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
RPTP Is a Strong Rea­son to Con­sider Giv­ing 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.