Tag Archives: The Giving Pledge

Philanthropy: To Boldly Go Private Sector, Part Five

2 Jul

From www.mcgeepost.com .Copyright © 2013 Michael H. McGee. All rights reserved. Please feel free to share or re-post all or part non-commercially, hopefully with attribution.

In Parts One through Four of this series we have set up the nature of the problem with philanthropy and the quest for solutions. It will be easier for you to understand this concluding Part Five if you have read the preceding three parts. They are long, yet worth the effort.

Don’t let your death bequests be the measure of your generosity. “What are you doing for the rest of your life, the north and south and east and west of your life?”

The big challenge is: what do you do with all that money you’ve made. Once you reach a certain level of wealth there’s really not much to spend all that money on but more of the same. There’s been a great accretion in money over the last fifty years, but not any concomitant increase in what you can buy with it.

I’ve generated the term “accretion” to describe the phenomenal growth in the supply of money over the past fifty years. “Inflation” is a specific increase in the level of consumer prices over time.

The massive accretion of the available supply of money has made a lot of new billionaires and multi-millionaires. Yet the value of this vast accretion of money is highly questionable. Once you have your life-line stash set aside, then all the other dollars or euros are almost as useless as measures of “value” as the green leaves on trees, which turn brown and fall off each autumn.

For most wealthy people, those extra accreted green-backs are little more than toys on a board-game. All you can really buy with them is more of the same of what you already have. This is why you’re so eager to give this extra money away to charity at your death. They mean so little to you now except as a score-card. www.thegivingpledge.org is a death list of the wealthy, who with their on-line pledges are erecting their tombstones now.

Yet to the economy as a whole, those leaves on the trees are the foundation of the stability of the United States as a nation, or the stability of whatever nation you are from. Your “toys” are the vital blood and bone of the nation as a whole. Think of this larger picture instead of feeling the uselessness of simply “having.”

I’m not saying twenty first century philanthropy should ignore the rest of the world and focus solely on your own country. What I’m proposing is the well-known truth that a person or a country cannot help another person or country unless the helping person or country is strong and healthy in its own right.

First-world countries around the globe, including the US, are doing great harm to themselves with their own internal financial stability crises. How can a floundering nation actually provide either charitable or market-based solutions for the developing world, if we can’t manage our own markets and put our own people to work? The G-8 and G-20 need to take care of these First Things first, and the rest will follow naturally as a benefit to the whole world.

The first thing you can do to give more meaning to your wealth is to get actively involved, using your money, clout and financial acumen, in working to repair the great debt and liquidity messes which are now plaguing the G-8 and G-20 nations. If 105 billionaires applied themselves to the current financial mess in these nations, in a creative and intelligent way, stability would return to the world markets in a much shorter time than with the current chaos.

Next, “give away” more of your fortune within the private sector. Use some of your personal wealth as tax-deductible grants to your companies to give pay raises and substantial bonuses to your employees – all of them. Owners of Wal-Mart, pay close attention here.  Direct that your companies give pay raises, bonuses, and better benefits out of corporate funds to all the employees in your home country. This increase in wage costs may cause a temporary distortion in stock prices, yet things will settle as your employees are able buy more consumer goods, or pay off student loans faster: or, they get more invigorated with energetic loyalty to their employer and produce better results.

Those at the top who generate the results in your companies are not just the CEO. There are at least five levels down in management where results are either made or lost, plus many technical people who are absolutely critical. All of these management and technical people should have substantial increases in pay and bonuses and benefits, which reflect their critical part in the results obtained.

It is really horrible from a true business point of view that the ignorant public and the so-called “Occupy Wall Street” protesters have made it more difficult for financial employers to give large bonuses to their traders and other executives. Such large payments, and similar activities, are a core part of twenty-first century philanthropy: paying people for the value they bring to the enterprise, rather than bidding salaries and wages solely at the lowest market rate.

Bill Gates has already proven beyond a doubt that paying people more than market wages and bonuses is a turbo-charged wealth creator. Thus he’s one of the harbingers of twenty-first century philanthropy: releasing great sums into the private sector and profiting thereby.

