Bill Totten's Weblog

Monday, March 31, 2008

The Gates and Buffet Foundation Shell Game

by Sheldon Drobny (August 23 2006)

My background is finance and accounting. As a socially conscious venture capitalist and philanthropist, I have a very good understanding of wealth management and philanthropy. I started my career in 1967 with the IRS as a specialist in taxation covering many areas of the tax law including the so-called legal loopholes to charitable giving. I have known for years that a smart wealthy person could keep control of all his assets without estate or income taxes through cleverly structured charitable foundations. These foundations are perfectly legal and allow the donors to keep absolute control of all their money and power and accumulate enormous appreciation free of taxation. In 1967, the loopholes were outrageous and the law has tightened some of these tactics for the rich. However, the Gates Buffet foundation grant is nothing more than a shell game in which control of assets for both Gates and Buffet remain the same.

The only difference is that the accumulation of wealth by these two will be much more massive because they will no longer have to pay any taxes.

The Gates Foundation now has about $60 Billion under the control of the wealthiest people in America. They do not have to sell any of their positions in the stocks that they put under the tax-exempt umbrella. Furthermore, they can vote their stock holdings the same as if they did before and they can make the same investment decisions about their considerable corporate holdings. Both Buffet and Gates exhibited the most predatory capitalistic practices as corporate executives and investors. Microsoft and Berkshire Hathaway are not models of socially responsible capitalism. That being said, this foundation will be in the long run richer than the Catholic Church, which has accumulated wealth and power for over 1500 years. However, the results will be exactly the same. They will never liquidate enough of their assets to do any real good for the most onerous problem we have as humans; the worldwide poverty that is caused by the great disparity between the haves and the have-nots.

The Gates Foundation and the Catholic Church have the same goals. They are to keep the legacies for which they were created. For Bill Gates and Warren Buffet it is the control and legacy of family wealth as in the ancient days of the Pharos of Egypt. And by not paying any taxes, Gates will be more powerful than the Pope. I realize that this foundation has done more for disease research and education than any single government institution. But, that is just a condemnation of how little rich countries do for the less fortunate. And the United States is one of the worst examples of how little it does for its own people.

The great problems of the world today are a direct result of the wide disparity between the rich and poor. But, it is hard for the wealthiest to even look at this as an issue of most importance. Catholic Charities do a lot for the poor and I am sure that the Gates Foundation will do a lot for diseases of the poor. But, that is merely a band-aid for one of the symptoms of poverty. The real issue today is poverty.

The governments that keep their people in abject poverty while their leaders are obscenely rich from oil revenues cause many of the problems in the Middle East. But, even the poorest of their people now have access to satellite TV and Internet information that shows these people how much they are being exploited. The simple answer that they hate us for our freedom is absurd. They hate us because they see the wealthy and powerful as the cause of their suffering. As was the case in Germany in the 1920s, even a cultured society can succumb to irrationally violent leaders if they are hungry and poor. It is a human problem that we saw occur in a 1st world country. The 1968 movie, The Shoes of the Fisherman {1} was a fictional account of a new Pope who had the conscience to solve world poverty by giving away all the Church's assets. Below is a summary of the plot from

“After twenty years in a Siberian labor camp, Kiril Lakota, the Metropolitan Archbishop of Lvov, is set free. The Catholic Archbishop is released and sent to Rome, where the ailing Pope makes him a Cardinal. The world is in a state of crisis - a famine in China is exacerbated by United States restrictions on Chinese trade and the ongoing Chinese-Soviet feud. When the Pontiff dies, Lakota finds himself elected Pope. But the new Pope Kiril I is plagued by self-doubt, by his years in prison, and by the strange world he knows so little about. This movie contains extensive information about Catholic faith & practice, as a television news reporter steps in from time-to-time to explain the procedures involved in selecting a new Pope.”

The movie was not great but it did emphasize the point I am making in this piece. Unless wealthy people and governments around the world recognize the threat that poverty has on humanity, our chances of survival are markedly decreased. And unless the major wealth of the world is used to help feed its people, the diseases caused by poverty will never be cured. The prevention of diseases, both physical and mental, caused by hunger and poverty are the real dangers we face. And with all the concentrated wealth, we have the capacity to give everyone enough to survive and still leave the wealthy with plenty of luxuries. If Bill Gates gave $29 Billion away and kept only $1 Billion he would still have a wonderful life. If he gave it to Sally Struthers {2}, she could probably feed the world.




Sheldon Drobny is the co-founder of Air America Radio.

Bill Totten

Just Another Emperor?

The Myths and Realities of Philanthrocapitalism

by Michael Edwards (March 2008)


A new movement is afoot that promises to save the world by revolutionizing philanthropy, making non-profit organizations operate like business, and creating new markets for goods and services that benefit society. Nick-named "philanthrocapitalism" for short, its supporters believe that business principles can be successfully combined with the search for social transformation.

There is no doubt that this is an important phenomenon. Very large sums of money have been generated for philanthropy, particularly in the finance and IT industries. But despite its great potential, this movement is flawed in both its proposed means and its promised ends. It sees business methods as the answer to social problems, but offers little rigorous evidence or analysis to support this claim, and ignores strong evidence pointing in the opposite direction. Business will continue to be an inescapable part of the solution to global problems, and some methods drawn from business certainly have much to offer. But business will also be a cause of social problems, and as Jim Collins, author of "Good to Great", concluded in a recent pamphlet, "we must reject the idea - well intentioned, but dead wrong - that the primary path to greatness in the social sectors is to become more like a business" {1}.

Philanthrocapitalism's other promise is to achieve far reaching transformation by resolving entrenched social problems. Yet its lack of understanding of how change occurs makes it unlikely that this promise will be achieved.

There is a huge gulf between the hype surrounding this new philanthropy and its likely impact. Some of the newer philanthropists have come to recognize this - and have shown both humility and a readiness to learn about the complexities of social change. But too many remain captivated by the hype.

Philanthrocapitalism has seized on an important part of the puzzle of how to square democracy with the market, but is in danger of passing itself off as the whole solution, downgrading the costs and trade-offs of extending business and market principles into social transformation. I argue that:

* The hype surrounding philanthrocapitalism runs far ahead of its ability to deliver real results. It's time for more humility.

* The increasing concentration of wealth and power among philanthrocapitalists is unhealthy for democracy. It's time for more accountability.

* The use of business thinking can damage civil society, which is the crucible of democratic politics and social transformation. It's time to differentiate the two and re-assert the independence of global citizen action.

Philanthrocapitalism is a symptom of a disordered and profoundly unequal world. It hasn't yet demonstrated that it provides the cure.

The stakes are very high. Fifty-five trillion dollars in philanthropic resources are expected to be created in the United States alone in the next forty years. It matters whether these vast resources are used to pursue social transformation or just to address the symptoms of global problems. And for the philanthrocapitalists themselves, it matters that they are seen to be serious about engaging with this question. If they aren't, they may find themselves on the receiving end of the same kind of backlash that greeted previous concentrations of private wealth and power. It is time for a different kind of conversation, less dominated by hype, more critical, and more open to evidence and dissenting voices. The result could indeed be a world transformed.

1. Introduction: The Rise of Philanthrocapitalsim

It is six o'clock on a Saturday afternoon, and the Swan Lake Fire Department Ladies Auxiliary are cleaning up after their latest community rummage sale. Not much money changed hands today, but plenty of warm clothes did, much needed with the onset of winter in this upstate New York town. Prices varied according to people's ability to pay, and those who couldn't pay at all - like the mother who brought all her money in dimes, quarters and pennies inside a ziplock plastic bag - were simply given what they needed, and driven home to boot. "Imagine what this would have cost me at Wal-mart?" was what she told her driver.

In some ways, there is nothing special about this story, which is repeated a million times a day in civil society groups that act as centers of solidarity and sharing. In an other sense, it is profoundly important, because it represents a way of living and being in the world that is rooted in equality, love and justice, a radical departure from the values of competition and commerce that increasingly rule our world. It is not that the Ladies Auxiliary is a community free of markets - like everyone else, they have to make a living and raise funds to support their work, and they keep meticulous accounts. But when it comes to their responsibilities as citizens, they have decided to play by a different set of rules - grounded in rights that are universal not access according to your income, recognizing the intrinsic value of healthy relationships that cannot be traded off against production costs or profit, and living out philanthropy's original meaning as "love of humankind". {2}

Across the universe, meanwhile, a very different form of philanthropy is taking shape. Nicknamed "philanthro capitalism" by journalist Matthew Bishop {3}, its followers believe that business thinking and market methods will save the world - and make some of us a fortune along the way. Bobby Shriver, Bono's less famous partner in the Red brand of products, hopes that sales will help "buy a house in the Hamptons" while simultaneously swelling the coffers of the Global Fund for TB, malaria and AIDS {4}. It is a win-win situation - gain without pain - and the price of entry to the world's "most elite club", as BusinessWeek describes the "Global Philanthropists' Circle" that is sponsored by Synergos in New York {5}. If only we can make foundations and non-profits operate like businesses and expand the reach of markets, great things will be within our reach, much greater than all the traditional activities of civil society combined.

From Bill Clinton to Bill Gates, the rich and famous are lining up to boost the claims of this new paradigm. According to journalist Jonathan Rauch, ex-President Clinton wants to "repurpose business methods and business culture to solve the world's problems ... and he hopes to reinvent philanthropy while he's at it" {6}. "The profit motive could be the best tool for solving the world's problems, more effective than any government or private philanthropy", says Oracle founder Larry Ellison {7}. "Wealthy philanthropists have the potential to do more than the Group of Eight leading nations to lift Africa out of poverty", says "rock star" economist Jeffrey Sachs {8}. "If you put a gun to my head and asked which one has done more good for the world, the Ford Foundation or Exxon", says Buffet and Berkshire Vice-Chairman Charles Munger, "I'd have no hesitation in saying Exxon" {9}. "The most pressing environmental issues of our time will be ... solved when desperate governments and non-governmental organizations (NGOs) finally surrender their ideologies and tap the private sector for help" {10}. "This", says Jeff Skoll, who co-created eBay, "is our time" {11}.

Some even believe that terms like "business" and "civil society" are redundant: "We are beginning to understand that the old categories of commerce, capitalism, and philanthropy do not serve the new generation of either social problems or market opportunities. We are at the end of definitions" {12}. "I have difficulty not thinking of any non-profit as a business", says Buzz Schmidt, chief executive officer (CEO) of the non-profit (or is it business?) Guidestar {13}. What lies behind the rise of this phenomenon?

The philanthrocapitalists are drinking from a heady and seductive cocktail, one part "irrational exuberance" that is characteristic of market thinking, two parts believing that success in business equips them to make a similar impact on social change, a dash or two of the excitement that accompanies any new solution, and an extra degree of fizz from the oxygen of publicity that has been created by the Gates-Buffet marriage and the initiatives of ex-President Clinton.

There is justifiable excitement about the possibilities for progress in global health, agriculture and access to micro-credit among the poor that have been stimulated by huge investments from the Gates Foundation, the Clinton Global Initiative and others. New loans, seeds and vaccines are certainly important, but there is no vaccine against the racism that denies land to "dalits" (or so-called "untouchables") in India, no technology that can deliver the public health infrastructure required to combat HIV, and no market that can re-order the dysfunctional relationships between different religions and other social groups that underpin violence and insecurity.

Philanthrocapitalism should certainly help to extend access to useful goods and services, and it has a positive role to play in strengthening important areas of civil society capacity, but social transformation requires a great deal more than these two things. Despite their admirable energy and enthusiasm and genuine intent, the philanthrocapitalists risk misfiring when it comes to much more complex and deep-rooted problems of injustice. Before analyzing the evidence for and against that proposition, what exactly does philanthrocapitalism mean?


