On The Economics of Nonprofits
Tyler Cowen lists “the economics of the non-profit sector” as an under-explored area in economics. Having worked primarily in the non-profit sector (with a brief stopover in the intriguing for-profit-but-not-profitable sector inhabited by The Atlantic) I also think this is an interesting topic. I sort of wonder why economic researchers aren’t more interested in it, since they overwhelmingly work in this sector as well, so it’s hardly plausible that they forget it exists. According to “The Nonprofit Sector in Brief 2007: Facts and Figures from the Nonprofit Almanac 2007″, “the nonprofitsector accounts for 5.2 percent of gross domestic product (GDP) and 8.3percent of wages and salaries paid in the United States.”
You can also learn here the perhaps-surprising fact that sales revenue dwarfs donations as a source of nonprofit financing:
Figure 2shows that fees for services and sales of goods account for a huge percentage (71 percent) of the revenues for reporting public charities. These include patient revenues for hospitals (including Medicare and Medicaid reimbursements) and tuition at colleges and universities. They also include items such as the revenue from theater tickets, rental fees for providers of low-income housing, and—much less significant for most organizations—sales of goods such as merchandise sold at thrift or museum shops.
Which is just to say that the economics of the non-profit sector isn’t the same as saying the economics of giving money away. American nonprofits are primarily in the business of charging customers money in exchange for medical or educational services.
My sense is that in the near future a larger-and-larger portion of news media is going to be produced by non-profits, and we may need to start adding advertising revenue to the list of major sources of non-profit funding. After all, a great newspaper whose advertisers covered 85% of the costs of gathering news would be (a) totally non-viable as a business proposition, (b) a great bargain as a charitable endeavor, and (c) still primarily in the business of selling readers to advertisers rather than attracting donors.
19 Responses to “On The Economics of Nonprofits”
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October 20th, 2009 at 2:34 pm
Peter Drucker did a lot of writing on this area before he died.
October 20th, 2009 at 2:45 pm
For profit hospitals complain often about the unfair advantage enjoyed by nonprofit hospitals. And it’s not just income taxes they don’t pay. It’s state and local taxes as well. And since hospitals have very large real estate holdings, the local property taxes the for profits pay are enormous.
October 20th, 2009 at 2:49 pm
Interesting. Non-profit is by definition clunky if it includes both organizations with a sellable product (like hospitals, universities) and organizations that can’t really monetize their services, like domestic violence agency. Here in BC, Canada, where spending cuts are devastating the non-profit industry, it is the ones without the sellable product that suffer the most as private contributions just can’t keep up with government funding cuts and there is nothing to sell…
October 20th, 2009 at 2:55 pm
My sense is that in the near future a larger-and-larger portion of news media is going to be produced by non-profits, and we may need to start adding advertising revenue to the list of major sources of non-profit funding. After all, a great newspaper whose advertisers covered 85% of the costs of gathering news would be (a) totally non-viable as a business proposition, (b) a great bargain as a charitable endeavor, and (c) still primarily in the business of selling readers to advertisers rather than attracting donors.
Really bad idea.
October 20th, 2009 at 2:59 pm
I wonder how the pie chart would change if you took obvious fee-for-service institutions like hospitals and private schools.
October 20th, 2009 at 3:06 pm
For profit hospitals complain often about the unfair advantage
Unfair seems like a slipper, muddy word here. Unfair in the market sense? Maybe. But the only reason we care about fair markets is that truly fair markets create perfect competition and no profit. If you are making a profit, you have not driven your price down to match your costs, and therefore the customer is paying for more than their product. Do we want patients to pay for anything besides the cost of making them better? (Remember, that cost includes healthy salaries for the workers, including the managers, and the financed costs of investment and improvement.)If so, WHY?
Taxes are levied on things that can benefit a private owner. Profits. Property taxes apply b/c a for-profit hospital can always liquidate, and the owners walk away with the cash, while a non-profit liquidation can only benefit another non-profit.
