Giving now vs. later

by paulfchristiano

It has been observed that money spent helping the poor compounds over time in the same way that profit-oriented investments do (see Holden Karnofsky, or Giving What We Can). When I support the world’s poorest people I’m not just alleviating their suffering, I’m increasing the productivity of their lives. The recipients of aid go on to contribute to the world, and their contributions compound in turn.

Moreover, one can argue that the returns to aid are much higher than achievable financial returns. Equities make around 5% in real terms, while the world’s poorest earn returns upwards of 20%. And that’s not surprising—more people are interested in making money than are interested in improving the world, so we should expect it to be harder to find opportunities to make money than opportunities to improve the world.

So, the argument goes, altruists ought to donate as quickly as possible, doing good works that will compound out there in the world much faster than they will compound in their bank accounts. Make sense?

I think this argument is mistaken.

Here’s the problem: if you give your money well, it might compound much faster than it would have in your bank account—but only for a while. Over time the positive effects will spread out more and more, across a broader and broader group of beneficiaries, until eventually you are just contributing to a representative basket of all human activities. Eventually, my investment will compound at the rate of world economic growth, rather than at the particularly promising interest rate I was able to originally identify.

When I leave money in my bank account, it compounds slightly (1-2%, conservatively) faster than world economic growth. It does this for years, until I decide to spend it, for example on developing world aid. At that point it will earn anomalously high returns for a while, before being spread out throughout the world and then compounding in line with world economic growth. If I donate a year later, I earn 1 extra year of market returns, and 1 less year of compounding in line with economic growth. That’s a good deal—an extra 1-2%.

What I really care about is the extra multiplier I get right after I donate my money, before it resumes compounding at the usual rate. E.g., if my investment compounds 5% faster than economic growth for 15 years, my money is being effectively doubled, when compared to an investment that compounded with growth all along. That multiplier isn’t changing a lot over time (it might increase or decrease as good charitable opportunities arise or dry up, but there’s no good a priori reason to expect it to decrease steadily with time).

So if I’m considering donating to a cause like developing world aid, I shouldn’t donate sooner rather than later just because poor folks can earn higher returns than I can. I should instead look at the total multiplier I’m getting on my money, and donate iff I expect that multiplier is declining faster than [(market rates of return) – (economic growth)]. I don’t think we’ve found many causes for which this is plausibly the case, and I think that aid is definitely not one of them.

The basic issue is that philanthropists aren’t much less selfish than normal people, instrumentally. Even if you care about other people, you would much prefer that you make $1 than that someone else make $2, since when you make $1 you can use it to create more than $2 of value. (Of course this wouldn’t be true in a world with many altruists, in which the returns to altruistic endeavors were less fantastic.)

In the very long run I expect interest rates to fall / growth rates to rise until the two are equal, and I expect the multiplier on altruistic investments to decrease until it’s 1. But those events look to be a long way off.

Is giving later really an option?

There are at least four other reasons to give now rather than later:

  1. Giving can send a social signal, which is useful for encouraging more giving, building communities, demonstrating our generosity, and coordinating with charities. (Who are more likely to take a community of donors seriously than a community of people saying “maybe we’ll donate in the future.)
  2. Our priorities may change over time, and we would prefer that our future selves not have the option to keep money for themselves.
  3. Eventually we will die, and it is very hard to build institutions which will carry out our mission after our death.
  4. Taxes favor giving as you earn. (You can only deduct donations against this year’s income, and in the US at least you can only deduct 50% of your income in this way, so someone looking to donate a large fraction of their income will be deduction-opportunity-limited, and will want to use up all of the available deductions each year.)

I believe that these are serious considerations. However, “give now” is just one possible solution to these challenges, and if “give later” would otherwise be a much better strategy, it is worth searching for alternative solutions. Moreover, I expect that I’ll have a much better idea of how to spend charitable dollars in the future. So I would like to hold on to my money even if it weren’t earning interest, and I would need to confront these problems anyway.

Donor advised funds, or more generally donating to 501(c)3’s which invest, may resolve some of these problems. Giving to a DAF serves as a binding commitment to give, and therefore overcomes problem 2 and some of problem 1. Contributions to DAFs have the same tax status as donations, so overcome problem 4. Potentially the existence of such funds could also facilitate community-building and coordination with charities, perhaps even more effectively than an established record of giving.

