Wednesday, April 9, 2008

The Privilege of Giving

I read an article a couple of months ago that I've really thought alot about. I liked it so much I thought I would share it will you. This is going to be a long post but it will be worth reading I promise. I hope the author doesn't mind my sharing it with you. It is written by Arthur C. Brooks who is a professor at Syracuse University. This article is adapted from the George W. Romney Distingushed Lecture given by Brooks 16 October 2007 and was printed in the Marriott School of Management Magazine Winter 2008. I was going to paraphrase it but I don't want to leave out anything so here it is in its entirety.

"On 23 December 1999 there was a poor man in Kansas City looking for some warm winter clothing in a Salvation Army thrift shop. He had seventy-five cents in his pocket. Suddenly someone approached him from behind and said, "Excuse me." He turned around, and a man pushed a hundred-dollar bill into his hand, said, "Merry Chtristmas," and walked away. That wasn't the first time something like this had happened. It had been going on for years, and no one knew the giver's identity. He was only known as Secret Santa. He would walk around during the Christmas season giving money to people who needed food, clothing, or shelter.

He came forward in 2006, because he had terminal cancer and was given one month to live. His doctor told him that if he wanted anybody to understand his mission than he should reveal his identity. Secret Santa's real name was Larry Stewart, and he was a very wealthy entrepreneur.

He'd given away $1.3 million in hundred-dollar bills, but he had also given away tens of millions of dollars more in traditional philanthropy-building youth centers, building a YMCA, and helping the community.

When the press asked him why he gave so much, he said, "I'm just doing what the Lord is directing me to do. I'm just a pair of hands and feet. He's using me. He's lighted my path. Part of my daily prayer was, 'Lord, let me be a better servant.' I had no idea this is what he had in mind, but I'm happy. I'm so thrilled he is able to use me in this way."

Larry Stewart, aka Secret Santa, honestly believed that the secret to his happiness was his giving. In my research I have found that part of the secret to his prosperity was also his giving.

Why Giving Matters

Americans give at an astounding rate. Last year Americans privately gave $295 billion to charity. That's more than the entire gross domestic product of all but about twenty-five nations in the world.

About three-quarters of that comes from private individuals writing checks to their favorite charities and churches. Only about a quarter comes from foundations, corporations, and bequests.

The average American gives three and a half times as much money to charity as the average French citizen, seven times as much as the average German, and fourteen times as much as the average Italian. That's not because of income differences or tax differences; that's because of values and culture.

The question, of course, is why does it matter? Go back to Larry Stewart, Secret Santa. He said, "I can't be happy unless I give." I'm an economist, and I also teach in an entrepreneurship department at Syracuse, so I work with successful entrepreneurs all the time. Most of them are exceptionally generous people, and they always tell me the same thing: part of my secret to success is how much I give away.

I didn't believe them for the longest time. When you study economics you learn that you have to have money before you give it away. But every entrepreneur I've ever talked to said you've got to give it away before you can have it. John D. Rockefeller was famously quoted as saying in 1905, "God gave me my money to use as I see fit for the benefit of my fellow man." He believed that if he did not do so, God would take the money back. In other words, he thought he was rich because he gave.

I decided to test this and prove the theory was incorrect, so the next time an entrepreneur told me that part of his or her success was due to their giving, I could say, "I actually tested that, and it's not correct." It turns out the joke was on me. I'm going to show you how wrong I was, why I think it matters, and how it changed my understanding of charitable giving.

Giving's Return on Investment

In 2000, Harvard and other universities and community foundations in forty-one United States communities sponsored a study of thirty thousand American families. Named the Social Capital Community Benchmark Survey, it asked families what they do with their time, where they donate, if they volunteer, how much money they make, and what their jobs are. It's an incredibly exhaustive survey.

I expected to find that when people got rich they gave more but that when they gave more they didn't necessarily get richer. What I learned from this great data source is that when people get ten percent richer in income, they give away seven percent more money to charity, and that when people give charitably they also get richer. Imagine you have two families that are exactly the same demographically. Same level of education, number of kids, region of residence, ages, religion-the only difference is that the first family give $100 more to charity than the second family. It turns out that first family will earn, on average, $374 more than the nongiving family, and that extra income is attributable to the charitable donation.

When I realized this, I thought that was completely wrong. As a matter of fact, I got new data and rewrote my analysis, because I thought I'd done something wrong. The analysis was suggesting that the return on investment to a dollar given to charity is $3.75. That's an incredible investment. So I got new data, and it kept coming up again and again.

What about when the whole country gives a little bit more away? Does the whole country get a little bit richer? The average household in the United States during a fifty-year period (the mid-1950s to 2004) increased its take-home income by about 150 percent in inflation-adjusted terms. This is American prosperity right here, but there's a better reason to celebrate. The bottom line is the average amount that the household gave away to charity in inflation-adjusted terms went up over the same period by 190 percent. That means we're getting richer fast, but we're giving a disproportionate amount of it to charity-further proof that Americans aren't stingy.

If we were to increase our charitable giving this year as a nation by just one percent at a private level, that would be about an extra $2 billion to charity. We could expect as a result of that, for the economy, an increase in our gross domestic product of about $39 billion. But think of the multiplier, $39 billion coming from a $2 billion investment? That tells us charitable giving is not just a great investment secret for individuals; it's a patriotic act. It's good for our country. It's part of the reason that we're so rich. We're in a virtuous cycle of giving and getting. This is part of our secret to success as individuals, as communities, and as a nation."

To be continued tomorrow. So come back and join me.


Thimbleanna said...

Very interesting Kim -- I'll be back!

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