Thursday, June 23, 2011

Brian Galle: Do Charitable Subsidies Decrease Social Welfare?

Brian Galle has posted, "The Distortionary Effects of Subsidies for Charity in a Federal System,"  in which he questions the conventional wisdom that charitable subsidies invariably increases social welfare.  He suggests that the undisciplined application of subsidies might actually decrease social welfare.  Here is the conclusion:

We have shown here that the leading normative justification for subsidized charity inadequately explains that subsidy. The claim in the literature is that subsidies are welfare-increasing. We show that, once interactions with local government are taken into account, in many cases it is ambiguous whether a subsidy would increase social welfare. At best, then, the traditional justification is fully persuasive only in those instances, sketched here, in which the welfare-reducing aspects of the subsidy are mitigated. For example, our analysis implies that the traditional rationale cannot explain subsidies for universities, hospitals, or social-service organizations, all of which can create localized negative externalities and are not fully subject to crowd-out. Accordingly, our analysis can be read to suggest that the subsidy should be available for a dramatically narrower class of organizations than are currently eligible to claim it. Given that the subsidy bears an estimated tax cost of $50 billion annually in the United States, and that eligible recipients account for on the order of one-seventh of U.S. GDP, we think this is a significant result. We note, though, that once nonprofits and local government are considered together as substitutes, new justifications for the subsidy emerge. For example, the threat of nonprofit production of public goods might be desirable when Tiebout sorting is implausible, such as in conditions of high exit costs. In that case, nonprofit production serves the competition function that is usually attributed to federalism. We analyze these possibilities at greater length elsewhere. (Galle 2011).



June 23, 2011 | Permalink | Comments (0) | TrackBack (0)

Federal Grants Discourage Public Fundraising (and the growth of civil society?)

To have a vibrant and active charitable sector, government should not be too generous towards charities.  That seems to be the counter-intuitive lesson in Jeremy Thornton's recently posted "Flypaper Nonprofits:  Federal Grants and Nonprofit Expenditures." Here is the abstract:

The flypaper effect is a common anomaly observed when federal transfers to local governments stimulate local spending more than theoretically expected. The behavioral influence of grants is of particular concern for the nonprofit sector, where governments may wish to stimulate the production of social services. Recent research shows that grants can reduce private sector giving by causing a reduction in private fundraising activity. This study extends the work on federal grants to the charitable sector by examining the influence of incentive versus lump-sum style grants on the subsequent expenditures of recipient nonprofit firms. The paper draws detailed grant data from the Federal Assistance Award Data System (FAADS), which includes structural characteristics of the grant. Empirical results demonstrate that the structure of the grant matters a great deal. Incentive grants appear particularly effective at stimulating both additional fundraising activity and output of the firm.


The author tests whether government funding actually reduces or "crowds out" private charitable initiatives.  The research question is a good one to the extent civil society is viewed as a valuable alternative to top-down public action.  The value added by the charitable sector is manifested in the belief that "bottom up" or grassroots public action is distinguishable from top down public action.  The paper supports the assertion that to have a vibrant and active charitable sector, government should not be too generous.  This is a "macro" finding, since an individual charity might maintain its independence and distinction from government even if it receives government funding.  But too much government help might actually impede the growth of a vibrant civil society from a macro standpoint.  This seems a helpful paper for legislative policy makers.


June 23, 2011 in Publications – Articles | Permalink | Comments (0) | TrackBack (0)

Tuesday, June 21, 2011

"Drowning in Debt: Financial Outcomes of Students at For Profit Colleges"

Last week, I blogged on the Cato Institute's report critizing nonprofit higher education's "profligate" spending which, according to the Institute, eats up federal subsidies of higher education and generally results in increased tuition costs as opposed to increased access.  In an effort to give equal time, I note that the U.S. Senate Committee on Health, Education, Labor & Pensions held a hearing (full video, plus witness statements) on student debt at for-profit colleges.  You can get the full text of the witness statements at the Committee's website.  All the witnesses pretty much beat up on for-profit higher education, mostly for encouraging vulnerable populations to borrow too much money to pay for increasingly worthless degrees.  One witness, though, gave a succinct description of the motivations distinguishing for-profit from nonprofit higher education.  I thought the discussion was particularly useful as it relates to the need for the nonprofit form (characterized by the nondistribution constraint) and the advisability of sharing public subsidies amongst both for profit and nonprofit higher education.  Of course, the statement neither addresses nor precludes the assertion that the nonprofit form too often acts very inefficiently.  Here is a large excerpt from that witness (Dr. Sandy Baum):

How is the For-Profit Sector Different from Other Postsecondary Sectors?

