June 26th, 2006

Brad @ Burning Man

Setting Out to Do the Impossible

I've heard it repeated as a truism that beyond a certain level, it's impossible for an American to give away their fortune. That somewhere in the billion dollars' worth of assets range, a fortune becomes a self-defending thing, and that it's impossible to give it away faster than it naturally appreciates, not without creating such economic havoc that society steps in to stop you.

Warren Buffet, the 2nd wealthiest man in the United States, just committed to giving away 85% of his fortune. Judging by the numbers -- and who's going to predict that Warren Buffet is wrong about numbers? -- he thinks he can achieve it in less than 40 years. Counting the whole pledge as made right now (and he no longer considers the assets to be his), and valuing them at current share prices, the resulting thirty seven billion dollars is the single largest gift ever given. (See Carol J. Loomis, "Warren Buffet gives away his fortune," Fortune, June 25th, 2006.)

The deal involves transfers of his personal shares in Berkshire Hathaways to various charitable foundations, almost entirely to the Bill and Melinda Gates Foundation. The formula is calculated to deliver what he predicts will be a constant dollar amount per year based on what he predicts the stock will do over the span of time involved, that is to say, somewhere in the vicinity of a billion dollars a year. To that end, he's set aside 85% of the shares he owns to be sold over time via this formula, hence, 85% of his total wealth. As regards the famous truism, though, if the stock goes up more than 5% a year, growth in earnings and assets will outpace the rate at which he's giving it away. Despite his stated intention to leave his heirs no more money than it would take to start their own businesses, to earn their own fortunes, Warren Buffet may actually die leaving his heirs a bigger fortune than the one he has now, even after giving away a billion dollars a year.

The amount involved is, in fact, actually not that huge a percentage of the Gates Foundation's annual giving. That's why he picked them; increasing what they give away per year by 12% or so isn't going to be as hard as, say, setting up a billion-dollar-a-year charity from scratch. Assuming giving priorities remain the same, the vast majority of that money is going overseas. The Gates Foundation's mission is aimed at reducing economic inequality, and right now the bulk of their money is going towards the southern hemisphere. Obviously, they're not just handing out the cash, though, which would be pointless -- it'd only come to about $10.00 or so per person. Which suggests, if nothing else does, that no amount of philanthropic giving or foreign aid is actually going to lift the southern hemisphere out of poverty; they're going to have to do that themselves by building working economies. At best, the money can be spent on removing obstacles to that, which is why right now the biggest part of their annual giving is aimed at fighting AIDS, tuberculosis, and malaria in ways that poor countries can afford.