1. Fairfield Senior Center OCTOBER 13, 2015

2. Topics Covered During the Next Six Weeks  Week 1 (Today)The State of Giving in the U.S.  Week 2Why People Give  Week 3Giving in the U.S. versus Philanthropy Overseas  Week 4Government Spending and Charitable Giving (Crowding Out or Crowding In)  Week 5Corruption in the Nonprofit Sector – Nonprofit Malfeasance  Week 6The New Philanthropy and the Principal-Agent Problem

3. To Get Copy of Slides Go to: www.faculty.fairfield.edu/mleclair Click on link that says Fairfield Senior Center

4. Week 1 – Giving in the U.S.  U.S. by far the most generous country in terms of giving per capita  Reflection of both higher income and tradition of philanthropy  Protestant ethic of taking care of neighbor(s)  Giving was up close and personal  Also, as will be argued in a later presentation, much of what was once philanthropy is now in the public sector in other developed nations

5. Historical Statistics

6. Current Statistics 2014 Charitable Giving by Source: Individual giving, $258.51 billion, increased 5.7 percent in current dollars over 2013. Foundation giving, $53.97 billion, was 8.2 percent higher than 2013 Bequest giving, $28.13 billion, increased 15.5 percent 2013 Corporate giving, $17.77 billion, increased 13.7 percent over 2013 giving Source: Giving USA

7. Numbers Reflect a General Trend Foundation and bequest giving is rising at a faster pace than individual giving Represents rapid accumulation of wealth May influence overall patterns of giving in the future For now, individual giving dominates

8. Where does money go? Religion—$114.90 billion, 2014 giving increased 2.5 percent higher Education—giving increased to $54.62 billion, 4.9 higher Human Services—$42.10 billion total was 3.6 percent higher Health—$30.37 billion 2014 estimate was 5.5 percent higher than the prior year Arts/Culture/Humanities—$17.23 billion, growth of 9.2

9. Others Environment/Animals—The $10.50 billion estimate for 2014 was up 7.0 percent Public-Society Benefit—the $26.29 billion estimate for 2014 increased 5.1 percent International Affairs -- $15.10 billion estimate for 2014 decreased 2.0 percent, in current dollars, from 2013. The drop was 3.6 percent when adjusted for inflation.

10. What about corporate giving? Why do businesses give?  Provides a company with an enlightened image  Particularly businesses that may not be viewed favorably by the public  Petroleum business, tobacco, etc.  Improves work satisfaction among employees  Retention may improve  Firms may donate to causes that help train needed labor  Interest of a top executive might also be a driver

11. Result-Business Giving Looks Very Different from Personal Giving – Largest Participants 1.Novartis Patient Assistance Foundation, Inc. (NJ) $452,981,816 12/31/2013 2.Wells Fargo Foundation (CA) 186,775,875 12/31/2013 3.The Wal-Mart Foundation, Inc. (AR) 182,859,236 01/31/2013 4.The Bank of America Charitable Foundation, Inc. 160,479,886 12/31/2013 5.The JPMorgan Chase Foundation (NY) 115,516,001 12/31/2012 6.GE Foundation (CT) 124,512,065 12/31/2013 7.The Coca-Cola Foundation, Inc. (GA) 98,175,501 12/31/2013 8.Citi Foundation (NY) 78,372,150 12/31/2013

12. Direction of giving for Corporate Programs Main Destinations were: ◦Education (29%) ◦Health (25%) ◦Community Investment (15%)

13. Mechanism of Giving Corporate Foundations (34%) Direct Giving (49%) In-Kind (17%) ◦Last category a reflection of drug companies that donate medicines to poorer Americans and to overseas initiatives

14. Tax Treatment and Total Giving Tax Incentives are a significant driver of giving for those in the upper-income brackets Less, however, than many people assume The standard deduction for a couple filing jointly in now in the range of $12,500. Outside of high-tax, high-property price, Connecticut, you may not reach that by itemizing Tax breaks not a consideration when giving