The prevalence of high debt levels and high default rates in the for-profit sector justifies a focus on this sector. Individual institutions and categories of students in other sectors who are in similar circumstances also merit particular attention. But it is worth thinking analytically about why so many problems are concentrated in for-profit institutions. Too much of the debate on this issue is tinged with ideology. Are critics of the sector opposed to market forces or to the idea of profits? Are owners, managers and supporters of the sector evil people who cannot see beyond their own pocketbooks?

The reality is that the fundamental purpose and structure of for-profit entities differs from that of public and nonprofit entities. If the outcomes of these structures could not be differentiated, proponents of the free market would not be such strong opponents of a larger role for government in the production of goods and services. The market works very well for our economy and our society in many cases. But it is not difficult to see that all market outcomes are not optimal. We have seen all too well in recent years the dangers of inadequate consumer protection, inadequate information, and inadequate regulation of financial markets. By definition, for-profit enterprises are run with the goal of maximizing profits. Managers have a fiduciary responsibility to make the interests of owners their primary focus.

When the for-profit sector was smaller, it consisted largely of small privately owned institutions. Some owners of for-profit colleges founded their institutions to provide specific opportunities to specific types of students and are deeply committed to the well-being of their students. But the sector is increasingly dominated by large, publicly held companies. Where it exists, good will and social consciousness on the part of the officers of these companies can only go a limited distance in determining how the firms operate. Comparison of compensation levels in the three major sectors of postsecondary education is instructive. Average compensation for the five highest-paid public university chief executives in 2009-10 was $860,000. The five highest-paid Ivy League presidents received an average of $1.3 million in 2008-09. The top five leaders of publicly traded for-profit postsecondary institutions received and average of $10.5 million in 2009.

Economic theory suggests that market forces lead to efficient outcomes if certain stringent conditions are met. These conditions include the absence of significant externalities – the costs and benefits of the product or activity must accrue to the direct participants without significant impact on others - and notably, perfect information. Consumers must have the information necessary to make sound judgments about which products and services will meet their demand. They must understand the characteristics of what they buy, how the products and services produced by different firms compare, and the prices they will pay. The rapid growth in enrollments in the for-profit sector is not just a reflection of increased demand. It’s not that so many students are suddenly making informed decisions about the best way to realize their educational dreams. A combination of aggressive recruiting and the growing funding and space constraints in the public sector have changed the way students perceive their options.

The market for higher education meets few of the requirements for perfect competition. Students can’t buy one, try it, and buy a different brand next time if they are unhappy with the outcome. There is little market incentive for producers to provide thorough and accurate information because they do not rely on repeat customers and once students make a choice, it is likely to take them a long time – and a lot of payments – before they learn the true properties of what they have purchased.

Well-designed consumer protection makes market forces work more effectively. It doesn’t make sense to have students give up large amounts of time, energy, and money to test for themselves whether institutions offer reasonable education and training. Postsecondary education is an investment that typically provides a high rate of return to both the students who participate and to society as a whole. But it can be a risky investment. If we subsidized only students who have a very high probability of succeeding and seeing their investment pay off handsomely, we would fail to provide opportunities to many individuals who cannot afford them on their own. We know some students will fail, either because they aren’t up to the task or because circumstances interfere with their success.

But we shouldn’t subsidize students to play the lottery. Students who enroll in institutions or programs that graduate fewer than 20% (or 15% or 30%) of their students or that succeed in placing only a small percentage of their students in remunerative positions in the fields for which they have been trained are playing the lottery. They are making a significant investment in an undertaking that has a stunningly low probability of success. Our political philosophies might lead us to debate whether or not we should prevent them from playing this lottery. But it is difficult to come up with sound principles of public policy that would support our subsidizing them to play this lottery. And unfortunately, even the best available information is unlikely to discourage the most vulnerable students from playing the lottery with a combination of taxpayer funds and funds they will only have to pay off in a vague and distant future.

