give it up

Mark Zuckerberg wants to change the world, again. You got a problem with that?

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Mark Zuckerberg has already changed the world we all live in. Now he wants to change the world that future generations will live in, too. Weirdly, quite a lot of people seem to have a problem with that.

For better or for worse – and mostly for the better – Silicon Valley is home to the most ambitious people in the world. Just like Larry Page, Mark Zuckerberg isn’t going to be satisfied with small, visible interventions which don’t scale – feeding the hungry, say, or giving money to the poor. Such activities improve the world, but they don’t change the world. Once you’ve invented Facebook, your impact on the planet is already so big that when it comes to giving away your wealth, you’re going to look to the kind of things which might, conceivably, have a Facebook-sized impact. And that’s exactly what Zuckerberg is trying to do.

Zuckerberg’s giving vehicle, the Chan Zuckerberg Initiative, has hugely ambitious aims. As he has explained in a thoughtful letter to his newborn daughter Max, the 7.3 billion people alive in the world today are dwarfed by the tens of billions of people who are going to be born in the future. “We believe all lives have equal value, and that includes the many more people who will live in future generations than live today,” he writes. “Our society has an obligation to invest now to improve the lives of all those coming into this world, not just those already here.”

This can be read as platitudinous philanthropic throat-clearing, but in fact it’s much more important, and much more controversial, than that. The most important stick that Zuckerberg has planted in the ground this week is not the fact that he has set up an LLC rather than a charitable foundation, nor is it the precedent of a man just 31 years old making such a large charitable pledge. Rather, it’s Zuckerberg’s high-level view of intergenerational equity.

It’s important to have a clear grasp of this concept, because it underpins not only Zuckerberg’s philosophy but also the climate-change discussions which are taking place in Paris this week.

There’s no better place to start than Zuckerberg’s letter: “While headlines often focus on what’s wrong, in many ways the world is getting better,” he writes. “Health is improving. Poverty is shrinking. Knowledge is growing. People are connecting.” The result, he says, is that Max’s life, along with the lives of people born in future decades, “should be dramatically better than ours today.”

If that’s the case, then why should our generation – people living today, who are worse off than almost everybody who will be living in the future – spend trillions of dollars on abating the effects of climate change, or investing in technologies which will only improve the lives of people who aren’t yet born? If Earth’s future inhabitants are going to be so much better off than us whatever we do, shouldn’t we concentrate on the immediate problems of the here and now? Even if doing so involves, say, burning lots of fossil fuels?

That question is part of the criticism that Jesse Eisinger and others worried about our society have directed at Zuckerberg. “This should be an occasion to mull what kind of society we want to live in,” he writes. “Who should fund our general societal needs and how? Charities rarely fund quotidian yet vital needs. What would $40 billion mean for job creation or infrastructure spending?”

The key assumption buried in these questions is that today’s pressing needs are today’s pressing needs, and that it’s dilettantish to concentrate on anything else.

In the climate-change debate, such questions normally reduce to a number known as the “social rate of time discount,” which is used to calculate how much current generations, with less money, should spend to increase the wellbeing of future generations, with more money.

Zuckerberg is clear on his answer to that question: when he says that “all lives have equal value”, even the ones in future generations, he’s signing on to the philosophy of Sir Nicholas Stern, who calculated that the world should spend 1% of gross world product – around $1 trillion per year – on doing everything we can to reduce our carbon emissions and improve the world for those not yet born.

Stern’s very low social rate of time discount, of 0.1%, has some uncomfortable implications: Sir Partha Dasgupta, of Cambridge University, calculated (although not everybody agreed) that it means we should invest 97.5% of our current income for the benefit of future generations. But that, of course, is exactly what Mark Zuckerberg has pledged to do, with his own wealth.

It’s not uncommon for philanthropic funds to be directed for the benefit of those not yet born. Look at one of the greatest philanthropists of all time, John Rockefeller Sr: the University of Chicago, Spelman College, Tuskegee University, and Morehouse College, all of which he helped to found, all survive to this day. The vaccines he funded, for meningitis and yellow fever, prevented millions of deaths of people born long after he died. And countless other Rockefeller projects have had similar long-term effects.

