Donor-advised funds are in the news, here's why it matters

Become a Patron!Attributing quotes to famous dead people is, as the great Greek poet Homer is said to have once remarked, one of mankind's oldest storytelling traditions. In that spirit, I want to pass along Margaret Thatcher's famous answer when asked to name her greatest achievement in office: "Tony Blair and New Labour. We forced our opponents to change their minds."In the US, this mental revolution took a very specific form: taxes — and tax avoidance — have become the primary engines of public policy. And it's been an unmitigated disaster.

Why are charitable contributions deductible?

Charitable contributions have been deductible for so long it's become difficult for some people to imagine any alternative. Difficult, but worthwhile. There are, I think, two obvious public policy reasons why charitable contributions might be deductible from taxable income:

• Charitable spending "doesn't count." This is a version of the backdoor VAT, which says that only personal consumption should be taxed, not personal income. Even though charitable spending is a form of personal spending (it's directed by the individual, not the state), since it isn't a form of personal consumption (it's the charity's beneficiaries who benefit, not the donor), it doesn't belong in taxable income.
• Charitable spending is a "substitute" for state action. This argument says that individuals are able to direct spending more effectively than the state: while federal emergency aid might rely on crude tools like ZIP codes or satellite imagery, individuals close to the ground will know exactly who is affected and how, and they'll be able to direct their giving in a way that will deliver higher per-dollar benefits than state action.

If you believe either of those things, I won't try to convince you otherwise. I just want to ask the question, if you believe in your heart of hearts that either of those explanations is true, why are charitable contributions only deductible for high-income taxpayers?

The alternatives are obvious

If the state has determined, upon deep reflection, that individuals are better suited to direct the nation's resources towards charitable ends than the state itself is, there are obvious solutions:

• the government could offer matching funds, at any ratio and with any limit. For example, in the 37% income tax bracket, a $1,000 donation generates $370 in tax savings. The federal government could simply offer a 59% match — the same $630 (after-tax) donation would generate the same $1,000 in charitable assets. If you think that's too generous, pick a lower matching rate; if you think it's too stingy, pick a higher matching rate. In either case, the match could be available to anyone with any level of taxable income, since it would be claimed by the charity, not the taxpayer.
• alternately, the federal government could simply assign everyone funds they can contribute to the charities of their choosing. In 2017, the Treasury department estimated $58.29 billion was spent on the deductibility of charitable contributions — roughly $376 for each of the 155 million individual tax returns filed that year. If that's the amount of federal money we're willing to spend on taxpayer-directed charity, then a simple box on each tax return seems like a commonsense way of allocating it. Anyone who's familiar with United Way knows how this works.

Note that neither of these solutions is more complicated than the current system of tax deductibility. In fact, they're both far simpler. The key difference is that they're also more fair: whatever you think the purpose of federal spending on private charities is, there's no logical reason that fixed amount of federal spending should be directed exclusively by the wealthy, the old and the dead.

Donor-advised funds are in the news because no one knows exactly what they are

All this brings me to the news hook for this post: donor-advised funds.I said above that charitable contributions are only deductible for high-income taxpayers, but this isn't exactly true: they're deductible for high-deduction taxpayers. By far the most common itemized deductions are mortgage interest, state, and local taxes (with the latter two currently capped at $10,000, combined).As your mortgage gets closer to repayment, or you consider moving to a lower-tax state, it might occur to you that this is a good opportunity to front-load some charitable contributions: once your house is paid off and Florida zeroes out your income taxes, your first $12,000 in charity will be in some sense "wasted," since taking the standard deduction reduces your taxes by more than itemizing deductions would.On the other hand, making a large donation immediately has its own drawbacks: there's nothing more common than a charity run on a shoe-string budget blowing through your donation this year and then begging for more next year, when your tax advantage is much smaller.Enter the "donor-advised fund:" make an irrevocable contribution to an investment account, take an immediate deduction, and then dole the money out over years or decades to the charities of your choosing.What could go wrong?

You don't own your donor-advised fund, but you think you do

Donor-advised funds are under assault for a very simple reason: large, centralized organizations are easy targets, and rightly so.

• In November, Schwab's fund stopped allowing advisors to direct contributions towards NRA-linked organizations.
• Fidelity's fund was likewise attacked for allowing funds to be paid out towards white nationalist hate groups like the Family Research Council, Center for Immigration Studies, and the New Century Foundation.

An interesting subplot to this story is that conservative con artists actually foresaw this exact development as far back as 1999: Donors Trust is a donor-advised fund that allows funds to flow exclusively to conservative organizations.Irrevocable donations have the advantage of immediate tax benefits, but the disadvantage of irrevocability. What people are discovering far too late, to their chagrin, is what "irrevocability" means. You cannot shift your donor-advised assets from one fund to another. You cannot control what charities your fund allows contributions towards.And the reason is simple: it's not your money. It stopped being your money the second you claimed a tax deduction for it. It's Fidelity's money now, and there's nothing you can do about it, except "advise."

Conclusion: it doesn't have to be this way

On this subject, someone on Twitter responded to me with what, I assume, they thought was an airtight criticism of my position, but which I thought was perfectly correct: "you think DAF custodians want to start to make calls on which legally incorporated charitable organizations meet their standards."The only disagreement we appear to have is that what Joseph describes incredulously is, in fact, the status quo: once a custodian accepts an irrevocable charitable contribution, and the donor deducts that contribution, there is no one else who can be responsible for the final disposition of those funds than the custodian. They cannot be rescinded and they cannot be transferred. They are in the hands of the custodian until they are depleted, and that means the custodian is going to be subject to criticism, sometimes fair and sometimes unfair, about where those funds go.It doesn't have to be this way. We can eliminate the charitable contribution deduction, eliminate "qualified charitable distributions" from IRA and 401(k) accounts, and wait for these donor-advised funds to die of their own accord. But as long as they exist, they're going to be subject to criticism for where they send their money.Because the second you gave it away, it wasn't yours any longer.Become a Patron!

The SECURE Act and the defects of the centrist mind

Become a Patron!I've written previously about the SECURE Act, the House version of a measure designed to encourage employers to allow employees to gamble their retirement savings on the long-term financial stability of private insurance companies. The measure has since cleared the House but is currently being held up in the Senate for now by Ted Cruz who is trying to turn the 529 loophole into a piggy bank for the wealthiest Americans. With this terrible measure one step closer to passage, I want to use it to illustrate a particular problem raised by the cult of moderate centrism.