October 20th, 2009 at 3:13 pm
I agree that the pie chart is hugely skewed by organizations that are primarily fee-for-service. Which is to say this post mostly just illustrates the inutility of the term “nonprofit” as a meaningful umbrella phrase.
It’s much more useful to study large groupings of types of nonprofits (hospitals, colleges, traditional charitable organizations, private foundations, etc.) than to pretend MSF and Harvard have similarities that extend beyond mutual 501(c)(3) status.
October 20th, 2009 at 3:18 pm
After all, a great newspaper whose advertisers covered 85% of the costs of gathering news would be (a) totally non-viable as a business proposition, (b) a great bargain as a charitable endeavor, and (c) still primarily in the business of selling readers to advertisers rather than attracting donors.
I am not a lawyer, but it is my understanding that for most non-profit publications, advertising revenue is considered unrelated business income (UBI). There are limits on how much of a 501(c)(3) organization’s revenue can be from UBI. I’m not sure what the exact limit is, but 85% seems way over it. Maybe a lawyer out there can clarify.
October 20th, 2009 at 3:32 pm
You can also learn here the perhaps-surprising fact that sales revenue dwarfs donations as a source of nonprofit financing:
With 60% of hospitals and 40% of health insurance companies non-profit it’s not surprising at all.
October 20th, 2009 at 3:34 pm
Advertising revenue is generally considered unrelated business income and is taxable to non-profits. To retain tax exempt status, a non-profit must get “substantiall all” of its revenue from government grants or public donations or 33 1/3% of its revenue from contributions or activities related to its exempt status. As a result, if 85% of an organization’s revenue came from advertising, it most likely wouldn’t be able to retain it’s tax exempt status. The law would probably have to change to make an exception for news gathering organizations, just as there are specific rules for hospitals and educational institutions.
October 20th, 2009 at 3:49 pm
Non-profit models are among the strongest proposals for rescuing journalism — particularly investigative reporting — in the current debate. Advertising/subscription revenues will certainly be a part of that conversation, but we should take care not to recreate the private system under the name “non-profit.” What makes these new models so appealing is the potential to return to the vision that solid news and reporting is a public good that must be supported beyond the marketplace.
In the early 20th Century, Americans felt strongly about this issue but in one of the earliest examples of special interests taking hold, for-profit broadcasters saw how Canada and Europe were setting up strong public media infrastructures and quickly quashed similar efforts in the U.S.
October 20th, 2009 at 5:00 pm
Frankly, it may be just that Tyler Cowan isn’t familiar with the work that’s being done in the economics of non-profits (I’m sure not), but there is a literature. Here’s the reading list from Burton Weisbrod’s syllabus for The Economics of Non-Profit Organizations at Northwestern:
The Nonprofit Firm Glaeser, Edward, ed. (Chicago: University of Chicago Press, 2003).
The Role of Non-Profit Enterprise, Hansmann, Henry (Yale Law Journal. 1980)
Who Benefits from the Nonprofit Sector, Clotfelter, Charles, ed. 1992.
Wither the Non-profit Wage Differential? New Estimates from the 1990 Census, Leete, Laura (Journal of Labor Economics, 2001)
Private Action and the Public Good, Powell, Walter, and Elisabeth Clemens, eds. (New Haven, CT: Yale University Press, 1998).
Behavior of Nonprofit Organizations in For-Profit Markets, Sinitsyn, Maxim and Burton Weisbrod (working paper, 2008)
Toward a Theory of the Nonprofit Sector in a Three-Sector
Economy, Burton Weisbrod
Altruism, Morality, and Economic Theory, E. Phelps, ed. (New York: Russell Sage Foundation, 1975).
To Profit or Not to Profit: the Commercial Transformation of the Nonprofit Sector, Weisbrod, Burton, ed. (New York, NY: Cambridge University Press, 1998).
Mission and Money: Understanding the University, B. Weisbrod, J. Ballou, and E. Asch (NY: Cambridge University Press, 2008, forthcoming).