Twenty-first century philanthropy also involves improving tax-paying employment and consumer prospects in the United States (or in your native country, if another). In the last fifty years the United States has virtually ceded the playing field for manufacturing to the rest of the world. Now is the time to take it back.

Those manufacturers in China and Bangladesh and other emerging nations will not have to suffer too much. If they raise the wages in their own factories, then they’ll be able to sell their manufactured products to their own people. If they don’t figure this out, then they will suffer at their own hands. It’s not our problem.

We have no moral obligation to “assist” third world countries by throwing money at them and buying their products, regardless of what Angelina Jolie and George Clooney say. Investments should be made only if they can produce a profit: and twenty-first century philanthropy says we have a “moral obligation” to assist the economy of our own country, which has taken a real beating lately; and our unemployed and poorly paid citizens.

Bill Gates and Larry Ellison and Paul Allen and the other tech billionaires could start building factories inside the United States to make the machinery and equipment which is necessary to build electronic parts. The next step is to build factories in the United States to assemble these electronic parts, and facilities inside the United States to package and distribute the assemblages at a wholesale and retail level.

Intel is already leading the way by chunking more than $10 billion into constructing the one-million-square-foot state of the art Fab 42 plant in Arizona, building another major manufacturing plant in Hillsboro, Ore., and upgrading other facilities in Arizona, Oregon and New Mexico. See http://usatoday30.usatoday.com/tech/news/2011-03-28-intel-manufacturing.htm .

Intel is going against the grain of twentieth century thinking by not worrying too much about any added costs of making their products inside the United States. They will succeed mightily. They will succeed even more fully if other electronics makers follow their lead and choose the United States as the place to build their manufacturing plants.

The Walton family has up to now succeeded with Wal-Mart primarily by buying manufactured goods from China and other developing countries at the lowest possible price. Then they foist off these cheap goods onto a public which can’t afford to pay more because either their own wages are depressed, or they are out of work or otherwise struggling to make ends meet. This is the classic twentieth-century principle of hollowing out the economy, and then selling cheap to the hollowed out people.

Many of the Walton family members also, admirably, practice twentieth century philanthropy. They set up non-profit foundations, give to local charities around the country, and show a quite decent level of generosity. What I want to do here is to push them, and other retail giants, to look into the possibilities of twenty first century philanthropy as an outlet for their inherent generosity.

It’s definitely not just Wal-Mart. It’s absolutely amazing how many of our sellers of consumer goods are forced by the market to put on their shelves only goods manufactured in developing countries. I was shopping in a local neighborhood Ace Hardware the other day, when I began to look at the labels. I was shocked to see that almost every product on the shelves was manufactured in China. This would not have been the case even five years ago.

Twenty-first century philanthropy for retailers involves, among other things, improving tax-paying employment and consumer prospects in the United States (or in your native country, if another). In the last fifty years the United States, led by Wal-Mart, has virtually ceded the playing field for clothing and other retail goods to the rest of the world. Now is the time to take it back. Wal-Mart will need to lead the way, since no one can really compete with them by being the first to raise wages and prices.

Start, Wal-Mart, with raising wages and benefits for your retail store employees and managers, all the way to the top. Then stop playing games with the grocery business; it’s not your core competency. It will hurt you in the end, but not until it seriously impairs a thousand retail grocery chains. Then set your best and brightest planners and managers to a new task which is absolutely within your core competency, and will represent twenty first century philanthropy.

Since Wal-Mart and Amazon and others know retailing, and already inspect quality and set standards in factories around the world, building and operating manufacturing plants inside the United States should be a no-brainer. Start by building factories inside the United States to manufacture the machinery and equipment which is necessary to install in factories to weave and sew textiles and make rope and plastic goods and other things.

The next step is to build state of the art textile mills and dye houses and cut and sew facilities inside the United States. Also build plastic stamping plants and facilities to make rope and paint and other goods, inside the United States, and facilities inside the United States to package and distribute each of the finished products at a wholesale and retail level.

Knowing something of the company’s supply-chain philosophy, Wal-Mart may be more comfortable with making investments in other enterprises inside the United States to make these products locally and sell them to Wal-Mart. In any event, even if Wal-Mart shrinks temporarily on the retail side, the manufacturing side will increase profits in the long run.

