Felix Salmon

Adventures with the new plutocracy, wealth-beta edition

Felix Salmon
Dec 19, 2011 16:53 UTC

Robert Frank — the WSJ writer, not the Cornell economist — had a fascinating column about what he calls “wealth beta” this weekend. If you’re a member of the 1%, it turns out, you don’t just have a lot of money; you’re also likely to be seeing a huge amount of volatility in your wealth and your income. And this volatility has been measured according to the familiar scale where the broad stock market has a beta of 1:

The new rich have become the high-betas of our economy. With their dependence on financial markets, their leverage and their hyperspending, the top 1% have income swings that now are more than twice as high as those of the rest of the population.

A study by Jonathan A. Parker and Annette Vissing-Jorgensen of Northwestern University found that the beta of the top 1% nearly quadrupled between 1982 and 2007 to 2.39. The top 0.01% had a beta of 3.96, making even the riskiest tech stocks look safe by comparison. Economists and wealth managers say the betas of the rich have likely soared even higher in recent months as markets gyrated sharply.

Frank’s column is based pretty unquestioningly on the idea that this is a bad thing, and he quotes a few wealth-management executives talking about how very rich people can stay rich for decades, and avoid losing all their money.

But my feeling is that high-beta wealth is something to be celebrated — it’s one of the few silver linings to the current rise in inequality. People might become stupendously wealthy, but we’re not really creating a new class of dynasts here. Instead, the money comes, and then, almost as fast as it came, it goes.

One reason is just that the idea of preserving wealth in one’s own family for many generations to come has rather gone out of fashion. If you inherit a fortune which has been in your family for hundreds of years, then you do generally feel a responsibility for maintaining it and passing it on to future generations. But families are smaller now than they used to be, and self-made billionaires don’t necessarily consider multi-generational wealth preservation as a particularly top priority. Indeed, it’s more common to see billionaires swing the other way: Warren Buffett, for instance, likes to say that he wants to leave his children “enough money so that they would feel they could do anything, but not so much that they could do nothing”.

And some billionaires, of course, are childless, which means they can and should do exactly what they want with their money. They’re basically forced to give it away to charity, since it’s pretty much impossible to spend that kind of money.

The fact is that if you’re hugely wealthy, you’ll almost certainly live very well for the rest of your life no matter how much of your money you risk and lose. Short of going to jail, the rich very rarely find themselves completely impoverished. And in any case, self-made plutocrats tend to have extremely healthy egos: they’re confident that if they lose everything, they’d be able to pick themselves up by their bootstraps and do it all over again.

Wealth, at these stratospheric levels, is a way of measuring who’s winning the game; if it’s not rising, you’re not winning. And of course the things that Frank prescribes — like taking on less debt and diversifying your holdings — tend to go directly against the very strategies which created all that wealth in the first place.

We live in a world where millions of people are pursuing dreams and careers which have some small chance of being hugely successful. The number of people who have a chance of achieving such success has never been greater — and when it arrives, that success is increasingly lucrative for those who get there. That’s the game; its winners change from year to year and decade to decade. But the glory goes only to the person who makes the money, not to anybody who inherits it — unless they, too, display a similar knack.

So let’s not encourage the uber-wealthy to squirrel away their money and keep it in their families. It’s a good thing that today’s wealth has high velocity and that if it doesn’t get lost in the marketplace it’s more likely than ever to end up somewhere philanthropic. Even if that frustrates executives at private banks and wealth management companies.


Wouldn’t we expect the income of the top 1% to be extremely volatile because at higher income levels recognizing income is to some degree a voluntary act?

Many mechanisms for creating great wealth rely on creating assets of value. As such, there is no income realized until one chooses to do so.

Those pre-IPO Facebook shares don’t generate any income until they are actually sold.

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How Alice Walton has improved America

Felix Salmon
Dec 13, 2011 16:26 UTC

Jeffrey Goldberg is on something of an anti-Walmart campaign — and there’s nothing particularly wrong with that. There’s a lot of things to dislike about Walmart, including the fact, as Goldberg notes in his latest Bloomberg View column, that its stores don’t have windows. But having decided that he doesn’t like Walmart, Goldberg is attacking the company and its founding family on grounds which don’t stand up to scrutiny.

For instance, take this seemingly damning statistic from Goldberg’s column:

In 2007, according to the labor economist Sylvia Allegretto, the six Walton family members on the Forbes 400 had a net worth equal to the bottom 30 percent of all Americans. The Waltons are now collectively worth about $93 billion, according to Forbes.

This sounds outrageous, until you stop for a second and take note of the fact that Jeffrey Goldberg, individually, has a net worth greater than the bottom 25% of all Americans.

According to the latest data we have, 24.8% of American households had zero or negative net worth — add them all together, and you get zero. Jeffrey Goldberg’s net worth, it’s safe to say, is greater than zero. And while it’s definitely a bad thing that one in four Americans have no net worth at all, I don’t think you can really blame Walmart for that. Indeed, Walmart saves money for poor Americans — while it might not be a great employer, there are many more poor Americans than there are poor Walmart employees. From a financial perspective, Walmart has been a decidedly positive force in terms of bringing down the cost of living for those on extremely limited budgets.

Goldberg’s thoughts, on the other hand, are in a higher place. The main subject of his column is the new Crystal Bridges Museum of American Art, in Bentonville — a museum which Goldberg (or at least his headline writer) considers “a moral blight”.

What makes Goldberg say that? Well, while the museum itself is beautiful, he says, and contains much beautiful art, the “American landscape has been systematically disfigured by thousands of hangar-sized warehouses bearing the Wal-Mart name”.

This might be true — although to be honest I can’t recall ever seeing a Walmart erected anywhere particularly beautiful; they tend to pop up, in my experience, in vast and dreary expanses of exurbia. But even if Walmart is a beauty-destroying monster, that hardly makes Crystal Bridges equally monstrous.