401(k) plans have enough bad investment options without adding annuities

Like many pieces of the American welfare state, 401(k) plans became a retirement savings tools for private sector workers more or less by accident. Consequently, they are governed by a mishmash of rules and regulations of different vintages. For example, while the investment options within a 401(k) plan have to be administered exclusively for the benefit of the contributing employee, the design of the plan and selection of investment options does not — employers can and do receive kickbacks from 401(k) custodians for filling their plans with high-cost investment options, for instance. Employee lawsuits typically revolve around this distinction: is the kickback an employer receives based on employees' investment choices or based on plan design?Every 401(k) plan I've seen has included 10-15 high-cost, actively managed mutual funds alongside 2-4 low-cost index funds. That's not the exception: that's the rule. When deciding on an asset allocation within a 401(k), there's simply no alternative but to look up the ticker for each available investment option, record its benchmark and expense ratio, and try to cobble together an appropriate low-cost asset allocation from the options available. This is not terribly difficult for someone who knows what they're doing and has the time and patience to do it, but it's naturally overwhelming for the vast majority of people who have neither aptitude not interest in making these kinds of investment decisions.

Insurance companies want to add their annuities to your 401(k)

That brings us to the core policy goal of the SECURE Act: give employers a "safe harbor" from employee lawsuits when they include annuities offered by insurance companies that meet a rudimentary test of financial stability.You might observe this is a very counter-intuitive way to frame the policy change, and you would be right. The SECURE Act is supposed to improve employee retirement security by preventing employees from suing when their employers offer them crappy retirement investment options? Surely it would make more sense to improve employee retirement security by increasing their legal recourse against employers who do not offer them appropriate and appropriately-priced retirement investment options!But of course the circle is easy to square when you remember that annuities are sold, not bought. The issue is not that employers, let alone employees, are demanding access to annuities in their 401(k) plans. The issue, rather, is that insurance companies are clamoring to have their annuities included in 401(k) plans but are being stymied by the unwillingness of employers to take on the legal risk of vetting them. With that barrier removed through the "safe harbor," insurance companies will be free to offer the same kickbacks investment companies do today to sell their confusing, expensive annuity contracts to 401(k) participants.

Annuities don't eliminate risk, they transform and hide it

In theory I don't have anything against single-premium immediate annuities as a method of converting a lump sum into a predictable stream of income upon retirement (or any other time), but it's important to understand what is and is not happening when you do so.When you hold an FDIC-insured bank deposit, or a SIPC-insured security in a brokerage account, you are roughly speaking entitled to some stream of income (interest, dividends, capital gains distributions), plus the value of the underlying asset. Both components of the asset will generally fluctuate: the interest you earn on your bonds will change as you reinvest coupons over time; dividends will rise and fall along with the profitability and capital allocation decisions of the underlying companies; the asset's resale value will change along with the winds of capitalism. Even cash grows more or less valuable as inflation rises and falls.When you exchange those real assets for an annuity contract, you receive a different kind of asset in exchange: the promise of an insurance company to pay you a fixed or variable sum described in the contract over some time period. You've now converted the variable stream of income and variable asset value of your stocks and bonds into a fixed income stream.But there's no sense in which you have eliminated your risk by doing so. Instead, you've simply transformed the risk you're taking. Instead of being subject to the whims of inflation, interest rates, and the stock market, your income now depends on your insurance company being able to pay the promised stream of income over the promised time horizon.To be clear: I'm not an insurance company analyst and I don't have the tools to perform a comprehensive assessment of the creditworthiness of American insurance companies over the next 70+ years (a 40-year career followed by a 30-year retirement, for instance). Of course, your employer probably isn't either, and that's why they don't offer annuities in your 401(k) plan. If passed, what the SECURE Act will do is relieve employers of that responsibility, so you won't have any recourse if the annuity you select flounders and your contributions are lost or deeply discounted in your insurer's bankruptcy.

Social Security has always been the answer

Social Security's old age benefit is the only source of income security for the overwhelming majority of older Americans. It's important to understand exactly what this means. Social Security is not the only source of income for older Americans. About 27% of Americans continue to participate in the labor force (i.e. work or look for work) between the ages of 65 and 74. Others receive passive income from rental real estate, farm, mineral, and gas leases, etc.What distinguishes those sources of income from Social Security is that Social Security old age benefits are paid by the federal government and subject to annual cost of living adjustments, and they're guaranteed to continue for as long as you live. Employment income in old age lasts as long as you're employed, rental income fluctuates over time (just ask Detroit if you don't believe me), and commodity prices go through long cycles of rise and decline. Social Security isn't like that.That means the first place you should look to improve income security is the only source of income security most people have, and the obvious place to start is allowing people to make additional, voluntary Social Security contributions. Since the only input into the Social Security benefit calculation is the average wage-inflation adjusted income reported in each year of a worker's earnings record, a natural approach is to treat voluntary contributions as "increased income" for the year the contribution is made.For example, a worker earning $50,000 in 2019 would ordinarily pay $3,100 in OASDI (the Social Security component of FICA), matched by their employer. An additional, voluntarily payment of $6,200 (conveniently close to the 2019 IRA contribution limit) could raise their recorded OASDI income for that year to $100,000. Note that this would not double their Social Security old age benefit, since each year of earnings only contributes 1/35 to a worker's average earnings, and old age benefits increase at a graduated rate.

Centrists say personal responsibility when they mean risk

I'm all for "personal responsibility," defined properly. I simply don't know how a person can take personal responsibility for the trajectory of interest rates, or the performance of the S&P 500, or the rise and fall of US auto manufacturing, or the financial stability of America's insurance companies. If you believe an important problem facing America is the problem of retirement security, by all means let us allow workers to reduce their present consumption in exchange for higher income in retirement.But having decided to do so, why on earth would we then subject them to the cost, complexity, and vulnerability of private insurance companies?Because when a centrist talks about personal responsibility, what they really mean is risk. Personal responsibility for the decision of whether to go to college, and what to study, means the risk of poverty. Personal responsibility for an unplanned pregnancy means the risk of homelessness. Personal responsibility for filing your SNAP application on time means the risk of hunger. Personal responsibility for your income in retirement means the risk of being taken advantage of by unscrupulous employers and insurers.But there's no way to take personal responsibility for what happens to us under a system that mechanically produces pain and trauma. Our personal responsibility is to fix the system.Become a Patron!