It’s really hard to imagine having “textile mills” in the United States again. I grew up in North Carolina and textile mills were a way of life, and a part of the lifeblood. Now I doubt you could find even one textile mill in North Carolina.

The Walton family members may want to use some of their individual wealth in building or funding these manufacturing plants inside the United States. In any event, put the money to work in a way that will make a difference to your country and your people, and still make a profit.

Kurtis Lockhart, an economist and writer in Vancouver, Canada, says “he truly believes that social enterprises – using market-based solutions to address social problems – will begin to replace traditional philanthropy and conventional corporations in the 21st century.” Although his views may be somewhat extreme, his thesis that “market-based” solutions are necessary is consistent with what we’ve been writing here.

He focuses on third-world countries and how social enterprises may help them. I have a very different focus, however. My focus is that our own country, the United States, will have continuous bumpy economic conditions over the next years unless we apply “market-based” solutions to our own economy. We are a very strong country, yet we are not invulnerable. There’s plenty of kryptonite out there, and we need to get our twenty first century philanthropy in gear sooner, rather than later, to give our country the chance it needs to ride smoothly through the next hundred years.

And only if the United States and the other G-8 and G-20 nations are strong and prosperous, will developing and third-world
nations find any traction in their own serious efforts to move ahead economically. Only the strong can help the weak. It’s that simple.

 

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Philanthropy: What To Do In Its Place? Part Four

1 Jul

From www.mcgeepost.com .Copyright © 2013 Michael H. McGee. All rights reserved. Please feel free to share or re-post all or part non-commercially, hopefully with attribution.

In Parts One through Three of this series we have set up the nature of the problem with philanthropy and the quest for solutions. It will be easier for you to understand this Part Four if you have read the preceding three parts. They are long, yet worth the effort.

As we’ve already mentioned, Bill and Melinda Gates and Warren Buffet have set up a challenge to the wealthy of our time to give away at least half their assets to charitable and other non-profit organizations by gift or bequest. This challenge is described in the Internet site www.thegivingpledge.org . As of now at least 105 billionaires have signed this pledge, which is not binding yet illustrates the generous nature of those signing.

I’ve shown how doing so will unbalance the overall economy even more than it’s now already unbalanced. If this pledge is fulfilled, then the “dead hand” or mortmain burden on the economy will grow to where it becomes stifling to the living, breathing, private enterprise part of the economy.

So therefore I suggest that The Giving Pledge recur to a philosophy which has proven effective through almost three thousand years of history. The pledge should be for billionaires to give away at least ten per cent of their assets to charitable or non-profit purposes; and to find ways to use at least half of their assets to engage in creative yet profit-making projects which involve some degree of risk in return for possibly pumping up their country’s private economic base. Remember that if your country’s economic base falters, your wealth will falter also.

Cease the nineteenth and twentieth century ideas of ensconcing all your generosity in your dead body. Not only is it rather morbid to do so, it deprives you of much present pleasure in the life you have yet to live. We’ll show you how to first feel safe, and then let your generosity drive your daily life. You can make generosity a part of your DNA right now, and for as long as you live. We’ll give you several twenty-first century principles, and many examples, of how this may be done.

A first principle of twenty-first century generosity is to love your government in a tangible way, and pay your taxes. We will again approach the second concept laid out by the greatly respected New York industrialist and philanthropist Peter Cooper (1791 – 1883) in his 1871 address to Cooper Union students:

“The individuals to whose lot these fortunes fall . . . should never lose sight of the fact that they hold them by the will of society expressed in statute law….”

Those who are eager to give away charitable money as a “tax dodge,” to prevent the government from getting their greasy hands on their money, are engaged in very short-sighted thinking. It is the very existence of our federal, state and local governments which has made it possible for us to have a stable social and economic society where wealth may be accumulated in vast amounts.

America is still the Land of Opportunity. A strong and stable government, under our Constitution and laws, and our reasonably adequate tax revenues, are the primary basis for the opportunities which are presented to our citizens to make large amounts of money.