Public Subsidies

There is nothing inherently wrong with people making profits from providing education. And no doubt there are some efficiencies in the for-profit sector that could, if applied in other sectors, both improve the learning experiences of students and reduce the cost of providing those experiences. But holding up this sector as an example of market forces at work is simply inaccurate. Many institutions in this sector receive close to 90% of their revenues from federal student aid. That number is actually higher if the federal funds that are excluded under the 90/10 regulations are considered. Very few students are actually paying with their own money to enroll in these institutions. Why is it that only independent students and dependent students from low-income families choose the for-profit sector? Don’t these particularly vulnerable students, who are most likely to be making their educational choices without the advice of college-educated parents or well-trained counselors deserve added consumer protection, rather than maximum opportunity to make decisions with a high probability of damaging their futures?

Surely there should be better regulation of an industry that is so heavily financed by taxpayers and that has such a dramatic influence on the lives of so many Americans – particularly vulnerable Americans.  Advocates of the sector frequently contend that restrictions on their institutions will deprive low-income students of educational opportunities. But if these opportunities lead to heavy debt burdens and questionable credentials, they are not opportunities in any meaningful sense of the word. Is it wrong to regulate payday lenders because it might deprive vulnerable individuals of the right to borrow money at extraordinary interest rates and generate debts they will never be able to repay? Is it wrong to regulate car dealers because we might deprive consumers of purchasing cars that have every likelihood of self-destructing on the road? Institutions in the for-profit sector that are serving their students well should be first in line arguing for protection against their colleagues whose drive for profits is exploiting students and undermining our ability to use market forces to the fullest to further our educational goals.


June 21, 2011 in Federal – Legislative | Permalink | Comments (0) | TrackBack (0)

Stanford v. Roche, Bayh-Dole and the Intersection of Patent and Tax Exemption

I hope someone writes an article using the title of this post.  The Wal-Mart case is all over the news these days but Stanford v. Roche,  a case decided last week has gone quietly unnoticed, it seems, by most within the nonprofit sector. I am not quite sure how, but the case seems to unwittingly implicate the prohibition against private inurement.  I am only just now getting to a thorough read, but my first impression is that the Supreme Court appears to state that a researcher at a university may claim personal ownership of intellectual property derived from the researcher's activities on behalf of the university.  This, it seems to me, raises an interesting issue of private benefit, and perhaps private inurement and excess benefit (depending on whether the researcher can be characterized as an insider).  Suppose the researcher applies for and receives a grant in her capactiy as a professor and scholar at a tax exempt university.  The researcher subsequently makes a monumental discovery and, for whatever reasons, retains the IP rights in that discovery.  May the researcher license those rights for her own personal benefit?  Stanford v. Roche seems to answer the question in the affirmative.  But who should own the discovery when the discovery was made at, with the indispensable assistance of, and by virtue of the researcher's affiliation with the tax exempt university? The Court's disposition of the narrow issue, whether the University's rights in the discovery necessarily take precedence over the researcher's rights, seems to miss the important point that the university is a tax exempt public trust.  Only Justice Breyer's dissent seems to give this fact the significance it deserves, though he does not explicitly mention that tax regulations designed to make sure tax exemption leads to public rather than private benefit: 