Similarly, many philanthropists set up charitable foundations, often named after themselves. Those foundations are designed to exist in perpetuity, and generally give away no more than 5% of their assets each year. Benjamin Franklin’s Franklin Funds were founded in 1790 and continued through to 1991, a period of 200 years. Today’s foundations, such as the Russell Sage Foundation, founded in 1907 and still going strong, could well last even longer, helped as they are by the fact that they pay no taxes on any of their investment income.

But this kind of philanthropy generally works a bit like a perpetual-motion machine: you wind it up with some up-front endowment, get it started, and then watch it do whatever it does (teach students, fund charities, whatever) for many decades to come. Zuckerberg’s vision, by contrast, is different. He doesn’t want to create something which just keeps on doing the same thing for hundreds of years. He wants to spend billions of dollars today (or at least within his lifetime) on something transformational, which could help transform the lives of billions of future inhabitants of the planet for the better. Like Rockefeller’s meningitis vaccine, but probably more electronic.

That’s why Zuckerberg isn’t going to give his money to his roommate, as Dylan Matthews says he should. Dustin Moskovitz – the aforementioned roommate – is doing very smart things in what Matthews says is “a careful, rigorous way”. That’s great. But as Zuckerberg’s failed experiment of giving $100 million to Newark schools shows, he has very little interest in being either careful or rigorous. He’s not looking for a predictable return on his $45 billion investment: instead, he sees his fortune as risk capital, which can be invested in projects which have a low chance of succeeding but which if they do succeed could be genuinely transformational.

As Rob Reich explains, this is one of the areas where philanthropies are uniquely placed to make a huge difference:

Commercial entities in the marketplace do not have an incentive structure that systematically rewards high-risk, long time horizon experimentation; they need to show quarterly results. Similarly, public officials in a democracy do not have an incentive structure that rewards high-risk, long time horizon experimentation; they need to show results quickly from the expenditure of public dollars in order to get re-elected. In contrast, foundations are not subject to earnings reports, impatient investors or stockholders, or short-term election cycles.

Foundations, answerable only to the diverse preferences and ideas of their donors, with a protected endowment permitted to exist in perpetuity, may be uniquely situated to engage in the sort of high-risk, long-run policy innovation and experimentation that is healthy in a democratic society.

Zuckerberg, in creating an LLC rather than a foundation, is going one better even than this. He has no desire for his LLC to exist in perpetuity; indeed, its stated aim is that it will give away 99% of his fortune within his lifetime. Zuckerberg knows that the future world is going to be richer than the present world: the last thing the future world really needs is Zuckerberg’s money. Instead, he’s going to invest his money today in an attempt to improve the lives of the world’s future inhabitants, using every means at his disposal.

Zuckerberg has therefore given himself a lot of flexibility here, which means that he could even claw back the money, or end up leaving it to his daughter, if that’s what he changes his mind and decides to do. James Kwak is quite right that there’s nothing irrevocable about this gift. But then again, there’s nothing irrevocable about the Giving Pledge, either. And in any case, philanthropists like Zuckerberg tend to concentrate more on outputs (what might be achieved) rather than on inputs (how much is given). The important thing isn’t how much you give away, or how much control you retain over that money once you have donated it. Rather, it’s how much your donation managed to change the world for the better.

In his letter, Zuckerberg writes that “The greatest challenges require very long time horizons,” and says that he’s willing to “make long term investments over 25, 50 or even 100 years”. This is one reason why it makes sense for him to structure his philanthropic efforts in the form of an LLC, rather than as a federally-recognized charitable foundation. Official non-profits are constrained in what they can do with their money: it can be hard for them to make strategic investments in companies, for instance, or to participate in policy debates, both of which are tools that Zuckerberg envisions using in the future.