Even in other countries such as China, Japan, Saudi Arabia, India, Russia and the European democracies, there is no certainty of holding onto wealth where the government is weak and unable to generate stability in either daily life or in financial transactions. For a government to be strong requires a steady flow of tax money. (Borrowing alone – issuing government bonds – will not forever preserve the steadiness of our or any other government.)

At least 95 per cent of the 1,342 on the Forbes 2013 list of billionaires operate in countries which have reasonably stable governments and reliable tax revenues. See for yourself at the site:  http://www.forbes.com/sites/luisakroll/2013/03/04/inside-the-2013-billionaires-list-facts-and-figures/ . Trust me, though; it was quite tedious to go through that whole list.

If the owners of great wealth continue to be as stingy with taxes as they have been, a weakened central government will undoubtedly take a great toll on their ability to hold this wealth, as time goes by. Step up and pay your taxes as they are due. Stop hiding all your assets in the Caymans or in other tax havens to avoid taxes. Cisco Systems, stop holding all your cash outside the US to avoid paying legitimate taxes on repatriation of the funds.

Don’t try to chisel the tax-man. Don’t fight so hard for loopholes, or to keep tax rates on the rich at super-low levels. Such chiseling is no more than a way of saying that you don’t like our system of government and would rather see it go away. It’s simply not patriotic. If we are going to have a country to be patriotic about, we need to pay the bill.

One who chisels the tax-man is really not much different in philosophy and effect than a communist agitator or a radical militant who wants to destroy us. Such a person is definitely not a patriot. It really irritates me that great flag-wavers want to prevent the government from getting enough tax revenues to avoid having to borrow so much from China. It’s not patriotic; it’s subversive, and contributes to government instability.

Even Carlos Slim Helu, one of the world’s richest men, will not be likely to be able to hold on to his wealth if the Mexican government collapses from want of revenue or descending into chaos. Mexico is one of the countries where the government is unstable and tax revenues are unreliable. The country is almost a war zone. Carlos Slim, watch out. Pay your taxes or you’ll lose your shirt. When your government falls apart, who will be there to sustain the legitimacy of your vast telecom monopoly?

Mr. Slim, look at the example of Bill Gates. Use your influence to help drive out corruption and drug cartels. Lower your monopoly prices, and pay your employees enough for them to live full lives. Acting alone, like Henry Ford did a hundred years ago for the US, you, and you alone, have the power to begin the development of a stable middle class in Mexico.

This change in the direction of stability will not come about from you making charitable contributions. It will come about from your assisting the government and paying taxes; and from using some small part of your wealth as payroll to generate a middle class in your home country. With the current instability in Mexico, you may be in the situation of “use it or lose it.”

Now let’s turn our attention away from taxes and toward the best principles of wealth for the twenty-first century, and how they play into the desire to be charitable. Remember here that we’re talking about those individuals who have considerable personal wealth. We need to show in some details the emotional issues that get in the way of a genuine charitable impulse.

The greatest barrier is fear of loss. This prevents most wealthy persons from being generous in their current use of their wealth for creative and fun profit-making projects. Getting creative and having fun is the anodyne for fear. Focusing on giving away money at death is the handmaiden of fear. So we must go into these two psychological issues before we can get to the fun part of using large sums of money now for creative and pleasurable projects, rather than focusing on death as the trigger for the first outpouring of generosity.

You will NEVER be in a position to intelligently play with or give away your money or any part of it during your lifetime unless you feel more secure in your personal life, and feel free from the possibility of losing everything. Being serious about everything is for fearful and anxious people. When you already have a lot, you can fearlessly use what you have to play with investments or to fund good ideas. You and your family can also freely enjoy the good things in life, as long as you aren’t constantly obsessing about fear of loss.

I’ll bet your wife and children and other relatives will like you much better if you can be more playful and feel more freedom in your life decisions. Then you can bequeath the bulk of your assets to those you love, knowing that they may care more about your purposes and intents than they did when they hated you for always being gone or always being in a foul mood.

I’ll bet that a lot of cocaine use and abuse of uppers, even excess drinking, comes directly from the fear and anxiety about imagined losses. If you can be calmer in general, you won’t need to pump yourself up so much and cause the personal damage attributed to the use of high-voltage drugs and alcohol.