Beware Republicans bearing robust debate and compromise

Aparna Mathur is a Resident Scholar, Economic Policy, at the American Enterprise Institute, a libertarian think tank with an excellent kitchen that I periodically visit when I want to save money on lunch or cocktails. If you're ever in DC I strongly recommend visiting their events page to see if you can enjoy one of their catered meals or open bars.Scholar Mathur has recently focused her residency on the question of paid parental leave in the United States, as in a recent blog post, "The Birth of a Compromise on Paid Parental Leave" (get it, "birth?").As she and her co-authors write, "history shows that when both sides express a willingness to compromise, great policies can emerge. Our elected officials are now facing one such historic opportunity. It is time for them to pass legislation that creates a national paid parental leave program."The question, as Napoleon famously asked about the pope, is "how many divisions does the AEI-Brookings Paid Leave Working group have?" More to the point, how many votes do they have?

Ted Cruz and the amazing vanishing immigration vote

The year was 2013, and after years of gridlock, Democratic and Republican moderates in the Senate had hammered out an immigration compromise that included border enforcement, changes to future immigrant flows, and legal status for long-time US residents. The bill quickly ran into a problem: the Texas Senator, and Canada native, Rafael Edward "Ted" Cruz.Cruz, the son of Cuban revolutionary Rafael Bienvenido Cruz y Díaz, was concerned that the bill as drafted would allow long-time undocumented residents of the United States to receive permanent resident status and, eventually, US citizenship like his and his father's (n.b.: his mother was born in Delaware, so while he immigrated to the US from Canada at a young age he enjoyed US citizenship from birth).What followed was a grueling rearguard action as Cruz moved heaven and earth to try to block newly normalized permanent residents from any so-called "path to citizenship." Unable to sway his colleagues, he was forced to vote, more in sadness than in anger, against final passage of the "Border Security, Economic Opportunity, and Immigration Modernization Act."At least until the 2016 primaries came around, when Ted 2.0 was launched, and much to the surprise of his colleagues and constituents, it turned out he had been opposed to the law all along, whether or not it included a path to citizenship. Incredulous reporters went back and checked the tapes, and found out Cruz had masterfully outplayed them in 2013: it turned out Cruz had never made his vote conditional on removing a path to citizenship from the bill. Indeed, it soon became clear his vote was never in play.To take one of literally hundreds of examples, on May 21 Cruz introduced an amendment to remove the path to citizenship, saying, "I don’t want immigration reform to fail. I want immigration reform to pass. And so I would urge people of good faith on both sides of the aisle, if the objective is to pass common-sense immigration reform that secures the borders, that improves legal immigration, and that allows those who are here illegally to come in out of the shadows, then we should look for areas of bipartisan agreement and compromise to come together. And this amendment—I believe if this amendment were to pass, the chances of this bill passing into law would increase dramatically" (emphasis mine).Now, you or I might look at this statement and conclude that Ted Cruz, someone who says they want immigration reform to pass, but who can't vote for a bill that includes a path to citizenship, and is proposing an amendment to remove a path to citizenship, is saying that he will vote for the bill if the amendment passes.But Ted Cruz never said that. In 2016, the trap was sprung: Cruz revealed that he had been opposed to immigration reform all along, and that his amendments were intended solely to reduce the bill's chance of passing, and to weaken it in case it did.

Olympia Snowe and the amazing vanishing healthcare vote

If you'll step into my time machine yet again, let's return to 2009, when Democrats held a filibuster-proof majority in the United States Senate. Max Baucus, Democrat of Montana and chair of the Senate Finance Committee, had been holding months of hearings and closed-door sessions in an effort to get three Finance Republicans on board with healthcare reform: Mike Enzi, Chuck Grassley, and Olympia Snowe.After months of wrangling, the death of Senator Ted Kennedy, the seating of Al Franken, and Arlen Specter's frantic last-minute party switch, all three Republicans voted against cloture and against final passage of the Affordable Care Act.

Paul Ryan and the amazing vanishing Earned Income Credit expansion

Before he decided to retire to spend more time with the Koch brothers' money, Paul Ryan reinvented himself in office one last time: as an anti-poverty champion. The so-called "Better Way" Republican agenda, launched in the summer of 2016, included an anti-poverty program (available for now at the Internet Archive). That document contains the following enigmatic paragraph:

"The Earned Income Tax Credit is another potential solution. The EITC is a refundable credit available to low-income workers with dependent children as well as certain low-income workers without children. It can help with the transition because it increases the financial rewards of work. Increasing the EITC would help smooth the glide path from welfare to work."

Fortunately, on other occasions Paul Ryan has written more extensively about his support for Earned Income Credit expansion. In a 2014 "discussion draft" for the House Budget Committee, he wrote:

"there’s a growing consensus to expand the EITC for childless workers...Given the EITC’s success in boosting work among families with children, a larger EITC should have a similar effect on childless workers. Given these troubling trends for young workers, there is a real need to consider lowering the age of eligibility for the EITC, which currently does not serve this population...Because the EITC helps low-income households while encouraging work, this proposal would expand the credit for childless workers. Specifically, it would double the maximum credit, phase-in, and phase-out rates for childless adults, and it would lower the eligibility age for workers from 25 to 21, assuming they are not a dependent or qualifying child for another taxpayer."

If you knew nothing else about Paul Ryan, you might conclude from this evidence that he supports an expansion of the Earned Income Credit for childless workers.But since you are reading this today, you know that would be wrong. When offered the opportunity to pass changes to the tax code that could increase the deficit by a total of up to $1.5 trillion over the 10-year budget window, i.e., the changes did not have to be paid for as long as they were not scored as increasing the deficit by more than that amount in that period, Paul Ryan did not lower the eligibility age for the Earned Income Credit. He did not double the maximum credit, nor the phase-in, nor the phase-out rates for childless adults. He did not expand the Earned Income Credit at all.That is because Paul Ryan does not, and never did, in fact support an expansion of the Earned Income Credit. Paul Ryan was lying.In a roundabout way, this brings us all the way back to Aparna Mathur, whom I asked on Twitter earlier this year, "why do you think Paul Ryan refused to expand the EIC after making it the cornerstone of his woke Republican anti-poverty agenda?." Aparna Mathur didn't have me muted back then, so she saw my question and even replied to it:"I wish we could move forward with an EITC expansion. I have no idea why a policy that has so much support doesn't make it through Congress..it would be so helpful."She. Has. No. Idea. Which tells you almost everything you need to know about Aparna Mathur.