5 Continuing the Conversation: Conclusions and Next Steps

Philanthrocapitalism offers one way of increasing the social value of the market, but there are other routes that could offer equal or better results in changing the way the economic surplus is produced, distributed and used: the traditional route that uses external pressure, taxation and regulation; the philanthrocapitalist route that changes internal incentives and gives a little more back through foundations and corporate social responsibility; and more radical innovations in ownership and production that change the basis on which markets currently work. We don't know which of these routes carries the greatest long term potential, though all of them rely on civil society as a vehicle for innovation, accountability, influence and modified consumption, and especially for getting us from reformist to transformational solutions. I suspect that civil society will be able to play those roles more effectively from a position of diversity and strength. "It's the difference that makes the difference" remember, so working together but independently may be a better way forward than dissolving our differences in some soggy middle ground. In the real world, there is no gain without pain, no seamless weaving of competition and cooperation, service and self interest, inequality and fairness. If something seems too good to be true, it probably is.

"What could possibly be more beneficial for the entire world than a continued expansion of philanthropy?" asks Joel Fleishman in his book that lionizes the venture capital foundations {179}. Well, over the last century, far more has been achieved by governments committed to equality and justice, and social movements strong enough to force change through, and the same might well be true in the future. No great social cause was mobilized through the market in the twentieth century. The civil rights movement, the women's movement, the environmental movement, the New Deal, and the Great Society - all were pushed ahead by civil society and anchored in the power of government as a force for the public good. Business and markets play a vital role in taking these advances forward, but they are followers, not leaders, "instruments in the orchestra" but not "conductors".

"We literally go down the chart of the greatest inequities and give where we can affect the greatest change", says Melinda Gates of the Gates Foundation {180}, except that some of the greatest inequities are caused by the nature of our economic system and the inability of politics to change it. Global poverty, inequality and violence can certainly be addressed, but doing so requires the empowerment of those closest to the problems and the transformation of the systems, structures, values and relationships that prevent most of the world's population from participating equally in the fruits of global progress. The long term gains from changes like these will be much greater than those that flow from improvements in the delivery of better goods and services. After all, only the most visionary of the philanthrocapitalists have much incentive to transform a system from which they have benefited hugely.

So where are the examples of philanthropy that supports organizations that really make a difference? There are thousands of them scattered widely across the world through civil society, but very few receive support from the philanthrocapitalists. I'm thinking of groups like "SCOPE" and "Make the Road by Walking" in the United States, which build grassroots organizations, leadership and alliances in communities that are most affected by social and economic injustice in Los Angeles and New York respectively. Established after the Los Angeles riots in 1992, SCOPE addresses the "root causes of poverty" by nurturing new "social movements and winning systemic change from the bottom up" {181}. It has involved almost 100,000 low-income residents in community action to secure a $10 million workforce development program with the Dreamworks Entertainment Corporation, developed a regional healthcare program funded by local government, initiated the Los Angeles Metropolitan Alliance to link low income neighborhoods with each other across the city and upwards to regional solutions, and launched the California State Alliance that links twenty similar groups throughout the state to develop new ideas on environmental policy, government responsibility, and reforms in taxation and public spending.

Make the Road New York opened its doors in 1997 in the Bushwick section of Brooklyn to build capacity among immigrant welfare recipients, but soon expanded its focus to combat the systemic economic and political marginalization of residents throughout New York. Since then it has collected over $1.3 million in unpaid wages and benefits for low income families through legal advocacy and secured public funding for a student success center to meet the needs of immigrants {182}. Both organizations are part of the Pushback Network, a national collaboration of community groups in six states that is developing a coordinated strategy to change policy and power relations in favor of those they serve from the grassroots up.

Outside the US there are lots of similar examples. Take SPARC (Society for Promotion of Area Resource Centers) in Mumbai, India, which has been working with slum dwellers since 1984 to build their capacities to fight for their rights and negotiate successfully with local government and banks {183}. SPARC - whose motto is "breaking rules, changing norms, and creating innovation" - sees inequality as a "political condition", the result of a "deep asymmetry of power between different classes", not simply "a resource gap" {184}. SPARC has secured large scale improvements in living conditions (including over 5,500 new houses, security of tenure for many more squatters, and a "zero-open defecation campaign"), but just as importantly, it has helped community groups to forge strong links with millions of slum dwellers elsewhere in India and across the world through Shack Dwellers International (SDI), a global movement that has secured a place for the urban poor at the negotiating table when policies on housing are being developed by the World Bank and other powerful donors.

Housing is just a concrete expression of a much deeper set of changes that are captured in the following quotation from Arif Hasan, who works with SDI from his base in Karachi, Pakistan. "Traveling in different parts of the city as I did", he writes after the unrest that followed Benazir Bhutto's assassination in December 2007, "you see nothing but burnt-out cars, trucks and trailers, attacked universities and schools, destroyed factories and government buildings and banks, petrol pumps and 'posh' outlets - all symbols of exploitation: institutions where the poor cannot afford to study; businesses where they cannot get jobs; government offices where they have to pay bribes and where they are insulted and abused. This is not a law and order situation, but an outpouring of grief and anger against corruption, injustice and hunger ... This is a structural problem that requires a structural solution." {185}

Groups like these do deliver tangible outputs like jobs, health care and houses, but more importantly they change the social and political dynamics of places in ways that enable whole communities to share in the fruits of innovation and success. Key to these successes has been the determination to change power relations and the ownership of assets, and put poor and other marginalized people firmly in the driving seat, and that's no accident. Throughout history, "it has been the actions of those most affected by injustice that have transformed systems and institutions, as well as hearts and minds", as the Movement Strategy Center in Oakland, California puts it {186}.

This is why a particular form of civil society is vital for social transformation, and why the world needs more civil society influence on business, not the other way around - more cooperation not competition, more collective action not individualism, and a greater willingness to work together to change the fundamental structures that keep most people poor so that all of us can live more fulfilling lives. Would philanthrocapitalism have helped to finance the civil rights movement in the US? I hope so, but it wasn't "data-driven", it didn't operate through competition, it couldn't generate much revenue, and it didn't measure its impact in terms of the numbers of people who were served each day, yet it changed the world forever.

If I was ever invited to address the philanthrocapitalists, what would I say? First, a big vote of thanks for taking up the challenge of "entrepreneurship for the public good" {187}. Without your efforts, we wouldn't be having this debate, and the world would be further from the commercial and technological advances required to cure malaria and get micro-credit to everyone who needs it. But second, don't stop there. Please use your wealth and influence to lever deeper transformations in systems and in structures, learn much more rigorously from history, measure the costs as well as the benefits of your investments, be open to learning from civil society and not just teaching it the virtues of business thinking, and re-direct your resources to groups and innovations that will change society forever, including the economic system that has made you rich. That's not much to ask for, is it?

Venture philanthropists and social entrepreneurs are pragmatic people, with little appetite, I'll wager, for lectures in political science; they could argue that action is vital in the here and now while we move slowly along the path tosocial transformation. That's fair enough, I think. Pragmatism is a feature of civil society too, and neither wants to make the "best the enemy of the good". Small victories are still victories, and a vaccine against HIV/AIDS would be a very big victory indeed. "I don't believe there is a for-profit answer to everything", says Pierre Omidyar, "but if for-profit capital can do more good than it does today, foundations can concentrate their resources where they are most needed", a welcome dose of common sense in a conversation dominated by hype {188}. No one is forcing Omidyar, Gates, Skoll and the rest to give billions of dollars away (they could have kept it for themselves). So how can we cooperate in moving forward together?

Organizing A Better Conversation

The first thing we need to do is to pause, take a very deep breath, and create space for a different kind of conversation. Philanthrocapitalism is seductive for many different reasons - the allure of a new magic bullet, set against the reality of plodding along, step by step, in the swamps of social change; the glitz and glamour of gaining entry to a new global elite; and the promise of maintaining a system that made you rich and powerful while simultaneously pursuing the public good. We all want our place in history as the ones who saved the world, but this is surely immature. Will "social enterprise end up intoxicated by virtue, breathing its own exhaust", as a report from Sustainability concluded? {189}. At least Bill Clinton's enthusiasm is tempered by some boundaries: "What I long to do", he says, "is to see this [approach] integrated into every philanthropic activity from now on, where it is appropriate" {190}, and "where it's appropriate" may be a small but not unimportant part of the picture as a whole. I think it is time to launch a "slow food movement" for the philanthrocapitalists, in order to help them savor the complexities of what's involved. It's not that our old ideas about social transformation were perfect; it's that our new ideas are imperfect too, and almost certainly won't turn out as planned. There is no place for triumphalism in this conversation {191}.

What we do need is a good, old-fashioned, full-throated public debate, to sort out the claims of both philanthrocapitalists and their critics, and to inform the huge expansion of philanthropy that is projected over the next forty years. So here's the $55 trillion-dollar {192} question: Will we use these vast resources to pursue social transformation, or just fritter them away in spending on the symptoms? The stakes are very high, so why not organize a series of dialogues between philanthrocapitalists and their critics, on the condition that they shed the mock civility that turns honest conversation into Jell-O. There isn't much point in staying in the comfort zone, forever apart in different camps, like the World Economic Forum and the World Social Forum that take place in splendid isolation each and every year {193}. Deep rooted differences about capitalism and social change are unlikely to go away, so let's have more honesty and dissent before consensus, so that it might actually be meaningful when it arrives.

Philanthrocapitalism is the product of a particular era of industrial change that has brought about temporary monopolies in the systems required to operate the knowledge economy, often controlled by individuals who are able to accumulate spectacular amounts of wealth. That same era has produced great inequalities and social dislocations, and past experience suggests that such wealth will be politically unsustainable unless much of it is given away, just as in earlier decades when Ford, Rockefeller and Carnegie found themselves in much the same position.

Effective philanthropists do learn from their experience and the conversations they have with others. Melinda Gates, for example, describes this process well: "Why do something about vaccines but nothing about clean water? Why work on tuberculosis but not on agricultural productivity? Why deliver mosquito nets but not financial services?" {194} . Of course, there is another set of questions waiting to be answered at a much deeper level - why work on agricultural productivity but not on rights to land? Why work on financial services but not on changing the economic system? But these are challenges that face all foundations and they are best addressed together, since all of us have much to learn from others. Rather than assuming that business can fix philanthropy, why not put all the questions on the table and allow all sides to have their assumptions tested? Who knows, this kind of conversation might lead us far beyond the limitations of the current debate and closer to that ultimate prize of an economic system that can sustain material progress with far fewer social, personal and environmental costs.

Principles of Self-Restraint {195}

Philanthropy of all kinds saves you money on your tax bill but reduces the resources that governments have to pursue the public interest (to the tune of $40 billion in the US in 2006 alone). Only eleven percent of the money that Americans give to charity addresses "social justice", so this is far from an academic issue {196}. Philanthropy is based on the understanding that tax breaks are given in return for a commitment to use the same resources as or more effectively than government, so it is not unreasonable to ask whether tax exempt activities are living up to their side of this agreement. This question is more pressing for living donors who have tied their business interests to their philanthropy in ways that might benefit themselves - by reducing their own tax liabilities, for example, boosting the revenue of their companies, or improving its image among consumers. This is especially true for businesses like Google (but not Gates), whose co-founders have pledged shares in the company to but not any of their own personal wealth {197}.

However, humility and self-criticism don't come naturally to many foundation leaders or social entrepreneurs, so it will take more than a "conversation" to encourage them to live up to their social and political obligations. A binding commitment to the following principles is probably too much to ask, but voluntary support might garner more publicity and exert more pressure on others to perform.