The first principle is that charity begins at home. It’s my experience that most individuals with great personal wealth are always afraid of The Next Thing that will wipe them out and leave them living in a poorhouse. Actually, most people feel this way; it’s fairly normal. However, those with wealth feel it more acutely. They have a serious standard of living to protect, and they are more aware of the vicissitudes of the market place due to having participated in it at a high level.

There are several things Benjamin Graham’s book The Intelligent Investor has to say about the psychology of wealth. The first is a quote from financier Nathan Mayer Rothschild: “It requires a great deal of boldness and a great deal of caution to make a great fortune; and when you have got it, it requires ten times as much wit to keep it.”

So the primal psychological burden of wealth is that each person who has actually made a fortune knows, deep in the gut that “when you have got it, it requires ten times as much wit to keep it.” This knowledge is a deep and intractable burden. I’ve got to be ten times as good as I already was, in order to keep what I have. I don’t know if I have that level of drive and intelligence in me. So I face the bleak prospect of ending up losing everything and ending up in the poorhouse, no matter how well I’ve done in the past at wealth-building.

The second psychological burden was identified by Kahneman and Tversky, who have shown in academic studies that the pain of a financial loss is more than twice as intense as the pleasure of an equivalent gain. So once you have it, the prospect of losing it looms twice as large in your emotional makeup as the joys associated with what you’ve already done to create your wealth. This generates a fear that will never to be entirely overcome once you reach the upper reaches of finance.

The third point from Graham’s book is on a more positive note. “The whole point of investing is not to earn more money than average, but to earn enough money to meet your own needs.”  And as your wealth grows, your and your family’s needs increase, and this is normal and natural.

Yet you will always need to keep a distinct focus on meeting the natural needs you and your family have developed due to your increase in wealth. It can keep you looking over your shoulder to make sure that aggressive creditors are not suddenly foreclosing on the wonderful homes you have in New York and Denver and Hong Kong.

So the first point is that each individual person of wealth needs to set up an ultra-stable “life-line” fund, grouped in his or her own name and in the names of family members, or in trust for the same. At a minimum the fund will be $100 million dollars; and the maximum might be ten per cent of individual wealth, i.e. $7 billion equals a life-line of $700 million.

Those with less yet significant total wealth may need to put more than ten per cent in their life-line fund. For example, a person with $50 million would probably want to put $10 million into the fund, or twenty per cent of assets. This may limit his or her future abilities to grow by tying up part of the wealth, yet having a settled mind and a secure sense of the future is well worth the sacrifice.

In any case, this life-line will assure than even if every single dollar of other funds is lost in a major financial debacle or through an imprudent fling with a Bernie Madoff, you and your family will for the rest of your lives have enough to live on, even if not quite at the same level as before. You’ll never be poor again. You’ll never again have to worry about sinking into the poorhouse and begging on the street corner.

The life-line fund should be totally separate from any other assets. The money should be invested only in ultra-safe assets such as government bonds, or whatever other ultra-safe assets you can think of that I don’t know about because I’m not in the business. Don’t let your desire for quick increases guide these investments. The benchmark should be safety of principal only.

Use this life-line only if some enterprise may fail but for a small immediate withdrawal (to be repaid soonest), or if the rest of your fortune goes away or gets tied up in some very damaging way.

After establishing these funds, consider deeply the true promise of these funds, until you are satisfied according to your own feelings that you and your family will never again be without significant resources, no matter how bad your future business ventures go. Then let go of the fear of loss of everything. You’ll be surprised how much anxiety will be eased and fears erased once you’ve conquered your fear of loss and degradation.

I’m sure some of you have already set aside life-line funds, or have significant family trusts. Yet have you gone through the emotional process of lessening your anxiety over the prospect of total loss? One man who seems to operate rather fearlessly is Sir Richard Branson. I don’t know his internal fears though. He may just be putting on a good front.

There is a part two to the formula for protecting your “life-line.” It involves making sure that you or your family cannot incur personal liability for business ventures made with the rest of your money, some of which are bound to go south over time.

Part two involves making sure that all the rest of your money is isolated in separate corporate or partnership or trust forms that do not implicate your personal assets. The only way to be dead-certain that a creditor cannot “pierce the corporate veil” is to make sure that each of the many corporate or other entities you set up are well-funded with part of your remaining money, for the purposes for which they are intended.