The Republican Party and the amazing vanishing national paid family leave program

Aparna Mathur thinks that the time has come for a national paid parental leave program. I also think the time has come for a national paid parental leave program. The proposal with the most widespread support in Congress today is the FAMILY Act (don't ask what it stands for), which would create a small additional payroll tax and use those funds to pay for wage replacement for workers who need to take time off to care for a new child or in case of serious illness or injury. It currently has 35 Democratic co-sponsors in the Senate and 178 Democratic co-sponsors in the House of Representatives, and widespread support among Democratic members of Congress.Unfortunately, Aparna Mathur doesn't much care for the FAMILY Act. Without meticulous documentation, I can boil down her objections as follows:

• It's too long. While the FAMILY Act entitles workers to 12 weeks of paid leave, that's a little bit excessive. Isn't 8 weeks of leave a bit more realistic?
• It's too generous. While the FAMILY Act entitles workers to 66% of their weekly pay up to $1,000 per week, that seems like an awful lot of money to give to new parents. Why not limit it to $600?
• It covers too many life events. While new parents surely need some time to bond with their children, there's no need to pile family and medical leave into the same law. Why not restrict the paid leave benefit to birth and adoption events only?

I think these objections are ridiculous, but this post isn't about what I do or don't consider ridiculous. That's a judgment you have to make for yourself.This post is about the fact that Aparna Mathur, AEI, and the Brookings Institution don't have the votes. If Aparna Mathur could come up with 13 Republican Senators willing to vote for a motion to bypass Senate Majority Leader Mitch McConnell and bring this pared-down version of paid parental leave to the floor of the Senate, it would get 47 Democratic votes, and it would pass the House with a comfortable Democratic majority.But there aren't 13 Republican Senate votes for a pared-down paid family leave law. There isn't one Republican vote for a pared-down paid family leave law. There are, currently, maybe 3 votes for a Rubio-style "mortgage your retirement to spend a few weeks with your kids" bill, but there are zero Democratic votes for that idea because it's terrible.The point is, there's no secret backdoor workaround to find Republican votes for compromises, hacks, or kludges. If, like Aparna Mathur, you think "It is time for them to pass legislation that creates a national paid parental leave program," then you have to support the FAMILY Act. You have to contact your representatives in Congress and demand they support the FAMILY Act. If they refuse, you have to vote against them in your congressional primary, and vote for Democrats in general elections, until you are represented by someone who does support the FAMILY Act.That's the entire show. While Aparna Mathur and her colleagues at AEI and Brookings furiously workshop compromises, the one thing they can't do is provide the votes necessary to pass national paid family leave into law. For that, you need Democrats — and you need a lot of them. Get cracking!

Book review: Reihan Salam and the limits of American greatness

The local public library recently spit into my hands Reihan Salam's slender volume about US immigration policy, "Melting Pot or Civil War? A Son of Immigrants Makes the Case Against Open Borders." The "son of immigrants" in question is Salam himself, who is so thoroughly integrated into American life he manages to hold down a gig writing for the fringe conservative website National Review.Reading the work of conservative "intellectuals," whether it's Reihan Salam, Ben Sasse or Jeffrey Goldberg, is obviously a curious exercise given how fundamentally our politics and values differ, but I never fail to learn something from these books about the conservative mind, and Salam's latest book proved to be no exception.

What's the problem with immigration?

I always try to give the most generous interpretation possible of these conservative ideologues so no one can claim I'm taking them out of context or setting up straw man versions of their arguments just because I disagree. Salam's argument against immigration (or against "open borders" as he puts it), hinges on the following observations:

• the foreign-born share of the population is historically high and rising;
• the foreign-born share of the working-age population is historically high and rising;
• a community of immigrants that is replenished with new arrivals is less likely to encourage integration into established American institutions, and may even "draw established Americans into its cultural orbit" (horrors!);
• low-skilled immigrants are likely to have low-skilled children, who will both use means-tested programs and agitate for social justice.

Rarely has anyone interpreted the "melting pot" so literally

It's true that humans don't actually melt, even at very high temperatures, with the Indiana Jones canon notwithstanding. But they do the next best thing: they marry. And Reihan Salam is obsessed with marriage. In particular, intermarriage:

• "Marrying outside one's own ethnic community was often frowned upon"
• "The children and grandchildren of European immigrants became much more likely to marry outside their ethnic tribes"
• "It would be one thing if the likelihood of intermarriage were identical for more- and less-educated Hispanics, but that's far from the case"
• "Today, rising rates of intermarriage and residential integration suggest that a growing minority of blacks are finding a place in the mainstream"
• "When Italians stopped arriving in America, Italian Americans had little choice but to marry non-Italian Americans"
• "Assuming these college-educated, native-born Hispanic women are marrying college-educated non-Hispanics, it's quite likely both that their children will be college-educated themselves, and that they'd find themselves in social networks that are more Anglo than Hispanic"

Now, I have to confess, I'm the marrying type. I myself got married in August. Two of my brothers are married. My late father loved marrying so much he did it 4 times!But even as a marital fellow, I found Salam's obsession with marriage and breeding creepy as hell. The reason for it, however, soon becomes clear: Salam uses marriage, and particularly intermarriage, as one of many substitutes for a vigorous state.

Reihan Salam's vision is of America's weaknesses and limitations

The key to understanding Salam's vision of the United States, I realized, is that buried somewhere deep inside the United States, perhaps somewhere under Kansas or Nebraska, is a powerful enchanted object that grants the United States certain powers:

• the United States, alone amongst the nations of the world, can integrate immigrants into its multiethnic, participatory democracy.
• the United States, also uniquely, has the power to improve the economic well-being of its residents by training them to take its good-paying, middle-class jobs.

