Giving Makes You Rich

In John Bunyan’s 1684 classic The Pilgrim’s Progress, the character Old Honest poses this riddle to the innkeeper Gaius: “A man there was, tho’ some did count him mad, / The more he cast away, the more he had.” Gaius solves the riddle thus: “He that bestows his Goods upon the Poor / Shall have as much again, and ten times more.”

Less poetically, the idea is this: Giving makes you rich. A lovely sentiment, to be sure, but quite backward-sounding to an economist. You obviously have to have money before you can give it away, right? Or in the pithy words of former British prime minister Margaret Thatcher, “No one would remember the Good Samaritan if he’d only had good intentions—he had money too.”

Well, it turns out that Gaius was right, and new economic research backs him up. Emerging evidence—crunchy statistics from real data, not the mushy self-help stuff—supports the contention that giving stimulates prosperity, for both individuals and nations. Charity, it appears, can really make you rich.

The United States is a remarkably charitable nation. The Giving U.S.A. Foundation estimates that Americans donated nearly $300 billion to charity in 2006—more than the gross domestic product (the annualized value of goods and services produced within a nation) of all but 33 countries in the world. More than three-quarters of this came from private individuals. Additional research suggests that between 65 and 85 percent of Americans give to charities each year.

How does all this generosity relate to our high average levels of prosperity? Let’s begin with individuals and families. The Social Capital Community Benchmark Survey, completed in 2000, is a survey of about 30,000 people in more than 40 communities across the U.S. and is the best single source of data available on the civic participation of Americans. The S.C.C.B.S., which takes into account differences in education, age, race, religion, and other personal characteristics, shows that people who give charitably make significantly more money than those who don’t. While that seems like common sense, it turns out that the link in the data between giving and earning is not just one-way. People do give more when they become richer—research has shown that a 10 percent increase in income stimulates giving by about 7 percent—but people also grow wealthier when they give more.

How do we know this? When two variables like giving and income are interrelated, economists use something called an instrumental variable to see which is pushing and which is pulling. In a nutshell, that means selecting something that’s closely related to donations but not directly to income, like volunteering. Volunteers tend to be money givers and vice versa because of the same charitable impulse. But income doesn’t always directly affect volunteering. (While people have differing amounts of money, they all have the same amount of time.)

We start by predicting how much money people would donate based on how much they volunteer, regardless of income. This projection essentially strips out the role of income in giving. Next, see if that predicted donation level correlates with income. If it does and the correlation is positive, it means that giving pushes up income and not just vice versa.

This is precisely what is found in the S.C.C.B.S. data: More giving doesn’t just correlate with higher income; it causes higher income. And not just a little. Imagine two families that are identical in size, age, race, education, religion, and politics. The only difference is that this year the first family gives away $100 more than the second. Based on my analysis of the S.C.C.B.S. survey, the first family will, on average, earn $375 more as a result of its generosity.

How can this be? Is it a statistical anomaly—or even a metaphysical phenomenon? While the link between giving and prosperity is not as mechanistic as returns on municipal bonds, there are some very earthbound explanations for it. Psychologists and neuroscientists have identified several ways that giving makes us more effective and successful. For example, new research from the University of Oregon finds that charity stimulates parts of the brain called the caudate nucleus and the nucleus accumbens, which are associated with meeting basic needs such as food and shelter—suggesting to the researchers that our brains know that giving is good for us. Experiments have also found that people are elevated by others into positions of leadership after they are witnessed behaving charitably.

The financial advantages of giving aren’t limited to individual givers. There is also evidence that donations push up income even more at the level of an entire nation’s economy. We can demonstrate this by looking at average household charity and per capita G.D.P. as they change over time. Charity and G.D.P. levels have moved together over the years. Corrected for inflation and population changes, U.S. government data show that G.D.P. per person in America has risen over the past 50 years by about 150 percent. At the same time, donated dollars per person have risen by about 190 percent.

These trends by themselves don’t tell us which force is pushing and which is pulling, however. To figure that out, we need to determine whether past values of one affect future values of the other. By using a method called vector autoregression, economists can see how changes in this year’s G.D.P. are affected by past values of both G.D.P. and charity. If an increase in last year’s charity levels correlates with a jump in this year’s G.D.P., it is logical to conclude that donating is stimulating the economy.

As in the case of individual income, the evidence is that increases in G.D.P. and giving mutually reinforce each other: Economic growth pushes up charitable giving, and charitable giving pushes up economic growth. Data from the Statistical Abstract of the United States and the Center on Philanthropy at Indiana University provide examples: In 2004, $100 in extra income per American drove about $1.47 in additional charitable giving per person. At the same time, $100 in giving stimulated more than $1,800 in increased G.D.P. This rate of social return shows that economic-multiplier effects are not limited to private investment. In short, giving plays a positive role in American economic growth. It is a good investment for our country. Some might even go so far as to say that donating to charity is a patriotic act.

I've always heard that the more you give, the more you get. Here's someone's attempt at proving it.