Zuckerberg’s announcement has caused a silly debate about whether the actions of the Chan Zuckerberg Initiative can really be considered philanthropic, if they’re not certain to be given to non-profit charities. Eisinger, in particular, seems aggrieved at the fact that Zuckerberg hasn’t (yet) set up a charitable foundation, and that his LLC is going to do things which society deems not to be philanthropic.

But this is to confuse philanthropy with fiscal policy. Some entities, like your local church, your local food bank, Harvard University’s $36 billion endowment, the National Hockey League, and IKEA, are tax-exempt non-profits. Other entities, like the New York Times and the Sierra Club, are not tax-exempt. The rules about which entities get a tax exemption and which ones don’t are arcane and complex, and indeed there’s a strong argument to be made that the charitable tax deduction should be abolished entirely. But suffice to say: just because you’re tax-exempt doesn’t make you charitable, and just because you’re not tax-exempt doesn’t mean you’re not philanthropic. If Zuckerberg keeps his promise and gives away 99% of his Facebook shares in an attempt to improve the lives of future generations, that’s a philanthropic act no matter what the tax man says.

Eisinger also points to the fact that foundations need to give away 5% of their assets each year as a good thing, complaining that Zuckerberg’s LLC won’t be subject to that constraint. But this is an even sillier complaint: just look at the philanthropy that Zuckerberg engaged in during his 20s, before his daughter was born.

Zuckerberg, in his first incarnation as a philanthropist, donated billions of dollars to the Silicon Valley Community Foundation, a donor-advised fund which allows him to pass through as much or as little as he likes to various registered non-profits. In Silicon Valley, donor-advised funds like SVCF are more popular than bespoke foundations – and they are generally unencumbered by any requirement to give away 5% of their funds each year.

In reality, however, the donor-advised funds easily beat the foundations. There’s reason to believe, indeed, that the 5% requirement can end up backfiring: while foundations generally give away only the bare minimum each year, the donation rate for donor-advised funds is much higher, at around 22%. Maybe if you tell people they have to give away 5%, the result is that they only give away 5%. While the natural rate of giving is substantially higher.

None of which is to say that Zuckerberg’s philanthropy is certain to have any positive effect at all. High-risk ventures often go to zero, after all. But when Eisinger complains that the destination for Zuckerberg’s funds will come from one person, rather than society as a whole, he’s missing one of the great features of philanthropy, which is precisely that it can zig while everybody else is zagging. Here’s Rob Reich again:

Foundations can yield more idiosyncratic results. They deploy private assets for public benefit, as judged by the donor. Foundations are thus especially well placed to fund public goods that are under-produced, or not produced at all, by the marketplace or the state. Because donors have diverse preferences about the goods they wish to fund philanthropically, foundations can be a source of funding for the minority public goods or controversial public goods that a democratic state will not or cannot fund.

When Eisinger asks about the kind of good that Zuckerberg’s billions would do if they were ploughed into job creation or infrastructure spending, he’s essentially saying that philanthropies have a quasi-statal role. And maybe some of them do. Non-profit universities, for instance, do almost exactly the same thing that state-run universities do. But that can’t be the limit of what philanthropy does. Zuckerberg has a bigger vision, as befits someone who already managed to change the world while he was still in his 20s. He wants to make big, long-term investments of the kind that governments can’t or won’t make. After all, even if he just donated the entire $45 billion to the US government, to be used as society sees best, that would be barely one percent of the $4 trillion federal budget. And then it would be gone.

John Arnold, another billionaire philanthropist, made a similar point when I asked him about Zuckerberg’s donation. “I believe much of the highest value add in philanthropy is in things that are controversial,” he wrote. “That they are controversial is exactly why there is underinvestment, and thus the most to gain, in these areas.”

He continued:

I think many philanthropically inclined people struggle with how to give away very large sums. The institutions most adept at handling large grants are universities, hospitals, and cultural institutions. However, the ability to handle large grants does not necessarily correspond to maximizing marginal utility of an additional dollar, or billion dollars.

