pay off. It’s time to find good fund managers who are dedicated to the stated aims of the Gates Foundation, and just pay them a flat salary (which can be quite large). Philanthropic foundations shouldn’t act like hedge funds, a few exceptions like TCI notwithstanding.