The Bayh-Dole Act creates a three-tier system for patent rights ownership applicable to federally funded research conducted by nonprofit organizations, such as universities, and small businesses. It sets forth conditions that mean (1) the funded firm; (2) failing that, the United States Government; and (3) failing that, the employee who made the invention, will likely obtain (or retain) any resulting patent rights (normally in that just-listed order).  U. S. C. §§202–203. The statute applies to "subject invention[s]" defined as "any invention of the contractor conceived or first actually reduced to practice in the performance of work under a funding agreement." §201(e)(emphasis added). Since the "contractor" (e.g., a university or small business) is unlikely to "conceiv[e]" of an ideaor "reduc[e]" it "to practice" other than through its employees, the term "invention of the contractor" must refer to the work and ideas of those employees. We all agree that the term covers those employee inventions that the employee properly assigns to the contractor, i.e., his or her employer. But does the term "subject invention" also include inventions that the employee fails to assign properly? . . . Given this basic statutory objective, I cannot so easily accept the majority’s conclusion—that the individual inventor can lawfully assign an invention (produced by public funds) to a third party, thereby taking that invention out from under the Bayh-Dole Act’s restrictions, conditions, and allocation rules. That conclusion, in my view, is inconsistent with the Act’s basic purposes. It may significantly undercut the Act’s ability to achieve its objectives. It allows individual inventors, for whose invention the public has paid, to avoid the Act’s corresponding restrictions and conditions. And it makes the commercialization and marketing of such an invention more difficult: A potential purchaser of rights from the contractor, say a university, will not know if the university itself possesses the patent right in question or whether, as here, the individual, inadvertently or deliberately, has previously assigned the title to a third party.

The majority's rationale and decision might be limited, it seems to me, to a holding that Stanford simply failed to assert the rights necessarily implied by tax exemption.  In other words, many observers suggest that Stanford v. Roche is more about contract law; but Stanford sought to have the contracts at issue interpreted in the context that Justice Breyer seems to understand.  The majority's fault lies in its taking the issue out of the tax exempt, nonprofit context.  Had it paid heed to that context, one which necessarily implies public ownership first and foremost, it might not have held that a researcher may take her invention, made with the indispensible assistance of the tax exempt entity, and commercialize it for her own benefit.


June 21, 2011 in Federal – Judicial | Permalink | Comments (0) | TrackBack (0)

Monday, June 20, 2011

Burton Weisbrod: Its Fun to Stay at the YMCA!

Burton Weisbrod has posted "The Pitfalls of Profits,"  which explores the increasing commercialization of nonprofits using the YMCA for primary context. The abstract is below the picture: 


Since the 19th century, the Young Men's Christian Association (YMCA) has morphed into a health-and-fîtness Goliath. In 2001, this tax-exempt organization had revenues of $4.1 billion, making it the largest nonprofit, in terms of earned income, in the United States. Today, many of the more than 2,400 local Y's in the country boast basketball courts, swimming pools, jogging tracks, and well equipped weight rooms. These familiar neighborhood institutions are under heavy fire, however, for an increasing presence in upscale areas. Private health clubs have sued Y's for unfair competition, claiming that as a tax-exempt charity, the YMCA is able to undercut private operators' prices enough to siphon away a significant amount of profitable business. The Y's expansion into affluent neighborhoods raises the question of whether it has become overly commercialized and whether it deserves its tax-exempt status. The Y's expansion into new markets is just one example of how nonprofits are becoming increasingly commercialized. The social sector is witnessing a wave of commercialization among nonprofits. The trend is partially a response to a leveling off of government grants and contracts as well as the lack of growth in tax-deductible donations to charity- the traditional sources of funding for nonprofits. Mechanisms to encourage donations, by altering tax law, are readily available. Mechanisms to discourage commercial activity, however, are more challenging. Outright prohibition of any activity that generates "sales" would have vast and uncertain consequences, but the use of tax instruments to discourage all commercial activity - not merely unrelated business activity, which is already subject to taxation deserves exploration.


June 20, 2011 in Publications – Articles | Permalink | Comments (2) | TrackBack (0)

Worth Reading: Walkathons and Excuses to Give

I like good editorials and sometimes pretend to be a good editorial writer myself.  That's why I still read newspapers, actually.  I can get all the news pretty easily from TV or online, but a good, thought provoking editorial can only be had in an old-fashioned newspaper.  I just hope newspapers are still around when my kids get older.  Anyway, an interesting op-ed in Sunday's NY Times opines that people give when, curiously enough, selflessness coincides with self-interest.  Seems oxymoronic to me.  But if true, maybe the charitable contribution deduction is unnecessary, except or even (I don't know which) for the very wealthy who can give large enough to purchase a quid pro quo from the gift -- a naming opportunity for example, or some advertising in the case of what we wink and call "corporate sponsorships."  But for individuals, who give small gifts, what's the real incentive when most individuals can't take a tax deduction and don't get something named after them?  The op-ed below excerpted below makes sense to me even if it seems ultimately to conclude that people give because they are truly altruistic. 

