Wednesday, February 11, 2009

Private charity vs. government support

Europeans prefer the state to help needy causes, Americans have a preference for charities to take care of this. Are government support and philanthropy substitutes or complements? If they are perfect substitutes, then it would not matter what the source is. If they are complements, you would want both to be in play.

James Andreoni and Abigail Payne point out that there is more to the story than simple crowding out. Suppose that a government provides some resources to an organization, say $100. Then people will contribute $56 less. But not all this crowding out is coming from people feeling they are not needed any more. $38 of this $56 reduction are due to lower fund raising effort. This makes it particularly important that any money the government gives should have a matching requirement from private funds to maintain the fund raising effort.


T-Bone said...

I read that many charities have a surprisingly low level of efficiency in terms of how much of your donation actually goes to the cause. I remember reading some spend nearly all the donated money on solicitations, leaving 10 or 20% for the cause. Though most are better than that... I saw a charity ratings site that rates charities that spend more than 60% of funds on the cause as "satisfactory" with a C grade. And charities spending more than 75% on the cause were "highly efficient" with an A grade.

I bet a lot of them mostly use volunteers too, and still have such relatively low efficiencies.

Or how about this tidbit about charity events:

"According to a 2007 survey of charitable events by New Jersey watchdog group Charity Navigator, the average fund-raiser in 2005 lost 33¢ for every dollar raised."

The average fundraiser spend 1.33 to get $1!? Again, probably with volunteers working for free...

Anyway, my point to all this was that maybe after charities get funds from government, maybe they are reducing their less efficient fundraising efforts. Maybe they send solicitations to only previous donors. Or maybe the cause only requires a certain level of funding. Perhaps the food kitchen is stocked, the orphanage running smoothly, and the free clinic sufficiently supplied and staffed.


Anonymous said...

I have a question...i have heard that Charities like the United way are about 80%...80cents of a donation gets to the end user.....but government is about 15-20 %...does anyone have a verifiation of the 20% number?

Curious George

Economic Logician said...

I strongly doubt these figures about governement administrative costs. Keeping in mind that governements typically pick up programs that are more difficult to administer, efficiency is still remarkably high. For example, this report about the US Food Stamp Program concludes that administration accounts for about 28% of total costs. A lot of these costs have to do with eligibility verification.

Anonymous said...

Thanks...I hope you are correct...but logic says the collection costs(IRS), regulation, distribution and oversight, of tax dollars has to be much higher than pure charities...United Way locally claims 15%, Susan B Komen and Arnies Army are proported to be about 45%...This because of high promotion and advertising cost...all of this with a lot of volunteer labor volunteer labor....any thought how a layman could calculate it from public data?

"Trying to determine the best policy"

Anonymous said...

According to the Cato institute, 30% of each tax payer dollar makes it to the poor. The question I've always asked myself when deciding which side to take in an issue about government vs. private sector is "how efficient and how capable at this do I think the government can realistically ever really be?" I'd have to say that in this case, I just don't see the government realistically, without having tons of layoffs (which would certainly be unpopular right now), being able to increase this direct aid (i.e. decrease the beaurocracy), nor do I see our current president desiring such a decrease, so I'm going to have to go with a favoring of the private sector on this one. That is not to say I don't think there should be any government aid, just that the private sector is more efficient (in general, although, there are of course, exceptions)and therefore should take the lead.

Chris Shaeffer said...

The pure fiscal concerns of this issue are only a small factor in deciding which program is best. The other factor is our ideology of personal choice.

So let's say the government version is 100% efficient, and the private charities are only 50% efficient, at distributing their funds to the "needy". Is the government solution the best one? I say no. In the end the private system still allows participation by choice rather than the mandate of taxes.

Typically the next argument I encounter is something revolving around the idea that the charity may not get the funds it requires while the government has a lesser issue with this. First, neither system is going to save everyone. There will always be casualties. Second, if the charity cannot raise the funds it requires, then the people have spoken. Forcing a moral decision to be charitable on your neighbor via legislation for fear that they may not share your generosity is an abomination.

I cover this in some detail here:

Check the "cool links" tab to the right of the article for charities I support :)