Warming to his theme, Goldberg notes that the messages of Norman Rockwell’s “Rosie the Riveter” and Jacob Lawrence’s “Ambulance Call” stands in contrast to, respectively, the way that Walmart treats its female employees, and the way in which it’s denying many of them healthcare coverage.

Does Goldberg celebrate the fact that these messages are being displayed for perpetuity in the town where Walmart has its headquarters, and might somehow serve to remind Walmart’s executives of the broader American context in which they’re making their decisions? He does not. Instead, he thinks that this art does not deserve to be in Bentonville at all:

I’m not begrudging Alice Walton her inherited wealth. What I am begrudging are her priorities. Walton has the influence to help Wal-Mart workers, especially women, earn more money and gain access to affordable health care.

But her response so far to the needs of the people whose sweat pays for her paintings is a simple one: Let them eat art.

Talk about looking a gift horse in the mouth. Firstly, it’s not clear that Alice Walton does have a lot of influence within Walmart’s senior managerial ranks. Could Walton really help Wal-Mart’s workers earn more money and get better healthcare? Maybe she could; I’m not convinced. But here’s the thing: in what way does building a beautiful museum prevent her from doing just that? The only way, it seems to me, is if we’re in some kind of a zero-sum game, here, where the alternative to building the museum would be for Walton to take the money she would otherwise have spent on Crystal Bridges, and give it directly to Walmart workers.

Except, Goldberg says quite explicitly that he doesn’t begrudge Walton her wealth. Does he want her to give it away or not?

Let’s say that Walton has spent a total of $1 billion on this museum. According to its latest annual report, Walmart has 2.1 million “associates”: if you shared $1 billion between them, that would be an investment of $476 apiece in giving them more money and better healthcare on an ongoing basis. Even if you could somehow manage to use 10% of that value every year on a sustainable basis, that’s less than a buck a week.

Walmart is a public company, now — it’s owned by hundreds of thousands of individual and institutional shareholders. (Goldberg himself is probably a beneficial shareholder somehow, through a pension plan or insurance policy somewhere.) Walmart has been good to Alice Walton, and she’s giving back to Bentonville and to America by building a fine museum in a part of the country which is relatively starved for cultural goodness. Her impulses and her museum are admirable, whatever you think of Walmart.

When the East Coast liberal elite, in the form of Jeffrey Goldberg, sneers at Walton’s generosity and calls her museum a moral blight, that only serves to make us seem even more elitist and out of touch. It’s pretty clear that Goldberg would have preferred Asher Durand’s “Kindred Spirits” to have remained in New York, rather than being moved to Bentonville — maybe we have finer aesthetic sensibilities up here, and therefore the painting would be better housed in the Stephen A. Schwarzman Building on the corner of Fifth Avenue and 42nd Street. I’m sure that Stephen A. Schwarzman, for one, would like that.

But Arkansas is America too. And it’s fantastic that a wide range of exciting American art — including the likes of Jenny Holzer and Kara Walker — is being displayed in the heart of Red State America. Well done to Alice Walton for making that happen. Arkansas is a better place, now, thanks to Crystal Bridges, and Walton deserves our thanks. Not brickbats.


I noticed Mr. Goldberg wrote another article today on Alice Walton. I sent him the following after the first article.

I read your article about Alice Walton and the new Crystal Bridges Art Museum and have to say your research is either lacking or you just have a problem with the Walton family and Wal-Mart. It is easy to jump on the bandwagon that paints the Walton’s and Wal-Mart as an evil empire, rather than look at the many good deeds the family, Wal-Mart and their foundation does for the general public. I realize this is just an opinion piece and you can simply write your view, but I believe it is irresponsible to continue to fuel the flames against this family and the company. Actually, if you were any sort of real journalist, you would actually write something that doesn’t cater to popular opinion. For full disclosure, I grew up in Arkansas and lived there until I was 26. I worked for the Walton family bank for 7 years and knew many of them personally. It was the best job anyone in my family ever had and had my husband not been transferred to Los Angeles, I would still be working for them. I now live in Chicago and work for one of the largest banks in the country.

As to some of your statements, I take offence that you believe it is a moral tragedy to build a billion dollar art museum in a recession. First, do you not think it created much needed jobs? I can tell you that it did, especially for those in construction, a business sector that has suffered considerably during the recession. Maybe you should reach out to some of those contractors who were hired to build Crystal Bridges and get their take on it. Second, were other billionaires on financial lockdown? Given my position, I first hand witnessed the upper 1% continue to build extravagant homes and spend significant sums on art (it was a buyer’s market, after all), but for their own personal collection. I also witnessed them tightening their belts by way of cutting back on their philanthropic giving. Ask anyone who works for a non-profit and they will tell you their major donors were no longer major. I commend Alice and the foundation for giving tremendous amounts of money throughout the recession. While the Walton Family Foundation did give $1.2B to build the museum in 2010 (which created both short term and long term jobs), they gave another $276M to education and conservation programs. With the museum built, the vast majority of those grants will go back to education and conservation like it did in 2009 when the foundation gave $327M to such programs. I do believe only the Gates foundation can claim more.

As far as the building itself, yes, it is indeed a beautiful building and you are right in stating it is the handsomest building ever built by Wal-Mart money. That is because Wal-Mart has never felt the need to build some grandiose monstrosity to flaunt their success, as so many of these enormous corporations feel the need to do. They don’t waste revenues on such extravagances; their buildings are for function, which should make shareholders happy. When companies build such lavish buildings, they are shouting, “Look at us! We are so successful and powerful, we just had to show you by this outlandish display of wealth!” Quite simply, it is nothing more than textbook megalomania. They could have contributed that money to charity.