A commitment to learning

* Dedicate ten percent of annual foundation payout to increase the resources and capacities devoted to learning in philanthropy, and ring fence half of that amount for joint learning with grantees and other partners.

* Invest much more seriously in research and evaluation that measures progress on the really important questions. Do philanthropy, social enterprise and corporate social responsibility reduce or reinforce inequalities of wealth and power? And when the hype and self-promotion are peeled back, what of substance remains?

* Sponsor action learning on civil society's changing shape, to test whether the "ecosystem effects" I've mentioned are as damaging as I've claimed. The "Inquiry into the Future of Civil Society in the UK and Ireland" (sponsored by the Carnegie UK Trust) is a good example of the kind of work we need {198}.

* Bring in lessons and experiences from other and older literatures on civil society, international development and social change, instead of pretending that we can reinvent the wheel using only the language and methods of business and the market. Invest in the time required to understand the complexities of social transformation.

A commitment to transparency and accountability

* Pass legislation to protect the public interest in schemes for "embedded giving" (in which a proportion of the price of goods and services is donated to social causes), the use of charitable trusts, and other forms of business involvement in philanthropy {199}.

* Commission independent impact evaluations for any tax exempt activity above a certain size, and publish the results {200}. Require all foundations and social enterprises above a certain size to compile a publicly available summary of all evaluations every five years, and to solicit feedback from grantees and beneficiaries, and independent experts in the field.

* Publish the salaries, salary increases (compared to other staff), and salary differentials (highest to lowest) of CEOs in all foundations and social enterprises in a report on their website every year.

* Find better metrics to inform decision making that measure progress toward material and systemic change together, like those used by SCOPE, SPARC and Make the Road New York which were cited earlier on. This is likely to be more fruitful than the endless refinement of financial measures of social value.

A commitment to democracy

* Give recipients and beneficiaries a real voice in governance and program strategy. The absence of grassroots voices, community organizers, and labor representatives on the boards of major foundations is quite striking, populated as they are by business leaders, CEOs of large non-profits, and the occasional academic or public intellectual. No foundation or social enterprise should receive tax-exemption unless its board is fully representative of the communities it claims to serve.

* Sponsor "immersion trips" to learn about the realities of power and the politics of social transformation from those at the sharp end of this process (and not from the ghastly stage-managed versions beloved of foundation site visits for their trustees). Think how much more could be achieved with an education of this sort, given that many philanthrocapitalists are in their thirties and forties and will enjoy even greater access to resources as they grow older.

A commitment to modesty

* Recognize your limitations, and build support for other institutions that must be part of the solution to social problems, especially government. Corporate tax evasion is one of the dirtiest business secrets and an "Achilles heel" of the philanthrocapitalist claim to pursue the social good, so pay your taxes instead of sheltering your profits in havens by the beach.

* Don't hold debates about philanthropy that exclude the voices of the poor themselves, and of others who are the subjects, not objects, of social transformation. Those closest to the action have ideas and experiences that can shed light on problems and solutions, and they have networks and associations through which they can participate. Make every foundation and social enterprise above a certain size pay for this participation.

A commitment to devolution

* Invest in civic capacity and voice, and promote the long-term financial independence of civil society organizations through long-term "unrestricted" or core support, non-profit reserve funds, and endowments.

* Reduce the transaction costs of approaches to foundations by re-designing application procedures, increasing the length of grants, and finding better ways to distribute funds through multi-foundation initiatives.

A commitment to funding structural and systemic change

* Spend at least fifty percent of each foundation's annual payout on "social justice philanthropy" - investments that tackle causes and not just symptoms; build institutions and relationships; increase the power and voice of those left outside the mainstream; protect the public sphere; strengthen social movements; and change the systems and structures that keep certain people poor.

* Report on this fundamental work to Congress or parliament every five years in a nation-wide foundation summit.

These measures may seem overly intrusive, but many wealthy individuals are already heading in this direction. For example, the Arcus Foundation in the United States (founded by the medical equipment entrepreneur Jon Stryker) invests in Gay and Lesbian rights and other areas of social and racial justice, while the Resource Generation Network works with young high net-worth individuals to "support and challenge each other" to use their wealth to contribute to "social, racial and economic justice" {201}. The Omidyar Network recently gave $2.1 million to Harvard University to "identify and adapt military tools and approaches that aim to prevent genocide" {202}. Corporate Voices for Working Families {203} links over fifty companies who have developed family support policies for their own workforces and who advocate together for government policies that do the same, and the Hewlett Foundation's recent gift of $113 million to create one hundred endowed chairs at the University of California in Berkeley is a great demonstration of support for public resources {204}.

Why, however, should philanthrocapitalists do any of these things, especially if they appear to be against their short-term interests? The answer is that rising inequality and concentrated influence are politically unsustainable, as similar movements have found to their cost in the past. These trends always stimulate a counter reaction rooted in civil society and government, to protect democracy and the deeper values that animate the popular imagination. "Only twice before over the last century has five percent of the national income in the US gone to families in the upper one-hundredth of a percent of the income distribution (that's 15,000 families with incomes of more than $9.5 million a year). Such levels of concentration occurred in 1915 and 1916, as America's 'Gilded Age' was ending, and in the late 1920s, before the stock market crashed." "History could not have developed so destructively if so much knowledge of the past had not slipped away in stock market and 'new era' triumphalism", writes Kevin Phillips {205}. Will the same be said of the rise and fall of the philanthrocapitalists?

Deep down, perhaps the leaders of this movement know that this is true. "Reducing inequity is the highest human achievement", said Bill Gates, Jr, when he spoke at Harvard University's graduation ceremonies in June 2007. "The question of how to assure that American capitalism creates a decent society is one that will engage all of us in the years ahead", is H Lee Scott's conclusion, the CEO of Wal-Mart {206}. So let's hold these leaders to their commitments, and ensure that they deliver on their promises.

Could it be that civil society can achieve more of an impact on capitalism by strengthening its distinctive roles and values than by "blending" them with business? Are civil society and business just different ways of answering similar questions about production and delivery, or are they asking different questions about society altogether? That is the beauty of a different kind of conversation, in which there is sufficient room for all these positions to be listened to, and heard. What we must avoid is a cocktail in which civil society's influence is significantly diminished.

Citizens' groups have nothing to be ashamed of in not being a business, and everything to gain by re-asserting their difference and their diversity. At its best, voluntary action releases incalculable social energy - the sheer joy of collective action for the public good, free, as far as is humanly possible, of commercial considerations and self-interest. That is surely something to preserve, build on and extend as we edge closer to a world that is thoroughly and comprehensively transformed.


1. J Collins (2005). Good to Great in the Social Sectors. New York: Harper Collins.

2. "Philanthropy" ... "love of mankind, especially as shown by contributing to the general welfare". Chambers Dictionary, New Edition.

3. M Bishop (2007) "What is philanthrocapitalism?" Alliance, March, page 30.

4. Cited in "The New Wave of American Philanthropy", NonProfit Times e-newsletter, January 7th 2007. To be fair to Bono and Shriver, "Product Red" is one of the better "embedded giving" schemes on the market, insisting on detailed contracts with companies who participate so that buyers can see how much of the price they pay will find its way to the Global Fund. See also S Strom, "Charity's Share From Shopping Raises Concern", The New York Times, December 13th 2007.

5. BusinessWeek, November 26th 2007.

6. J Rauch (2007) "This is not charity", Atlantic Monthly, October, page 66.

7. Cited in W K Kellogg Foundation (2003) "Blurred Boundaries and Muddled Motives: a world of shifting social responsibilities", page 12.

8. "Philanthropy can eclipse G8 on poverty" Financial Times, September 4th 2007.

9. "Buffett rebuffs efforts to rate corporate conduct", Los Angeles Times, May 7th 2007.

10. "Richard C Morais on Philanthropy",, December 23rd 2007.

11. Ibid, page 6.

12. S Raymond and T Watson (2007) "The End of Definitions: A Briefing on Innovation in Revenue and Grant-Making Among Non-Profits and Philanthropies". New York: Changing our World Inc., page 12.

13. Cited in W K Kellogg Foundation, op cit, page12.

179. J Fleishman (2007) "The Foundation: A Great American Secret - How Private Wealth is Changing the World", New York: Public Affairs, 2007.

180. "Melinda Gates goes Public", by Patricia Sellers,, January 7th 2008.

181. "Strategic Concepts in Organizing and Policy Education". See

182. Make the Road by Walking email to supporters, December 6th 2007. See

183. "Society for the Promotion of Area Resource Centers. See

184. SPARC Annual Report 2005 pages 3 and 16. The Gates Foundation has promised to invest in SDI but there are concerns (on both sides) about whether they will stick with the slow process of institutional development that underpins SPARC's ability to lever large- scale improvements in housing and sanitation, and not just invest directly in the capital required to provide these things.

185. Cited in an email from Joel Bolnick to SDI members dated January 9th 2008.

186. See
187. Cited in K Schneider, "Win Fabulous Prizes, All in the Name of Innovation", The New York Times, November 12th 2007.

188. Cited in McGray (2007) op cit.

189. SustainAbility (2007) op cit, page 44.

190. Cited by Rauch (2007) op cit, page 66, my emphasis added; plus see B Clinton (2007) Giving, New York: Knopf, in which he articulates a wider range of avenues in which all of us can participate.

191. Bruce Sievers, one of the few commentators who has criticized philanthrocapitalism in public, often makes this point. See B Sievers (2001) "If pigs had wings: the appeals and limits of venture philanthropy", Issues in Philanthropy Seminar, Georgetown University, Washington, DC, November 21st 2001; and Alliance (2006) Volume 11 (3), September, page 23.

192. See note 39.

193. Some efforts have been made to link the two via video-conference, but not with any great success.

194. Melinda French Gates, Remarks to the Annual Conference of the Council on Foundations, Seattle, 2007.

195. I am grateful to Geoff Mulgan for this formulation.

196. "Age of Riches: Big gifts, tax breaks and a debate on charity" by S Strom, The New York Times, September 6th 2007.

197. "Philanthropy Smackdown: Google vs Gates for the World Charity Championship" by D Gross, Slate Magazine, September 18th 2006.

198. See for details.

199. The U.S. Congress began discussion of such legislation in December 2007. In the UK, billions of pounds have been raised by businesses through trusts with charitable status that are not actually donating anything to charity. It's no surprise that those involved include the now-bankrupt Northern Rock, which raised seven billion pounds for sub-prime mortgages on the back of "Downs Syndrome North East". See I Griffiths and I Cobain, "Banks Exploit Charity Tax Laws to Raise Billions Through Trusts", Guardian Weekly, December 14th 2007.

200. Joel Fleishman makes some useful recommendations on foundation accountability in his book The Foundation: A Great American Secret, op cit.


202. "Peace and Security Funders Group News", January 22nd 2008.


204. "UC Berkeley to get $113 million gift" by R Paddock, Los Angeles Times, September 10th 2007.

205. "The Richest of the Rich, Proud of a New Gilded Age" by L Uchitelle, The New York Times, July 15th 2007; and K. Phillips (2002) Wealth and Democracy: A Political History of the American Rich, New York: Broadway Books, page viii.

206. Cited in S Worthington, President and CEO of InterAction, "Testimony before the Senate Foreign Relations Subcommittee on International Development and Foreign Assistance", June 12th 2007; Scott's remark is cited in C Fishman (2006) The Wal-Mart Effect, London: Penguin, page 219.

Bill Totten

Sunday, March 30, 2008

Big Gifts, Tax Breaks and a Debate on Charity

by Stephanie Strom

The New York Times (September 06 2007)

Eli Broad, a billionaire businessman, has given away more than $650 million over the last five years, to Harvard and the Massachusetts Institute of Technology to establish a medical research institute, to the Los Angeles County Museum of Art and to programs to improve the administration of urban schools and public education.