Unfortunately, while the "opportunity crystal" (as I've dubbed it) is powerful indeed, its powers are limited, and thus those responsible for this magical object must carefully allocate that limited power between these two admittedly worthy goals.As Salam writes: "I find it useful to distinguish between amalgamation, in which intermarriage and other forms of cultural intermingling cause the ethnic boundaries separating different groups of Americans to blur to the point of insignificance, and racialization, in which a minority group finds itself ghettoized in segregated social networks [emphasis his]."Amalgamation is one of the enchanted gemstone's powers, but it must be carefully rationed in order to make sure the middle class is accessible to as many natives as possible, and if there are too many immigrants and not enough leftover power, we face the dire threat of racialization instead.But all this is false. The limits on the ability of the United States to assimilate immigrants come from the willingness of the United States to assimilate immigrants. The limits on the ability of the United States to afford decent pay and working conditions to the working class come from the unwillingness of the United States to guarantee decent pay and working conditions to the working class. There's no enchanted object whose power we need to carefully ration. It's just us.

Salam's immigrant hellscape is social democracy

What's wrong, you might ask, with a continent-straddling country that happens to have some pockets of people who are, by comparison with the rest of the population, relatively homogenous, relatively recent arrivals, and relatively low-skilled?Salam has an answer, and it goes back directly to the passage I quoted above about "racialization." You see, "racialized" immigrants, or those who "find themselves ghettoized in segregated social networks," might not like it very much. Specifically, the children of low-skilled immigrants (whether documented or undocumented), will use their influence as US citizens who can't be simply deported if they become inconvenient, to try to ameliorate some of the poor conditions they find themselves in.Which brings us to the core of the question: what don't low-skilled, low-income second-generation citizens like about the United States? Salam provides 3 basic answers:

• they don't like their wages, which are too low;
• they don't like their working conditions, which are too inhumane;
• and they don't like their living conditions, which are too primitive.

In other words, they're right. Wages in the United States are too low. Working conditions in the United States are too inhumane. Living conditions in the United States are too primitive. And it turns out the children of relatively recent immigrants aren't thrilled about it and might do something to change it!Salam is so concerned about this possibility that he wants to preemptively keep them out. I'm so thrilled about this possibility that I want to preemptively admit them.

If you aren't willing to pay taxes nothing is possible

Americans today have inherited an incredible array of institutions, from public universities to building inspectors, from public water and power utilities to post offices, from subways to regional rail. Most of them are still staggering along well enough, despite every attempt to bankrupt and dismantle them in the last 30 years. You can still get a drivers license replaced, you can still register to vote, you can even still get a building permit approved, eventually (here in DC we have a special bribes-only channel for approving building permits).But if the plan, from now until the heat death of the universe, is to reduce the government's financing stream by 20% every 8 years while dismantling all the institutions of accountability, then we're simply doomed. Without vigorous wage and hour enforcement, wage theft will continue regardless of the number of immigrants. Without fair scheduling and paid family leave laws, working conditions will deteriorate regardless of the number of immigrants. Without new construction and vigorous enforcement of tenants rights, living conditions will deteriorate regardless of the number of immigrants.Immigration, in this sense, is Reihan Salam's canard. He hates immigrants as much as everyone else in his party, he just hates them in a kinder, gentler way: it's not because they're foreign, it's because of the strain they'll put on the system. But the only reason the system is under strain at all is because of, you guessed it, Reihan Salam.

"Effective altruism" is as stupid an idea as "smart beta"

A spectre is haunting the United States — the spectre of "effective altruism." This is the idea, lifted from the corridors of financial capital, that philanthropy can and should be streamlined, optimized, A/B tested, and transformed to make sure each dollar is deployed "effectively."The other day I saw Dylan Matthews, in honor of "Giving Tuesday," write about his own recommendations for effective altruism ("Made possible by The Rockefeller Foundation"). Dylan Matthews is a very weird guy (he gave his kidney to a stranger), but I don't have any doubt he's a good guy trying to do his best, and modeling your philanthropy after his (with or without the kidney donation) is a perfectly good way to get started if you're interested in giving away some money.What baffles me is what "effective" altruism is supposed to be so deliberately contrasted with.

Shoveling cash into a raging furnace is an admittedly bad idea

You can imagine a completely altruistic person, finding they have no use for their money, deciding to go down to the boiler room of their apartment building, opening the grate, and throwing carefully bundled stacks of $100 bills into the fire. This is a perfectly reasonable exercise of self-abnegation, or "altruism," and I would have no serious objection.You can also see how this would be ineffective: it wouldn't work. Nothing would happen. Burning physical bills in the boiler room, or dumping sacks full of coins in the Potomac, would not have the slightest effect on the economy of the United States or the well-being of anyone anywhere in the world, no matter how many people indulged in the conflagration. That's because the monetary supply of the United States has nothing to do with the number of notes and coins in circulation; it's completely controlled by the policymakers at the Federal Reserve.This silly thought exercise is merely to point out that I understand perfectly well the meaning of "ineffective" altruism: when your sacrifice is completely pointless, you are being altruistic, but not having any effect, i.e., ineffective.

Almost no forms of altruism are like this

What bothers me about the "effective altruism" canard is that the Dylan Matthews of the world consider any form of altruism that is not optimized according the preferences of the speaker by definition "ineffective," and that simply makes no sense unless you ask another question: effective at what?Take, for example, the Wounded Warrior Project. The Wounded Warrior Project gets a lot of criticism since it's a fairly elaborate hoax. They spend very little money on what a normal person would consider "philanthropy," and an enormous amount on fund-raising and salaries for their executives, salespeople, press agents, etc. In the fiscal year ending in 2017 one in four contributed dollars went to...raising more dollars.But the Wounded Warriors Project isn't "ineffective" in any obvious sense. It may not help "wounded warriors" much, but it also doesn't incinerate cash: it pays it out in fundraising contracts, advertising, staffing, travel reimbursement, office leases, all the normal activities a sprawling, $200 million organization engages in ($371 million in net assets at the end of their 2017 fiscal year). If you wished it out of existence tomorrow, you wouldn't increase the effectiveness of altruism in the slightest, you'd just create some vacant office space, empty bus stop ads, and unemployed con artists.Now take another form of altruism the "effective" kind is juxtaposed against: simply giving money to panhandlers on the street. This violates all the rules of effective altruism: you're giving to an uncertified recipient, without conducting adequate research, at home instead of abroad. So it must be ineffective, right? Well, that depends: ineffective at what? If you think a panhandler is going to tear up your money and throw it away, then we're back in furnace territory. But if you think the panhandler is going to spend the money, then it seems to me your altruism was perfectly effective: in the course of handing a dollar from your wallet to a panhandler, you successfully transferred one dollar in value to its intended recipient. Zero overhead, tax-free, and no credit card commissions.That sounds to me like 100% effective altruism!