Most of the time, when the veil is pierced and personal assets are attached by creditors, it is because an operating company is only a “shell company” with little or no personal funds of the investor at risk. As a wealthy person you have enough money to make sure that each of your working entities is provided with a meaningful share of your money, consistent with the business purpose of the working entity. Then you can borrow more, or issue stock, without fear it will come back against your life-line funds.

A second and equally significant concern must be taken into account. Never, ever, establish a retirement or pension fund for any of your employees, except for special circumstances, where you or your company are guaranteeing the value of the funds or the payout at maturity. Always grant such funds to self-directed employee accounts such as 401k’s, or into separately managed fund accounts that do not impose any performance obligation on the part of yourself or your company.

One thing the twentieth century has demonstrated for certain is that well-intentioned efforts on the part of companies or individuals to guarantee retirement benefits for employees are doomed to failure, and these obligations can bring down even the best-run enterprises. Just don’t do it. Ever. Resist any and all union efforts to impose such an obligation as you would resist walking into the cage of a wild tiger.

Once you’ve established your life-line funds and managed your fear of failure, you can go about being much more creative in the investment of your remaining very sufficient funds. For example, Sir Richard Branson has founded Virgin Galactic, an airline to take people into low space orbit for a fee. I assume he intends to make a profit from this business, yet if he doesn’t, at least he’s had some fun with the resources available to him.

In summary, put a value to your comfort, and protect that value. Then invest for profit in things that are fun or are dear to your deepest longings. We all have inside us a set of half-formed wishes. Often we suppress those wishes out of fear of losing everything we have. It’s a vicious cycle: it’s time you stepped off your self-imposed circular stairway to the stars.

There are many things you can do with your money as a substitute for philanthropy. I’ll give you a few tastes here; then wrap up a comprehensive theory of profit versus philanthropy in the twenty-first century in the next and final part of this series.

Here’s an idea. Set up the first company to build a nuclear-powered desalination plant. Put it on the coast of Texas. Pipelines could carry the potable water from the plant across Texas and Oklahoma and New Mexico, to the areas where drought is most prevalent. Electrical companies have made profits from nuclear generated power. Why shouldn’t nuclear generated fresh water be able to make the same level of profits over time?

Similar nuclear-powered desalination plants could be built in various desert areas of the world, as long as the technology is protected from conversion into explosive nuclear weapons.

Here’s another idea. Buy tangible assets such as buildings from the US or state governments, with the stipulation that the purchase price must be applied against government debt first. At the same time negotiate a long-term lease; say thirty years, which is supported by the full faith and credit of the government.

Or, buy a US airline and turn it into a consistently profitable enterprise. This Holy Grail seems to have eluded most business leaders since the 1940’s.

Here’s another idea. Hire a group of extremely smart individuals, pay them very well, and give each of them a part of the executive authority for your companies or holdings. You will keep control of the big picture and make the moves that are your signature ways of making money that others don’t have.

Yet it’s probable that seventy-five per cent or more of the things you do on a daily basis have little to do with the core competencies which helped generate or hold your fortune. Let the others do these things, and spend more time with your family and friends, and doing those unprofitable things which may be your heart’s desire.

But you must be certain that I am not the best fountain of business ideas which are novel and which might even be fun to work on. Your own business sense is the best guide as to what to do. What I’m demanding is that you release yourself from the fear of loss. Then your own ideas will tumble out, creatively and even playfully at times; and you will have the resources to make them happen.

We’ll continue with more ideas, and cement the relationship between wealth and twenty-first century philanthropy, in the fifth and last installment, at https://mcgeepost.com/2013/07/02/philanthropy-to-boldly-go-private-sector-part-five/

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Philanthropy: No Longer the Answer? Part One

17 Jun

From www.mcgeepost.com .Copyright © 2013 Michael H. McGee. All rights reserved. Please feel free to share or re-post all or part non-commercially, hopefully with attribution.

