Is Generosity a Luxury Good?

A “luxury” good is something you consume more of as you have more money (economists call them “superior” goods, a subset of “normal” goods).  For example, as people get wealthier, they spend proportionally more on Tiffany rings, Hermes scarves and nights at the Ritz Carlton, and less on Kay Jewelers, Wal-Mart, and Best Western.

I’ve been fascinated by the role that optimism and pessimism play in today’s financial markets, specifically because I’d prefer to think that, for the most part, the price of stocks and bonds and condos in Florida is determined by something objective (like cash flows of the underlying business).  Of course it’s really about supply and demand, and demand for assets is at historically low levels.

This means that financial markets are like the old joke: two guys hear a bear outside their tent in the woods.  The first guy starts lacing up his Nikes, and the second guy says, “What are you doing?  There’s no way you can outrun a bear.”  The first guy says, “I don’t have to run faster than the bear; I just have to run faster than you.”

That’s how financial markets work: when sentiments change, the rational thing to do (if you can) is to get out first.  This is how we got: Lehman Brothers’ bankruptcy → defaults in a money market fund ( “breaking the buck”) → the end of liquidity → global economic meltdown.

So what about generosity, and specifically about philanthropy?  Is it the first thing to fall off the list when people’s portfolios are hit?  Where does it fall in the hierarchy of luxury vs. “inferior” goods (things you buy MORE of when you have less money?).

Wouldn’t it be amazing if, in tough times, people were MORE  philanthropic (on a relative if not on an absolute basis?).  Wouldn’t that say something extremely powerful about our society?

My worry is that this is not the case.

What scares me is the idea that philanthropy might be a luxury good.  Without a doubt, giving will decrease in the next 12 months.  Foundation assets (whether the Harvard Endowment, the Gates Foundation, or family foundations) are down, and out of that smaller pool of assets, people will give less.  But if generosity is a luxury good, that means it could be near the top of the list of things that people cut.  So the $260 billion worth philanthropic giving in the U.S. (2005 data) is itself at risk.

From what I’ve seen so far, donors and foundations are taking their philanthropic commitments very seriously and doing what they can to step up and support the nonprofits they believe in.

And that’s a good thing. It’s tantamount to running TOWARDS the bear and scaring him away.

5 thoughts on “Is Generosity a Luxury Good?

  1. Sasha:
    Very nice post today. I am a recent visitor to your site (via Seth Godin’s blog) and really enjoy the topics you take on.

    I could not agree with you more on this topic. In my estimation there are a couple of fundamental issues with many people/families today: properly budgeting and placing God first in our lives. I am sure by using the “G” word that I am turning off many people….which is precisely my point. If people were budgeting at all (which I am hypothesizing is more rare than not given the mortgage and personal credit debt meltdown lately) you put charitable giving at the very top, then savings, then basic living expenses (mortgage/rent, utilities, food, clothing) then the entertainment. Notice where charitable giving is placed….most people when budgeting turn this budget upside down and it goes last….and in your words is a “luxury”. Whether you are Christian or Jewish God tells us (in the Bible) that we need to give our “first fruits” to him via tithing….which simply means a tenth. That is off the top (ie gross income in today
    s language).
    What is hard for people to understand is to trust that God will ALWAYS take care of us if we put Him first….ALWAYS. That is not to say that we should give in order to get from God. Rather, I would say that we give BECAUSE we have already been blessed and have “gotten” from God. Yeah, I am sure I sound like I am out there but for those of you with faith you hear what I am saying. Take care, God bless and have a Merry Christmas to you and all your readers.

  2. Sasha – as many people are pointing out, the only two places that are having a good go through these tough times are McDonald’s and Wal-Mart.

    I’ve also heard from a good friend who owns a dessert company that they do well also – mostly because people need things that are “small indulgences” in times like these.

    I think the biggest impediment to getting philanthropy onto this exclusive list is the fact that most people think that it is only for the rich, and that only big gifts count. Of course, big gifts are not possible for most people right now. I think the Obama campaign made great strides in this area, but more needs to be done to educate potential donors that small actions can create a big impact.

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