In his situation, I would consider trying to replicate and scale Promise Neighborhoods, like the Harlem Children’s Zone, in the highest risk geographies in America. This idea is to concentrate public services of cradle to career support for the most at-risk children to maximize their potential. Practitioners who work just in schools recognize the unmet social needs of their students. Meanwhile social service providers are frustrated when the kids they work with go to dysfunctional schools. Promise Neighborhoods is an attempt to match birth to career social services with quality schooling, to match the opportunities that those in prosperous communities have and minimize the equality gap.

I acknowledge this concept is still in its infancy and there are potentially many improvements to be made in the execution of the model. But assuming a 5% annual return on Facebook stock and 2% inflation, Zuckerberg could give away nearly $2 billion a year in 2015 dollars for the next 40 years to help perfect the model and change the life trajectory of more than a million of the most at-risk kids in America. This would be a unique accomplishment in the history of philanthropy in America.

Such a project might fail: Zuckerberg can waste money just as the federal government can. “No matter how good their intentions,” writes Anil Dash, “the net result of most such efforts has typically been neutral at best, and can sometimes be deeply destructive.” But again, that’s just the Silicon Valley way. Most startups fail; most genuinely ambitious philanthropic ventures will also fail. That’s OK. Silicon Valley as a whole, as an ecosystem, is good for the planet. And if more billionaires follow Zuckerberg’s philanthropic lead, then perhaps, in aggregate, they will be able to do similar amounts of good for current and future generations.

Remember, too that there is also no particular reason why a philanthropic enterprise like the Chan Zuckerberg Initiative needs to be wholly selfless. This particular LLC, for instance, will be a holding vehicle for the Class B super-voting shares through which Zuckerberg has total control of Facebook and its board.

By setting up the LLC as he has done, Zuckerberg is trying to have his cake and eat it, to some extent: he’s maximizing the amount of time that he has voting control of Facebook, while still promising to give away the shares which give him that control. Eisinger speculates that Zuckerberg’s philanthropy will donate appreciated stock to charities; it might well do that. Or maybe it will borrow against its stock, and donate borrowed money. Or maybe it will create a special-purpose vehicle to own the stock, and then sell stock in that vehicle, and use the proceeds to make donations. Probably even Zuckerberg doesn’t know: such decisions are still years away, and he has a newborn daughter taking up most of his attention. The point is that LLCs are flexible things. Precisely because LLCs are flexible, Zuckerberg probably feels much more comfortable putting the overwhelming majority of his wealth into this particular one. After all, one of the iron-clad laws of philanthropy is that the more control you let someone have over their money, after it’s been donated, the more money they’re going to give away.

It’s always easy, when a billionaire does something philanthropic, to start looking for tax loopholes. Eisinger, for instance, concludes his column with a plea for a wealth tax, while the primary proponent of such a tax, Thomas Piketty, says that Zuckerberg’s donation is “a big joke”. But these reactions are churlish. So far, there is nothing in the way that the LLC has been set up to suggest that its primary purpose is tax avoidance: it’s an entirely taxable vehicle. And the world is full of billionaires who pay precious little tax while doing almost nothing philanthropic at all.

Indeed, Zuckerberg’s philanthropy could end up being good for tax revenues. Once he’s seeded it with his Facebook stock, Zuckerberg will have a strong incentive to start declaring a dividend on that stock, because that would allow the Chan Zuckerberg Initiative to give away the money it receives in dividends, without Zuckerberg having to give up any of his voting rights. That dividend income, in turn, will become taxable income for Facebook investors all over the country.

So let’s cheer this news from Zuckerberg, as he celebrates the birth of his daughter. Zuckerberg is no evil billionaire: he’s genuinely trying to improve the planet. He’s going to be a great dad to Maxima, and he clearly cares about improving the world that she is going to live in long after he dies. He might not succeed. But he’s doing his best. And Mark Zuckerberg, at his best, is pretty formidable.