15. In much of Europe Tax breaks are available only for specific donations (as in Italy) Another reflection of the subsidiary role played by the charitable sector as opposed to government social spending Discussion is brought up periodically in the U.S. (removal of tax breaks)

16. Corporate Deduction 5% of Income – Provides some incentive to give, but the prime motivator is still need to demonstrate enlightened nature of business This deduction was opposed by many when instituted, given the motives and nature of corporate giving

17. Uniqueness of U.S. Situation also Reflected in the Mechanisms of Giving Charity Aggregators (United Way) Giving through the workplace (and matching programs) More recent phenomena: Crowdfunding Social Pressure Websites (Hungersite.com) Giving through investing (Impact Investment)

18. Immigration and Economic Development Political battle in Washington just beginning Support for more open borders coming from strange bedfellows The Democratic Party and the Chamber of Commerce (usually regarded as Republican-leaning) Democrats see a means by which to build up a constituency that is fairly loyal (Hispanics, Asians)

19. Chamber of Commerce? Conservatives argue that business interests want a growing pool of cheap labor Somewhat confusing argument in an economy that has such a slack labor market Not sure where corporations are having a hard time hiring, except in high-skill occupations

20. Benefits and Costs of Immigration Skilled immigrant labor highly beneficial to economy Captured endowed human capital in worker Special programs over the years for nurses and workers with other specialized skill sets Unskilled labor more problematic Immigrants perform work that U.S. citizens are unlikely to seek out

21. Industries with high concentrations of unauthorized workers Most obvious is farming Also see employment in: Construction (roofing!) Packing Painting Landscaping

22. Benefits Avoid labor shortages common in Europe Labor market more flexible Humanitarian benefits

23. Costs Evidence of wage suppression @ lower end of market Cost is borne by those at lower end of labor market Social and monetary costs of absorbing millions of individuals No discussion of limits of market to absorb new labor California may have reached that limit already Victor David Hanson’s writings

24. Undermines existing immigration system Difficult to tell people they must go through a multi- year process to achieve legal status when millions are simply entering and staying A well thought-out guest worker program might have been a better way to go Path taken by Germany with Turkish guest workers Although social problems have arisen in Germany also

25. Week 2 – Why People Give Philanthropy is driven by a variety of Motives Some self-interested Reasons for giving partially determines patterns of giving Also provides some insights into how charities should approach donors

26. Commonly Discussed Motives Altruism/Obligation Warm Glow of Giving (What would Kant Say about this?) Social Stature Self-interest – primary motivation for corporate giving

27. Altruism and Securing Donations Charities use sympathetic message to raise donations May also draw some “bad apples” into certain segments of charitable sector Charities use key words that elicit a response: Police, fire, veterans, kids, cancer Those that truly give altruistically may get burned if they don’t investigate a charity’s history

28. Look More Closely at 2 of The other motives for giving Social Stature Giving is a form of social signaling People who give receive societal respect in return This motive drives people to give to causes that are physically apparent – e.g. a hospital wing or a college building May cause a form of competitive giving among elites

29. Self Interest as a motivator Most obvious example is corporate giving Businesses may give up to 5% of income in any given year and deduct it from earnings Might be driven by philanthropic interests of executives In literature, regarded as a means of advertising the firm as a good citizen to increase sales and profits Donations to the arts, for instance, make a firm appear enlightened

30. Danger Lurks Nearby Donations to controversial causes may damage business Corporate giving programs gravitate to “everyone supports that” causes Away from the NRA and Planned Parenthood Research shows that firms that want an enlightened image give to the arts, while manufacturing firms may donate to educational causes that improve the labor force they draw from

31. Example LeClair, M. and Gordon, K. (2000), “Corporate Support for Artistic and Cultural Activities: What Determines the Distribution of Corporate Giving?, Journal of Cultural Economics, 24

32. More Recent is the Advent of the “Ethical Lifestyle” Philanthropy (or social action) is part of everyday life Consumption Avoid products from firms that are regarded by some as morally challenged Large problem for Walmart for many years Portrayed in book “Nickeled and Dimed” by Barbara Ehrenreich

