Foundations and the Economic Crisis: Bill Gates Outlines His Philosophy

Following are excerpts from a letter Bill Gates released to the public describing his assessment of where his philanthropy, the Bill & Melinda Gates Foundation, stands. He also discussed the role of foundations, especially in the economic crisis:

A key question for Melinda and me is, Where are foundations uniquely suited to causing positive change?

Foundations are not needed in areas where capitalistic market signals work well and the poorest aren’t left out. If someone told you there was a foundation looking into what kind of restaurants should be started and helping them get started, you would rightly wonder why nonprofit dollars were being spent in that way.

Foundations provide something unique when they work on behalf of the poor, who have no market power, or when they work in areas like health or education, where the market doesn’t naturally work toward the right goals and where the innovation requires long-term investments. These investments are high-risk and high-reward. But the reward isn’t measured by financial gain, it’s measured by the number of lives saved or people lifted out of poverty.

Foundations are unusual because they don’t have to worry about being voted out at the next election or board meeting. But I do not hold them out as a panacea.

Another way that running a foundation is not like running a business is that you don’t have customers who beat you up when you get things wrong or competitors who work to take those customers away from you. You don’t have a stock price that goes up and down to tell you how you’re doing. This lack of a natural feedback loop means that we as a foundation have to be even more careful in picking our goals and being honest with ourselves when we are not achieving them.

We work hard to get lots of feedback. And as we execute our strategies, we need to share what we learn, because the biggest leverage is in getting many others to adopt best practices. Since we are in this for the long run, we need to develop credibility by the strength of our evidence, and by not claiming to know more than we do.

In the areas we work in, we want to make sure the foundation is drawing in other players in the best way we can. Given the business sector’s broad expertise and resources, we particularly need to get more of its innovation power focused on our issues.

About the Economy

The financial market and economic conditions that have developed this past year are truly unprecedented. I hope two years from now when I write this letter I can look at this section as a reflection of something that was short-term and that has passed, but I think the effects of the crisis will last beyond that.

If you take a longer time frame, such as five to ten years, I am very optimistic that these problems will be behind us. A key reason for this is that innovation in every field — from software and materials science to genetics and energy generation — is moving forward at a pace that can bring real progress in solving big problems. These innovations will help improve the world and reinvigorate the world economy.

Looking specifically at the foundation, our assets decreased in value by about 20 percent in 2008. I never thought I would say losing 20 percent is a reasonable result, but it is better than most endowments because so many asset classes went down by more than 20 percent in 2008.

During the past five years, as the foundation was growing, we spent a bit over 5 percent of its assets each year in addition to the gift from Warren [Buffett]. There is nothing magic about the 5-percent figure, except that it is the minimum required by the IRS.

Our spending in 2008 was $3.3-billion. In 2009, instead of reducing this amount, we are choosing to increase it to $3.8-billion, which is about 7 percent of our assets.

Although spending at this level will reduce the assets more quickly, the goal of our foundation is to make investments whose payback to society is very high rather than to pay out the minimum to make the endowment last as long as possible.

The global recession and market turmoil are forcing everyone to take a hard look at their plans.

Businesses and consumers are cutting back on spending. The 50-year-long credit expansion that fueled high spending levels, particularly in the United States, has turned into a credit contraction.

Governments face revenue shortfalls at the same time their citizens need government services and more U.S. humanitarian aid,

A great example of this is education. Recent improvements taking place in K12 education could be reversed because of budget cuts. State-funded two-year and four-year colleges will see record demand but may also face spending cuts. As governments respond to the crisis, they need to protect these investments even as they spend to stimulate the economy. In the United States only the federal government can do deficit spending and increase its investment in long-term goals like education. I am impressed with the way President Obama has talked about the need to do both and has his team looking at investments that fulfill both goals.

Like education funding, I see foreign aid that is spent wisely as being a smart thing even during these tough times. I hope the United States and other rich countries will continue to increase their aid, and when I meet with political leaders I encourage them to do so.

Although it will be difficult to keep aid-related issues on the front page during this crisis, we need to meet the challenge by making sure the success stories are told and making sure that inequity that is out of sight is not out of mind. Only with broad public awareness and voter interest will we keep aid on the positive track it needs to stay on.

I am impressed by individuals who continue to give generously even in these difficult times. I believe that the wealthy have a responsibility to invest in addressing inequity. This is especially true when the constraints on others are so great. Otherwise, we will come out of the economic downturn in a world that is even more unequal, with greater inequities in health and education, and fewer opportunities for people to improve their lives. There is no reason to accept that, when we know how to make huge gains over the long term.