The gurus of twenty-first century philanthropy are Bill and Melinda Gates and Warren Buffet. Between the two of them they have made plans for merging their wealth and creating the largest charitable foundation of our time. This is a good thing. There is a need in each historical period one or more charitable organizations of overwhelming size. Many of the social needs of our time demand large infusions of money from a single organization if the problem is to be overcome or even if it is to be addressed at all.

buffett_bill_melinda

Yet these three are also engaged in another activity which is not such a good thing. They’ve formed a group called www.thegivingpledge.org . The purpose of this group is to encourage all other wealthy people to give a majority of their assets to charitable purposes either during their lifetime or at the time of their death. As of April 2013, 105 billionaires have signed the pledge.

There is a huge and growing economic and social danger in encouraging these wealthiest of individuals to place so many more billions, even trillions, of dollars into the charitable sector. Especially when so many hundreds of thousands of other – not quite so wealthy – people are placing an aggregate of additional billions in the charitable sector at the same time.

The idea of unlimited charitable contributions was a very salutary and most excellent principle throughout the twentieth century. Why is this same patently good thing not so great in our current times? In this series I will first describe the problem in as dramatic a way as is possible when discussing accounting principles. Then I will offer alternatives to charitable giving; and in these alternatives you will see the new direction I am attempting to take charitable givers.

The danger is that the non-profit sector of the economy may grow so large that it will impair and erode the ability of the overall profit-making and individual enterprise share of the economy to function in the way that capitalism was designed to function.

All these massive new infusions into the non-profit sector will soon be competing with the private sector, eroding the tax base (non-profits are not taxed), and making it difficult for the individual to succeed unless he attaches himself passively to either the government sector or the non-profit sector. As a first thing to look at, note that the rise in the size of the government sector is legitimate yet excessive, and needs to be controlled and limited just the same as the non-profit sector.

Let’s look at the numbers. I think we will all agree that the government sector of the economy is not engaged in private enterprise except when contracts are let to private companies. The government sector also pays no taxes on its income, assets or other revenues. Right now about 26 per cent of the overall economy is in the federal government sector. When you add the state and local government sectors the percentage could go as high as 36 to 40 percent of the overall Gross Domestic Product (GDP) which is not engaged in private enterprise or paying taxes.

The below chart shows one person’s estimate of government spending. The term “f” means federal spending; the term “l” means local government spending; the term “s” means state government spending.

I cannot vouch for the accuracy of this information or these statistics. It is true, though, that many thoughtful people are very concerned about the growth in overall government spending and want to do as much as they can to either stop the growth or shrink the percentages. As the percentage of the GNP in the government sector grows, the economy becomes more of a mixed socialist state and less of a free-market capitalist state.

us_total_spending_full

So if we add the government spending numbers to the volume of the economy in the non-profit sector, then the portion of the economy in the free-market capitalist sector declines even more. As we will see as we go along, the non-profit sector is absolutely not a part of the free-market economy, and presents challenges to the continuation of our capitalist society.

It is very difficult to get exact numbers for charitable and religious and other non-profit organizations (non-profits), since their reporting is not uniform. An estimate is that at the present time about 10 per cent of the GNP is in the non-profit sector. In 2010, public charities reported over $1.51 trillion in total revenues. (I assume a total GNP of about $15 trillion.)

This reported figure does not include all non-profits, and includes almost none of the religious non-profits, which are not required to report to anyone. For this computation I have abstracted the assumption that combined religious organizations, including churches, have revenues of another 33 percent, another half-trillion dollars; for a grand total revenues of about $2 trillion dollars in tax-exempt non-profits of all kinds.

This addition brings our total percentage of the GNP in the non-profit sector to about 13.3 per cent of the GNP. When combined with the government sector, the total  revenues come to at least 49.3 per cent of the GNP.

(Further, the total value of fixed and tangible assets (as opposed to revenues) of reporting non-profits in 2008 were $4.34 trillion. Again, this does not include non-reporting non-profits, nor does it include religious non-profits. I’m sure assets have grown since then, though I can’t find the numbers.)

Such an exalted ascension of the charitable sector at the present time in history thus threatens to undermine the profit-making sector and individual enterprise, which is at the core of what has made America great.

I offer the example of England. In the Middle Ages there came a time when charity was so exalted that the church ended up owning as much as a third of the property in the country. Gradually the rulers began to realize that such non-profit, non-taxable ownership was sapping the will of those who would grow the economy and those who would labor as well.

