Keynesian Altruism


There have been a few discussions in the EA community about the merits of donating now versus investing and donating later. I think it is a very valuable question to answer, but I believe some have used flawed logic to conclude that we should donate later. In this article, I make the case against delaying deployment of funds to the distant future. I also suggest a novel approach, which I call Keynesian Altruism, that involves donating during global economic downturns to maximise impact when returns from investment are at their lowest. Using this logic, I conclude that now (August 2020) is a good time to be deploying (i.e. spending) funds.


I identify as an effective altruist and have earned-to-give for many years. I have studied advanced finance at a leading university and work in the asset management industry. All views are my own and unrelated to my employment.

In this piece, I have assumed a basic level of finance, statistics and economics knowledge. I have tried to be focused, concise and readable rather than exhaustive, rigorous and academic. I have also tried to avoid duplicating the contents of the articles to which I refer.

Invest to Give

A number of people have written some very thought-provoking articles asking whether we should invest money now and give at a later point:

The case for investing later
Giving now vs. later

The logic made in these article essentially goes as follows:

1) You can make positive inflation-adjusted returns by investing in equities;
2) On average the amount of money you will have in x years will be higher in real terms than you have today;
3) By deploying the money later, you will be able to buy more.

The proponents of this are very upfront about one-tail risks:

1) An existential event could cause complete loss;
2) The values of the fund may drift over time (my favourite example is the Communist Party of Great Britain, which disbanded in 1991 and became Democratic Left then New Politics Network then Unlock Democracy in 2007, hence within 16 years, the cause had changed from communism to advocacy for participatory democracy through a written constitution);
3) There are diminishing returns on deployment of capital and it is likely that EA will have more resources in the future;
4) We may (or may not) be living at the most influential time in history.

These are very well thought-through considerations that I broadly agree with.

The first issue I have with this is that it treats investments in equity as if they are risk-free. When you invest in equities, theory (CAPM) tells us we get paid two components: (1) a risk-free return + (2) a premium for beta. Component one, the risk-free return, is essentially compensating you for time. This is sometimes positive in real-terms and sometimes negative in real-terms. In short, if you invest in super low-risk investments (e.g. Treasuries), you may or may not have more money in x years in real-terms. Based on data up to 2011 compiled by Robert Shiller, the real risk-free rate of return has averaged −0.2% over the last 5 years (geometric mean), −0.1% over 10 years, +1.2% over 20 years, +1.9% over 50 years and +1.2% last 100 years, so typically more often positive than negative, but recently more often negative than positive.

Component two, the premium for beta, is essentially saying that you get paid for taking on risk that the market cannot diversify away, and this component should be ignored because it is a return you get for selling risk not selling time preference. There is a market for risk, just like any market for goods. You can sell risk (get paid to take it on) or buy risk (pay someone to take it off you). Like all markets, there is an equilibrium at which the market clears and this determines the price (for the finance theorists out there, this is the market risk premium multiplied by the forward volatility). When you buy equities, you are being compensated for taking on risk that can’t be diversified away. Essentially someone is willing to pay you around 5% (the market risk premium, with beta=1) to put your money through a probability function that spits out a roughly normal distribution with a standard deviation of 20% (the long-run normal level of the VIX). There is real economic value in minimising risk and real economic value to have investments that hedge you (i.e. having more money when the economy is weak and you need it); that’s why people are willing to pay for it. When you invest with leverage, you are just selling more risk. Because, at least in theory, you could get the return in a very short period of time and still get compensated for it, i.e. high leverage, short duration, this return is not driven by patience. If I short sell a AAA government bond with maturity of 1 year and use the cash to buy a 1-year forward on a stock or commodity, I will expect to make on average 5% of the notional capital at work, but (subject to no counterparty risk) I don’t need to invest any money at all. On one day in a year’s time, I will receive an uncertain amount of money and have to pay a certain amount of money, which will be either an infinite per-annum gain or an infinite per-annum loss if you insist on thinking about risky returns on an annualised basis. I’m not saying don’t invest in equities (for what it’s worth, I think EAs should invest in high-beta portfolios), but I am saying it’s not a like-for-like comparison.

The second issue I have is that the basis for it assumes inflation as a baseline. However, the cost of a product or service does not increase at the same rate as the cost to make somebody better-off, i.e. people in the future are likely to be wealthier so giving them the same amount of money (cash programming) or stuff (e.g. malaria nets) will be less impactful in the future. This difference is real GDP growth. Given the choice of deploying 10 malaria nets today or 11 malaria nets in 100 years’ time, I would definitely choose the former. In 100 years’ I hope and expect that everyone in the world can afford a malaria net and our philanthropy is targeting needs higher up the hierarchy. Even if scientific development means we have a malaria net that is twice as effective, I would still rather deploy 10 today. Historically, global real GDP growth has been at least 3% p.a. (and over the long run, lower income countries tend to be above that due to economic convergence). If your investments are not growing at greater than 3% p.a., then your outcomes will be shrinking even if your outputs are growing.

