Billionaires and the Power of Verticality

Social problems can sometimes be solved by stacking lots of money in one place, all at once. How do we reconcile the transformative impact of philanthropy with the destructive power of billionaires?

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I: Jeff Bezos, bags of cash, and the money vipers

It has served me well, as a general rule, to be suspicious of billionaires.

Red flags should pop up when any person responds to having a billion dollars by trying to figure out how to get more money, which is what all billionaires do. That’s the one unifying trait that bonds them together: each responded to having $1 billion by scheming how to get $2 billion instead. A few are benevolent geniuses, but by and large, billionaires are lucky weirdos. More often than not, they’re greedy, destructive weirdos, too—money vipers who make the world worse.

A billion dollars is, to state the obvious, a lot of money. If Jeff Bezos were to fill a sack with $5,000 every day—365 days a year—and hand it over to you, he would only exhaust one billion dollars after 548 years (and still have $203 billion left).

To put that into perspective, 548 years ago was 1476, quite some time before Columbus landed in America. We can only assume that 548 years from now, Jeff Bezos will either be dead, or a cryogenically frozen freak in his conspicuous cocketship, but this is all a moot point because Bezos has donated less than one percent of his wealth so you’re certainly not getting any sacks of cash.¹ Sorry to be the bearer of this disappointing news.

The important point is this: a billion dollars is an unfathomable amount.²

So, here’s a puzzle for you: if a billion dollars is a lot of money, is it possible to give that amount away and produce no discernible effect on the world? The answer, alas, is yes—and it has to do with a principle that I call verticality.

II: How to waste a billion dollars

If you want to waste a billion dollars in the United States, here’s how: just give every American—all 333 million of them—three dollars. Poof! A billion dollars gone, with virtually no effect on anyone’s life, nor much effect on the broader economy. Spread thinly, you can spend a billion dollars and achieve nothing. This is the epitome of horizontal spending and, at its extremes, it is hugely ineffective.

There are eleven countries that have a total annual economic output below one billion dollars. It isn’t difficult to understand than an infusion of a billion dollars would therefore be a bigger deal to, say, Vanuatu than China. Injecting a billion dollars into Vanuatu would be a prosperity game-changer, possibly even making a significant, lasting dent on national poverty. In China, a billion dollar infusion would be less than a dollar per person, not sufficient to even produce a discernible ripple in the $18 trillion economy.

This dynamic of verticality partly explains why there are divergent views on billionaires when it comes to philanthropy and wealth taxation.

In one camp are the billionaire sympathizers: those who say that without mega-rich philanthropists, you wouldn’t be able to engage in targeted interventions against scourges in, for example, global public health. Rich governments are constrained by fickle voters, so they cannot justify huge amounts of vertical spending on one specific health problem in the developing world. Meanwhile, organizations like the Bill & Melinda Gates Foundation can—and do—exactly that.³

In another camp are those who say that the system that produces billionaires and allows them to escape taxation is what creates these problems in the first place. The capacity of governments to overcome inequality, tackle public health debacles, and to create a just and fairer world is, in this view, inversely proportional to the creation and maintenance of the billionaire class.

Which view is correct?

III: The dirty secret of billionaire “philanthropy”

Just outside San Francisco, there is a 46,000 square foot, 98 room chateau known as Carolands.⁴ Inspired by the architecture of Louis XIV when it was built in 1916, it’s a monument to opulent wealth. The current owner is the billionaire Charles B. Johnson, former CEO of Franklin Templeton Investments, now Republican megadonor and part owner of the San Francisco Giants baseball team.

According to a ProPublica investigation, Johnson bought Carolands for $26 million, but it was later reappraised at a value of $130 million. In 2013, Johnson got a tax break worth more than $38 million—more than what he paid for the chateau—for an act of public minded “philanthropy,” after pledging to turn Carolands into a public museum, opening it up to visitors for 40 hours a week.