It is also funny you take a jab at Wal-Mart for selling foreign goods. Did I miss the memo that Target only sells American goods? Or Amazon? Or any other major department store, for that matter? Also, working for Bloomberg, you should know that foreign trade is extremely important to the American economy and without it, the cost of goods would be exorbitant (think of all those foreign manufactures for GE and Apple). It is unfair and quite frankly, irresponsible, to make such a statement. You only fuel the flames of a deeply divided political state that at this point in time, needs more compromise than agitation. Your comments suggest that it is even a possibility to sell only domestic goods, which you well know is impossible.

When you speak of values and the paintings that are the antithesis of the Wal-Mart spirit, I would like to share with you a bit of my own story and suggest you reconsider what you believe to be values. As I said, I grew up in Arkansas. My mother was a single mother who worked for a small diner that did NOT have to pay the state required minimum wage because of the “tip exemption”. At that time, between 1973 and 1995, minimum wage for the state went from $1.20/hour to a whopping $4.25/hour – and my mother made less. Now, if you are working at Morton’s or a high end restaurant, you can make a decent living off of tips. However, if you’re working at a small town diner that serves a 60 cent hamburger, tips don’t amount to much. If my mother received a 50 cent tip, that was high; a $1.00 was almost unheard of. It was not enough money to live on and we lived with my grandmother for 8 years out of necessity. Also, the restaurant did not have to provide health insurance and my mother made just enough to not qualify for Medicaid; all medical expenses were paid for in cash. Needless to say, we were on a very tight budget. So to us, Wal-Mart was the greatest place ever built. We could buy clothing and home goods for a fraction of the cost and a loaf of bread for $.85, instead of $1.10 at the local “mom & pop” store. Which as a side note, the owner of the “mom & pop” in town was the only man who could afford a Cadillac, send his children to the University, and actually take a real vacation (not camping 2 hours from home). To this day, I don’t have a lot of sympathy for the mom & pop retailers of the world. Wal-Mart has done more for the lower 50% of this country than most any person, company or government entity, and a lot of us owe our sheer survival to them. Where my mother could save her tips, they went toward my college education. Literally, nickels, dimes and quarters paid for my education and I went to the cheapest school in the state. After graduation, I was hired to work for the Walton family bank and I made more in one week than my mother made in a month. Wal-Mart’s values was to always to provide the lowest cost and everything about their business model is driven by this mission. Having the lowest cost items means that you support the poorest families, allowing them to stretch their dollars farther. I, for one, am a fan of Wal-Mart’s values.

On your comments about the paintings in the museum and the seeming contrast between the work and the family values, I ask you this: Since when did an art museum have to hold the values and beliefs as the artists exhibited? By that standard, you should walk around the Guggenheim and ask that they take down at least half of all of the works. The Guggenheim fortune was built with old inherited wealth created by gold mining, which exploited workers and their environment, all for their own financial success. In fact, I believe most artists would have related more to Sam Walton with his creativity and vision, as well as his desire to help the poor (including starving artists). I’m beginning to think your issue might be that the museum was built in lowly Arkansas, built by a man of little to no means.

On your point about the inequality of women, I certainly do agree there is a disparity in pay between men and women. But to be fair, that is a national problem and almost every corporation in this country is guilty of it. Even this well regarded bank that employees me discriminates against females in both pay and upper management. It is not fair to only call out Wal-Mart alone on this. This company also does not offer coverage to part time employees, as great majority of companies do not.

My final point is in regard to your statement about how Wal-Mart made its money. Wal-Mart was so successful, not because it undercut its employees as you suggest, but by streamlining distribution, creating better technology and simply out-maneuvering the competition. Wal-Mart, particularly Sam Walton, revolutionized business as we know it. Wal-Mart paying employees’ minimum wage is what all companies pay their non-skilled labor. But when Sam and the family managed Wal-Mart, those employees also received stock options. My uncle worked for Wal-Mart for 25 years as a truck driver. At retirement, he received over $350,000 from options – 10 times what he had personally saved for retirement. There are many others who benefited from options as well: secretaries, shelf stockers, and cashiers received significant sums from options, well more than what my uncle received (there was a very memorable stocker that retired with $1mm). There were also those that took what little savings they had and bought additional stock with it, with many of them having 10’s of millions in Wal-Mart stock by the time they retired. Everyone in the company wanted to keep costs down, regardless of what they were, because they had so much to gain on the future success.

So, the next time you want to write an opinion piece, you should consider choosing a topic that might actually make people think and consider that there are multiple sides to every story. As a few suggestions, you can look within your own piece.

1) National pay inequality between men and women, and the fact that women stopped gaining ground in high level executive positions and government in 2006.
2) Large companies sitting on trillions of dollars that could be deployed for goods, buildings and jobs, but are not.
3) Wealthy families that contribute little to none to charity (a shame list would be great and a mile long), yet spend their dollars lobbying for regulations that would benefit them to the great expense of others.
4) Corporate mismanagement and fiscal irresponsibility.
5) The long term affect of low minimum wages and the exemptions.
6) Health care for people who do not qualify for Medicaid.

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How to buy political access, charitable-donation edition

Felix Salmon
Dec 11, 2011 00:13 UTC

Eric Lichtblau has a depressing, must-read story today detailing how strong government regulation of the for-profit eduction sector was diluted into toothlessness by effective lobbying. Lobbyists, of course, trade on their access to politicians. And one way that they obtain that access surprised me — although it clearly didn’t surprise Lichtblau, who dropped it into his story in a subordinate clause with nary a raised eyebrow. Here it is with my emphasis:

Senator Tom Harkin, the Iowa Democrat who has led Congressional hearings into the colleges, got into a heated exchange with Mr. Stein, the Education Corporation investor.

The senator said that during a hallway conversation after lunch in the Senate dining room, Mr. Stein promised to “make life rough for me” if Mr. Harkin kept up his attacks.

“I took it as a threat — it was one of the most blatant comments ever made to me in my years in the Senate,” Mr. Harkin said.

Mr. Stein, a frequent Democratic donor who had bought the lunch with the senator at a charity auction, would not discuss the details of the conversation. But he said Mr. Harkin’s account was “totally incorrect”.