The rich are giving more to charity than ever, but people like Mr Broad are not the only ones footing the bill for such generosity. For every three dollars they give away, the federal government typically gives up a dollar or more in tax revenue, because of the charitable tax deduction and by not collecting estate taxes.

Mr Broad (rhymes with road) says his gifts provide a greater public benefit than if the money goes to taxes for the government to spend. "I believe the public benefit is significantly greater than the tax benefit an individual receives", Mr Broad said. "I think there's a multiplier effect. What smart, entrepreneurial philanthropists and their foundations do is get greater value for how they invest their money than if the government were doing it."

It is an argument made by many of the nation's richest people. But not all of them. Take the investor William H Gross, also a billionaire. Mr Gross vigorously dismisses the notion that the wealthy are helping society more effectively and efficiently than government.

"When millions of people are dying of AIDS and malaria in Africa, it is hard to justify the umpteenth society gala held for the benefit of a performing arts center or an art museum", he wrote in his investment commentary this month. "A $30 million gift to a concert hall is not philanthropy, it is a Napoleonic coronation".

Elaborating in an interview, Mr Gross said he did not think the public benefits from philanthropy were commensurate with the tax breaks that givers receive. "I don't think we're getting the bang for the buck for gifts to build football stadiums and concert halls, with all due respect to Carnegie Hall and other institutions", he said. "I don't think the public would vote for spending tax dollars on those things".

The billionaires' differing views epitomize a growing debate over what philanthropy is achieving at a time when the wealthiest Americans control a rising share of the national income and, because of sharp cuts in personal taxes, give up less to government.

Familiar Recipients

A common perception of philanthropy is that one of its central purposes is to alleviate the suffering of society's least fortunate and therefore promote greater equality, taking some of the burden off government. In exchange, the United States is one of a handful of countries to allow givers a tax deduction. In essence, the public is letting private individuals decide how to allocate money on their behalf.

What qualifies for that tax deduction has broadened over the ninety years since its creation to include everything from university golf teams to puppet theaters - even an organization established after Hurricane Katrina to help practitioners of sadomasochism obtain gear they had lost in the storm.

Roughly three-quarters of charitable gifts of $50 million and more from 2002 through March 31 went to universities, private foundations, hospitals and art museums, according to the Center on Philanthropy at Indiana University.

Of the rest, the Bill and Melinda Gates Foundation accounted for half on the center's list. That money went primarily to improve the lives of the poor in developing countries. Valuable as that may be, it also meant that the American public effectively underwrote several billion dollars worth of foreign aid by private individuals, even though poll after poll shows Americans are at best ambivalent about using tax dollars in such assistance.

In contrast, few gifts of that size are made to organizations like the Salvation Army, Habitat for Humanity and America's Second Harvest, whose main goals are to help the poor in this country. Research shows that less than ten percent of the money Americans give to charity addresses basic human needs, like sheltering the homeless, feeding the hungry and caring for the indigent sick, and that the wealthiest typically devote an even smaller portion of their giving to such causes than everyone else.

"Donors give to organizations they are close to", said H Art Taylor, president and chief executive of the BBB Wise Giving Alliance. "So they give to their college or university, or maybe someone close to them died of a particular disease so they make a big gift to medical research aimed at that disease. How many of the superrich have that kind of a relationship with a soup kitchen? Or a homeless shelter?"

Philanthropists like Mr Broad say that looking at philanthropy solely as a means of ameliorating need is too narrow. "If you look historically at what Carnegie did with creating a library system and the Rockefellers in creating Rockefeller University, I think it does a lot more for society than simply supporting those in need", Mr Broad said.

About two percent of the money Mr Broad has given away through his two foundations over the last five years, or $15 million, went to support organizations like the United Way and the United Jewish Fund, which serve needy people as well as the middle class. The foundations also have given money to groups that help homeless children, and the International Rescue Committee.

Still, Mr Broad dedicates his biggest gifts to areas he thinks lack government support, like the $25 million he gave to the University of Southern California last year to found an institute for integrative biology and stem cell research, or the tens of millions he dedicated to complete the new Disney concert hall in Los Angeles.

Like many major philanthropists, Mr Broad said he considered such gifts an illustration of the Chinese proverb: "Give a man a fish, and you feed him for a day. Teach a man to fish, and you feed him for a lifetime." The argument is that simply taking care of the poor does nothing to eliminate poverty and that they will ultimately benefit more from efforts to, say, find cures for the diseases that afflict them or improve public education.

As for Mr Gross, despite his uncharacteristically fiery criticism of what he calls "philanthropic ego gratification", some of the large gifts he and his wife, Sue, have made are not so different from those made by other billionaires. He has given millions to a local hospital, for example, and for stem cell research.

And in 2005 the couple gave roughly $25 million to Duke, Mr Gross's alma mater.

But the Duke gift illustrates Mr Gross's priorities. The money is almost exclusively for scholarships.

"Universities have their own thing going - they want to build infrastructure and endowments and perpetuate their system, which isn't necessarily in the social interest", Mr Gross said. "Scholarships get a little more down to the ground level".

Taking Aim at the Tax Code

The investor Warren E Buffett also voices strong feelings about how donations are used.

When Mr Buffett pledged $30 billion to the Gates Foundation, he included a little-noted requirement that the foundation spend each increment of the gift he hands over, in addition to its own annual legally mandated spending. If Mr Buffett transfers $1.3 billion of stock to it, it must spend every nickel within a year.

"I wanted to make sure", he said, "that to the extent I was providing extra money to them, it didn't just go to build up the foundation size further but that it was put to use".

The Gates Foundation's work is largely international, although a portion of its spending supports efforts to improve urban education and access to college, so Mr Buffett's money is unlikely to be used to address basic needs in this country.

"I think the government ought to make sure that all the people here who drew short straws have a decent minimum", Mr Buffett said. "We moved toward that with Social Security, but we could go a lot further now".

He does not regard his gift as charitable and expects no tax benefit from it, in part because he has credit for past donations that he has not used.

Rather, he calls his sister, Doris Buffett, the "real philanthropist" in the family. Ms Buffett runs an organization, the Sunshine Lady Foundation, that helps the needy pay for college, medical expenses, mortgages, glasses and cars.

Mr Buffett recently has brought attention to himself as a critic of inequities in the nation's tax system, which offers the wealthy better tax breaks for charitable giving than it does the average taxpayer. Deductions for charitable giving can be claimed only by the fewer than half of all taxpayers who itemize, and those falling in higher tax brackets get bigger deductions for cash gifts.

The charitable deduction cost the government $40 billion in lost tax revenue last year, according to the Joint Committee on Taxation, more than the government spends altogether on managing public lands, protecting the environment and developing new energy sources.

Rob Reich, an assistant professor of political science and ethics in society at Stanford, goes so far as to say that the tax code promotes inequities through the breaks it provides for charitable giving.

Take schools. The Woodside Elementary School in Woodside, California., where the median family income is $196,505, raised $7,065 a pupil in 1998 from charitable contributions to a foundation it created, according to Professor Reich's research. Across the San Francisco Bay, a similar foundation to support the Oakland Unified School District, where the median family income is $44,384, raised $138 a pupil that year.

In effect, the government is subsidizing a system that enhances inequities between poor and wealthy public schools, Professor Reich said.

Raising Questions

Legislators, regulators and others are asking more questions about exactly what charities do with the money they are given.

"When foundations, corporations and individuals give money to the opera", said Xavier Becerra, a California Democrat on the House Ways and Means Committee who represents a district in Los Angeles populated largely by young working-class immigrant families, "my folks are very unlikely to benefit from those forgone tax dollars that could have been used for health care, for after-school programs for kids, for help in getting access to college education".

Yet Mr Becerra himself is a beneficiary of one of the country's wealthiest charities, Stanford, which has a $15.2 billion endowment and gave him a scholarship. "There is no way my parents could have afforded for me to go there without the generous financial aid the university gave me", he said.

At the other end of the political spectrum, Grover G Norquist, whose Americans for Tax Reform lobbies for lower taxes, suggests taxing nonprofit hospitals that cannot demonstrate that they provide significant care for the poor.

"I'm not aware of anything they do that a for-profit hospital doesn't do in terms of providing free care", Mr Norquist said.

Like other billionaire philanthropists, Thomas M Siebel, founder of Siebel Systems, has given his largest gifts to his alma mater, the University of Illinois at Urbana-Champaign. In 1999, he donated $32 million for a computer science center bearing his name, and he pledged $100 million this year to support basic research that he hopes will reduce dependency on carbon-based fuels.

But when the university suggested using some of that gift to put up another new building named for him and hire new professors, he said no.

"I told them to use the basement of an existing building and some of the really smart people they already have", Mr Siebel said.

Attracting philanthropic support to fight substance abuse is one of the biggest challenges in fund-raising, but Mr Siebel has donated more than $15 million to the Meth Project, an organization he created. "I think we'll save a lot of lives in the end", Mr Siebel said. "Isn't that what philanthropy is supposed to be about?"

He has also given the Salvation Army more than $18 million over the last six years, mostly to support services for the homeless. He said he gives to the organization because of its low administrative costs and lack of frills.

"When I first started doing this, I made a contribution to some organization, Harvest something or other, I think, that was working on homelessness", Mr Siebel said. "The next thing I knew, I got a plaque in the mail and an invitation to an awards ceremony".

He added: "I never gave them another nickel. What were they spending money on plaques for?"

Bill Totten

It's better to give than receive

Philanthropists aren't being that altruistic

by Peter Wilby

New Statesman (March 19 2008)

Here is a very long word that may be new to you (I Googled it and, at the time of writing, it has only 2,710 hits): philanthrocapitalism. If you wish to be very hip and savvy, you can call it Philanthropy 3.0.

At bottom - though, as we shall see, there is more to it - this is about very rich people, such as Bill Gates, Jeff Skoll (the creator of eBay), Bono, George Soros and the founders of Google, giving away lots of money. What's wrong with that? It shows they have a heart, doesn't it? But I have long regarded this as a pernicious trend and I am delighted that a report from the Young Foundation and Demos this month (Just Another Emperor? by Michael Edwards) shares at least some of my concerns.

The great philanthropists of the twentieth century - Rockefeller, Ford, Carnegie, for example - gave their money to foundations, set out broad principles, appointed key people and left them to get on with it. That was Philanthropy 1.0 (don't ask me what 2.0 was) and the results have been described as "autocratic, ineffective, elitist, cloistered, arrogant and pampered".

In other words, it's right out of fashion. The 21st-century philanthropists take a more hard-nosed approach to giving. They behave like investors, allocating their money to maximise "social return". So, for example, Gates calculates how much malaria costs in lost GDP and then decides it's worth paying for its eradication.

Increasingly, bodies such as New Philanthropy Capital in Britain or GiveWell in the US provide data to help donors decide which charities or social enterprises should receive funds. The former "measures 54 indicators including the average years of experience of senior managers and the percentage increase in the budget for the previous year"; the latter records effectiveness according to "the most lives saved for the least money". Just as market principles and measurable outcomes were applied to public services, so they are being applied to charities. Forget the first, second and third sectors; they are being merged into one.

I have several concerns. First, philanthrocapitalism legitimises growing inequality, which might be unsustainable politically without greater generosity from the filthy rich. In fact, the rich are not particularly generous; if anything, people on middling or low incomes give proportionately more of their money to charity. Moreover, generosity is subsidised from tax breaks.

Second, philanthropy is often just another form of marketing, designed to strengthen the donors' market dominance and even to tie certain groups into buying their products or services.