Effective altruism and smart beta

In the world of finance, one of the greatest marketing coups of all time was the invention of "smart beta." Smart beta is the suggestion that unlike the dummies who settle for low-cost market-capitalization-weighted index funds, the knowledgable few can attain higher returns by tilting their investments towards cheap, or small, or profitable, or liquid, or expensive, or big, or unprofitable, or illiquid companies. Pick one or two or 10 "factors" and all of a sudden your beta is smart, instead of dumb.And who wants to be dumb? So the markets have been swarmed with smart beta funds, which promise you the market return...just a little bit smarter.Effective altruism strikes me as precisely the same branding exercise, in that merely saying it instantly conjures into existence the nonsensical idea of its counterpart, "ineffective" altruism, without specifying what ineffective altruism is supposed to be so ineffective at.Ineffective altruism is surely ineffective at the things it does not try to do, just as dumb beta is dumb at the things it does not try to do. You don't buy a total US stock market index fund in order to track value stocks any more than you buy it to track international stocks. But it's not broken, it's doing exactly what it's intended to do. Similarly, ineffective altruism is perfectly effective at what it is.In other words, there are no furnaces full of cash. It all gets spent.

The Better Billionaire Project

It's very fashionable in leftist circles to talk about the problem of wealth and income inequality in the United States and around the world. The problem of wealth and income inequality is, no doubt, very serious, but I take comfort in the words, "It is easier for a camel to go through the eye of a needle, than for a rich man to enter into the kingdom of God."Therefore what concerns me about the consolidation of wealth is not its concentration, but the hands it is concentrated in. Particularly, how unimaginative those hands are. There's no mystery why that should be the case. To become a billionaire in one lifetime, you need to combine talent, luck, perseverance, and in a pinch you can always steal intellectual property and sell it to the Soviets.Having mastered the desktop computing, digital payment, or car insurance industries, naturally you'd be tempted to treat philanthropy as yet another industry ripe for innovation and disruption. But there are an enormous number of fields that don't require any innovation or disruption at all. They just require money.Take the case of cash bail. Cash bail is such a terrible idea even the gross framers of our Constitution wrote into the Bill of Rights that "Excessive bail shall not be required." But today, excessive bail is so ubiquitous it's treated as a feature of the system, since holding people behind bars, keeping them from their jobs and families, is one of the surest ways to negotiate guilty pleas and reduce the workload of the courts and juries who were supposed to serve as the guarantors of American liberty.Just ask the Orleans Parish district attorney, when people started posting bail for his victims: "I think they are very naive as to what they are dealing with, especially with this criminal justice system," and "It's extremely disturbing." This is someone who is fundamentally uncomfortable having to accommodate the rights guaranteed to his victims by the United States Constitution.There are efforts around the country to eliminate the problem of cash bail, which require the diligent work of staffers and volunteers in cities, counties, statehouses, and in Washington to achieve their goals. That's expensive, difficult, important work.But writing checks is easy. You can go down to the courthouse every morning, sit in the back, and write checks made out to the city or county for the amount of each defendant's bail. Your hand might start cramping after a few days, you might need to order some more checks, but this is a problem that can be solved immediately by any billionaire in the country. And as far as I can tell, it hasn't occurred to a single one of them.Is that because it's ineffective? No, it's one of the most effective thing you can do to make real, immediate change in your community. It's because it's boring. No mosquito nets, no genetic engineering, no balloons broadcasting wifi into the Sahel, just money. And money, conveniently, is the thing billionaires have the most of.

Getting started

So for this, the inaugural edition of the Better Billionaire Project, let me introduce you to the National Bail Fund Network. If I were a billionaire, or even a low millionaire, I'd go down to the courthouse myself, but I understand y'all are busy. So check out the list of member funds, contact them directly, and figure which you want to contribute to. Some are focused on immigrant justice, others on disadvantaged communities, and others on low-level offenses. Ask how your contribution will be used, what their turnover rate is (bail funds are returned when a defendant returns for trial), and how quickly they're able or willing to expand their operations.Then once you find one or more funds you're comfortable with, all you have to do is give till it hurts. Remember, you can't take it with you.

What goes into a good active savings strategy?

A headline passed across my Twitter feed yesterday that seemed like a good bank account signup bonus: "$500 Bonus for New Money Market Account at Capital One." $500 is a lot of money, so I clicked through to check out what the requirements were. As usual, there were some deposit requirements, in this case a $50,000 deposit of outside money, held in the account for 6-8 weeks (until the signup bonus posts). $50,000 is a lot of money, certainly more money than I have, so I moved along.But, a few hours later, I circled back and started thinking: what is the right way to think about these signup bonuses, and how should you incorporate them into an active savings strategy?

How much cash do you have, and why?

I love cash. It's considered fashionable among some financial advisors to talk about how your cash is constantly losing its value due to inflation, it's not earning a high enough rate of return, it's not backed by gold, whatever. But actual people understand the great thing about cash is that it's cash. You can use it to buy things, you can give it away, you can invest it, you can do anything you want with it! Cash is great, and anyone who tries to convince you cash isn't great is probably trying to sell you something.But as great as cash is, it isn't everything. On the contrary, cash is always and everywhere a substitute for something. If you have a mortgage, car loan, or credit card debt, cash is a substitute for paying down those balances. It might be a good substitute (you might be able to earn more on your cash balances than your current mortgage interest rate) or it might be a bad substitute (unless you have a promotional rate, your credit cards are probably charging more interest than what you can earn on cash deposits). Likewise, up to the relevant balances, cash might be a good substitute for short-term bonds, but a bad substitute for long-term stock investments.

How active is your active savings strategy really going to be?