I’m sure that nothing illegal happened here, but it seems ethically well over the line to me. For one thing, Harkin is rich even by Senate standards: with an eight-figure net worth, he’s the 17th-richest member of the chamber. If he wants to support a certain charity, he’s more than capable of writing a check, rather than selling his own availability to any lobbyist who wants to bend his ear for an hour.

(Technically, Avy Stein is a private-equity investor who owns a network of schools called Education Corporation of America; he’s not a registered lobbyist. But that, of course, makes no difference.)

My point is that it would be obviously unethical and possibly illegal for Harkin to simply sell his lunch hours to anybody willing to pay his price. But isn’t that effectively what he’s doing here? Yes, the money went to charity rather than directly to Harkin. But the point is that Harkin got something he values greatly in return for his time, and it shouldn’t really matter if a politician is paid in cash or in kind.

According to Alex Knott, lobbyists — among whom Stein isn’t even included — made six donations in Harkin’s honor in 2010, adding up to a total of $218,000.

I don’t know how much Harkin and his wife donate to charity each year, but it’s surely more than nothing. And every time they donate a dollar to charity, they’re making the clearest possible statement that they would rather that charity have that dollar than hold on to it themselves. As a result, if you donate money to one of Harkin’s favorite charities, you can consider that your donation has roughly as much value to him as if you’d given the money to him directly.

Even if you apply a generous discount rate and assume that Harkin would personally prefer cash to a charitable donation in his name, the donation is still worth something to him. He might prefer $10,000 in cash to a $10,000 donation on his behalf, for instance, but he wouldn’t prefer $1,000 in cash to a $10,000 donation to a favored charity. And so you can consider that a $10,000 donation is worth at least $1,000 to Harkin.

Which raises the question: if you wouldn’t be allowed to give $1,000 to Harkin personally, how is it OK to tie a $10,000 donation to some quid pro quo with him? (I have no idea how much Stein paid for his lunch, but I assume it was a substantial amount.)

This is an ethical issue I’ve faced myself. Every so often I’m invited to give a talk somewhere, with a fee attached, and I’d happily give the talk even if there wasn’t a fee. If I ask them to donate the fee to charity, does that eradicate the kind of conflict that would be seen if I accepted a check? I don’t think it does, entirely. On the other hand, if I give the talk and I don’t ask them to donate the fee to charity, I feel as though I’ve missed an opportunity to support a great organization.

Normally I say that I won’t accept a fee, but that I invite them to donate the sum to Doctors Without Borders; they don’t have to tell me whether they did or not. It’s a not-entirely-satisfactory compromise. But then again, I’m just a pundit. For US Senators, the bar should be set high. And if you wouldn’t sell your availability for cash, you shouldn’t do it for a favored charity, either.


Do you think Senator Harkin really wanted to have a lunch like this? He may have hoped it would be an interested citizen or fervent supporter. He probably has things he would prefer more on his lunch break than getting surprised by someone who is battling against a major reform effort of his…

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The problematic charitable-donation tax deduction

Felix Salmon
Nov 28, 2011 02:11 UTC

David Kocieniewski has a long article about Ronald Lauder as sophisticated consumer of tax-avoidance advice, who has managed to become worth somewhere north of $3 billion even as he’s given away hundreds of millions of dollars to charitable causes. (In 1988 he was worth less than $250 million; he inherited a lot of money from his mother in 2004, but today his stake in Estee Lauder constitutes only about one fifth of his net worth.)

Kocieniewski’s article raises a salient question: should the tax deduction for charitable contributions be abolished, capped, or otherwise profoundly reworked? President Obama’s jobs bill includes an idea he’s been unsuccessfully pushing ever since he became president: that the deduction for charitable giving be capped at 28%, even if your top marginal tax rate is 35%. According to a recent paper from the Center on Philanthropy at Indiana University, this modest tweak to the tax code would produce about $20 billion per year for the public fisc, while reducing total charitable giving by about $2 billion per year. That seems like a great idea to me, whether or not the government uses some of the proceeds to support the worthy charities which lose out.

Among those worthy charities, however, I would not include the Neue Galerie. It seems that Lauder has not actually donated his $135 million portrait of Adele Bloch-Bauer to the gallery; if and when he does, however, he’ll be able to deduct the full amount from his taxes at the top marginal rate of 35%, and thereby reduce his tax bill by more than $47 million. (If he can persuade the IRS that the painting has risen in value since he bought it, the deduction would be worth more still.)

Put another way, the government will spend $47 million so that Ronald Lauder can transfer a painting from his own ownership to that of a museum he controls. The painting doesn’t even need to be moved into the museum: it’s there already, and has been there since the day the museum opened. As far as the public and the art world are concerned, nothing will have changed — but as far as Lauder is concerned, he has a “reduce your tax bill by $47 million any time you need to” card just sitting in his back pocket.

There is very little public policy served by giving Lauder such a card. At the margin, does it make him more likely to open up a lovely museum of early 20th Century German and Austrian art in a Fifth Avenue mansion? Possibly. But the connection is tenuous enough that it’s hard to have any conviction in. And two things are undeniable: no one but Ronald Lauder will ever donate a $100 million painting to the Neue Galerie; and Ronald Lauder will never donate his portrait of Adele Bloch-Bauer to anybody else. No matter what happens to the tax code.

What we have right now is a situation where non-profit organizations, especially cultural ones like art galleries and museums, get very little direct government support — and when they do get direct government support, the Republican party in particular loves to rail against such expenditure as being fiscally irresponsible. On the other hand, private museums like the Neue Gallerie are the annual beneficiary of millions of dollars in federal tax expenditures which no one ever seems to question.

There are however hints that the tax-deduction sacred cow might finally be showing the first signs of weakness. Exhibit A: a curious column by Stephen Carter, in Bloomberg View, rattling off the parade of horribles that might happen if the deduction is eliminated.

