Summary

This is a response to the Windfall Clause proposal from Cullen O’Keefe et al, which aims to make AI firms promise to donate a large fraction of profits if they become extremely profitable. While I appreciate their valiant attempt to produce a policy recommendation that might help, I am worried about the practical effects.

In this article I argue that the Clause would primarily benefit the management of these firms, resulting in an increased concentration of effective wealth/power relative to a counterfactual where traditional corporate governance was used. This could make AI race dynamics worse and increase existential risk from AI.

What is the Windfall Clause?

The Clause operates by getting firms now to sign up to donate a large fraction of their profits for the benefit of humanity if those profits become very large. The idea is that, right now, profits are not very large, so this appears a ‘cheap’ commitment in the short term. In the future, if the firm becomes very successful, they are required to donate an increasing fraction.

This is an example structure from O’Keefe document:

Many other possible structures exist with similar effects. As an extreme example, you could require all profits above a certain level to be donated.

Typical Corporate Governance 

The purpose of a typical corporation is to make profits. Under standard corporate governance, CEOs are given fairly broad latitude to make business decisions. They can determine strategy, decide on new products and pricing, alter their workforces and so on with limited restrictions. If the company fails to make profits, the share price will fall, and it might be subject to a hostile takeover from another firm which thinks it can use the assets more wisely. Additionally, in the meantime the CEO’s compensation is likely to fall due to missed incentive pay.

The board also supplies oversight. They will be consulted with on major decisions, and their consent is required for irreversible ones (e.g. a major acquisition or change of strategy). The auditor will report to them so they can keep apprised of the financial state of the company.

The amount of money the CEO can spend without oversight is quite limited. Most of the firm’s revenue probably goes to expenses; of the profits, the board will exercise oversight into decisions around dividends, buybacks and major acquisitions. The CEO will have more discretion over capital expenditures, but even then the board will have a say on the total size and general strategy, and all capex will be expected to follow the north star of future profitability. A founder-CEO might retain some non-trivial economic interest in the profits (say 10% if it was a small founding team and they grew rapidly with limited need for outside capital), which is truely theirs to spend as they wish; a hired CEO would have much less.

How does the clause change this?

In contrast, the clause appears to give a lot more latitude to management of a successful AGI firm. 

Some of the typical constraints remain. The firm must still pay its suppliers, and continue to produce goods and services that others value enough to pay for them more than they cost to produce. Operating decisions will remain judged by profitability, and the board will continue to have oversight over major decisions.

However, a huge amount of profit is effectively transferred from third party investors to the CEO or management team. They go from probably a few percent of the profits to spend as they wish to controlling the distribution of perhaps half. Additionally, some of this is likely tax deductible.

It is true that the CEO couldn’t spend the money on personal yachts and the like. However, extremely rich people often have significant political interests, and these would seem to be in-scope for the Clause. If you are a Warren Buffett or Peter Thiel or Mark Zuckerberg or Elon Musk or George Soros, having control of a Windfall Account that can only be spent on ‘philanthropic’ purposes is roughly as good as having the money personally.

The clause says that this money should be spent for the benefit of all humanity. But this is very subjective, and I doubt ‘all humanity’ would be able to bring a class action lawsuit here. In practice, it would likely be up to management to distribute the spoils. 

In theory the board might provide some oversight. However, in practice this doesn’t seem like that much of an improvement - it’s not like corporate boards are really designed for this purpose, and many technology startups have relatively tame boards due to supervoting shares and the like.

The Clause proposal discusses some restrictions (p13), but in practice I think would not work. Some of them are simply absurd, like all countries getting an equal amount of money regardless of population. Others, like fiduciary duties or transparency measures, are more appropriate for avoiding self-dealing and personal enrichment than substantive benefits. Finally, the requirement that spending be ‘effective’ seems like it would be meaningless in practice due to subjectivity - or perhaps the authors simply hoped that they or their allies would get to be the ones determining what is effective. 

Alas, when evaluating such a policy, we should not assume that we will be the ones given control of the money.

Concentration of Wealth

This seems like it could result in a significant concentration of influence. 

A typical public company has a very broad investor base; almost everyone who has invested in an index fund owns a bit of GOOGL and MSFT, for example. Even private firms will typically have venture capital investors, which in turn might have pension funds, insurance funds, etc. among their investors. The clause effectively expropriates a fraction of the profits which would otherwise accrue to this broad group, and transfers it to the CEO.

Given the size of the clause, it seems plausible to me that, conditional on a firm triggering the highest thresholds, this clause could be the largest transfer and effective concentration of wealth in history. 

