With Charity for All

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Ken Stern. With Charity for All: Why Charities Are Failing and a Better Way to Give. New York: Doubleday, 2013.

After I saw the statistics in this book on the size of the charitable sector of the economy, I wondered why I had never studied it before. That, of course, is part of the problem: Many of us just assume that organizations created to do good things…well…do good things. We don’t hold them to the same standards as businesses that are expected to make money producing useful products, or governments that are expected to spend our tax dollars for the public good.

“Charitable activity accounts for 10 percent of the economic life of this country,” which is very high by international comparison. That includes over a million charities employing about 13 million people and using another 61 million volunteers. They take in over $1.5 trillion in revenue, with an estimated third of that coming from government spending. Taxpayers also support charities indirectly by exempting them from taxation. “American charities dominate critical sectors of public life. They control segments of the education and health-care fields…and hold substantial positions in the environmental sectors, social services, arts, and media and digital services.”

Until the late nineteenth century, Americans generally preferred individual acts of giving and discouraged organized charities. The heightened awareness of social problems during the Progressive Era and the Great Depression began to change that. Government made two major contributions to the expansion: “a change in federal tax policies that encouraged widespread giving and, most important, the invention of the welfare state and a new federal practice of outsourcing much of its activity to the social sector.” Only in 1954 did the federal government subsidize giving with income tax and estate tax deductions for charitable contributions. The number of nonprofit organizations has increased by a factor of 116 since 1940, from only 12,000 then to 1.4 million now.

Evaluating so many organizations and identifying those worth supporting is a daunting task. Evaluating for-profit organizations is in many ways easier, since “there are…only some fifteen thousand publicly traded companies in the United States, and by law each company is required to divulge detailed financial and risk information to the investing public.” (I have to qualify this by saying that some investors want to do more than identify profitable companies; they want to get market-beating increases in share prices, and that too is a daunting task.) While we can reasonably assume that some charities are more effective than others, no one is requiring charities to provide enough evidence of their effectiveness. That’s why Stern can indict the charitable sector in general for setting very low standards of performance.

In those cases in which well-known charities have been subjected to close scrutiny, they often fail to show results commensurate with the amounts of money poured into them. Chapter 1 contains several examples:

  • Donors have contributed hundreds of millions of dollars to provide clean water in developing countries; yet “the water charity community, in the aggregate, has been singularly ineffective in relieving the problems of waterborne diseases.” That seems to be because the charities do the easy work of drilling wells, but not the harder, longer-term work of maintaining systems or bringing water to the home so that people can wash more often.
  • The biggest drug prevention program, D.A.R.E., has had great success in expanding and maintaining its funding despite the fact that “virtually every piece of quantitative evidence demonstrates that the D.A.R.E. program doesn’t actually work.”
  • The Bush administration expanded the Department of Education’s 21st Century Community Learning Centers program into a billion-dollar program for after-school activities. It continues to be funded despite the fact that the Department’s own evaluation showed it to be ineffective. “Most outcomes measured yielded no discernible differences between the study group and the control group, and negative effects were found in many categories.” The negative findings actually “dovetailed closely with a long history of social science findings that show negative effects when at-risk children are brought together in poorly structured groups.”

Stern questions whether some kinds of organizations should qualify as charities at all:

  • In most respects, nonprofit and for-profit hospitals are indistinguishable. On the average, they each spend about 4 or 5 percent of their operating expenses on uncompensated care. The cost to the government in lost tax revenue from the nonprofit exemption far exceeds the amount that the so-called charities actually spend on charity care. “Charitable hospitals have become some of the most aggressive debt collectors in the country.”
  • Beginning with the Rose Bowl and its association with the nonprofit Tournament of Roses, college bowls have been organized as charities. “The principal beneficiaries of these charities are not the public in any meaningful way but a small club of bowl employees, committee members, and the athletic directors and conference commissioners who have been the loudest and proudest defenders of the current bowl system.”
  • Operas such as the Metropolitan fall into “that odd class of charities where the principal beneficiaries of the service are defined primarily by their wealth,” since few others can afford to attend the pricey performances.

A widespread lack of accountability leads to a proliferation of scams. On the one hand, charities can defraud donors. With thousands of charities using names with words like “‘veterans,’ ‘policemen,’ ‘firefighters,’ ‘children,’ ‘hope,’ ‘support,’ ‘beneficial,’ ‘cancer,’ ‘widows and orphans,” donors have trouble distinguishing the legitimate from the illegitimate. “The absence of clear rules and marketplace data, and terrific opportunities for brand confusion, mean that many charities live in a quasi-lawful zone, distributing some minimal amount of funds to recipients but directing a far greater share of the proceeds to management and the expenses of fundraising.” On the other hand, individuals can loot the charities they run because of lax internal oversight. While the average bank robber only gets about $4,000, the average charitable theft is estimated at $100,000. Politicians have also used charities as “convenient vehicles to launder public dollars.” One political boss of a New York county used the charity he ran to channel public money to real estate developers and other businesses, which in turn made large campaign contributions to him and his party.

Why is there so little accountability in the charity sector? First, charitable status is so easy to obtain. The IRS approves 99.5% of all applications. With over 50,000 new charities appearing every year, the IRS doesn’t have the resources to scrutinize them very closely. Once they are approved, chances are slim that the approval will ever be revoked. Only thirteen states even attempt any oversight of charities, with probably fewer than a hundred state officials working on it in all states combined. When they do try to take legal action, the courts have trouble distinguishing fraud from incompetence or ineffectiveness, since legal standards of conduct in this area are so vague.

But what about the donors? Don’t they create the marketplace within which charities must compete? Why don’t they hold charities more responsible? In Chapter 5, Stern explores the question of why people give and what they expect from their contributions. The dominant theory is that people give in order to obtain some tangible or intangible benefit, especially the “warm glow” of giving, to use economist James Andreoni’s term. Some theorists support a more altruistic, less self-interested conception of giving, although it is harder to square with the individualistic assumptions of mainstream economics. (Is it so hard to imagine that a cultural animal can actually identify with something larger than the self?) The theoretical debate is relevant because “warm-glow donors behave differently than altruistic ones.” They can get their emotional high from responding to a good story, preferably accompanied by a picture of a cute child. They don’t have to be interested in facts and figures about results. Studies have found that donors are more likely to support a campaign to help one person than to support a campaign to help many people.

In some cases, the “care and feeding of donors who make highly personal gifts can distract from core charitable purposes and matters of organizational effectiveness.” The charitable arm of a large bank gave Florida State University a $500,000 grant for economics, as long as the courses would feature the writings of libertarian Ayn Rand. The estate of one prominent donor sued the Metropolitan Opera because their staging of Wagner was allegedly less traditional than she had specified. Donors easily become part of the problem as well as part of the solution.

When donors do consider organizational effectiveness, they often assume that the percentage of revenue going to recipients is a sufficient measure of it. In recent years, the Red Cross has come under fire both for responding ineffectively to disasters such as hurricane Katrina, but also for increasing the portion of revenue used to build the infrastructure needed to improve future performance. The simplistic idea that charities need to spend only on current programs and not invest in future organizational effectiveness is one of the biggest obstacles to improvement.

Continued

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