The third issue is that the return (in nominal terms) may be taxed or expropriated. If an individual delays donations, any gains will be part of their personal taxable income /​ capital gains. While charities normally have some tax efficient advantages, they are not exempt from all tax. For example, until 2016 in the UK charities had to pay tax on dividends but not capital gains. Of course, if doing at large scale, it would likely be possible to choose an offshore tax domicile, but this may also increase the risk of expropriation. It’s also worth noting here that for charities in the UK to maintain a level of capital above what can be justified as reserves, they need express permission in their deed of trust, as this would be considered an endowment. Even then, the original capital amount must be spent within 21 years to stay within the law.

In conclusion, it is more appropriate to compare the risk-free rate (typically −1% to 2% p.a. in real terms) with GDP growth (typically 3% p.a. in real terms), rather than comparing equity returns (typically 5% to 7% p.a. in real terms) with inflation (by definition 0% in real terms). That is even before you get into complications of implementing this strategy in practice: tax, expropriation risk, charity law, existential risk, value drift, diminishing returns and potentially diminishing influence.

Keynesian Altruism

While I disagree with delaying deployment of funds to the distant future, that’s not to say I insist on everything being spent now. There are short periods of time when the numbers can make it worth delaying deployment. This is due to economic cycles.

Basic macroeconomics tells us there are times when the economy is working faster than it should (overheated) and times when the economy is working slower than it should (usually defined as a recession). There is a lot of positive feedback in the economy; when demand for stuff is high, businesses make record profits, employees get paid well to retain them and capital is needed for growth. During a recession, the opposite happens and spending on advertising, capital equipment and R&D often falls.

Most governments do their best to reduce the magnitude (i.e. difference between peak and trough) of cyclicality through monetary policy. This involves lowering interest rates, which reduces the return you get from investing (this increases asset prices and explains why the S&P 500 is up year-to-date despite the worst pandemic in 100 years) and encouraging you to spend it instead. Essentially governments are subsidising spending because not enough people are doing it.

Another tool governments have in a recession is fiscal policy. This basically means they themselves are spending to fill the gap. Arguably if you are going to build long-term infrastructure assets (previously highways, now fibre optic), the best time is when lots of people are unemployed, so talented people are delighted to work for less than it would have cost to employ them previously. However, governments themselves are also faced with a reduction in income (less tax due to lower profits /​ incomes) and an increased in expenditure (more unemployment so more social security payments). This means if they are to boost spending during a recession, they need to be happy to run a deficit and need to be self-disciplined enough to run a surplus during good times. This sort of fiscal policy is known as Keynesian Economics. In my experience most governments do it to some extent, but few do it properly.

So what about the third sector. Just like their private and public sector peers, income for charities also typically falls in a recession. Charities are already making redundancies as a result of COVID-19, even though ironically their services are more required than ever now. There is also a structural cost to reduce a workforce: redundancy costs; other costs of restructuring (e.g. adjusting office space); then hiring and training new people when you return to growth. I believe that not only should charities /​ foundations run at a deficit during a recession (like a smart government), they should even consider growing to meet the increased need of their beneficiaries. I call this Keynesian Altruism.

From a practical perspective though, this takes guts for a charity to do as it means running ‘unsustainably’ (as in expenditure exceeds income) sometimes for a period of up to 5 years. It also requires planning in advance: charities don’t normally have the reserve levels they need to do this (and as I mentioned above, charity law actively prevents it). The onus often falls on the donors, but they can be equally bad. Many endowments deploy the income they receive from investment income, which of course falls during a recession. I disagree with this approach. In my view, now is a very good time to reduce the size of an endowment. For individual donors it is harder, but if you are truly altruistic, there is no better time to donate, even if your job security may be lower today than a year ago.

Returning to the financial theory we discussed in the previous section, right now the risk-free rate of return is solidly negative (as at 10th Sept 2020, US Treasuries have a −1.28% yield over 5 years in real terms), but the spending power is higher now than it was last year. The price of impact has also likely increased because there is now more need for help.

Final thoughts

Finally, while most of this article has focused on a quite complex, there are some basic practical steps that I think everyone can agree upon:

1) Cash sitting in a charity bank account costs money, so if you have lots of it, invest some;
2) Beware the extra administrative burden that comes with managing a charity with investment income (sometimes it’s better to have a bank account that pays no interest than one that pays 0.01% p.a.);
3) Taking time to work out where best to deploy funds clearly has value.