33. Direct consumption towards firm that are socially responsible Then, seek out consumption products with embedded philanthropic content Fair Trade Products, Products that have a complementary charitable component Girl Scout cookies, Newman’s Own products. And “buy this product and one dollar goes to breast cancer research” promotions

34. When it Comes to Investing……. First, engage in Socially Responsible Investing From the liberal perspective: No oil companies, no firearms manufacturers, no tobacco companies, etc. Could come from a conservative perspective: Avoiding media that conservatives consider biased, for example In general, most SRI arises from the liberal perspective

35. Examples Socially Responsible Funds

36. These Funds Necessarily Provide a Lower Long-Term Rate of Return Basic Economic Theory: Constrained Optimization Lower than Unconstrained SRI portfolios do not hold the whole “universe” of stocks If socially-responsible investing provided a higher rate of return (adjusted for risk), then traditional funds would switch to these stocks

37. For those that Truly Want to Invest Ethically Impact Investing Funds pursue a social goal as their purpose Sustainable Trade (e.g. Fair Trade) Low-Income Housing (South America) Clean Energy Access (Rural India) Active Programs within U.S. urbans centers

38. Exaggerated Claims Made About Returns Rates of return are significant for some Impact Funds Risk, however, is very high Unlikely risk-adjusted rate of return is remarkable Continuing argument made above, if Impact Investing created extranormal returns, then conventional funds would rapidly switch investments in this direction

39. Investors Compensated with Warm- Glow of Engaging in Philanthropy Upper-income individuals may continue to donate, even if returns are lower Raises concern (once again) that Impact Investing (like Fair Trade) is simply an arena for the well-off (a niche) Growth in Impact Investing has been slow, primarily due to inability to explain mechanism to potential investors

40. Questions

41. Current Events Once again looking at raising the debt limit (from $18 Trillion) to enable the government to borrow more money Opens up talk about deficits and debt Difference? Healthy numbers: deficit less than 3% of GDP Debt less than 60% of GDP Deficit has fallen into this range, but debt is 100% of GDP

42. Federal Deficits

43. Who holds debt? Public: $13,123 Trillion Other Agencies: $5,027 ◦Primarily the Federal Reserve ◦Problem: ◦Running of debt and selling it to the Federal Reserve is dangerous and unsustainable (monetizing the debt) ◦Risks inflation

44. Held by foreign nations $6 Trillion – primarily by China and Japan Used as a means of currency manipulation Also raises the specter of destabilization during a time of crisis South China Sea?

45. Point/Counterpoint? “Debt is OK since we owe it to ourselves” Counterpoint: not any more “Debt doesn’t matter because we can always raise taxes to pay for it” Counterpoint: Not under any conceivable plan at the present – tax rates would have to skyrocket

46. Dangers Debt service is now over $325 billion per year That money could have been used to end homelessness, hunger, medical care access issues, etc. Simply paid out instead What happens when interest rates rise? Currently at about 2% on average If they double to 4%, debt payment balloons to $650/year

47. Picture of Federal Government 10 years from now….. Debt service, Medicare/Medicaid and other required payments consumer most of the budget Congress meets to argue about nickels and dimes For those that believe in expansion of government programs, there will be no money to do so In effect, we will be struggling like Greece to provide basic services and avoid default Could be fixed with bipartisan work in congress

48. Week 3 – Giving in the U.S. Versus Overseas – Why the U.S. is Unique Americans donate at about the twice the rate of individuals in other developed nations Reflected in how difficult it is to get data on foreign nations Figures tend to be incomplete and haphazard – It’s just not as important Doing empirical work on international numbers is particularly complex

49. Reasons Protestant background Philanthropy deeply rooted in religious underpinnings of U.S. society Wealth accumulation – permits the kind of personal and foundational giving that occurs in U.S. Relative distrust of government as provider of social services Some validity to that argument – government spending is much less efficient than spending at GOOD charities

50. Counter-arguments Philanthropic activity is not “fair” May benefit one group of people over another Example: if you live by the Cleveland Clinic, you are entitled to world-class healthcare on a “pay as you can basis” If not, you may be relegated to a local clinic that provides adequate, if unexceptional care Private philanthropy may not align with societal goals What if everyone only gave to “housing” causes

51. Provision of services is uncertain over time Relies on continued giving Government programs tend to be reliably present until, of course, they aren’t Fiscal realities in U.S. may curb programs in the future Current debt of U.S. ($18 Trillion) costs the government only $360 billion per year at 2% interest At a normal interest rate (4%) that doubles to $720 billion- there go your social programs.

