Giving now vs. later

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.

Cross­posted from Ra­tional Altruist