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The Greater Good: How Philanthropy Drives the American Economy and Can Save Capitalism by Claire Gaudiani

 

Rating: (Recommended)

 

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Generosity

Claire Gaudiani presents a compelling case in her new book, The Greater Good. She proposes that we are rich because we are generous. Here’s an excerpt from the beginning of Chapter 6, “Generosity and The Future of Democratic Capitalism,” Gaudiani calls the heart of the book (pp. 134-41):

Yet the true friend of the people should see that they be not too poor, for extreme poverty lowers the character of the democracy; measures therefore should be taken which will give them lasting prosperity; and as this is equally the interest of all classes, the proceeds of the public revenues should be accumulated and distributed among its poor, if possible, in such quantities as may enable them to purchase a little farm, or, at any rate, make a beginning in trade or husbandry.

—ARISTOTLE, Politics

 

A man of humanity is one who, in seeking to establish himself, finds a foothold for others and who, desiring attainment for himself, helps others to attain.

—CONFUCIUS, SIXTH CENTURY B.C.E.

 

The previous chapters, with their examples of investments in human capital, physical capital, and intellectual capital, show the power of personal initiative and generosity, the power of social entrepreneurialism to improve our society and our economy in

America. They also offer compelling testimony to the potential long-term health of American democratic capitalism. By most metrics, the United States is now the most successful and prosperous country in the world. The majority of our citizens enjoy a higher standard of living and per capita income and the nation enjoys a higher sustained rate of economic growth than any other country with this level of diversity in the population. Moreover, the United States has led the world in technological innovation and the creation of intellectual property, particularly in quality-of-life fields such as software development, biotechnology, materials science, and pharmaceuticals. Moreover, we accomplished these things because we have been able to utilize the most diverse and mobile population in the world. The question we face together is whether we can sustain and grow our philanthropic spirit in the face of increasing material wealth and personal well-being. Will we fall away from the commitments to philanthropy that have strengthened our social and economic health?

Many challenges confront us, both domestic and international. I will focus on the domestic ones because the problems in the two arenas are closely related and addressing them first at home will make changes we undertake overseas more believable at home and abroad. In the coming pages, I will delineate the role that generosity must play in their successful resolution.

But in order to understand what really matters for success in the future, we need to reflect a bit more on the lessons to be learned from the preceding chapters. First, the development of human, physical, and intellectual capital via philanthropic investments sustains our belief in upward mobility as a democratic imperative. Second, that development relies on the commitment of Americans to the pursuit of happiness. I want to draw your attention to these two fundamental factors because they define our success as a nation some 230 years after our founding. These inseparable drivers of personal and collective growth distinguish our economic, social, and political ambitions from those of other nations and can serve, in my judgment, as the best guides for our economic and social health going forward. Each is tied to generosity and must be understood if our democracy and our brand of capitalism are to endure successfully for the next century. To achieve that longevity, our society will have to deal imaginatively with the economic and social problems that face our nation in the first decades of the twenty-first century. The second part of this chapter describes these challenges and reviews how a dramatic increase in philanthropy can enable the country to make important progress just as it has at other critical moments in U.S. history.

 

UPWARD MOBILITY

Upward mobility is an excellent measure of the dynamism of the relationship between democracy and capitalism. It quantifies how well the idealistic promises of democracy are actually working for those in the weakest position in the economy. "The rate at which people move up through the income-distribution categories vividly shows how well the economy is building human capital and whether it is enabling wealth building in the very groups that need investment before they can achieve economic progress.

For generations of newcomers who have chosen to immigrate to American shores, the U.S. economy and its education, health, and social services—despite significant flaws—have generally rewarded hard work with economic and social progress. The stories of countless millions of immigrant families attest to the truth of this statement. Our society opens opportunities and rewards highly competitive, dedicated efforts, if not always immediately in the first generation, then in the second and third generations resident here. Democracy offers justice and equality of opportunity to each citizen. It grants the promise of, in short, upward mobility. This has worked dramatically better for whites than for people of color, but consciousness of this issue has created significant progress over the decades since the beginning of the civil rights movement.

How robust is upward mobility today? For instance, what percentage of the people who were once in the bottom quintile of the income distribution in the United States are still stuck there fifteen or twenty years later? Pause and take a guess at the answer to this question. It's likely to surprise you.

The Dallas Federal Reserve Bank asked almost the same question in 1995. The Fed used the University of Michigan's Longitudinal Panel Study, which has collected information from the same people every year since 1968 to document their status for social science researchers' Looking at the people in the bottom 20 percent of the income bracket, the Fed report states:

The conventional view leads us to think they were worse off in the 1990s. Nothing could be further from the truth. In the University of Michigan sample, only 5 percent of those in the bottom quintile in 1975 were still there in 1991 [author's italics]. Even more important, a majority of these people had made it to the top 60 percent of the income distribution, middle class or better, over that 16 year span. Almost 29 percent of them rose to the top quintile.

 

The story is almost as good for other income brackets. More than 70 percent of the people who were in the second-poorest quintile in 1975 moved to a higher quintile by the end of the study in 1991. Twenty-six percent got right into the wealthiest quintile.