Third, it is unhealthy for democracy. Why should rich people, who wield enormous economic power, also determine social priorities? As Robert Reich, secretary for labour under President Clinton, has observed, governments used to collect billions from tycoons and then decide democratically what to do with it.

Fourth, the new philanthropists bring business attitudes into an area where they are not always appropriate. Not-for-profit organisations often exist to tackle problems that are beyond conventional market-led approaches. If charities and voluntary organisations are to be judged according to their success rates, they will tend to avoid the most complex and expensive issues and ignore the people who are most difficult to reach.

Fifth, the new philanthropists crowd out civil society. The Young Foundation/Demos report is particularly good on this last point. "No great social cause", Edwards writes, "was mobilised through the market in the twentieth century. The civil rights movement, the women's movement, the environmental movement, the New Deal, the Great Society - all were pushed ahead by civil society and anchored in the power of government as a force for the public good. Business and markets play a vital role in taking these advances forward, but they are followers, not leaders." He adds: "The world needs more civil society influence on business, not the other way around - more co-operation, not competition, more collective action, not individualism".

The Gates Foundation wants to "give where we can effect the greatest change". But the greatest change might come from transforming the economic system, the pattern of property ownership and the distribution of global power, and Gates is hardly likely to favour any of that. The danger is that things are done to the poor, rather than with them. The poor are written out of their own story.

I suppose it is very grudging of me not to applaud when wealthy folk open their wallets. It's surely better than spending their money on fifty-bedroom mansions or carbon-emitting private jets. But this, in effect, is what they are saying: leave the world's problems to us to fix, using our brilliant business techniques. Meanwhile, leave intact the system that made us rich, and promises to keep us so. Not a bad deal for them, eh?

Peter Wilby was editor of the Independent on Sunday from 1995 to 1996 and of the New Statesman from 1998 to 2005. He writes a weekly column for the NS.

Bill Totten

Saturday, March 29, 2008

The Richest of the Rich

Proud of a New Gilded Age

by Louis Uchitelle

The New York Times (July 15 2007)

The tributes to Sanford I Weill line the walls of the carpeted hallway that leads to his skyscraper office, with its panoramic view of Central Park. A dozen framed magazine covers, their colors as vivid as an Andy Warhol painting, are the most arresting. Each heralds Mr Weill's genius in assembling Citigroup into the most powerful financial institution since the House of Morgan a century ago.

His achievement required political clout, and that, too, is on display. Soon after he formed Citigroup, Congress repealed a Depression-era law that prohibited goliaths like the one Mr Weill had just put together anyway, combining commercial and investment banking, insurance and stock brokerage operations. A trophy from the victory - a pen that President Bill Clinton used to sign the repeal - hangs, framed, near the magazine covers.

These days, Mr Weill and many of the nation's very wealthy chief executives, entrepreneurs and financiers echo an earlier era - the Gilded Age before World War One - when powerful enterprises, dominated by men who grew immensely rich, ushered in the industrialization of the United States. The new titans often see themselves as pillars of a similarly prosperous and expansive age, one in which their successes and their philanthropy have made government less important than it once was.

"People can look at the last 25 years and say this is an incredibly unique period of time", Mr Weill said. "We didn't rely on somebody else to build what we built, and we shouldn't rely on somebody else to provide all the services our society needs".

Those earlier barons disappeared by the 1920s and, constrained by the Depression and by the greater government oversight and high income tax rates that followed, no one really took their place. Then, starting in the late 1970s, as the constraints receded, new tycoons gradually emerged, and now their concentrated wealth has made the early years of the 21st century truly another Gilded Age.

Only twice before over the last century has five percent of the national income gone to families in the upper one-one-hundredth of a percent of the income distribution - currently, the almost 15,000 families with incomes of $9.5 million or more a year, according to an analysis of tax returns by the economists Emmanuel Saez at the University of California, Berkeley and Thomas Piketty at the Paris School of Economics.

Such concentration at the very top occurred in 1915 and 1916, as the Gilded Age was ending, and again briefly in the late 1920s, before the stock market crash. Now it is back, and Mr Weill is prominent among the new titans. His net worth exceeds $1 billion, not counting the $500 million he says he has already given away, in the open-handed style of Andrew Carnegie and the other great philanthropists of the earlier age.

At 74, just over a year into retirement as Citigroup chairman, Mr Weill sees in Carnegie's life aspects of his own. Andrew Carnegie, an impoverished Scottish immigrant, built a steel empire in Pittsburgh, taking risks that others shunned, just as the demand for steel was skyrocketing. He then gave away his fortune, reasoning that he was lucky to have been in the right spot at the right moment and he owed the community for his good luck - not in higher wages for his workers, but in philanthropic distribution of his wealth.

Mr Weill's beginnings were similarly inauspicious. A son of immigrants from Poland, raised in Brooklyn, a so-so college student, he landed on Wall Street in a low-level job in the 1950s. Harnessing entrepreneurial energy, deftness as a deal maker and an appetite for risk, with a rising stock market pulling him along, he built a financial empire that, in his view, successfully broke through the stultifying constraints that flowed from the New Deal. They were constraints not just on what business could or could not do, but on every high earner's take-home pay.

"I once thought how lucky the Carnegies and the Rockefellers were because they made their money before there was an income tax", Mr Weill said, never believing in his younger days that deregulation and tax cuts, starting in the late 1970s, would bring back many of the easier conditions of the Gilded Age. "I felt that everything of any great consequence was really all made in the past", he said. "That turned out not to be true and it is not true today".

The Question of Talent

Other very wealthy men in the new Gilded Age talk of themselves as having a flair for business not unlike Derek Jeter's "unique talent" for baseball, as Leo J Hindery Jr put it. "I think there are people, including myself at certain times in my career", Mr Hindery said, "who because of their uniqueness warrant whatever the market will bear".

He counts himself as a talented entrepreneur, having assembled from scratch a cable television sports network, the YES Network. "Jeter makes an unbelievable amount of money", said Mr Hindery, who now manages a private equity fund, "but you look at him and you say, 'Wow, I cannot find another ballplayer with that same set of skills' ".

A handful of critics among the new elite, or close to it, are scornful of such self-appraisal. "I don't see a relationship between the extremes of income now and the performance of the economy", Paul A Volcker, a former Federal Reserve Board chairman, said in an interview, challenging the contentions of the very rich that they are, more than others, the driving force of a robust economy.

The great fortunes today are largely a result of the long bull market in stocks, Mr Volcker said. Without rising stock prices, stock options would not have become a major source of riches for financiers and chief executives. Stock prices rise for a lot of reasons, Mr Volcker said, including ones that have nothing to do with the actions of these people.

"The market did not go up because businessmen got so much smarter", he said, adding that the 1950s and 1960s, which the new tycoons denigrate as bureaucratic and uninspiring, "were very good economic times and no one was making what they are making now".

James D Sinegal, chief executive of Costco, the discount retailer, echoes that sentiment. "Obscene salaries send the wrong message through a company", he said. "The message is that all brilliance emanates from the top; that the worker on the floor of the store or the factory is insignificant".

A legendary chief executive from an earlier era is similarly critical. He is Robert L Crandall, 71, who as president and then chairman and chief executive, led American Airlines through the early years of deregulation and pioneered the development of the hub-and-spoke system for managing airline routes. He retired in 1997, never having made more than $5 million a year, in the days before upper-end incomes really took off.

He is speaking out now, he said, because he no longer has to worry that his "radical views" might damage the reputation of American or that of the companies he served until recently as a director. The nation's corporate chiefs would be living far less affluent lives, Mr Crandall said, if fate had put them in, say, Uzbekistan instead of the United States, "where they are the beneficiaries of a market system that rewards a few people in extraordinary ways and leaves others behind".

"The way our society equalizes incomes", he argued, "is through much higher taxes than we have today. There is no other way."

The New Tycoons

The new Gilded Age has created only one fortune as large as those of the Rockefellers, the Carnegies and the Vanderbilts - that of Bill Gates, according to various compilations. His net worth, measured as a share of the economy's output, ranks him fifth among the thirty all-time wealthiest American families, just ahead of Carnegie. Only one other living billionaire makes the cut: Warren E. Buffett, in 16th place.

Individual fortunes nearly a century ago were so large that just thirty tycoons - Rockefeller was by far the wealthiest - had accumulated net worth equal to five percent of the national income. Their wealth flowed mainly from the empires they built in manufacturing, railroads, oil, coal, urban transit and mass retailing as the United States grew into the world's largest industrial economy.

Today the fortunes of the very wealthiest are spread more widely. In addition to stock and stock options, low-interest credit has brought wealth to more families - by, for example, facilitating the sale of individual businesses for much greater sums than in the past. The fortunes amassed in hedge funds and in private equity often stem from deals involving huge amounts of easy credit and vast pools of capital available for investment.

The high-tech boom and the Internet unfolded against this backdrop. The rising stock market multiplied the wealth of Bill Gates as his software became the industry standard. It did the same for numerous others who financed start-ups on a shoestring and then went public at enormous gain.

Over a longer period, the market lifted the value of Mr Buffett's judicious investments and timely acquisitions, and he emerged as the extraordinarily wealthy Sage of Omaha, in effect, a baron of the new Gilded Age whose views are strikingly similar to those of Carnegie and Mr Weill.

Like them, Mr Buffett, 78, sees himself as lucky, having had the good fortune, as he put it, to have been born in America, white and male, and "wired for asset allocation" just when all four really paid off. He dwelt on his good fortune in a recent appearance at a fund-raiser for Hillary Rodham Clinton, who is vying for Mr Buffett's support of her presidential candidacy.

"This is a significantly richer country than ten, twenty, thirty, forty, fifty years ago", he declared, backing his assertion with a favorite statistic. The national income, divided by the population, is a very abundant $45,000 per capita, he said, a number that reflects an affluent nation but also obscures the lopsided income distribution intertwined with the prosperity.

"Society should place an initial emphasis on abundance", Mr Buffett argued, but "then should continuously strive" to redistribute the abundance more equitably.

No income tax existed in Carnegie's day to do this, and neither Mr Buffett nor Mr Weill push for sharply higher income tax rates now, although Mr Buffett criticizes the present tax code as unfairly skewed in his favor. Like Carnegie, philanthropy is their preference. "I want to give away my money rather than have somebody take it away", Mr Weill said.

Mr Buffett is already well down that path. Most of his wealth is in the stock of his company, Berkshire Hathaway, and he is transferring the majority of that stock to the Bill and Melinda Gates Foundation so the Gateses can "materially expand" their giving.

"In my will", he has written, echoing Carnegie's last wishes, "I've stipulated that the proceeds from all Berkshire shares I still own at death are to be used for philanthropic purposes".

Revisionist History

The new tycoons describe a history that gives them a heroic role. The American economy, they acknowledge, did grow more rapidly on average in the decades immediately after World War Two than it is growing today. Incomes rose faster than inflation for most Americans and the spread between rich and poor was much less. But the United States was far and away the dominant economy, and government played a strong supporting role. In such a world, the new tycoons argue, business leaders needed only to be good managers.

Then, with globalization, with America competing once again for first place as strenuously as it had in the first Gilded Age, the need grew for a different type of business leader - one more entrepreneurial, more daring, more willing to take risks, more like the rough and tumble tycoons of the first Gilded Age. Lew Frankfort, chairman and chief executive of Coach, the manufacturer and retailer of trendy upscale handbags, who was among the nation's highest paid chief executives last year, recaps the argument.

"The professional class that developed in business in the 1950s and 1960s", he said, "was able as America grew at very steady rates to become industry leaders and move their organizations forward in most categories: steel, autos, housing, roads".