Here’s a bilbliograph from a project on the economics of non-profits led by Leonid Polishchuk and Alexandra Vacroux:
Andreoni, J. Toward a Theory of Charitable Fund-Raising. Journal of Political Economy, 1998, 106:1186-1213
Andreoni, J., and R. Petrie. Public Goods Experiments Without Confidentiality: A Glimpse Into Fund-Raising. Journal of Public Economics, 2004, 88:1605:23.
Auten, G., H. Sieg, and C. Glotfelter, Charitable Giving, Income, and Taxes. American Economic Review, 2002, 92:371-82.
Fukujama, F. Trust. Free Press, 1995.
Glazer, A., and A. Konrad. A Signaling Explanation for Charity. American Economic Review, 1996, 86:1019-28.
Glotfelter, C. Federal tax Policy and Charitable Giving. University of Chicago Press, 1985.
Handbook for Giving, Reciprocity, and Altruism. To appear in the Handbooks in Economics series.
Harbaugh, W. The Prestige Motive for Making Charitable Transfers. American Economic Review, 1998, 88:277-82.
Putnam, R. Making Democracy Work. Princeton Univ. Press, 1993.
Rose-Ackerman, S. Altruism, Nonprofits, and Economic Theory. Journal of Economic Literature, 1996, 34:701-28.
Rose-Ackerman, S. The Economics of Nonprofit Institutions: Studies in Structure and Policy. Oxford Univ. Press, 1997.
Weisbrod, B. The Nonprofit Economy. Harvard Univ. Press, 1988.
Here’s a link to the National Center on Nonprofit Enterprise’s database section: http://www.nationalcne.org/index.cfm?fuseaction=category.display&category_ID=19&CFID=718&CFTOKEN=54748512
Here’s a link to a webpage for a textbook, Managerial Economics of Non-Profit Organizations: http://www.routledgeeconomics.com/books/Managerial-Economics-of-Non-Profit-Organizations-isbn9780415433822
GOOGLE IS YOUR FRIEND.
October 20th, 2009 at 5:33 pm
Great post. If I didn’t know what a non-profit was I do now. Excellent -shades o’ green- pie chart. Beautiful.
October 20th, 2009 at 7:19 pm
Nnnprofits include 527 political organizations, like Swift Boat Veterans, and special purpose investment vehicles used to package securitized mortgages. Congress just delivered for the SPIV boys.
http://stateofthedivision.blogspot.com/2009/10/congress-rides-to-rescue-with-treasury.html
October 20th, 2009 at 7:22 pm
To reiterate comment #12, Google is your friend. Also, there are countless nonprofits that have very little to no fee for service revenue, and depend on grant revenue, donations, etc. *significantly* more than this chart suggests.
October 20th, 2009 at 11:05 pm
It’s not just that some non-profits rely mostly on different kinds of donations, but that the non-profits the gov’t has offloaded social services onto depend almost entirely on totally inadequate funding structures. I wrote about this in the Canadian context, but in the US it’s a similar story: Pass off the burden to charities, then fund them in the stingiest, most bureaucratically cumbersome way possible. This opens a sliver of hope that non-profits will brilliantly innovate a new form of democracy, but the overwhelming likelihood that an unprecedented amount of money will be wasted helping to administer unprecedented suffering in a rich country. My story: Whose Burden? Two decades of government cuts to social spending have paralyzed the charities that Canada’s poor depend on for survival. But there is hope on the horizon
October 20th, 2009 at 11:48 pm
@15 Daniel Aldana Cohen
Great link. If I didn’t know what a non-profit was I do now.
October 21st, 2009 at 9:38 am
A successful example of a non-profit media company could be the Guardian Media Group
owned by:
The Scott Trust
October 21st, 2009 at 2:37 pm
Want another great fundraising tip? Check out http://www.cafegive.com where a portion of every purchase goes to support great non-profits! Let me know what you think!