The property and money given to the church was permanently in the hands of the church and could not be sold or transferred to anyone. There was no way for individuals outside the charitable sector to either gain ownership by purchase, or to pass on such property to the next generation by way of descent. Such property in the end became a “dead hand” on the economy of the nation.

This problem became known as “mortmain,” and became abhorrent to those who knew that the growth of the nation depended on the free transfer of assets and by passing on assets to the new generation. In English law, the state of land being held by the “dead hand” (French: mort main) of a public entity or charitable group, became an important condition to limit and control.

In feudal days a conveyance of land to a monastery or other public entity deprived the lord of many profitable feudal incidents, for the public entity or other charitable group was never motivated to sell, was never a child or an adult, never died, never committed a felony, and never married.

Statutes were consequently passed between the 13th and the 16th century seizing many mortmain assets and prohibiting the transfer of land or other assets into mortmain without license from the crown. Modern English law is contained in the Mortmain and Charitable Uses acts, 1888 and 1891, and in a number of acts that authorized some non-profit companies and some other entities to hold land without license in mortmain. An unauthorized conveyance into mortmain made the land liable to forfeiture to the crown.

This mortmain law is very similar and yet much more restrictive than the current US law which requires that a charitable organization register with the Internal Revenue Service and be granted a license to engage in non-profit, non-taxable activities. In fact the current American laws are so lax that almost anyone can create a non-profit, non-taxable entity, as long as they fill out the forms using the right catch-phrases and recitations.

The Internal Revenue Code describes approximately 30 types of tax-exempt organizations. Examples include universities, hospitals, charitable organizations, social welfare organizations, religious activities, labor unions, trade associations, fraternal societies, and certain types of political organizations. There is a great deal of heft in the tax-exempt portion of the economy.

Mind you, I do not intend to come across as being against public and private charity. Many non-profits have been a part of what have made our country great. Other non-profits have reached out to the world and helped to correct problems which government and private enterprise could not address.

I am solely addressing the current twenty-first century trend toward all the wealthy giving a majority of their assets to the non-profit sector, and the unchecked growth of the non-profit sector, and the effects of such growth on the economy of the nation. Such unchecked growth is a valid twentieth-century phenomenon, which promises to throw the economy out of whack if the concept is not adjusted to account for present conditions here in the twenty-first century.

There will eventually be a high price to pay in the ascension of the mortmain “dead hand” as a portion of the economy. Right now about 13.3 per cent of the GDP is in the non-profit sector; non-taxable and non-transferrable.

Also, right now approximately 36-40 per cent of the Gross Domestic Product (GDP) is in the governmental sector at all levels. This property and revenue is not subject to taxation, and cannot be transferred at will in and out of the private sector. I consider the government, however, to be just as much a “dead hand” as the non-profit sector, as we have defined it.

This means that at the present time at least 49.3 per cent of the GDP of the United States is currently operating under a “dead hand.” It cannot be taxed, and cannot be transferred at will in and out of the private sector. This large proportion of the economy of our country is entirely outside the reach of the private sector, and cannot really contribute to the advancement of capitalism except as it spends money to hire people and buy services from the other 66 per cent of the private economy.

Sources of these statistics are the Urban Institute, National Center for Charitable Statistics, Core Files (1998–2008); the Internal Revenue Service Business Master Files, Exempt Organizations (1998–2008); and “The Nonprofit Sector in Brief:” Public Charities, Giving, and Volunteering, 2010, Kennard T. Wing, Katie L. Roeger, and Thomas H. Pollak; “2011 Index of Economic Freedom,” by The Heritage Foundation.

So right now our private capitalistic economy really has an input over only about 50.7 per cent of our total Gross Domestic Product. As a direct result, the private sector is becoming more and more dependent on the “dead hand” portion of the economy to create income and profits. People must passively find work within the “dead hand,” and become dependents within the economy, rather than entrepreneurs or individualists.

Do we really want to make it worse? We’ll continue in the second of five parts of this essay, at https://mcgeepost.com/2013/06/19/philanthropy-bill-gates-and-mortmain-part-two/

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