REVIEW: When Public Policy Gets Hijacked by Billionaire Mega-Philanthropists

The Givers: Money, Power, and Philanthropy in a New Gilded Age by David Callahan (Alfred A. Knopf)

By Charlie Gofen

A small number of big philanthropists in the United States today wield enormous power over the public policy agenda at both the national and local level, David Callahan writes in his important new book The Givers: Money, Power, and Philanthropy in a New Gilded Age. This influence is likely to expand amid strapped government budgets, as public funding for science, education, the environment, the arts, human services, and community development is slashed.

Callahan, founder and editor of the media site Inside Philanthropy, profiles many of the largest donors across the political spectrum, from environmental protection advocates Michael Bloomberg and Tom Steyer to limited government and free market defenders Charles and David Koch.

Callahan isn’t focused on choosing sides among these liberal and conservative philanthropists; he’s warning that the entire system is undemocratic and unjust. The risk, he writes, is that the rising power of this elite group “will further push ordinary Americans to the margins of civic life in an unequal era when so many people already feel shoved aside by elites and the wealthy."

Numerous studies have shown that the interests of the wealthiest Americans don’t line up with the desires of the broader citizenry. What this means in an era of shrinking public funding and expanding private philanthropy is that the public parks that get built are the ones that big donors want rather than the ones that might benefit a city more. And the medical research that gets funded is increasingly determined by large donors, giving them significant control over which diseases get addressed and which are neglected.

“Philanthropy is becoming a much stronger power center and, in some areas, is set to surpass government in its ability to shape society’s agenda,” Callahan writes. “To put things differently, we face a future in which private donors – who are accountable to no one – may often wield more influence than elected public officials, who (in theory, anyway) are accountable to all of us.”

Big donors are not only unaccountable but often not even identifiable, particularly when the underlying cause is overtly political, such as voting rights or health care reform. Callahan describes some of the gimmicks that donors use (legally) to funnel tax-exempt donations to political groups without calling attention to themselves. Big donors can establish limited liability companies to avoid disclosure rules, and private foundations can delay for years reporting on their grantmaking. Donor-advised funds cloud transparency even further, making it impossible to determine who is supporting political causes. And everyone seems to have figured out how to get around the prohibition on tax-exempt 501(c)(3) organizations engaging in partisan political activities.

The philanthropic sector operates not unlike political campaigns post-Citizens United, the U.S. Supreme Court decision in 2010 that opened the floodgates to corporate campaign spending. In the political sphere, big donors use super PACs to do their bidding, and the public often has no idea who is behind political activity. Similarly, in the philanthropic world, mega-donors are able to take advantage of lax rules to exert extraordinarily influence, using partisan think tanks, donor-advised funds, networks of foundations, and a wide range of sophisticated tactics to promote or block policies.

“If you’re rich, you can pay the salaries of policy experts to advance your beliefs within the corridors of power,” Callahan writes. “You can underwrite books and magazines to sway broader audiences. You can support lawyers who use litigation to achieve change. You can finance pop-up PR blitzes.”

One place where all of these tactics are used is public K-12 education. Mega-donors have devoted great resources to establish charter schools in an attempt to break the public monopoly in certain cities and drive failing schools to improve. (The results have been mixed, prompting the author to note that the nation’s large and decentralized public school system “has famously been a graveyard for ambitious philanthropists.”) Critics of the charter school movement call it an undemocratic privatization of the public school system, and Callahan notes that at times, it’s impossible to determine whether the movement truly has wide public support or is being driven by a handful of big donors who have engineered a massive marketing effort.

The rising power of big philanthropists in the U.S. has been driven in part by the nation’s newest group of billionaires. Technology entrepreneurs and hedge fund and private equity executives have joined the “titans of the old economy” (energy, real estate, homebuilding, retail) in having the capacity to make huge charitable donations. The most recent wave of technology billionaires has shown a desire to start giving away their fortunes much earlier in their lives than their predecessors did. “[W]hy wait when there is so much to be done?” Facebook’s Mark Zuckerberg said after he joined Warren Buffett and Bill Gates’s highly publicized “Giving Pledge,” promising (along with 150 other billionaires) to eventually donate at least half of his wealth to philanthropy. “This readiness to give early, and give big, is already amplifying the influence of tech philanthropists,” Callahan notes.

Technology philanthropists are also showing creativity in their giving. “In Silicon Valley, you often make your fortune by solving a problem that nobody else has solved – or, ideally, is even working on,” Callahan writes. “Many techies are bringing the same mindset to their philanthropy.” While some make more traditional gifts to universities and art museums, or give to established research programs, many “embrace the adage that philanthropy is `society’s risk capital’” and seek to create transformational change. As tech entrepreneur Sean Parker argues, “It’s important for hackers to embrace the values that made them successful in the first place: skepticism of the establishment and a desire to provoke or upend it.”