Not long ago, I stood on a corner near my home and watched as some of the 42,000 men, women and children participating in Boston’s Walk for Hunger strode by. Their 20-mile round-trip trek was a success, raising $3.6 million for food banks. It was as if, by burning calories, they were feeding the hungry.  Still, the logic that united the walkers, the donors and the hungry mystified me. After years of witnessing such events I still wonder why we must be a nation in motion to secure aid for the needy. Why are benefactors moved by the sight of urban hordes headed for the suburbs and back? Why do such exertions trigger the charitable impulse?  What I saw that morning in Boston was a resource diverted from its true purpose. Imagine those 210,000 man-hours (42,000 times a five-hour walk) put into direct service to benefit the poor. Think of the houses that might be built, roofs repaired, gardens planted and harvested, public spaces improved, and meals delivered to shut-ins. (And add in the efforts of the 2,000 volunteers that day and the contributions of 50,000 donors.) Now multiply that by the millions of man-hours that are represented by such events in cities across the nation, from Los Angeles to Louisville, Ky., from Austin, Tex., to Grand Rapids, Mich.  In the charitable ritual that has evolved, two sides expend energy, but only the sponsors’ efforts directly aid the poor. The others’ is pure sweat equity that goes nowhere but down the necks of the participants. Consider, too, the public resources expended: the rescue squads and medics along the way, the police sealing off urban arteries, the snarling of traffic. We tie our cities in knots. Enduring such inconvenience is what each of us gives to the cause. I do not question the sincerity of the participants, but in these mass mobilizations I see many lost opportunity costs. I recognize the value of exercise and companionship, but question why society values these schemes. The easy explanation, of course, is that there would be no giving — or not nearly so much — without the walks. Fund-raisers recognize that the nobility of giving is often stimulated by activities that conjoin the selfless with self-interest. For giving, we often offer value received. Raffles and auctions and naming rights are among the inducements used to win support. But that’s not what’s going on here.



June 20, 2011 | Permalink | Comments (2) | TrackBack (0)

Charitable Giving Increased By Only 2.1 Percent in 2010

A new report prepared by Giving USA Foundation and the Center on Philanthropy at Indiana University found that Americans gave $291 billion to charity in 2010, 4 percent more than they gave in 2009 but more than 6 percent below the all time record set in 2007.  After adjusting for inflation, though, giving increased by only 2.1 percent.  Click here for the report's executive summary, also available for free online:  Download GivingUSA_2011_ExecSummary_Printthe entire report is available for $75.00.  A Reuters report states:

Revised estimates by the study, which started in 1956, showed that during the financial crisis giving fell more than $10 billion in 2008 to $299.8 billion and then dropped more than 6 percent in 2009 to $280.3 billion. Patrick Rooney, executive director of the Center on Philanthropy at Indiana University, said that giving in 2010 grew by 2.1 percent after adjusting for inflation. "But the sobering reality is that many nonprofits are still hurting, and if giving continues to grow at that rate, it will take five to six more years just to return to the level of giving we saw before the Great Recession," he said.  The study estimates the giving by about 75 million households, up to 1.5 million corporations, an estimated 120,000 estates and about 77,000 foundations. That money goes to more than 1.2 million registered charities and some 350,000 American religious congregations. Individual giving rose by 2.7 percent in 2010 to $211.7 billion, charitable bequests soared nearly 19 percent to $22.8 billion, foundation giving remained unchanged at $41 billion and corporate giving rose more than 10 percent to $15 billion.  Edith Falk, chairwoman of the Giving USA Foundation, a philanthropic research group, said that while giving had started to rebound, the gains "suggest philanthropy is likely in for slow growth over the next several years" and changes in donor behavior during the recession are likely here to stay.


June 20, 2011 in Studies and Reports | Permalink | Comments (0) | TrackBack (0)