Those in the middle fifth also did well, with almost half of them moving to the second or first quintile. More than 30 percent of those in the second-highest quintile in 1975 moved up to the top category by 1991. This kind of movement characterizes upward mobility and wealth-building opportunities for those at the bottom. Some smaller percentage fall back each year, and, of course, new arrivals and new families, often new single-parent households, refill the bottom quintile.3 Only 5 percent of the people who were in the bottom quintile in 1975 were still stuck there in 1991!

If you guessed wrong about this, you are not alone. When I interviewed colleagues on Wall Street and a number of faculty members from different universities, they guessed, on average, in the 60 percent range. Some even guessed that as many as 85 to 90 percent of those in the bottom quintile in 1975 were still there in 1991. Few people, even those in financial services or higher education, realize how powerfully our economy works for an individual.

Moreover, people in this country generally believe that they can move upward. They have faith in the American economic and social system as a vehicle for their own personal advancement. Critics of capitalism have long argued that lower-income groups will, over time in a competitive market economy, become chronically discouraged and angered and, finally, will rise up, riot, and take down the system. Is this kind of anger and dissatisfaction apparent in the United States? Harvard economists Alberto Alesina and Rafael DiTella and Robert MacCulloch of the London School of Economics focused an investigation on this question: How does income inequality affect the happiness of Americans as compared to Europeans? Are Americans, particularly those in the lowest-income levels, happy with our income distribution, or do we teeter constantly on the verge of revolution? Using surveys of 123,668 answers from people in the United States and twelve European countries over a twenty-three-year period (1972-1994), the researchers found that the poor in the United States are as content about income inequality as the other quintiles in this country. The group of people with the least money did not express unhappiness about the fact that incomes are unequal in this country. In fact, most people in the United States and in those twelve European countries said that they were not unhappy about income inequality. The only groups who were significantly unhappy about income inequality in their own countries were the poor in European countries and the wealthy in the United States. And this data was collected at a time when income disparity was actually widening in the United States!

These results show that, in general, Americans seem to be less affected by income inequality than Europeans. Further investigation of the results across income levels and ideological groups indicates that the wealthy and the right-wingers in European countries express very low concern about income inequality, while the European poor and its leftists express strong negative attitudes to it. On the contrary, in the United States neither the poor nor the left-wingers feel strongly about income inequality. Only the wealthy reflect somewhat negatively on it.

 

The researchers worked to interpret these outcomes and asked, "Do differences of opinion simply reflect different preferences about the merits of equality on the two sides of the Atlantic? . . . Is a preference for equality just a matter of "taste," or does it  reflect something else in society, such as the level of social mobility?" They surmised that if objections to inequality were a matter of taste, then the wealthy in various countries would be likely, perhaps, to have the same views of it—for instance, seeing equality as a luxury good or even a normal good for which demand rises as income increases. This is clearly not the case, because the rich in America and those in Europe have exactly opposite views of inequality. So, the researchers conclude, "A more reasonable interpretation is that opportunities for mobility are (or are perceived to be) higher in the United States than in Europe.”

Americans' belief in social mobility could logically account for the tolerance of inequality by all but the rich because all other categories, given their belief, have room to move up while the rich in a mobile society see that they can only move down. Europeans, without confidence or much experience in upward mobility, could be predicted to rank exactly as they do in the survey. The rich, who are already at the top in a society where mobility is not significant, are content with where they are and are likely to stay. The poor, conversely, are stuck in a bad place from which they have little hope of emerging, hence their higher levels of discontent with inequality.

This hypothesis is supported by large amounts of poll data published by Everett Ladd and Karlyn Bowman in 1998.7 They report that Americans are tolerant of inequality as long as they see that, generally, wealth is the result of personal output and that everyone can make it if enough talent and hard work are devoted to the task. Of course, not everyone believes this, but extensive polling of Americans indicates that the more people who believe that opportunities for wealth remain reasonably open to everyone, the more tolerance Americans show for inequality.

This is a critical point and a major asset to our society that I believe we must sustain. Our belief in upward mobility provides the foundation for wide-reaching prosperity without creating crippling class animosity, disruptions, or, worse, class-based violence.

As we have seen in previous chapters, this upward mobility did not happen by accident. Upward mobility for the great majority of people is not what might be expected from a free-market economy. Capitalism works as a great wealth concentrator and a weaker wealth distributor. This means that in capitalism, wealth builds wealth. People with some money can invest it in new projects and can often make even more money. So wealth tends to build where it is already in place. Capitalism tends not to distribute or redistribute wealth into the population.

Our current success is, in part, the fruit of extraordinary generosity and outstanding persistence to ensure that tax and other laws continue to advance upward mobility. It represents the willingness of all kinds of citizens to work hard and to move on and move up and then care for those who cannot do so for themselves as yet (or for some, maybe, never). It takes money and vigilance to ensure that our competitive capitalist system supports real economic progress, not just borderline subsistence, for people at lower levels. This is where the constitutional guarantee of the pursuit of happiness comes in.

To read about the pursuit of happiness, buy a copy of The Greater Good. Be prepared that after you finish reading this book, you may increase your charitable giving.

Steve Hopkins, October 28, 2003

 

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The recommendation rating for this book appeared in the November 2003 issue of Executive Times

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