The billionaire took the tax break, but didn’t keep his promise: Carolands is now open to a tiny group of visitors, by appointment only, who are entered into a visitor lottery. The tours only run most Wednesdays at 1pm. The government gave a tax break worth at least $38 million to a man now worth roughly $6 billion so that he would open his home to a handful of tourists for two hours a week. It is fitting that when “Ann and Charles Johnson unveiled the restored chateau at a costume party, they dressed as Marie Antoinette and Louis XVI.”

While this example offers a grotesque caricature of billionaires, one study suggests this is shockingly common and that “the wealthier the donor, the greater the taxpayer subsidy for their donation. For every dollar a billionaire donates to charity, taxpayers chip in 74 cents in lost revenue. This is because wealthy donors not only reduce their income tax obligations, but also capital gains, estate and gift taxes.”

By contrast, it is lower and middle-income donations that are most likely to flow to food banks, local charities, youth centers, and anti-poverty programs. Surprise, surprise: the overwhelming majority of philanthropy from the super-rich benefits not the poor and needy, but elite institutions. As Paul Vallely writes:

Philanthropy, it is popularly supposed, transfers money from the rich to the poor. This is not the case. In the US, which statistics show to be the most philanthropic of nations, barely a fifth of the money donated by big givers goes to the poor. A lot goes to the arts, sports teams and other cultural pursuits…The common assumption that philanthropy automatically results in a redistribution of money is wrong. A lot of elite philanthropy is about elite causes. Rather than making the world a better place, it largely reinforces the world as it is. Philanthropy very often favours the rich – and no one holds philanthropists to account for it.

Some have disparagingly called this dynamic “philanthrocapitalism.” For tax purposes, a dollar donated to Harvard or to an opera house is treated the same as a dollar donated to a homeless shelter or to fight global poverty.

For example, Stephen A. Schwarzman—chairman of Blackstone, former chairman of Trump’s strategic and policy forum, and a man who once compared a modest increase in the tax rate on carried interest to Hitler’s invasion of Poland—loves to slap his name on elite causes.

Schwarzman was appointed Commandeur des Arts et des Lettres of the French Republic after donating $4 million, or 0.010256 percent of his estimated $39 billion of wealth to help restore the gardens of the Chateau de Chambord, which was built as a hunting lodge for King Francis I of France (Francis used its 440 rooms, 282 fireplaces and 84 staircases for seven weeks total). For comparison, if you earned $100,000 a year and gave away 0.010256 percent of your income, that would be precisely 10 dollars and 26 cents.⁵ Quelle generosité!

Similarly, one academic analysis of global elite universities found that they received roughly $35,000 per student per year in philanthropy, compared to around $990 per year for national highly-ranked universities. (Full disclosure: I am a byproduct and beneficiary of this, as I studied at Oxford).⁶

The critique of this form of giving is nothing new. During the (First) Gilded Age—we are arguably living through the Second now—William Jewett Tucker criticized the Carnegie model of philanthropy not for its generosity but for the model it embeds in society, saying there is “no greater mistake…than that of trying to make charity do the work of justice.” Similarly, as Vallely points out, “Teddy Roosevelt’s judgement on John D. Rockefeller was that ‘no amount of charity in spending such fortunes can compensate in any way for the misconduct in acquiring them’.”

(Paging the Sackler Family).

Furthermore, those who decry billionaire philanthropy often see it as opening a gaping wound on society, then donating a few bucks for useless Band-Aids. For example, few have contributed more to the unaffordability of housing in San Francisco than Mark Zuckerberg, who then donated $3 million to help with housing affordability in the Bay Area. Given that the median house price of a San Francisco home is now $1.4 million, that’s not a Band-Aid that will accomplish much other than a tiny bit of healing for the scab that is Zuckerberg’s reputation.

And yet…there are ways that we can learn from billionaire philanthropy to more effectively tackle global poverty.

IV: Credit where it’s due: the power of verticality