a word on charities and their foilables...

Charity for Charities
By ARTHUR C. BROOKS
December 28, 2006

Many nonprofit leaders in America could not be more pleased at the Democratic takeover of Congress in a few days. For years, they have complained (justifiably or not) that Congress has underfunded critical nonprofit services. They look forward expectantly to an environment in which Congress -- they imagine -- will tap the keg of cash for nonprofits, from symphony orchestras to soup kitchens.

It remains to be seen whether the Democratic Congress will actually be more profligate than the Republicans were; after all, part of the reason the Republicans lost substantial conservative support in the 2006 midterm election was the fiscal bender Congress has been on for the past few years. But even less clear is whether greater government subsidies are in the interest of the charities themselves.

One large nonprofit organization that helps the poor in New York state illustrates this point. The agency was relatively small a few years ago, but provided a critical service in several cities. The state, taking notice of the organization's good work, began pouring money into operations, doubling and tripling its budget. The staff was focused on managing and spending the public dollars, and allocated less and less of its time to private fundraising -- which, predictably, vanished. When the state, facing budget cutbacks, began to reduce the organization's subsidy, it led to service cuts and layoffs because there were no private funds to fill the gap. Ironically, the organization and its clients were worse off than they would have been had the nonprofit received no government "help" in the first place.

This experience is hardly unique -- indeed, nonprofits and their communities all across America are exposed in the same way when government funding grows as a source of support. According to the National Center for Charitable Statistics, a quarter of human service charities in 2002 received at least 50% of their income from the government. This represents a lot of risk, because public funding is pro-cyclical: It increases or decreases more than changes in the economy, and thus can destabilize nonprofits. In contrast, charitable donations stabilize charities because they fluctuate less than the economy as a whole. For a charitable organization, relying on government funding as the main income source is like investing your 401(k) entirely in biotech stocks: You might do great -- for awhile.

But the problem with government money goes beyond just its volatility: Studies by economists over the past decade have demonstrated that government spending on nonprofit activities actually lowers private charitable giving. In the case of social welfare services, a dollar in government funding to nonprofits generally suppresses private giving by 25 cents or more. Part of this is due to a lower perception of need among charities when they get public money. There is also evidence, however, that charities spend less effort fundraising after governments give them money.

The bottom line is that there is nothing free about cash from the government. Perhaps this should come as no surprise, given what we know about the effects of public subsidies to individuals, such as welfare recipients. I would not argue that the destabilizing effects of government subsidies and the downward pressure on giving are reasons to eliminate public funding to nonprofits. But these effects do represent serious unintended consequences of nonprofit reliance on the government. Charities and policy makers should remember this in the new congressional regime.

Mr. Brooks, a professor at Syracuse University's Maxwell School of Public Affairs, is the author of "Who Really Cares: The Surprising Truth About Compassionate Conservatism" (Basic Books, 2006).

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