At the moment donor advised funds typically charge management fees of about 0.6% / year on top of normal management fees, and tend to place more restrictions on grants than are legally mandated. In principle, it seems that US charities are free to invest arbitrarily (and  subsume arbitrary for-profit enterprises), and use investment income to finance their activities or make grants.

It is tempting to imagine a charitable fund designed to accommodate very long-term giving, organized as a 501(c)3 and not charging significant annual management fees. Such a fund might seek out philosophically aligned donors and adopt a governance structure which codifies their shared values (representing a more credible commitment to to the charities that might want to coordinate with those donors). It might go further and actively manage its funds, hiring philosophically aligned traders and analysts, who would be happier to see the surplus they create split between themselves and philanthropists with similar values. I don’t know whether this is possible, but it seems worth thinking about.

Problem 3 appears to be significantly more difficult, but might be addressed in part by the same mechanisms. Donor advised funds provide a legal framework in which donated funds can be preserved without suffering from estate taxes or the mandated 5% payout of foundations. If there were enough like-minded philanthropists, it may be possible to allow each philanthropist to pass of advisory control of their funds to a like-minded successor before they became unable to oversee them themselves. Making such a fund stable enough to resist gradual value drift or pillaging would be a significant challenge.

The historical record is conspicuously devoid of successful enterprises of this kind, which suggests that future outings in this genre are doomed to fail. But I don’t think this is such strong evidence:

  1. I know of few serious attempts to create institutions which would build up wealth while resisting value drift or collapse. Today may be special just because today we think of different plans than our ancestors thought of.
  2. We have access to more effective communication/coordination mechanisms than were available historically. It may now be possible to reliably identify a like-minded and similarly able successor who shares your values even if the social prevalence of those values is one in a million or lower.
  3. I think there is a reasonable probability that we are in an unprecedentedly stable legal and political regime which will last longer than any preceding regime. Moreover, we now have a global political infrastructure which lets us build financial entities that can survive changes or collapse in one country by moving to another.

So if “give much later” looks like a good strategy, I think we should seriously consider trying to make it work, rather than throwing up our hands and saying “at least we can get some value by giving now.”

Can good works grow faster than the world around them?

The argument above is based on an empirical claim: good deeds tend to grow at the same speed as the world at large, rather than growing much faster. Equivalently: measured as a fraction of the world, the positive changes we effect don’t continue growing indefinitely. (While money in your bank account steadily increases as a fraction of the world’s wealth.) For some interventions, like existential risk reduction or undirected economic boosts, this is true almost definitionally (and I consider risk reduction an unusually forward-looking strategy, rather than unusually short-sighted).

Something that compounds faster than economic growth necessarily represents an increasing fraction of the world, and if it continues compounding faster than economic growth for long enough it will eventually make up a large fraction of the world and single-handedly increase the growth rates. This is rarely realistic for the kinds of investments we consider.

Instead, what happens is that the returns from an investment are typically not that concentrated. If I improve the educational system, this may make the world significantly better, but very little of that improvement will occur within the educational system itself. Instead, that improvement will be scattered out across many different endeavors (which will in turn spread their outputs even more widely). Even if the returns to education are very large, they will eventually spread out through society and compound at the usual rate unless the product [(returns to education) times (fraction of returns that are reinvested in education)] exceeds the economic growth rate.

In general, for a class X of investments to compound faster than economic growth rate, it would need to be the case that [(returns to X) times (fraction of returns reinvested in X)] exceeds the growth rate. If X is a small or very specialized class of investments (like education), it is hard for “fraction of returns reinvested in X” to be large. If X is a large natural class of investments (like the economy of the US), it is hard for “returns to X” to be far above market returns.

Investment seems to have anomalously good internal returns. I think this is possible because someone is actively applying significant effort to ensure that the returns from one opportunity are reinvested exclusively in the most promising opportunities (and a lot of effort has gone into building the legal and economic infrastructure that can support this). The same thing applies within a firm, although usually firms eventually encounter diminishing returns and their growth slows or stops.

Even so, the above argument implies that it is impossible for an investor to earn market returns for too long (or else they would eventually have all of the money). In practice, investors are able to earn market returns while they invest, but eventually they take their money out of the market or die, and they do not form lasting lineages of investors.

There may be other opportunities that have the same important properties as investment. For example, I might be able to efficiently support individuals or organizations that share my values, and therefore might be able to pursue other high-return investments after they have used up their own capacity for growth.  It is plausible to me that supporting a growing community of “effective altruists” might have this effect.