If this has always been true, perhaps it'll explain why lib dems hate charitable giving: It enrichens the giver. And we all know how lib dems don't want anyone to become richer, especially if its not from the efforts of their big government programs.

As an abstract, the poor will spend the money, and increase economic activity in the community and that raises everyone's boat as it were as the money stays in the community for the most part. Plus, the Laws of God have never been repealed to mankind's detriment...

As an abstract, the poor will spend the money, and increase economic activity in the community and that raises everyone's boat as it were as the money stays in the community for the most part.

It's amazing that this doesn't work for big-goverment programs. You'd figure that the redistribution of wealth would increase economic activity in all cases, but the economic status of the nation during 60s and 70s were proof against this notion.

Also, the article mentions that both individuals and a nation's GDP as a whole become richer through charitable giving. It doesn't mention whether governments become richer when they give money to the poor. I'm betting this is the only time when the Laws of God don't apply.

It's amazing that this doesn't work for big-goverment programs.

Probably because the Government is working with stolen money.

Winfield Scott Stratton

Itinerant Carpenter Strikes It Rich
By Ed Hunter, Victor

...

"Stratton continued to practice his quiet acts of philanthropy after the sale when the world thought he would buy mansions and yachts to demonstrate his financial success. Instead, he built the Mining Exchange building in Colorado Springs, donated land for the Downtown Post Office building construction and donated a park to the city for people to enjoy. Stratton also purchased and expanded the trolley car line in Colorado Springs for the benefit of the public."

...

Probably because the Government is working with stolen money.

And also perhaps because the government gives not to help the recipients, but to make the recipients more dependent on the goverment.

Stratton’s giving helped his community. More than likely, he benefited from the increased economic activity resulting from his charitable gifts.

And this goes to the nature of Govt programs, as well as money staying in a community, in the 70’s the economy was much smaller, Govt dollars didn’t have the impact that they have today.

It’s one of the arguments about Capital Flight and the rise of Corporatism.

Govts however, remoe money from local economies and then redistribute it to whomever they are trying to buy off, rather then who provides the best service to the community.

I agree. The percentages won’t change regardless of what you do. Give an uninspired, socially “victimized”, led to believe needs all kinds of help, lazy-ass $500,000. Broke as fast as they can spend it.

The more LOCAL the charity and the oversight of fund dispensation, the more it gets to where it is really needed.

Yup. When the funds travels through fewer layers of beauracracy, fewer people are taking their cut of the funds, leaving more for the intended recipients.

It doesn't mention whether governments become richer when they give money to the poor. I'm betting this is the only time when the Laws of God don't apply.

God's laws apply in this situation, too. Governments don't benefit, because they're not really being charitable, plus they have to steal the money first.

Probably because the Government is working with stolen money.

A much bigger issue, IMHO, is that while the recipient of private charity knows that they have no legal or moral right to demand their gift, much less its continuation, a recipient of government welfare has the legal authority to demand present and future payouts. Government-mandated subsidies are prone to corrupting people's behaviors even when run well. Most welfare systems are designed to maximize that corruption.

You said it. I know doctors whom no longer take government welfare recipients, because they don't show up. No retribution to the patient and no way to recoup the time.

Hillary care will be a total failure based on what we know already.

Milton Friedman showed studies that as government assistance goes up, private giving goes down. The problem is that only 20% of government welfare costs actually go to the poor. The other 80%, local, state, and federal is wasted in administering the programs.

Except for a few bogus charities, like the March of Dimes, most private charities get 50% of their money to the needy. And Churches get 75-80% of their donations to the poor. This is the real reason for public-private programs. Even though it 'violates' the anti-church bias of the government, such programs are 4x to 5x more beneficial than anything the government can do directly.

The more LOCAL the charity and the oversight of fund dispensation, the more it gets to where it is really needed.

Certainly local charities are often better than nationwide bureaucracies, though larger organizations are needed in some cases (e.g. a small locally-based hurricane relief organization probably wouldn't be very helpful, since it would have nothing to do when its area wasn't hit, or be totally swamped with its own problems when it was). The primary difference between charity and government welfare, though, isn't size, but rather entitlement. If there's a law that says people who sit at home on the couch all day will get $X/month, then sitting at home on the couch all day becomes a perfectly legitimate way of "earning" $X/month.

Hillary care will be a total failure based on what we know already.

Be very careful with terms like "failure" and "success", since they are extremely viewpoint-dependent. I believe one of Hillary's goals is to trash the health-care system that's available to the middle class, and I believe that Hillarycare, if implemented, would be extremely successful at doing so. Many other liberal programs which are widely derided as failures on FR are likewise very successful when one recognizes their real goals.

The difficulty is in getting others to see what the real function of all those programs is (i.e. pushing 'equality' between the lower and middle class, thus protecting the elite class from competition)

As an abstract, the poor will spend the money, and increase economic activity in the community and that raises everyone's boat as it were as the money stays in the community for the most part.

I wonder what you think of supply side economics.

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