Aggravating Race Dynamics

One of the primary motivations behind the Clause is to reduce race dynamics, by both reducing the rewards to first place (as they will be taxed by the clause) and increasing the rewards to second place (as they will benefit from the windfall). If this was the case, it could be worthwhile even if it resulted in a significant concentration of power; it is much better to have some trillionaires in a world made rich by AI servants than for everyone to be dead.

However, if it is true that the primary effect of the Windfall Clause is to concentrate money/power in the hands of AGI startup CEOs, this argument will likely not work. Rather, from the point of view of the CEOs, the spoils available to winning are now even larger than before, because you will get a massive slush fund for political pet projects, and the losers will not even get the consolation prize of their 401(k) doing so well. To many tech CEOs, “your competitor will be able to spend trillions of dollars on the stuff he cares about while you become irrelevant” is very far from reassuring!

This is even worse when you consider that many tech CEOs are very politically active and often disagree with each other. Depending on your ideology, preventing Soros/Thiel from winning the race potentially seems much more important than beating IBM’s diversified investor base.

So overall my guess is that overall the Clause encourages a destructive race to AGI and worsens prospects for safety.

How could we fix this?

One approach would be to fix the beneficiaries of the windfall in advance, rather than leaving it to the subsequent discretion of management. If all firms chose the same beneficiaries, the incentive to race would be significantly reduced. This also potentially reduces rent seeking in the future.

Who could this be? There are a variety of options, none of which seem ideal.

• Minority investors without a vote or legal right to profits
  • Special share class?
  • Effectively be a normal company in most ways.
  • Don’t base management compensation on distributions to this class.
• Investors in all AGI firms
  • Potentially reduces race incentives.
  • Probably antitrust violation.
• Buying bitcoin
  • Effectively makes BTC owners economic investors without rights. 
  • Anyone can buy in, easily to implement.
  • Wastes a lot of electricity.
• Invest in global stock market, never redeem
  • Effectively a subsidy for global growth.
  • Wealth transfer to investors.
• Put it in a bank account, never use it.
  • Ignoring some issues caused by financial stability regulations, effectively reduces inflation / wealth transfer to USD owners. 
• All people, equally
  • GiveDirectly style.
  • Could be hard to implement.
  • Important that this is a cash transfer, not just ‘spend on behalf of’.
• The US Federal Government
  • Aligns incentives with global hegemon.
  • Relatively benevolent by the historical standards of governments.
  • Quite wasteful.
  • Somewhat arbitrary dividing line.
• All Americans, equally
  • Some random blogger suggested this a while ago.
  • Easier than global.
  • Somewhat arbitrary dividing line.
• The UN
  • Theoretically represents most people in the world.
  • Quite wasteful.
• King Charles II
  • Centuries of family experience being trusted with extreme power and not using it.
• Give it to me
  • Clear schelling point to solve the problem via the person who first noticed it.
  • I will spend it wisely.
  • Advantages too numerous to list, few drawbacks.
  • My personal favourite option.

Is this just Against Billionaire Philanthropy again?

Many people are critical of billionaires giving to charity, and this argument has some features in common with their argument. If by some chance you haven’t come across this argument before, Scott’s article on the subject is a reasonable starting point.

I believe this argument is distinct from that. Specifically, in contrast to the typical argument, I believe:

• Many billionaires (in the US etc.) came by their money in morally neutral or positively laudworthy ways.
• Policy should not have reducing the number of billionaires as an object.
• Billionaire philanthropy does a lot of good in the world and should be praised.

Where this post differs is:

• While we shouldn’t try to reduce the number of billionaires relative to a ‘neutral’ free market outcome, we shouldn’t pro-actively try to increase it either.
• This policy uniquely worsens AI race dynamics in a manner not typical of most billionaire philanthropy.
• The primary concern is reducing existential risk, not egalitarianism.

Of course, if you were concerned about billionaire philanthropy, you should be even more convinced by this argument!

Conclusion

By default the Windfall Clause could lead to a huge concentration of money and influence in the hands of AI CEOs/Management, and reduce incentives for AI safety by accelerating race dynamics. This effect could be partly ameliorated if AGI firms could all agree on the precise beneficiaries ahead of time.

Addendum: Could the clause drive AI winners to bankruptcy?

This is a very trivial point that I include here only as a curio.

The clause is clear that it refers to pre-tax profit:

Profits: income before income taxes. (p4)

Furthermore, the US tax code limits the tax deductibility of donations in typical years to 10%. 

In the event of AGI, it seems quite plausible that governments might try to expropriate the profits and raise corporate taxes a lot. Because of this, for sufficiently high levels of profit, taxes and windfall clause, there is no guarantee that their sum will be less than 100%. 

This issue, at least, could be easily avoided by changing the definition to refer to income after income taxes. This is a more typical definition.

Thanks to everyone who gave feedback on this document; all mistakes remain my own.