52. In Ideal World………… Government spending and philanthropy would complement one another Government programs (such as food stamps) that assist people in buying food would be bolstered by food banks, etc. Result would be more efficient, closer to those in need (so better able to judge needs) Yet, universally available

53. Tax Policy (Cross-Nation) Reflects this Tension Most western nations allow either tax credits Or tax deductions (like the U.S.) Whether the amount subsidized by the government is greater or smaller depends on tax bracket of individual 2 European countries – Finland and Sweden- allow no deduction And Austria’s dates only to 2009

54. Statistics from Overseas, Social Spending as a % of GDP Nation Private Public United States10.6%19.2% Australia 3.117.8 Canada 5.119.2 Norway 2.323.3 Germany 3.227.8 France 3.132.1 Spain 0.526.0

55. Explains Differing Views on Philanthropy U.S. does not provide the same level of social programs, but has a much more extensive system of philanthropy Ratio of private:public is 55% No other nation comes close to this Canada, the next closest, is at 26% Reflects Canada’s similar Protestant roots

56. For good (if simplistic) comparison World Giving Index (Charities Aid Foundation) First complete cross-national database that uses survey data Very little detail, but at least all the data is there Link: http://www.cafamerica.org/media/wgi-2014/http://www.cafamerica.org/media/wgi-2014/

58. Why differences in giving matter Government and the Third Sector fulfill specific roles Emphasis is different Adding to list of things that philanthropy does better than the government: Emergency response FEMA response to Hurricane Katrina was slow and later the subject of intense criticism American Red Cross ended up acknowledging some issues regarding its response to Katrina, but….

59. 239 shelters were open the day Katrina hit (Room for 37,000 people) Day 2: space for 40,000 people and 63,000 hot meals were served Day 9: Shelter for 144,000 people and 670,000 hot meals were served Government response was eventually larger, but very much delayed.

60. Decline of Third Sector….. Means slower response times, and all that entails (presumably more human suffering) Will argue later that innovation needs to occur in both the transparency of nonprofits and (possibly) regulation Recapture public confidence

61. Questions

62. Week 4 Current Events – currencies and the gold standard Looked around at chatter on economic websites – Gold Standard being talked about again due to instability Particularly recent competitive devaluations by China, Japan and others Returning to a fixed exchange rate system would end that practice and reduce uncertainty

63. Bretton-Woods System Dollar pegged to gold – all other currencies pegged to dollar A trade deficit led to a loss of gold (money), which reduced economic activity and led to a drop in imports Situation was “self-correcting” Large deficits in early 1970s led to abandonment of gold standard in 1973.

64. New System is Called “Fiat Money” Money is backed by nothing – system works as long as people are willing to accept it. Devaluations can be unintended – producing higher costs to buy imports (e.g. Venezuela) Or, intentional – to increase exports Japan devalued the Yen from 90/$ to 120/$ to increase exports as a way of stimulating growth

65. Problem – Can’t all devalue at once Process quickly becomes destructive Return to gold standard (or other fixed rate system)

66. Advantages Stability, tight control on inflation Cannot do “crazy” things with currency system (Zimbabwe, 2008-09) November 2008, inflation was 79,600,000,000% in one month Financial Crises (like 1997 East Asian Financial Crisis) unlikely

67. Problems Insufficient gold in hands of governments to back existing currency (U.S. has $11.3 billion at Fort Knox, valued at $42/oz.) No Guarantee that there won’t be a 1973 style run on a currency despite being gold-backed Removes monetary policy from bag of tools that can be used to fight a recession