Carter talks about — without citing or linking to any examples of — “the rising mania among politicians on both sides of the aisle to adopt a policy long popular within academic circles — either eliminating or severely restricting the charitable deduction, at least in the upper-income brackets”. Without any citations or links, it’s hard to know what he’s talking about, but I assume he’s not talking about the Obama proposal: reducing a deduction from 35% to 28% is not my idea of “severely restricting” anything, and if he was talking about an on-the-table presidential policy proposal, I’m sure his editors would have forced him to come out and say so.

In any case, color me enthusiastic about this idea, if indeed there is a “rising mania” for it. There are lots of public policy reasons why the federal government should encourage charitable giving — but I can’t think of any good reasons why that encouragement should be targeted especially at higher-income taxpayers. Generalizing wildly, the poor give to churches and the needy; the rich are much more likely to give to museums or concert halls or their own bespoke charitable trusts.

Carter is absolutely right that the funds donated to charity each year go to a very different set of places than the funds which are spent by the federal government, despite the fact that both are designed “to promote the general welfare”. In that sense, government can never replace charity.

But of course people wouldn’t stop giving to charity if the tax deduction went away — indeed, 70% of Americans don’t itemize their taxes at all. And there will still be plenty of millionaires and billionaires who want to save lives and/or put their names on hospital wings, or support their beloved local opera house, or help keep Central Park beautiful. The only important numbers here are the deltas: if the tax deduction went away, how much would charitable giving go down? And which charities would be hardest hit?

It’s hard to answer the first question with any specificity. But the second is easier to answer. Take a look at the $360,000 salary for the director of the Neue Galerie — or, for that matter, the $1.5 million paid to the general manager of the Metropolitan Opera, or the other seven-figure salaries paid at non-profit hospitals, universities, and foundations. There’s a rich-people money-go-round here: Jeff Raikes of the Gates Foundation doesn’t need his million-dollar salary, but the foundation is paying it anyway, as a matter of principle, presumably to encourage other foundations to start paying similar sums. These 1% salaries aren’t being paid out of small-dollar donations from the masses; they’re being paid out of large-dollar donations from other members of the 1%. And there’s no good reason for the US tax code to encourage such things.

Richard Thaler has a smart take on all this:

Having decided that charitable giving is a worthy cause, the government subsidizes charitable gifts from certain households, and for those chosen to be part of the plan, every dollar donated to a charity is increased by a specified percentage. To qualify, taxpayers must have a substantial home mortgage; the subsidy rate increases with taxable income. Low-income taxpayers receive no subsidy, but donations from qualified high-income taxpayers are subsidized by as much as 40 percent — or more…

The tax subsidy rate should be the same for everyone. This means that rather than being a deduction from income, the subsidy should take the form of a tax credit, so that if you contribute $1,000 and the subsidy rate is 15 percent, your taxes would be reduced by $150. (Ideally this credit should be “refundable,” so it is payable even if your tax bill is zero or negative.)

Carter’s response to Thaler is to say that it’s “a solution that would, of course, ‘cost’ the government more” than it’s spending right now in tax expenditures on the charitable deduction. But again, he doesn’t explain why this should be the case; it’s certainly not self-evident. A universal, refundable 15% tax credit would be a lot more democratic than the current deduction, and allow all Americans to take advantage of it, rather than only the minority who itemize their taxes. And if it did indeed end up costing more than the current system, with its deductions of 35% or more, that would only go to prove how badly skewed towards the rich the current system is.

We’re getting nowhere with respect to deep reform of the tax code, but it’s back on the table, as it is during every presidential election campaign. If we’re serious about it, then we should start taking an ax not only to the mortgage-interest deduction but also to the charitable-donation deduction. Because every time I see reports of a family charitable trust which carefully makes only the minimum outlays each year, I wonder just how charitable a lot of these donations are.

And of course Bloomberg View has a very large dog in this fight: it’s based in the headquarters of the Bloomberg Foundation offices on 78th Street, which are by some margin the most lavish offices I’ve ever seen in my life. Mike Bloomberg has every right to spend as much money as he likes on his foundation. But there’s absolutely no reason why the rest of us should subsidize those expenditures.


PLEASE VISIT http://donationmoneyfreetocharity.weebly .com

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Media buyer of the day, Gates Foundation edition

Felix Salmon
Nov 18, 2011 22:52 UTC

I’ve been thinking a lot of late about brands and media — as have people like Noah Brier. If you want to build your brand online, the best way of doing so is not to rent media, but rather to own it. To use Noah’s distinction, you want a sustained product, rather than a temporary campaign. Here’s Noah:

How does this look? On the extreme end it’s BabyCenter, RedBull.com or AMEX OPEN Forum, those brands are so far out ahead of everyone else from a publishing standpoint it’s just amazing. And look at the value they’ve created for themselves: Their sites are big enough that other brands want to advertise on them to reach the audience they’ve amassed. Not necessarily the most important thing for the brand, but a pretty good statement about what they’ve accomplished.

Now what happens if your aims are a not selling baby stuff, or fizzy drinks, or financial products? In fact, what happens if your aims aren’t selling anything at all?In that case, you might not mind if someone else were doing the publishing, just as you managed to achieve your goals at the same time. Which brings me to a very interesting $2.5 million grant from the Gates Foundation, which is sponsoring the Guardian’s global development microsite for three years.

The Gates Foundation actually launched the site in 2010, spending an undisclosed sum to do so; the new grant keeps the site going for another three years. As part of the deal, every page in the site — be it blog post or news story — gets prominently branded with the Gates Foundation logo, right at the top of the column where all the editorial content goes. (In fact, the logo is significantly larger than the Guardian’s own logo at the top of the page, although the site looks and feels like the rest of the Guardian site, and lives at guardian.co.uk.)