It doesn't matter how lazy you think you are, it matters how lazy you actually are.Consider the Capital One money market account I mentioned above. It offers a $500 bonus after 8 weeks, and 1.85% APY, which roughly works out to the equivalent of 8.35% APY for the 8 weeks it takes the bonus to post — a high interest rate by anyone's standards. However, it only offers that interest rate for 8 weeks. If you leave your money there for 16 weeks, your blended APY will be 5.1%. At 24 weeks, it'll be 4.01%. If you leave it there for a full year, you'll earn just 2.85% APY.Commenter Kim pointed out last week that Heritage Bank's eCentive account earns 3.33% APY on balances up to $25,000 (she also said she had three of them), while my favorite Consumers Credit Union rewards checking account earns up to 5.09% APY on up to $10,000 (starting in October).In other words, if you only muster up the initiative to actually move your cash savings or your direct deposit from bank to bank once per year in order to trigger a bonus, you're probably earning less than if you simply sat on the cash in the highest-earning accounts you have access to year-round!

Where are you getting the cash?

One tempting option is to say that instead of having a pool of cash you're constantly chasing bank account signup bonuses with, you're going to selectively target just the highest signup bonuses that come around.While it avoids the problem of decaying interest rates I described above, the problem with this strategy is that the cash still has to come from somewhere. If you already have a large cash balance, then the problem is easy to solve by moving the cash from one account to another and back again, but in that case your profit is only the difference between the bonus-inclusive APY and the basic interest rate you earn year-round. That may still be worth doing on a case-by-case basis, of course.Alternatively, you could combine chasing signup bonuses with a more comprehensive strategy of harvesting losses in taxable brokerage accounts. If you have a taxable portfolio with $50,000 in assets showing a loss, then you can sell those assets, realizing a deductible loss, then instead of immediately reinvesting the assets, deposit them in bank accounts offering the highest current signup bonuses. Since bank account bonuses typically take at least 30 days to post, this is also a convenient way to avoid the "wash sale rule," allowing you to reinvest your cash into the same investment you had originally sold (just be careful that ongoing contributions aren't being made to that investment or you're going to run into all kinds of trouble come tax time).Finally, you could borrow the money to chase bank account signup bonuses. While this may or may not be more expensive than the other two options, it's not strictly speaking "riskier." The simplest example would be funding a new account using a credit card, waiting for the bonus to post, then paying off the credit card with money from the same account. A more complicated option, popular back when money market accounts were paying 6% APY or more on liquid deposits, is to open a credit card with a 0% introductory APR and no balance transfer fees to spin up lots of cash that can be invested across a variety of accounts for the entire introductory period.

Conclusion

I love robbing banks and encourage anyone and everyone to get in on the action to the degree it makes sense for them individually. However, there are real risks to trying to dive into the signup bonus game without thinking through a strategy ahead of time:

• how active are you willing to be? The less work you put into your bank account signup strategy, the more your lived interest rate will decay compared to the advertised rate.
• how much is your cash costing you? Do you have other debt that cash could be used to pay down at a higher interest rate than a bank account signup bonus earns?
• are you integrating your cash holdings into a comprehensive investment strategy? If you have $100,000 invested in a 60/40 equity/fixed income portfolio and another $50,000 held in cash, you have just 40% of your investable assets in equities. Does that correspond to your long-term investment goals?

Once you've answered those questions to your satisfaction, there really are opportunities to get outsized returns on short-term deposits, and those opportunities are well worth considering.

Idiosyncratic bets on real estate: homeownership or mutual funds?

I've written before about the ways homeownership in the United States is heavily subsidized by the federal government, at the expense of current and future taxpayers:

• preferential tax treatment of capital gains on primary residences, with $250,000 or $500,000 (depending on filing status) of a home's appreciated value being completely tax free;
• the tax deductibility of mortgage interest (on the first $750,000 of a home's value for new mortgages);
• a federally backed system of securitization which ensures liquidity for mortgage backed securities and encourages banks to issue mortgages while taking on virtually no risk themselves;
• and the exclusion from taxable income of "imputed rent," the amount of value a homeowner receives by occupying a dwelling they also own, instead of paying (taxable) rent to someone else.

Different policy makers, journalists, and think tanks focus on different elements of this system, but I don't want to litigate any one piece of this policy puzzle. I'm merely pointing out that these policies create an enormous federal tax and regulatory subsidy for owner-occupied housing of all kinds.What is missed in criticism (much of which I agree with) of this system is that it exists in order to encourage Americans to make a totally idiosyncratic bet, not on the value of land in the United States, or the trajectory of residential housing prices in the United States, but on the value of a specific parcel of land, structure, or condominium unit.No matter how sure you are in a stock pick, commodity bet, or options strategy, you wouldn't put 80-100% of your net worth into one of them without a significant amount of downside protection. Since we decided homeownership was an important goal of American economic policy, we decided to create an enormous subsidy to encourage people to make what would be, under any other circumstances, an extremely unfavorable bet.

Comparing idiosyncratic bets on real estate

I started to wonder: if you wanted to make an idiosyncratic bet on US real estate, and have somewhere to live, would you be better off buying a house and living rent-free in it, or buying the Vanguard Real Estate Index Fund (VGSIX) and paying your rent with distributions from the fund?Both vehicles should provide access to the US real estate market and a stream of income. The mutual fund provides access to a diversified portfolio of US real estate investment companies and periodic dividend distributions, while the single-property option is a concentrated bet on a particular parcel and income in the form of imputed rent you're (not) paying yourself.To answer this question, first I pulled the price and distribution data of VGSIX back to January, 1997, and compared it to the Median Sales Price of Houses Sold for the United States (MSPUS) data available through the St. Louis Federal Reserve's FRED project. Since the median sales price in January, 1997, was $145,000, I used that as the starting value of the mutual fund investment as well.The two numbers we're interested in are capital appreciation (the market value of the mutual fund or the house) and income distributions (the annual income received by owning the asset). Once you have those numbers, you can slice and dice them in a variety of interesting ways.

Why a real estate mutual fund?

Before I get into the numbers, you might be asking, why would you want to get your rent from a real estate mutual fund, instead of a diversified portfolio of stocks and bonds? Isn't that an awfully concentrated bet on a particular sector, and wouldn't it be better to diversify?The answer is yes, which is precisely the point of this analysis: if you think a large sector-specific bet on real estate is too much concentration in your investment portfolio, you should be even more skeptical about a bet not just on the real estate sector, but on a particular unit in a particular building on a particular plot of land.