That changed with the arrival of "the technological age", in Mr Frankfort's view. Innovation became a requirement, in addition to good management skills - and innovation has played a role in Coach's marketing success. "To be successful", Mr Frankfort said, "you now needed vision, lateral thinking, courage and an ability to see things, not the way they were but how they might be".

Mr Weill's vision was to create a financial institution in the style of those that flourished in the last Gilded Age. Although insurance is gone, Citigroup still houses commercial and investment banking and stock brokerage.

The Glass-Steagall Act of 1933 outlawed the mix, blaming conflicts of interest inherent in such a combination for helping to bring on the 1929 crash and the Depression. The pen displayed in Mr Weill's hallway is one of those Mr Clinton used to revoke Glass-Steagall in 1999. He did so partly to accommodate the newly formed Citigroup, whose heft was necessary, Mr Weill said, if the United States was to be a powerhouse in global financial markets.

"The whole world is moving to the American model of free enterprise and capital markets", Mr Weill said, arguing that Wall Street cannot be a big player in China or India without giants like Citigroup. "Not having American financial institutions that really are at the fulcrum of how these countries are converting to a free-enterprise system", he said, "would really be a shame".

Such talk alarms Arthur Levitt Jr, a former chairman of the Securities and Exchange Commission, who started on Wall Street years ago as a partner with Mr Weill in a stock brokerage firm. Mr Levitt has publicly lamented the end of Glass-Steagall, but Mr Weill argues that its repeal "created the opportunities to keep people still moving forward".

Mr Levitt is skeptical. "I view a gilded age as an age in which warning flags are flying and are seen by very few people", he said, referring to the potential for a Wall Street firm to fail or markets to crash in a world of too much deregulation. "I think this is a time of great prosperity and a time of great danger".

It's Not the Money, or Is It?

Not that money is the only goal. Mr Hindery, the cable television entrepreneur, said he would have worked just as hard for a much smaller payoff, and others among the very wealthy agreed. "I worked because I loved what I was doing", Mr Weill said, insisting that not until he retired did "I have a chance to sit back and count up what was on the table". And Kenneth C Griffin, who received more than $1 billion last year as chairman of a hedge fund, the Citadel Investment Group, declared: "The money is a byproduct of a passionate endeavor".

Mr Griffin, 38, argued that those who focus on the money - and there is always a get-rich crowd - "soon discover that wealth is not a particularly satisfying outcome". His own team at Citadel, he said, "loves the problems they work on and the challenges inherent to their business".

Mr Griffin maintained that he has created wealth not just for himself but for many others. "We have helped to create real social value in the US economy", he said. "We have invested money in countless companies over the years and they have helped countless people".

The new tycoons oppose raising taxes on their fortunes. Unlike Mr Crandall, neither Mr Weill nor Mr Griffin nor most of the dozen others who were interviewed favor tax rates higher than they are today, although a few would go along with a return to the levels of the Clinton administration. The marginal tax on income then was 39.6 percent, and on capital gains, twenty percent. That was still far below the seventy percent and 39 percent in the late 1970s. Those top rates, in the Bush years, are now 35 percent and fifteen percent, respectively.

"The income distribution has to stand", Mr Griffin said, adding that by trying to alter it with a more progressive income tax, "you end up in problematic circumstances. In the current world, there will be people who will move from one tax area to another. I am proud to be an American. But if the tax became too high, as a matter of principle I would not be working this hard."

Creating Wealth

Some chief executives of publicly traded companies acknowledge that their fortunes are indeed large - but that it reflects only a small share of the corporate value created on their watch.

Mr Frankfort, the 61-year-old Coach chief, took home $44.4 million last year. His net worth is in the high nine figures. Yet his pay and net worth, he notes, are small compared with the gain to shareholders since Coach went public six years ago, with Mr Frankfort at the helm. The market capitalization, the value of all the shares, is nearly $18 billion, up from an initial $700 million.

"I don't think it is unreasonable", he said, "for the CEO of a company to realize three to five percent of the wealth accumulation that shareholders realize".

That strikes Robert C Pozen as a reasonable standard. He made a name for himself - and a fortune - overseeing the investment department at Fidelity.

Mr Weill makes a similar point. Escorting a visitor down his hall of tributes, he lingers at framed charts with multicolored lines tracking Citigroup's stock price. Two of the lines compare the price in the five years of Mr Weill's active management with that of Mr Buffett's Berkshire Hathaway during the same period. Citigroup went up at six times the pace of Berkshire.

"I think that the results our company had, which is where the great majority of my wealth came from, justified what I got", Mr Weill said.

New Technologies

Others among the very rich argue that their wealth helps them develop new technologies that benefit society. Steve Perlman, a Silicon Valley innovator, uses his fortune from breakthrough inventions to help finance his next attempt at a new technology so far out, he says, that even venture capitalists approach with caution. He and his partners, co-founders of WebTV Networks, which developed a way to surf the Web using a television set, sold that still profitable system to Microsoft in 1997 for $503 million.

Mr Perlman's share went into the next venture, he says, and the next. One of his goals with his latest enterprise, a private company called Rearden LLC, is to develop over several years a technology that will make film animation seem like real-life movies. "There was no one who would invest", Mr Perlman said. So he used his own money.

In an earlier era, big corporations and government were the major sources of money for cutting-edge research with an uncertain outcome. Bell Labs in New Jersey was one of those research centers, and Mr Perlman, now a 46-year-old computer engineer with 71 patents to his name, said that, in an earlier era, he could easily have gone to Bell as a salaried inventor.

In the 1950s, for example, he might have been on the team that built the first transistor, a famous Bell Labs breakthrough. Instead, after graduating from Columbia University, he went to Apple in Silicon Valley, then to Microsoft and finally out on his own.

"I would have been happy as a clam to participate in the development of the transistor", Mr Perlman said. "The path I took was the path that was necessary to do what I was doing".

Carnegie's Philanthropy

In contrast to many of his peers in corporate America, Mr Sinegal, seventy, the Costco chief executive, argues that the nation's business leaders would exercise their "unique skills" just as vigorously for "$10 million instead of $200 million, if that were the standard".

As a co-founder of Costco, which now has 132,000 employees, Mr Sinegal still holds $150 million in company stock. He is certainly wealthy. But he distinguishes between a founder's wealth and the current practice of paying a chief executive's salary in stock options that balloon into enormous amounts. His own salary as chief executive was $349,000 last year, incredibly modest by current standards.

"I think that most of the people running companies today are motivated and pay is a small portion of the motivation", Mr Sinegal said. So why so much pressure for ever higher pay?

"Because everyone else is getting it", he said. "It is as simple as that. If somehow a proclamation were made that CEOs could only make a maximum of $300,000 a year, you would not have any shortage of very qualified men and women seeking the jobs".

Looking back, none of the nation's legendary tycoons was more aware of his good luck than Andrew Carnegie.

"Carnegie made it abundantly clear that the centerpiece of his gospel of wealth philosophy was that individuals do not create wealth by themselves", said David Nasaw, a historian at City University of New York and the author of Andrew Carnegie (Penguin Press, 2006). "The creator of wealth in his view was the community, and individuals like himself were trustees of that wealth".

Repaying the community did not mean for Carnegie raising the wages of his steelworkers. Quite the contrary, he sometimes cut wages and, in doing so, presided over violent antiunion actions.

Carnegie did not concern himself with income inequality. His whole focus was philanthropy. He favored a confiscatory estate tax for those who failed to arrange to return, before their deaths, the fortunes the community had made possible. And today dozens of libraries, cultural centers, museums and foundations bear Carnegie's name.

"Confiscatory" does not appear in Mr Weill's public comments on the estate tax, or in those of Mr Gates. They note that the estate tax, now being phased out at the urging of President Bush, will return in full in 2010, unless Congress acts otherwise.

They publicly favor retaining an estate tax but focus their attention on philanthropy.

Mr Weill ticks off a list of gifts that he and his wife, Joan, have made. Some bear their names, and will for years to come. With each bequest, one or the other joins the board. Appropriately, Carnegie Hall has been a big beneficiary, and Mr Weill as chairman was honored at a huge fund-raising party that Carnegie Hall gave on his seventieth birthday.

The Weills - matching what everyone else pledged - gave $30 million to enhance the concert hall that Andrew Carnegie built in 1890 in pursuit of returning his fortune to the community, establishing a standard that today's tycoons embrace.

"We have that in common", Mr Weill said.


Amanda Cox contributed reporting.

Correction: July 19 2007

A front-page article on Sunday about a new era of wealthy and powerful men misidentified the cable television network that the entrepreneur Leo J Hindery Jr assembled and sold in 1999 for $200 million. It was InterMedia Partners, not the YES Network. (He was a founder in 2001 of the YES Network, which has not been sold.)

Correction: July 21 2007

A front-page article on Sunday about a new era of wealthy and powerful men incorrectly described the management role of Robert C Pozen at Fidelity Investments, and referred incorrectly to his pay. Mr Pozen oversaw the entire investment department at Fidelity; he did not manage any funds, including one that made a profit of $1 billion one year. The manager of that fund, not Mr Pozen, was paid $15 million. Also, the article misinterpreted comments by Mr Pozen about managing a company. Mr Pozen was referring to the manager of the portfolio that made $1 billion - not to himself - when he said, "In every organization there are a relatively small number of really critical people".

Copyright 2007 The New York Times Company


Bill Totten

Saving the World for Plutocracy

Beltway Bacchanal

Congress lives high on the contributor's dime

by Ken Silverstein

Harper's Magazine (March 2008)

Try to list the stakes at play in the congressional elections this fall, and one might settle on health care, taxes, immigration, Iraq. Seldom considered, though, is an issue of more direct importance to the members of Congress themselves: Which party will get to live more lushly in the nation's capital, where those who control the levers of legislation also command the most and best perks? Washington by and large is a restrained, workaday sort of town, its residents not known for high living; but a significant exception can always be found among the denizens of Capitol Hill, and especially among the legislators who command a majority there. For this convivial crew and its hangers-on, the most pressing matter to be decided on Election Day is, as ever, whether they can hold on to that majority and all its accompanying boons.

The most lavish benefit of winning a congressional campaign is, ironically enough, the right to keep on campaigning - and therefore to keep raising and spending donor money. Uninformed citizens may still think of "campaigns" as discrete events, waged mostly in home districts and just before election time. In fact, political fund-raising is now a nonstop activity, with candidates chasing dollars far outside the borders of their home states and districts. And although the Federal Election Commission (FEC) is supposed to monitor the use of this money, it has interpreted the relevant rules in a highly flexible fashion. Politicians have two primary vehicles with which to raise and spend money, the first being their campaign treasuries, which according to ethics rules must be kept "separate from [the member's] personal funds" and can be used only for "bona fide campaign or political purposes". But in practice the FEC has permitted virtually any expenditure, from a night on the town to a resort stay with big contributors, to be drawn from these funds. (Last October, in a rare act of censure, the FEC cited New York Democratic Congressman Gregory Meeks for using $6,230 to pay for a personal trainer, whose services initially had been justified by his office as necessary to alleviate stress brought on by "the candidate's duties".) Spending from the second vehicle - the Leadership PAC - is less restrictive still, since it is not even subject to the nominal "personal use" prohibition that applies to campaign treasuries. Furthermore, individual contribution limits to Leadership PACs are $5,000 per year, versus $2,300 per election for political campaigns. Not surprisingly, most senators and more than a third of House members now run Leadership PACs, which were quite rare as recently as a decade ago. During the 2006 election cycle, fund-raising by Leadership PACs exceeded $160 million.