From an old-media perspective, this is a fantastic deal for the Guardian, which retains full editorial control:

The world’s news organisations can no longer rely solely on advertising and sales revenues. So, as we look beyond traditional sources of funding, the backing of third parties who are willing to support our journalism while respecting our editorial freedom enables us to explore important subjects that may too easily be neglected elsewhere. Sponsorship of individual sections and pages already exists in other areas of guardian.co.uk, and can make possible the otherwise impossible. Without sponsorship, a project such as our global development site would simply not have been realised with such depth and ambition.

What the Guardian doesn’t say, here, is that $2.5 million is what’s technically known as a shit-ton of money. It’s vastly more than it could ever get from ad revenues on a niche site like this — even at a $20 CPM, you’d need to serve up 125 million pageviews over three years to get that much money. Global development issues have a substantial audience, but not that substantial.

More importantly, $2.5 million is significantly more than it costs the Guardian to put together a micro-site like this — this deal is profitable, for a media organization which, like most, is in desperate need of profits. In fact, it’s a twofer for the Guardian, which manages to improve its revenues and also beef up its editorial offerings in one go.

Looked at from the point of view of the Gates Foundation, there’s real value here. For one thing, all of the content automatically gets a lot more credibility than it would if it were published by the Gates Foundation directly, especially given the suspicion with which it’s already regarded. And frankly, publishing well-written, agenda-setting material for a mass audience is not one of the Gates Foundation’s core competencies: if they tried to do it, there’s a good chance they wouldn’t do it very well. (Non-profits in general seem constitutionally incapable of getting out of their wonky high-serious comfort zone.)

And the way these deals are structured, they do a pretty good job of minimizing the sulfurous smell of advertorials and “sponsored content” which has a habit of lingering in even the glossiest sponsor-driven site. Which isn’t to say that they’re not criticized. The Seattle Times did a 2000-word investigation into the Gates Foundation’s media sponsorships earlier this year, and found it quite easy to find critics:

Gates-backed think tanks turn out media fact sheets and newspaper opinion pieces. Magazines and scientific journals get Gates money to publish research and articles. Experts coached in Gates-funded programs write columns that appear in media outlets from The New York Times to The Huffington Post, while digital portals blur the line between journalism and spin…

“Even if we were to satisfy ourselves that the Gates Foundation were utterly benign, it would still be worrisome that they wield such enormous propaganda power,” said Mark Crispin Miller, professor of media, culture and communications at New York University…

“It would be naive to believe big-money foundations don’t play the same game that corporations and other special interests do,” said Marc Cooper, assistant professor at the University of Southern California’s Annenberg School for Communication & Journalism.

Cooper actually isn’t troubled by the Gates Foundation, but his point is well taken: if the Gates Foundation can do this kind of thing, other organizations can too. If, that is, they have a lot of money: the foundation’s direct funding for media and media programs, has now reached the $50 million level, and includes $3.6 million to the PBS NewsHour, $3.3 million to Public Radio International, $5 million to NPR, $1 million to Frontline, and $1.5 million to ABC. More controversially, the foundation gave a $500,000 grant to the Brookings Institution so that it could “re-engineer media coverage of secondary and postsecondary education.”

It also helps if you’re all non-profits: most of the recipients of Gates Foundation grants, including the Guardian, PBS, PRI, NPR, and Brookings, fall into that category. The Gates Foundation is clearly happier dealing with other non-profits, and I suspect that places like the Guardian are much happier letting the Gates Foundation “support” a large chunk of their editorial copy than they would be with, say, Monsanto doing the same thing.

The one weird thing about the Gates Foundation’s media partnerships is that the foundation doesn’t seem to value the exposure it’s paying so much for. It’ll go into great detail about how it wants to “build understanding and stimulate conversation around challenges of inequity”, but will tell you, if asked, that “we do not view these partnerships as advertising”. Which is a little bit weird, because the Gates Foundation branding is extremely prominent on the Guardian microsite, and the foundation also accepts all the broadcast recognition that comes with sponsorships on NPR or PBS.

This exposure — at least in context like the Guardian’s microsite — is more valuable than traditional advertising, for the reasons Noah laid out and because it positions the Gates Foundation as an entity which is providing great independent content, rather than one simply pushing its own message. Is all that value really going to waste? I doubt it, somehow — I suspect that somewhere along the line, the foundation was quite active in negotiating its logo placement on the site.

I’d love to see a little more transparency on this front: what value does the foundation think its getting out of that logo placement, and the NPR announcements that it sponsored some show or other? And if the logos and the announcements went away, how much would that reduce the amount of money the foundation was willing to give? Because somewhere in here there’s a model, I think, which can be applied to media buyers who aren’t the Gates Foundation. And I’d love to see how it works.


“Non-profits in general seem constitutionally incapable of getting out of their wonky high-serious comfort zone.”
Funny, since as you later point out, the Guardian and other media organizations the GF gives money to are non-profits.

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Cooper Union’s murky finances

Felix Salmon
Nov 9, 2011 14:22 UTC

In the immediate wake of the greatest financial crisis in living memory, Cooper Union looked like a genius. Remember this article by John Hechinger? Here’s the headline, if you don’t:


In particular, Hechinger credited a low-risk investment approach at Cooper Union.

The expansions stem from Cooper’s decision three years ago to ratchet back the financial risk in its endowment, enabling it to avoid the losses that have racked its peers. The college renegotiated a lease to lock in a future income stream from its key property, sold another parcel at a favorable price, raised its cash holdings and picked investment managers that hedged against stock-market declines.

Administrators say they wanted to be especially careful because of the school’s no-tuition policy, which leaves its budget largely dependent on investment income…

John Michaelson, who heads Cooper’s investment committee, said other schools could benefit from taking a lower-risk investing approach.

You know how this is going to end, don’t you.

As Cooper Union officials try to quell the uproar over news that the college may start to charge tuition, some students, alumni, faculty members and college trustees are advocating an inquiry into how the school got into such serious financial trouble.

One bit of the story stands out: it seems that the endowment was leveraging its bets with borrowed money — and has been doing so since 2006.