VGSIX and median home prices do track each other over long time periods

The first question we can ask is simple: over the entire time period, does the Vanguard Real Estate Index Fund actually provide access to the same asset class as individual homeownership?An investment of $145,000 in the median US home in 1997 would be worth $305,125 in 2016, while the same investment in VGSIX would be worth roughly $309,474 (the average of the starting and ending balance in 2016). The maximum deviation was in 2009, when REIT prices bottomed out, while the median home price was more resilient.

VGSIX is much more volatile than median home prices

During the 20-year period I looked at, VGSIX experienced 3 minor and 2 major decreases in market value:

• Between January and December 2002, between January and December 2013, and between January 2015 and December 2015, VGSIX dropped up to 3%.
• Between January 1998 and December 1999, the investment in VGSIX dropped 22%.
• And between January 2007 and December 2008, VGSIX dropped over 52%

Meanwhile, the median home price only fell once, between 2007 and 2009, when it dropped from $244,950 to $215,650, a decline of 12%.

VGSIX distributions fall more often, but by less

Remember, the point of this comparison is to look at the possibility of using real estate distributions to pay rent. That means the volatility of mutual fund distributions matters more than the volatility of the fund's price. During the 20 years I looked at, VGSIX distributions fell in 8 years. However, the peak-to-trough drawdowns were relatively modest, except during the global financial crisis.

• Between 1998 and 1999, distributions fell 4% before recovering in 2000 to above their 1998 level;
• Between 2000 and 2002, distributions fell 7%;
• Between 2005 and 2010, distributions fell a total of 48%, with year-on-year drops between 3% and 35%.

The risk of the strategy, then, comes from experiencing a large decline in distributions after anchoring your expectations to a particular value. Given that VGSIX has experienced a peak-to-trough fall in distributions of 48% in just the last 20 years, you should be prepared to withstand a drawdown of at least that much in the money you have available to pay rent.

Case study: what will the median home price buy you today?

In 2017 VGSIX paid out $1.13 per share in distributions (including dividends and return of capital).In the 4th quarter of 2016, the median home price was $310,900, which would have bought 11,305 shares of VGSIX, distributing (in 2017) $12,775, or about $1,065 per month.Were that to be reduced by 48% to just 59 cents per share, however, you would only left with $556 per month to pay your landlord. Of course, renters also have the luxury of following prices down, so if radical cuts to dividend distributions reduce your spending power, as a renter you'd have the option of moving to a more affordable unit or location, or renegotiating your rent. Likewise as distributions increased you'd have more money available to move to a more expensive location.

Taxes, liquidity, distribution, leverage, and timing

There are some limitations and nuances to this kind of analysis, so let's take a quick look at them, if for no other reason than to abbreviate the arguments in the comments section.First of all, the issue of taxes. The United States has a fairly curious system of taxation whereby the owners, rather than the occupants, of real estate pay taxes on it. I call this curious because it means a homeowner has to personally cut a check to the city or state every year, while a renter usually has no idea what portion of their rent is going to their landlord as income and which portion is going to pay property taxes. In states with limits on property tax increases, two tenants paying the same amount in rent may have totally different allocations of that rent between their landlord and the state, depending on how long the landlord has owned the property.Meanwhile, a tenant paying rent with mutual fund distributions pays capital gains taxes, decreasing the amount of taxable distributions that can be spent on rent, while an owner-occupant receives the imputed rent of the property tax-free. This is an important nuance to be aware of, but is too dependent on local tax policy for me to provide any general insight. I suspect the value of tax-free imputed rent is somewhat higher than any potential benefit to a tenant of avoiding property taxes, but that's an empirical question I don't know the answer to.Second, the issue of liquidity cuts strongly in favor of the mutual fund owner. I used market values in this analysis but the term "market value" means something very different in the two cases: in the case of the mutual fund, it's the actual amount you would receive for selling your shares on any day the stock markets are open. In the case of the median home, it's the price that home sold for after days, weeks, or months sitting on the market and before paying fees to one or more real estate brokers.Third, that brings me to the question of the distribution of home prices. I used the median home price in each year, which is the price above which and below which 50% of homes sold at. That is not, however, the price of the same house, because the distribution of property values shifts over time around the country. While the median home price in 1997 was $145,000, and the median home price in 2016 was $305,125, the median house in the first case might be in Illinois and in the second in Arizona. VGSIX did a good job of tracking median home prices over the 20-year period, but your particular home is virtually certain to deviate from the median by more than VGSIX did — either by appreciating more than the median, or failing to keep up with it.Fourth, leverage is another area where the homebuyer has a key advantage: due to the federal system of subsidies, you can buy $145,000 in housing for just $29,000. It's true you could also use leverage to buy VGSIX (or, more easily, VNQ, the exchange-traded version of the fund), but you'd find yourself paying higher, non-deductible interest rates, and be subject to margin calls should the fund's value drop enough to leave you underwater. By contrast, as long as you keep making your mortgage payments, you can stay in an underwater home for as long as you'd like.Finally, there's the issue of timing. The key feature of the mutual fund strategy is that you can move without selling. Just take your rent budget and spend it somewhere else. Homeownership means that in order to liberate the imputed rent you've been using to live on, you have to sell your home entirely, at whatever price you're able to get, and then make the decision whether to rent or buy all over again.

Conclusion

In the absence of the enormously expensive regime of subsidies provided to owner-occupied housing, I believe the financial advantages of mutual fund investing would swamp those of homeownership:

• if imputed rent were taxed as ordinary income the way other rents are, then homeowners would have to more carefully consider if they're getting as much value from their homes as a potential renter would;
• if mortgage interest were not tax deductible, after-tax mortgage interest rates would be more closely aligned with rates charged on other kinds of secured loans, making leveraged housing purchases less attractive compared to other kinds of debt;
• if a federally-backed system of securitization didn't exist, banks would be less willing to make mortgage loans to marginal buyers, requiring shorter terms, variable interest rates, or higher down payments;
• if capital gains on residences were taxed the same as gains on other capital assets, there would be less incentive to use housing as a form of tax-advantaged savings account.

Without those benefits, the idea of making a leveraged bet on residential real estate in a particular time and place would make as much sense as making a leveraged bet on the price of Apple stock, pork bellies, or bitcoin.However, given the existence of those benefits, the picture becomes much murkier and almost completely contingent on the specific buyer, location, and property.