Most of the political spending by members of Congress is no doubt legitimate, at least under existing rules, because it is in fact connected (if often tenuously) to winning reelection. But as the "campaign" has lost all temporal and spatial boundaries, and the FEC has largely turned a blind eye, misuse of donor money has become positively shameless. Those who hold safe seats spend just as freely as those in highly competitive districts, if not more so, and these allegedly campaign-related expenditures continue year-round. According to the Center for Responsive Politics (which helpfully provided much of the data for this article), at least eight House members spent more than $10,000 in campaign funds on food, travel, and fund-raising in the eight weeks between Election Day 2006 and New Year's Eve - not exactly a peak campaigning period. These included Democrat John Murtha and Republican Don Young, whose respective margins of victory were 22 and 17 percent. Three of the other big spenders, interestingly enough, were Republicans who lost their seats in the 2006 midterm, vote; in their dwindling days of public service, they apparently decided to treat themselves well on the way out.

Inside Washington itself, such casual appropriation of political contributions bankrolls much of the city's social life. Some of the spending on food and drink is related to fund-raising events, but a notable portion is for private restaurant meals - sometimes classified in disclosure forms under the category of "political meetings". These "meetings" are held at a circuit of nightspots that include the two political parties' clubs - the semiprivate National Democratic Club and, for Republicans, the strictly cloistered Capitol Hill Club - and otherwise range from such old standbys as Morton's (where, in the 1980s, the corrupt House boss Dan Rostenkowski held court so frequently that a bronze plaque near the bar read "Rosty's Rotunda") to chic eateries like Bistro Bis and the Sonoma Wine Bar. Most Americans could not afford to eat at any of these restaurants. The price of an appetizer alone - like the $15.95 lobster mac-and-cheese at the Oceanaire or the $18 crabmeat, lobster, and shrimp cocktail at the Capitol Hill Club (why settle for one when you can have a!I three?) - tends to be daunting. The a la carte entrees begin at the low end with items like the stuffed rabbit loin at Bistro Bis ($29.50), move up to the signature porterhouse at the Capital Grille ($41) or the double-cut prime rib at Morton's ($43), and for the truly memorable occasion climb to $20 per ounce (five-ounce minimum) for the Kobe strip steak at Charlie Palmer's. With drinks, dessert, and a tip, a meal for two can easily run into the hundreds of dollars.

In the land of the permanent campaign, though, these are the everyday haunts of our elected leaders. Between 2005 and late 2007, at just ten of Washington's priciest restaurants, House members collectively spent $5.4 million of their campaign money. (Note that this does not even include senators, who typically spend even more than their colleagues in the lower chamber; but because senators are not required to file disclosure forms electronically, categorizing their expenses with any specificity is a nearly impossible task.)

Last year, in the aftermath of scandals involving Jack Abramoff and Randy "Duke" Cunningham, among others, Congress passed an ethics bill that barred lobbyists from directly buying members food and drinks", a step that was hailed as imposing a barrier between lawmakers and special interests. But political donations continue to underwrite legislators' nightly entertainment in Washington - helping to maintain the hermetic Beltway bubble in which lawmakers fraternize with precisely those people from whom ethics laws, and the demands of good governance, aim to separate them.

To see just how well one can live while in the public employ, stand near the Capitol South metro station around 6:30 PM on those weeknights when Congress is in session. One can witness a steady stream of members, staffers, and their acquaintances, in groups of twos, threes, and fours, fanning out across the city. The stream soon divides, with some branches flowing toward such nearby destinations as the Capitol Hill Club or the cavernous Charlie Palmer steakhouse. Among the other popular options are the Caucus Room, whose owners include Democratic lobbyist Tommy Boggs and former Republican National Committee chairman and current Mississippi Governor Haley Barbour; and Sam & Harry's, a beef shrine downtown.

During the period of GOP rule, the Capital Grille, which, at Pennsylvania Avenue and Sixth Street, sits in the reflected glow of the Capitol dome, was perhaps the most popular hangout in town for Republican insiders. The restaurant opened here in 1994, the year that Newt Gingrich led the GOP takeover of Congress, and on its opening night handed out $100,000 in free food and drink to legislators. "It might as well be part of the Capitol complex", The Hill remarked in 2003, "like the Russell Senate Office Building or the Rayburn House Office Building, since you're likely to run into almost as many members of Congress and staffers at the Capital Grille as you do on Capitol Hill". Business has reportedly dropped off now that Democrats are back in charge, but it remains one of the best spots in town to hobnob with members of Congress and their entourages.

When I visited the Capital Grille one night last fall, three SUVs were idling out front for lawmakers who were finishing up inside. As I walked toward the revolving front door, Representative Charles Rangel (Democrat, New York), head of the House Ways and Means Committee, was walking out. A man just in front of me - likely a lobbyist, given his power suit, leather briefcase, and Bluetooth earpiece - immediately accosted Rangel, furiously shaking his hand, and the two struck up a short but friendly conversation. After Rangel stepped into his waiting car (license plate NYREP15), the man turned to me, eyes afire, and exclaimed, "He's da man!"

Inside, just past a window display of aged beef hanging like holy relics, the first thing one sees is a wall of wine lockers, their owners' names engraved on brass plaques. Defense contractor Brent Wilkes, who was convicted of bribing former Representative Duke Cunningham, used to have a locker here, as did businessman Mitchell Wade, who pleaded guilty to similar charges. Former lobbyists whose names grace lockers include Jeffrey Shockey, a longtime aide to Republican Congressman Jerry Lewis, as well as the late Ann Eppard, who pleaded guilty in 1999 to taking payoffs while working for former Pennsylvania Republican Bud Shuster, a longtime powerhouse on the House Transportation Committee. (Her locker is kept in memoriam.)

In the bar just beyond, an assortment of politicos can inevitably be found mingling about. On one night in October, I saw Terry Nelson, who until the summer had served as John McCain's presidential-campaign manager, strolling through toward the dining room; William Pickle, the recently retired Senate sergeant at arms, moving from stool to stool, chatting with acquaintances; and a dapper Arthur Wu, the Republican staff director of the House Veterans' Affairs oversight and investigations subcommittee, who stood at center stage with a big smile and glass in hand. Senator Norm Coleman (Republican, Minnesota), who had dropped by after a fund-raiser held in his honor earlier in the evening at the US Chamber of Commerce town house, sipped from a drink while chatting with Matthew Brooks, head of the Republican Jewish Coalition.

On another night, Senator Ben Nelson (Democrat, Nebraska) came into the bar from the dining room and struck up a conversation with two men while several suitors lined up to wait their turn. Also on hand was Edwina Rogers, a lobbyist and the wife of Republican power broker Ed Rogers, who along with a female friend was enjoying a night on the town whose itinerary still included a stop at Georgetown's Cafe Milano. Rogers, whose freewheeling style seemed hard to square with her role as a conservative strategist and former Bush White House aide at the National Economic Council, was immersed in conversation with someone whom she identified to me, moments later, as an important committee staffer. The topic wasn't hard to discern.

"You need to make Rick an offer of at least three times what he's making now", the man told Rogers.

"Let's get together Thursday at Charlie Palmer's", Rogers replied with a laugh. "And bring Rick".

I shared drinks with several lobbyists who meet regularly at the Grille. "They decided to criminalize everything", one said, referring to the new ban on lobbyists buying meals for lawmakers. "My reaction is, 'Have a good life'. It's not going to hurt me, I already know people, but it's going to make it hard for those who are new [at lobbying] and are trying to build personal relationships."

One of our tablemates was similarly untroubled. "So far, it's saved me a lot of money", he said. "But I'm not sure what's going to happen in the long run. When they lowered the speed limit to 55, everyone paid attention for six months. Then they started driving seventy again."

As originally envisioned by the founders of the American republic, serving in Congress was to be strictly a part-time job. Early officeholders, typically farmers and businessmen, came to Washington for only a few weeks to deal with national affairs and then returned home. Too much time in the capital, it was thought, would diminish the bond between representatives and their constituents. "As it is essential to liberty that the government in general should have a common interest with the people, so it is particularly essential that [Congress] should have an immediate dependence on, and an intimate sympathy with, the people", Federalist #52 opined.

It is perhaps too easy to romanticize this era of "citizen legislators", who of course generally came from, and represented the interests of, the economic elite. And yet holding office was then genuinely seen as a public service rather than a career, let alone a path to riches. Today's lawmakers complain bitterly about the rigors of the job, including the incessant fund-raising, but they overwhelmingly opt to seek term after term and in recent decades have won reelection at a rate of roughly ninety percent, in part because both parties have gerrymandered congressional districts so that few incumbents are dislodged.

Why do they so dearly want to stay? The pay is very good but not outlandish: at $169,300 per year, a member of Congress earns less than what he or she could likely command in the private sector {1}. More generous, arguably, is the retirement plan, which (for members serving at least five years) is guaranteed for life, at a payout that the National Taxpayers Union estimates to be at least twice what a similarly salaried corporate executive would get upon retirement. Another factor, no doubt, is the entourage that tends to members' needs. As recently as World War II, lawmakers got by with a minimal staff, but today each congressman typically has a score of young, eager aides who do everything from managing his schedule to driving him around town. Only the nation's most elite CEOs can afford to have so many talented minions at their beck and call around the clock.

But among the greatest perks of congressional service today is the campaign dole, which provides legislators with potentially limitless funds to lavish on associates, or on themselves. One cannot flip through disclosure reports of the most powerful members of Congress without finding vast sums being dispensed for purposes that hardly seem essential to their reelection. Over a recent four-year period, Senate Majority Leader Harry Reid has used more than $125,000 in political funds to pay for stays at such Las Vegas hotels as the MGM Grand, the Wynn resort, Caesars Palace, and Mandalay Bay. His House counterpart, Congressman Steny Hoyer of Maryland, has displayed similarly pricey tastes: during the 2006 election cycle alone, his Leadership PAC doled out $66,146 on hotels, including the Intercontinental Hotel in Chicago, the Ritz-Carlton in Phoenix, the Breakers in Palm Beach, and the W in Seattle. In the fall of 2005, Virginia Congressman Eric Cantor, now the GOP chief deputy whip, charged his political funds more than $42,000 for stays at the Beverly Hills Hotel and Bungalows, as well as $1,224 for a tour of the Warner Brothes studios.

Such eye-opening use of donor money is by no means confined to party leaders. Consider the case of Representative James McCrery (Republican, Louisiana), who has held no post in the Republican leadership and whose national profile is fairly limited. McCrery's campaign took in $3.3 million between 2005 and 2007, a staggering amount given that his seat is utterly secure; he crushed his most recent Democratic opponent, who spent all of $7,000, by some forty percentage points. McCrery's Leadership PAC - which is named, without apparent irony, the Committee for the Preservation of Capitalism - raised another $2.3 million during the same period. McCrery recently announced that he would not seek reelection this fall, a choice that analysts described as a serious blow to the GOP's financial prospects for the 2008 election.

By congressional standards, McCrery is poor: his assets, as listed on disclosure forms, are estimated at between $25,000 and $200,000, ranking him in the bottom fifth of his peers. Yet life in Congress has been good for McCrery, as well as for his friends, family, and associates. In 2004 his wife, Johnette, until then an assistant professor at Louisiana State University - Shreveport, was named a vice president at the Washington office of Ketchum, one of the world's largest PR firms. A number of his staffers have gone on to become lobbyists or consultants, and the wife of one former aide gets paid to run the Committee for the Preservation of Capitalism {2}.

McCrery has cut a broad gastronomical swath through Washington, using political funds to dine out frequently at twenty-five different restaurants since 2005. Although his favorite spot seems to be the Capitol Hill Club (twenty-eight visits and events, totaling more than $59,000), the congressman has spread his wealth around town, spending thousands of dollars from his political funds at Bistro Bis and the Capital Grille, as well as at Johnny's Half Shell, a seafood spot near Union Station, and Acadiana, whose menu reflects "the bounty of Louisiana, in the finest of seafood and premium meats". When in his home district, McCrery regularly drops by the Southern Trace Country Club (twelve visits in three years, at combined costs to his political funds of some $40,000) and the Shreveport Club (seven visits, $2,200).