68. Crowding Out (or Crowding In) in the Charitable Sector Crowding out: A drop in contributions due to rising government spending Two causes: Perception that government is already taking care of a social issue Higher taxes leave individuals with less money to donate Result: In European “Social Democracies” giving is much lower

69. Examples of Overlap of Federal Programs and Charitable Sector Food Stamps currently cover 47 million Americans Private philanthropy City Harvest: Collects food that would be thrown away by grocery stores and restaurants Our own Connecticut Food Bank Maintains food distribution center Backpack program Bridgeport Rescue Mission maintains a kitchen that serves meals daily as does Operation Hope

70. Example 2 – Medical Care The Federal Government maintains multiple programs for the poor Medicaid is largest But, multiple programs for children (CHIPS, SCHIPS) and now the ACA Total cost in U.S. budget: $265 billion Plus states spent $193 billion More than ½ of U.S. population covered by government programs – do we already have national healthcare?

71. Parallel Private Programs Mainly nonprofit hospitals that provide care on a pay-as-you-can basis Cleveland Clinic is one well-known example Tax-Exempt Hospitals and Community Benefit: New Directions in Policy and Practice Annual Review of Public Health Vol. 36: 545-557 (Volume publication date March 2015)

72. Housing/Education Overlaps Federal housing programs under Housing and Urban Development (HUD) Habitat for Humanity Department of Education and education grants Nonprofits that provide support for low-income students, coupled with thousands of private grants that support higher ed And, higher ed itself, with growing “discount rates”

73. Question – is duplication a good thing, or a waste of resources As noted last week, GOOD nonprofits are far more efficient at providing resources than the federal government Bad nonprofits can be even more wasteful than Feds Rankings help get rid of the poorest charities When was the last time we ranked HHS and said its too inefficient and we should get rid of it? And, do nonprofits fill in the gaps left by Federal programs

74. Examples Government supports housing for low-income residents, and even supports home-ownership through FHA and (discredited) Community Reinvestment Act Habitat for Humanity focuses solely on home ownership for those that cannot qualify for these programs Connecticut Food Bank and Operation Hope are busiest near the end of the month Indication that these organizations are filling in when federal benefits run out

75. Even more Ideal Situation is stimulation of nonprofit programs that mesh with government spending (“crowding in”) Existence of federal or state program leads to development of complementary private programs Nonprofits seek out gaps in programs and fill in Or, utilize government grants to carry out federal and state priorities Utilize knowledge of local needs to better serve community Example……”food deserts” – federal programs are leveraged by local nonprofits by providing complementary services

76. Tax bite and Total Spending in U.S. and other Countries NationCentral Government Taxes as a % of GDP Government Spending as % of GDP (all levels) Austria43.4%50.9 Belgium45.454.8 Canada32.2NA Denmark49.057.1 France44.657.0 Germany40.644.1 Netherlands39.846.2 U.S.26.939.0

77. Tax Burden and Government Spending as % of GDP Very High in Nearly all of Europe High taxes reduce ability to give High government spending calls into question whether philanthropy is “necessary” Social programs are the government’s purview Some surprising results in data on giving overseas Donations to medical causes high in the UK, despite the presence of the NHS Doesn’t entirely make sense Last week talked about advantages and disadvantages of government spending versus philanthropy Suppressed Third Sector means society loses those advantages

78. Testing Crowding in or Crowding out Empirical Testing in Economics is complex Key aspect is that multiple factors are used to explain one variable Example: In (early) medical research, it was believed that coffee caused bladder cancer Once ALL factors were considered, relationship vanished Other factors were more important than coffee intake

79. With Philanthropy Need to control for income, growth in income, wealth, age, etc. and then test to see if rising government spending reduces giving Given that so little data exists, my research assistant and I used 10 countries and 12 years of data from each Result: size of government significantly reduces giving

80. Social Policy in Presence of Crowding out No expectation that European nations are going to reduce the role of government to stimulate philanthropy Accept that social policy is less efficient, but more consistent