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Annals of Wealth (part 1)

October 12, 2007


Further evidence ours is a new Gilded Age.

In today's Wall Street Journal, Greg Ip reports ("Income-Equality Gap Widens") that "the richest Americans' share of national income has hit a postwar record, surpassing the highs reached in the 1990s bull market, and underlining the divergence of economic fortunes blamed for fueling anxiety among American workers."

Based on an IRS analysis of tax returns, the numbers show that

The wealthiest 1% of Americans earned 21.2% of all income in 2005...up sharply from 19% in 2004, and surpass[ing] the previous high of 20.8% set in 2000, at the peak of the previous bull market in stocks.

The bottom 50% earned 12.8% of all income, down from 13.4% in 2004 and a bit less than their 13% share in 2000.

While the IRS data did not identify the source of this widening gap, Ip and his editors, citing scholars," suggest that "the boom on Wall Street likely played a part" (as it did in the 1990s), along with "technological change that favors those with more skills," globalization, and "advances in communications that enlarge the rewards available to 'superstar' performers, whether in business, sports or entertainment."

Great wealth, as anyone who has read Wharton or Fitzgerald knows, often creates big headaches, if not great problems, as another item from today's Journal reminds us. In his weekly "Wealth Report," Robert Frank reports that

A growing number of multimillionaires and billionaires, hoping to stave off costly feuds, are drawing up family mission statements -- lofty treatises filled with words like "legacy," "values" and "stewardship" that aim to carry rich families (and their fortunes) safely through the ages.

The goal of such statements, writes Frank, is

to help keep the peace in affluent families. By agreeing on a basic set of principles, families hope to avoid lawsuits between relatives about money. They also hope to draw up moral guides for future generations, so that kids and grandkids will inherit values as well as wealth.

We know that wealth and philanthropy, in America at least, are two sides of the same coin. And as Paul Schervish and others have argued, the U.S. is almost sure to see an unprecedented generational transfer of wealth over the coming decades. That, in turn, is likely to give rise -- in fact, already has -- to a Second Great Wave of Philanthropy.

One of the most astute chroniclers of the "new" philanthropy is Sean Stannard-Stockton, author of the Tactical Philanthropy blog, who in his very first post wrote:

[A]s we embark on the 21st century, the traditional hierarchical structures are collapsing. While the traditional top-down hierarchical system describes the way [John D.] Rockefeller’s foundation distributed grants to charities, which then provided services for the public, a flat organizational system is the model of the Second Great Wave.

This shift acknowledges that no one person or entity has all the answers and instead leads to a virtuous cycle of information feedback. The philanthropists of the 21st century will be smaller in size, but much larger in numbers than the philanthropists of the last century.

I agree with the first part of Sean's analysis, but have yet to see much evidence to support the second. Indeed, just as the rich are getting richer, big organizations, of all kinds, are getting bigger. I think this has a lot to do with network effects, the compounding "returns" that accrue to reputation in an attention-based economy, and other externalities.

What about you? Are we moving toward a flatter, more distributed and disaggregated philanthropic culture in the U.S., or will that culture increasingly be characterized by a few "red giants" (think Bill & Melinda Gates Foundation or the American Red Cross) surrounded by countless smaller foundations and nonprofits?

-- Mitch Nauffts

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Posted by Sean Stannard-Stockton  |   October 16, 2007 at 11:30 AM

Thanks for the nice comments Mitch. You're doing an excellent job with your new blog.

Regarding evidence that "The philanthropists of the 21st century will be smaller in size, but much larger in numbers than the philanthropists of the last century." I think that the two areas of evidence come from the fact that foundations with assets under $1 mil are the fastest growing asset segment and the explosive growth of the Fidelity and Schwab Gift Funds and Foundation Source (catering to smaller foundations). We're also seeing mainstream publications like the Financial Times, Wall Street Journal and New York Times focusing more and more on philanthropy so they must believe that this subject is of interest to their mainstream readership (ie. smaller donors). Also , "charitable planning" is becoming a hot area for financial planners who cater to the less than ultra-wealthy, so we're seeing the demand from smaller donors there as well.

But all of that being said, I think that the big influence is still with the big philanthropists. "The Second Great Wave" is still in its early stages and we'll have to see if my prediction comes to fruition or not.

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