Cooper Union spent $166 million on a new academic building at 41 Cooper Square, replacing two outmoded buildings. To help pay for that and other projects, and to retire old bonds, it borrowed $175 million in 2006.

The college also invested $32 million of that borrowing in its endowment, calculating that the endowment investments would earn a higher rate of return than the interest Cooper was paying on the loan. That turned out to be a bad bet when the recession hit.

There’s still a lot of murkiness surrounding Cooper Union’s finances, which don’t seem to be quite as bad as the NYT — or, for that matter, Cooper Union president Jamshed Bharucha — is making out. The endowment is still near its all-time high, with the most recent number being $577 million, while the annual deficit right now is $16.5 million. You can call that unsustainable if you want — and Bharucha does — but there’s no immediate threat to the college here.

Certainly the financial situation at Cooper Union is murky: former president George Campbell Jr is quoted in the NYT as saying “that Cooper’s financial problems had always been well documented in public records like financial statements, reports on trustees’ meetings and his annual addresses on the state of the college”, but I can’t find any of those statements, reports, or addresses on Cooper’s website. Guidestar has the 2009 Form 990, but it’s a bit out of date, and it’s not easy to understand — especially the $319 million in liabilities, including $175 million in “secured mortgages and notes payable”, which help result in total annual interest expenses of more than $10 million. (Salaries and wages, by contrast, the only larger item on the expense statement, are $22 million.)

So I’m very sympathetic to calls for an audit at Cooper Union. There’s no reason that the college’s finances should be this opaque — and the idea of creating a “task force” to investigate options seems designed to ensure that a lot of that information remains confidential. At the very least, the task force should be charged with putting together a detailed history of Cooper Union’s finances right up to the present day, and making that history public for all to see. Otherwise, it’s going to be hard to believe anything we’re told about what’s going on there.

Ego du jour, John Thain edition

Felix Salmon
Nov 8, 2011 21:42 UTC


David Dunlap took a visit to the Bronx, and came back with a 13-page slideshow of John Thain’s self-aggrandizement:

The generosity of John A. Thain and his wife, Carmen, in helping rehabilitate the forest has been rewarded with its renaming as the Thain Family Forest. The new name has also been worked into the text of almost every sign…

One expects donors’ names at entrance ways and on directional signs and maps. It’s more unusual to find donors’ names woven into the interpretive narration. At the garden, however, the words “Thain Family Forest” are slipped into signs about black oaks, hemlocks and hillside blueberries (“a favorite of birds and small mammals in the Thain Family Forest”); about vernal pools and great horned owls; about mound formations and forest layering; and even about snags, as standing dead trees are called, which help “reveal the Thain Family Forest’s great age.”

They turn up on prohibitory signs, too. “Please Stay on the Path: The Thain Family Forest is a fragile ecosystem.”

Indeed, by the time you reach the sign beginning, “When a tree falls in the Thain Family Forest —,” you may be tempted to finish the thought yourself, “— does it make a Thain Family Sound?”

A spokeswoman for the New York Botanical Garden tried to say, with a straight face, that the Thain family did not request that the forest be named at all; that the Garden “named it as a thank you for their gift”; and that the ubiquity of the Thain name was simply a function of a “scrupulous interpretive specialist”.

You’re welcome to believe her, if you want. But I’m quite sure that John and Carmen Thain could have declined the Garden’s generous offer to ensure their name was used on first mention every time the forest is mentioned. Or even to use their name at all.

After all, the whole point of this forest is that it dates back to the 17th Century. It’s being carefully managed with Thain funds, which I’m sure have been put to good use. But there’s something vulgarly presumptuous about a Wall Street plutocrat playing happily along with the idea that he and his family should get enormous amounts of public credit, in perpetuity, for what is essentially the same forest where Lenape Indians hunted.

But of course we’re talking about John Thain here. He of the $35,000 commode on legs, and the $87,000 office rug. You’d think he’d have learned his lesson about his displays of wealth having quite the opposite effect to that originally intended. But obviously not.


If a tree falls in the John Thain forest and nobody’s around to hear it, is it still a display of Thainian ego?

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Steve Jobs’s philanthropy

Felix Salmon
Aug 30, 2011 16:26 UTC

Andrew Ross Sorkin takes a look at the private life of Apple’s chairman today, passing on rumors about activity he clearly doesn’t want publicized, in the face of stony silence from Apple. But hey, Sorkin’s a journalist, I guess that’s what journalists do.

The column is headlined “The Mystery of Steve Jobs’s Public Giving,” but really there’s no mystery at all: there is no public giving from Steve Jobs. Sorkin isn’t happy about this. “Most American billionaires have taken up philanthropy in a public way and helped inspire future generations of charitable giving,” he writes, concluding that “perhaps” in future years Jobs might “inspire his legions of admirers to give.”

Some of Sorkin’s points are good ones. There’s no good reason, for instance, for Jobs failing to reinstate Apple’s philanthropic programs, which he cut on the grounds of wanting “to restore the company’s profitability.” Similarly, Apple’s failure to match its employees’ charitable giving does make it stand out — and not in a good way — from its Silicon Valley peers.

I think this is maybe a downside of Jobs’s famous micromanaging: if he’s personally not interested in something, then his entire company becomes uninterested in it.

Now there are good reasons why Jobs might not be much of a philanthropist, at least in public. For one thing, it’s far from clear that seeing billionaires give away lots of money and put their names on hospital wings does any good at all in terms of inspiring other people to make charitable donations. So if a private man like Jobs wants to make his charitable donations privately or anonymously, I don’t see much if any harm in that. And the coverage of Jobs in recent days is proof positive that he’s hardly in need of good press.

On top of that, effective philanthropy is hard work. Just ask Bill Gates. If it’s as difficult to give away money as it is to make it, and if you’re already stretched between making Apple insanely great, spending time with your family, and dealing with personal health issues, then it’s reasonable not to even try on the philanthropy front.