For travel, McCrery appears to enjoy the Napa Valley, having charged his political funds tens of thousands of dollars for fund-raising trips there in the past three years. His fall 2007 expenses at Sonoma's Benziger Family Winery, which "produces Sonoma cabernet sauvignon, merlot, and chardonnay wines with a strong sense of place", set back his Leadership PAC $13,000. The congressman also enjoys a good party. McCrery sits on the executive committee of the Mystick Krewe of Louisianians Inc, a group of "displaced Louisianians living in our nation's capital". In 2005, his campaign paid $7,725 to the group for a Mardi Gras-themed party.

McCrery's passions include golfing - several years ago, he appeared on Golf Digest's list of the top 200 players among members of Congress, White House officials, Supreme Court justices, and lobbyists - and he frequently can be found on the links, courtesy of his political funds. McCrery spent $1,592 in December of 2005 at the Calusa Pines Golf Club and another $994 the following month at the Olde Florida Golf Club, both in balmy Naples, Florida. He frequently holds his fund-raising events at golf clubs, where donors have given him the money to pay for yet more golfing{3}. He spent $7,488 at the Talking Stick in Scottsdale, Arizona (winner of the Golden Nugget Award for Best Recreational Facility), and $32,036 at the Kiawah Island Golf Resort off the South Carolina coast (named Number One golf resort in America by Travel + Leisure Golf magazine and Number 2 tennis resort by Tennis magazine).

He and donors traveled farther south for an affair McCrery hosted at the Rio Mar Beach Resort and Spa in Puerto Rico, which, says its website, "lies between a magnificent palm-lined beach and lush mountains" and boasts "an award-winning staff at your beck and call". The resort offers - naturally - two championship golf courses, as well as eleven tennis courts, two ocean front swimming pools, and "oceanfront meditation areas". Still another golfing affair - a single-event expense record for McCrery, costing his Leadership PAC nearly $52,000 - was held at the Lansdowne Resort in Virginia's Hunt Country.

McCrery's non-travel-related payments of note include an $88,512 bonus to his fund-raising consultant last year, $10,000 in checks to the Tom DeLay Legal Expense Trust, more than $10,000 for gifts (much of it spent at the Tiny Jewel Box in Washington), $3,000 labeled only as petty cash, $1,427 at the Marble Slab Creamery, and $1,102 more at the Cake House. There is seemingly nothing that McCrery has not seen fit to charge to his political funds, including babysitting for his children: a bill of $300 was paid to one Katie Raffaelli, the daughter of John Raffaelli, a lobbyist and campaign donor to the congressman.

I called McCrery and asked whether he thought some of his expenditures might have been a bit extravagant - for example, the donor event in Puerto Rico. McCrery explained that early in his career, he had attended many fund-raisers, and had developed a keen sense of what made for a memorable affair. "I tried to emulate those events that attracted people so that they would want to come back", he told me. "Yes, we do go to some very nice places, and we like to make sure that people have a good time ... So I plead guilty".

What about expenditures for meals and other non-fund-raising events? I asked. "It's fairly loose in terms of the use of campaign money", the congressman replied. "It has to be connected to the campaign, but that can be any number of things". For example, McCrery might pick up the dinner tab for other members of Congress "if I'm talking to them about fund-raising activities, or if I'm trying to get them to come to a campaign event". At the Capitol Hill Club, some of his expenditures were for what he called "check presentations", ceremonial events (often including donors) at which the PAC hands out checks to members and candidates. As for babysitting, the congressman said that he had asked the FEC for an opinion about that matter, and he had been assured it was appropriate. "We don't use it often, but we have occasionally", he told me, adding that he usually paid $100 "if the person comes in and spends the night". The 2007 tab for $300 was for babysitting when he and his wife were away for a few days at a Republican retreat - at the Hyatt Regency Chesapeake Bay Golf Resort, Spa and Marina.

All in all, McCrery has allocated some $650,000 in political funds for food, drinks, catering, and hotels during the past three years. This is a pace of roughly $18,000 a month - and keep in mind that this figure excludes tens of thousands of dollars more in airfare, rental cars, and related travel costs. For Democrats just beginning to enjoy the enhanced perks of majority status and hoping to tighten their grip thereon, McCrery's story can only serve as election-year inspiration.

Even as the Democrats' triumph in 2006 has accomplished almost nothing in terms of policy, it has produced a stunning reversal in the parties' respective finances. As of January, the Democratic Senate and House congressional campaign committees had combined cash on hand of $56 million, almost five times more than their formerly cash-swollen Republican counterparts. At one point last fall, the GOP's House campaign committee was technically insolvent, with $2.3 million more in debt than in the bank. "Washington is a town that operates on the basis of what people can do for you", says Melanie Sloan, director of Citizens for Responsibility and Ethics in Washington. "Now that the Democrats control Congress, it's a lot easier to get people to show up at their fund-raisers. As a donor, you can't afford to say no."

In Washington, the Democrats' political and social resurgence can be witnessed in the revived fortunes of the National Democratic Club , which serves as a semiprivate venue for party lawmakers and elected officials, as well as the lobbyists, consultants, fund-raisers, and others whose livelihood depends on access to them. Monthly fees at the club - located on Ivy Street, a few minutes' walk from the House and Senate office buildings - are only $25 per month for members of Congress; others pay $80 monthly, on top of a $300 initiation fee.

I stopped by the club on a cold, windy evening last December to meet a party political consultant. It was a jovial spot, to be sure, but surprisingly modest, with pre-Christmas decor reminiscent of a roadside hotel lounge. Thick pillars in the dining room were wrapped in faded red, white, and silver decorations, and a small Christmas tree squatted against a wall. Among the customers were a few members of Congress, including Carolyn McCarthy of New York and Barney Frank and Michael Capuano of Massachusetts, as well as an elderly foursome playing bridge at a corner table. At the bar, Hill staffers, assorted politicos, and a few locals from the neighborhood chatted over drinks and bowls of a low-grade nut mix.

The club was founded by former staffers in the Truman Administration, and for decades it was a de rigueur stop on the local social circuit. In March 1986, when Democrats held a huge majority in the House, a capacity crowd gathered for "a glittering gala" to mark the completion of a major remodeling, the website relates. Eight years later, catastrophe struck when the party lost both chambers for the first time in over forty years. More than 1,000 members promptly resigned from the club, and the smart action drifted a few blocks away to the Republican Party's more lavish Capitol Hill Club.

As the Republican grip on Washington tightened in the ensuing years, the National Democratic Club was forced to sell its three-story building and then rent back the ground floor for its dwindling operations. Up until recently, the mood here had been desultory, but a renaissance arrived on Election Night 2006, when hundreds of revelers gathered to celebrate the sweeping Democratic victory. "Once again, the place to be is your NDC", said the club's first post-election newsletter. General Manager Christine Hilty describes the club as a refuge for Democrats and their supporters. "There's certainly networking going on, but people come here because it's a safe place", she' said. "There are no cameras". Membership has climbed by about thirty percent since the 2006 elections, she estimated, and business is more bustling than at any point in the six years she's worked there. During the first nine months of 2007, congressional Democrats and party committees used political contributions to pay for $426,431 worth of food and drink at the club. That was an increase of about seventy percent from the same period in 2005, when the Democrats were still in the minority {4}.

Not only does the majority party have more to spend; it is also more spent upon. Democrats have found themselves newly fashionable on the Washington scene, whether as party guests, as dinner partners, or simply for a coffee or office meeting, especially, of course, with lobbyists. "You're vying for time and you're not going to vie for the time of someone who has no power", one lobbyist explained to me about his post-2006 shift in social priorities. Former Democrats, and those considering retirement, have seen their prospects soar as K Street firms look to enhance their outreach to the new kings of Congress. The Republican-dominated lobby shop of Barbour Griffith & Rogers - founded by Haley Barbour, the Mississippi governor - recently announced that it would begin hiring Democrats. "I'm not going to deny the obvious", the firm's chairman, Ed Rogers (Edwina's husband), told the Washington Post. "The expectations of our clients are such that we have to have a full range of political, policy and business expertise, and in today's world that includes Democrats".

The new ethics rules ostensibly prohibit lobbyists from buying members drinks and meals, but it almost certainly will still happen, albeit with a variety of winks and nods. One of the lobbyists I met at the Capital Grille explained a common method of picking up tabs for members in the past. "Let's say there were four or five members sitting at a table with a couple or three lobbyists", he said. "The bill might come to $1,500. But when it came time to pay, they [the members] would pay nothing, or throw in a twenty and say, 'There's my share'".

Every so often, public outrage compels law-makers to make a show of their determination to "clean up" Washington. Congress's "ethics reform package", passed last year, widely hailed as the toughest ever approved, is at least the fourth enacted since the end of World War II. Over the years, members have tightened the rules about their use of corporate jets, the amount of money they can receive from political donors, and the legality of having private entities pay for their food and travel, among other matters. But largely exempted from the chopping block have been the extraordinary benefits and perquisites available to members, which have grown exponentially and transformed a seat in Congress from a comfortable but relatively modest office into a sort of modern-day lordship.

Last November, the Senate Finance Committee announced that it would be scrutinizing, as part of a probe of tax-exempt organizations, the compensation packages and perks enjoyed by leaders of some of the nation's top ministries. The committee expressed concern about religious officials granting themselves high salaries, huge travel allowances, private jets, and luxury cars, all paid for by donations to their ministries. "I don't want to conclude that there's a problem, but I have an obligation to donors and the taxpayers to find out more", Senator Charles Grassley. (Republican, Iowa) said at the time the probe was announced. "People who donated should have their money spent as intended".

Whether or not the ministers are a worthy target of investigation, the fact that a high committee of the US Congress would be in charge of such an inquiry is, to put it mildly, ironic. For if there is any single group in America that lives high on funds donated for other purposes, it is our 535 members of Congress. Perhaps they should overlook the motes in the reverends' eyes until they have considered the beams in their own.


1 Though of course a seat in Congress virtually guarantees members a high-paying job in the private sector upon retirement.

2 Numerous lawmakers view their political funds as job programs for friends and family members, thus offering yet another means of enhancing their incomes and lifestyles. The wife and daughter of former House Majority Leader Tom DeLay were paid several hundred thousand dollars to serve as his PAC's fund-raising and political consultants. The wife of Representative John Doolittle (Republican, Caliornia.) took a fifteen percent cut of all the money she brought in for his PAC, and Senator Barbara Boxer (Democrat, California) pays her own son's firm $72,000 annually to run hers. But no one can top Representative David Scott (Democrat, Georgia.), who since winning office in 2002 has paid, from political funds, more than $600,000 to his wife, his two daughters, his son-in-law, and an advertising firm he owns. "The payments to his family and company became larger and more frequent in 2003, around the same time Representative Scott was falling behind on his federal income taxes and property taxes", reports the watchdog group Citizens for Responsibility and Ethics in Washington. "At the same time the Scotts were failing to pay their taxes, they increased their stock holdings from $5,000 to about $67,000 and bought a $702,000 row house in Washington, DC".

3 Last year's much-lauded congressional-ethics bill specified that members of Congress can no longer travel on a lobbyist's dime. Now lawmakers host and sponsor vacation-style fund-raisers, that lobbyists and others pay for through their donations.

4 And again, this does not include the Senate.

Ken Silverstein is the Washington editor of Harper's Magazine. His last article for the magazine, "Making Mitt Romney", appeared in the November 2007 issue.

Bill Totten