Big philanthropists from the financial sector, by contrast, often “are more comfortable with the status quo, and a lot of their giving goes to boost elite universities, arts institutions, hospitals, and land conservation trusts. Compared to techies, they’re more into charity than change.”

Naturally, people applaud the mega-donors with whom they share political opinions and condemn donors who are pushing an agenda they disagree with. “When donors hold views we detest, we tend to see them as unfairly tilting policy debates with their money,” Callahan writes. “Yet when we like their causes, we often view them as heroically stepping forward to level the playing field against powerful special interests or backward public majorities.”

Callahan acknowledges that conservative philanthropists have some built-in advantages based on the amount of money that has gone into “policy work friendly to corporations and Wall Street.” In addition, the big donors on the right appear to have developed more intricate networks of like-minded philanthropists and have a better ground game at the local level.

Conservative philanthropists are more likely to face charges of “feathering their own nests.” When mega-donors use their philanthropic support to advocate for reducing taxes on the wealthy and deregulating the very industries in which they operate, they give the appearance that they are acting out of self-interest rather than aiming to make the world a better place. (A specific example would be donors supporting groups that advocate for the “carried interest” loophole, a rule that allows private equity investors to pay taxes on income at a reduced rate but has questionable benefit to the broader society.)

Another area of conservative political advocacy that has generated strong criticism is voting rights. Strict voter ID requirements reduce participation in a process essential to democracy, and critics say these laws seek to tilt elections by disenfranchising certain groups of voters such as racial and ethnic minorities. It’s especially galling for big donors to get a tax break to support laws designed to reduce voting.

At the same time, liberal mega-donors promote equally controversial causes, such as the Buffett Foundation’s longstanding support for abortion rights. Again, Callahan’s point is not to take sides between the Buffetts and the Kochs but rather to show how the philanthropy of these billionaires has given them all so much power.

And again, he warns that things are likely to get worse. The outlook for discretionary government spending is dismal. Meanwhile, the rich get richer, and private philanthropy will likely continue to grow in importance.

Given that wealthy donors, particularly fiscal conservatives, have helped create government austerity by lobbying to cut taxes and government programs, Callahan deems it fair to ask whether this is all a “brilliant power grab: First, the wealthy helped knock out government. Now, they’re taking more direct charge of society themselves, using philanthropy as one tool.” He ultimately concludes that he can find “no plutocratic plot,” but his profiles of certain philanthropists raise an interesting philosophical question about the net impact of a donor who gives tens of millions of dollars to the arts but, at the same time, supports politicians and groups that are aiming to reduce government funding for the arts by a much larger amount.

One perspective largely missing from the book is that of the individual nonprofit organization. The imbalance in political power between wealthy donors and the nonprofits that are often desperate for operating capital can drive recipients of charitable gifts to surrender autonomy or even modify their mission. As an example, Callahan shows how colleges have accepted large sums from donors who require curricular content with a particular political viewpoint, or demand a say in faculty hiring and firing decisions. He presents these cases more to illustrate how large donors operate, though, and doesn’t explore how colleges and other nonprofits struggle with thorny issues as they are offered large gifts with strings attached.

Callahan suggests several reforms that would bring greater transparency and oversight to the philanthropic sector:

·       Nonprofits and donor-advised funds should be required to disclose their donors.

·       Fewer organizations should qualify for tax-exempt status. Nonprofits engaged in partisan political activities would lose their 501c)(3) designation. Additionally, donations to certain nonprofits that do the most good for society would be fully tax-deductible, while donations to other nonprofits that provide less of a public benefit would get only a partial deduction. (Good luck making that distinction.)

·       Donor-advised funds should be required to give a certain percentage of their assets to charities each year, as foundations are. Today, the rules permit donors to get an immediate tax break for contributing to donor-advised funds even though those funds have no near-term obligation to pass that money along to charities. In addition, the required annual payout for foundations could be raised above 5 percent.

·       The philanthropic sector should have stronger regulatory oversight, and there should be studies analyzing the societal benefits of charitable giving, both of which could be paid for out of the federal excise tax on the investment income of private foundations.

The challenge, Callahan writes, is to find ways to promote civic equality without impinging on our nation’s longstanding tradition of philanthropic freedom. His ideas for reform, which are so timely right now, strike that balance thoughtfully.

Charlie Gofen is an investment counselor in Chicago who has taught high school and been a newspaper reporter.