The sad fact of the matter is that Jobs’s wife, Laurene Powell Jobs, will almost certainly outlive him; what’s more, she is more familiar with the philanthropic world than he is, sitting on the boards of Teach for America and the New Schools Venture Fund, among others. Jobs is a technology visionary; that doesn’t make him a great philanthropist. Maybe he’s simply and lovingly trusting his wife to be able to take care of such things after he’s gone. That would be a very admirable and selfless act.


It baffles me, absolutely baffles me, how so many people don’t care about billion dollar corporations NOT being philanthropic!

We absolutely SHOULD care when we see a human being, or a corporation, marinating in hundreds of millions of dollars (or BILLIONS) and not using some it to help other human beings or the world at large.

This is a lesson we teach our children: SHARE. But for some reason, when it comes to corporations and business people, it’s no longer about helping the environment or animals or humans; it’s about buying homes, yachts, and showcasing and hoarding your wealth!

Steve Jobs could have been a wonderful role model for not only someone who developed cool gadgets, but also for being humane and compassionate.

He is an incredibly innovative man — but he is also a pure, unadulterated, capitalist pig (like many, many other *supremely* rich humans on the planet).

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Where Haiti’s money has gone

Felix Salmon
Aug 22, 2011 20:55 UTC

What happens when you drop billions of dollars onto a country like Haiti? Immediately after the earthquake happened, in January 2010, I said that “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”. But that’s exactly what we did — with predictable results.

I’d urge you to read Janet Reitman’s full 12,000-word Rolling Stone article on what an enormous amount of foreign aid has done for Haiti; it’s a wonderful piece of journalism, albeit a very depressing one.

The first thing to note is that most of the money given to Haiti hasn’t even started to be spent yet: a whopping $11 billion was pledged by donor countries and financial institutions in the wake of the earthquake, but if you take the US as a good example, it’s so far managed to spend just $184 million of the $1.14 billion allocated to the country. Even the Red Cross is barely halfway into its $479 million fund — all of which has been earmarked for Haiti, and none of which can be spent elsewhere, no matter how much better it might be put to use in some other context.

But even the amount of money that has been spent has been harmful in its own way. Haiti has been known as “the Republic of NGOs” for well over a decade now, but the earthquake just turbocharged their presence while devastating everything else, leaving foreign aid the only game in town:

“I’ve had two ministers come up to me this week, personally, and ask what’s in it for them,” says a frustrated IHRC official. “Since money grows on trees in this disaster, the attitude among Haitian officials is: Just call up your buddies in Washington, and they’ll send another check.”

Meanwhile, given that it’s difficult to effectively spend money in Haiti, millions of dollars are making their way to people like our old friends at Dalberg:

There was significant grumbling in aid circles, for example, when the department awarded a $1.5 million contract to a New York-based consulting firm called Dalberg Global Development Advisors. Glenn Smucker, an anthropologist who specializes in Haiti, was asked to brief the Dalberg team, which included several summer associates from Harvard Business School. “They were nice people, but they struck me as naive about Haiti,” he says. “They asked the appropriate questions and were eager to learn, but from what I gathered, they had never lived overseas, didn’t have any disaster experience or any background in urban planning, and they’d never carried out any program activities on the ground. Only one of them spoke any French. They were being asked to do extremely important things that they had no background to do.”

One of Dalberg’s assignments was to do an assessment of a broad, bow-tie-shaped swath of land near the Corail camp, where thousands of Haitians had moved earlier that spring. Even as refugees were streaming onto the land and establishing squatter camps, the State Department hoped to create new communities in the area as part of an attempt to depopulate Port-au-Prince. It was the second time in three months that consultants had assessed the area, and after Dalberg was finished, a team of experts from USAID was brought in to reassess the assessments. “One of the sites they said was habitable was actually a small mountain,” says Bill Vastine, one of the experts on the USAID team. “It had an open-mined pit on one side of it, a severe 100-foot vertical cliff, and ravines.” After looking at the photos in Dalberg’s report, he said, “it became clear that these people may not even have gotten out of their SUVs.” The process of assessments and reassessments dragged on for months. In the end, only one of the six sites approved by Dalberg was deemed viable for relocation.

I’m pretty sure that when individuals and politicians committed billions of dollars to Haiti, they weren’t intending for it to be spent on callow HBS types who generate headlines like “With Andrew Stern’s Help, US Executes Holistic Rebuilding Approach in Haiti”.

Meanwhile, Haiti’s suffering if anything is getting worse. Not only are new shantytowns springing up in places like Corail, but disease is now spreading disastrously: cholera hadn’t been seen in Haiti for more than 60 years, before the earthquake; it has now infected more than 250,000 Haitians, with no sign that it’s remotely under control.

It’s worth remembering, too, that there was reason for optimism regarding the rebuilding of Haiti. There was lots of money, and the country’s right on America’s doorstep, which also helps. On top of that, it had the best conceivable international ambassador in Bill Clinton, backed up with the full support of the US government in the form of his wife’s oft-stated commitment to getting Haiti back on its feet.

Development is a tricky game, easy to get wrong; as a rule, it only works when the people providing the aid are working at the margin, helping to strengthen existing projects, industries, and institutions, rather than trying to build them all from scratch. Let’s target it where it can be most effective, rather than where there happens to have been a newsworthy natural disaster. Of course Haiti needed help after the earthquake, but $11 billion was far too much for the fragile and damaged economy to bear. It’s a lesson worth remembering, the next time a natural disaster triggers another wave of appeals for financial aid.


Tied aid is foreign aid that must be spent in the country providing the aid (the donor country) or in a group of selected countries. A developed country will provide a bilateral loan or grant to a developing country, but mandate that the money be spent on goods or services produced in the selected country.

Haiti: Where Did The Money Go? Episode 3
http://www.youtube.com/watch?v=pa7CUhSrA Uc

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