Foundations Gone Wild

A July 17, 2010 Wall Street Journal story, "Gates, Buffett Goad Peers to Give Billions to Charity," told how these two billionaires, plus other members of this exclusive club (notably Michael Bloomberg, Ronald Perlman, and David Rockefeller), were mobilizing to entice fellow billionaires to spend half their fortunes on philanthropy (to donate, go here). If successful, this would dramatically increase charitable donations, already estimated to be $303.75 billion in 2009. The Gates/Buffet admonition is certainly great news for nonprofit-sector executives, and even better news for medicine, the arts, and education, all of which heavily depend on public-spirited charitable donations.

But generosity duly acknowledged, this story has a less sanguine side. To exaggerate a bit, the Wall Street Journal story could have begun with "Rich Airhead Busybodies Strike Again." Let us be clear. The argument is not that charity is evil or necessarily misguided, but rather that foolishness, some of it dangerous, can infuse the enterprise. With so many people with outstretched palms, this side of the story is too easily pushed aside.

The place to begin is the IRS. All foundations, regardless of size and mission, must satisfy IRS regulations, and there is nothing in these rules regarding whether anything positive is accomplished. IRS officials focus on possible tax scams, forays into partisan politics, money-laundering, and (recently) promoting terrorism. Foundations may invite trouble with sloppy record-keeping or excessive executive compensation, but this is seldom a problem since major philanthropies hire expert legal advice and technical assistance to meet IRS requirements. But they need not worry that a swarm of IRS agents will arrive and announce, "Your goals are so dim-witted that we are closing you down." 

Nor, unlike with public officials, do most foundations worry about prying eyes that might expose embarrassing ineptitude. Annual reports must be filed with the IRS, and while an industrious reporter might scrutinize them, this is nothing compared to what public officials face daily from the media, "good government" watchdog organizations, lawsuits, and, most critically, political rivals ever anxious to seize upon ineptitude or corruption. Though those dispensing grants may carefully review proposals, unlike government, they are under no legal obligation to hold hearings or solicit public comments. It is hardly accidental that New York City's Mayor Mike Bloomberg has used private foundation money to finance dubious schemes like paying kids to read rather than allow these gimmicks to be picked apart in open, contentious public settings. The operative word is "unaccountable."

What undoubtedly separates rich foundations from the "real world" is that those handing out the money need not act wisely. Making money and handing it out have radically different requirements. Sam Walton may have been a genius at retail but there is no assurance that Sam's heirs who run the multi-billion-dollar Wal-Mart Foundation are capable of addressing America's problems. Acquiring billions entails careful calculations, and businesses regularly collapse thanks to foolishness. By contrast, neither the patron nor grant recipients have any incentive to say, "This scheme looks iffy, so why not study it more or just drop it?" Similarly, business success is indicated by profit and loss, but there is seldom an equivalent when dispensing grants (nonprofits usually hail only accomplishments in their handsome reports). No wonder running a big-spending foundation is so popular -- this is great fun and far less demanding than the stresses of acquiring wealth. 

Foundation benevolence is also bereft of capitalist competition to kill bad ideas. No grant-bestowing venture, no matter how imprudent or even life-threatening, is constrained by superior rivals. Microsoft frets about being outshined by Apple, but the Gates foundation need not worry that Steve Jobs will excoriate its grant-giving policies. There are not even any penalties for working at cross purposes, let alone inflicting harm. So while the Gates Foundation lavishly spends to eradicate disease in Africa and thereby increases population (which could bring ecological disasters and war), the Hewlett foundation promotes population control. Down deep, charitable generosity is antithetical to the very capitalist competitive spirit that initially created these fortunes.     

Charitable largess is also radically unlike, say, running an investment fund, where trained, experienced experts carefully pore over proposals and, if nothing looks promising today, invest in U.S. Treasury bills until better opportunities arise. Foundations, by contrast, have powerful tax incentives to spend 5% of their assets annually regardless of merit. Compare the burden on those seeking a charitable handout to firms seeking investors. Businesses needing capital must supply detailed business plans, audited financial statements, and other similar data before receiving a nickel. If the investment turns sour, heads will roll among those who signed the checks; by contrast, people are rarely fired if a nonprofit just wastes the money. "At least we tried" usually suffices for those handing out other peoples' money. Foundations do, of course, disappear, but almost never from ill-advised intervention.

Still, all of this acknowledged, what is the balance sheet regarding net benefits? Unfortunately, compiling an accurate bottom line is impractical, but it is clear that serious troubles abound far beyond just wasting billions or just having a penchant for troubling left-wing causes. In the late 1960s, for example, the Ford Foundation thought it was a "good idea" to turn the schools in black communities over to black community activists, who "would surely know how to educate these children." The predictable upshot was heightened racial polarization, citywide teachers' strikes to protest the firing of white teachers in these black-controlled schools, rampant stealing, and no improvement in academic performance despite all the millions spent. The Ford Foundation was hardly finished "helping" America; it has played a major role in funding multicultural education and other leftish educational nostrums that have undermined the academically tough policies so needed by the poor completely dependent on public education. It has also, along with the Rockefeller Foundation, the David and Lucile Packard Foundation, and the Levi Straus Foundation (among others) generously funded La Raza ("The Race"), a Hispanic organization notable for its divisive race-based rhetoric.  

But if there is a poster child to illustrate this Foundations Gone Wild tale, it would have to be the Gates Foundation's bumbling efforts to uplift U.S. education. To say that it foolishly spends money like a drunken sailor probably insults the U.S. Navy. It has lavished billions on risky schemes that lacked any sound basis other than "why not?" This includes setting up generous college scholarships for semi-literate high school students, establishing hundreds of small "themed" high schools since everybody knows that big schools hinder learning (they failed), extravagantly funding community colleges where students continue their slothful ways, and trying to transform every American, no matter how capable, into a college graduate.

And make no mistake: Gates is not alone in his ill-advised meddling. Perusing one failed education reform after the next, the common element is some well-intentioned foundation that seems anxious to suspend rational judgment since "who knows? It might work." Tellingly, scholars can be hired to prove program success. Such well-intentioned but inept largess can transform the hard work of educating students into chasing free money. The Broad foundation even annually awards a million-dollar prize to school districts that have gone from horrific to just appalling, as if this is the first step on the road to academic excellence. Again: There are no penalties for imprudence as long as the IRS is happy with the paperwork.

It was once alleged that the Catholic Church or the Masons or the Illuminati were powerful, "invisible" governments. Today, these hidden string-pulling entities have been replaced by foundations, and the potential for evil is far greater, given their staggering wealth and absence of critics. They regularly make offers nobody can refuse, and while they generally perform good deeds, they deserve more careful scrutiny.

Many of America's current tribulations began as foundation do-gooder schemes. If you are exasperated with Windows' poor security, switch to Apple. If Gates wants to undermine a school system with millions in "help" for his ill-conceived schemes, escape may be far costlier than a Mac. Free money can be expensive.

Robert Weissberg is Professor of Political Science-Emeritus, University of Illinois-Urbana. His latest book is  Bad Students Not Bad Schools.
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