The Economy Is Changing — and So Must We: A New Charge for Nonprofits

“WATCHING” (DETAIL) BY KEITH POINTING/WWW.SAATCHIART.COM/ACCOUNT/PROFILE/970048

This is the first in a four-part series of articles from the summer 2018 issue of the Nonprofit Quarterly, “Nonprofits as Engines of a More Equitable Economy.”

Since fall 2017, the Nonprofit Quarterly has covered a growing number of stories on emergent forms of economic organization. This includes writing on employee ownership, cooperatives, social enterprise, community development finance, anchor institutions, the growth of nonprofit-owned businesses, and the rise of community land trusts. We’ve run features on a union-co-op conference in Cincinnati; on the use of employee ownership as a business succession strategy as the baby boom generation retires; and on the rise of platform cooperatives — that is, app-based platforms that are co-owned by the workers, in lieu of the investor-owned Ubers of the world.

In their own right, these are important stories, but there is something deeper going on here, too. A few years ago, Clara Miller, then president (now president emerita) of the F.B. Heron Foundation, wrote a paper titled “The World Has Changed and So Must We.” Miller was talking about capital markets and the need for a mission-based approach to investing foundation assets. But what about us? In other words, what is the role of civil society — the people who our sector represents, independent of our legal form — in a world where the economic ground beneath us is shifting rapidly?

In our sector, nonprofits typically act to mend problems. The basic assumption behind this is that the system, despite major problems here and there, is more or less functional, and our role is to come up with clever solutions — be good social entrepreneurs, if you will — to plug the holes and fill in the gaps.

But it is increasingly evident that these basic assumptions don’t remotely describe the world in which we operate. Last December, NPQ’s Cyndi Suarez wrote:

Places like Puerto Rico that are experiencing full-scale collapse are simply at the edge, experiencing it first. In Dmitry Orlov’s The Five Stages of Collapse: Survivors’ Toolkit, he proposes that current civilization has entered the collapse phase where, rather than long-term decline, we have sudden changes caused by systems out of control. Perhaps these moments are the new high-leverage points in systems change; when systems are collapsing, there is a vacuum and a battle for the new order.

So, if the current political and economic systems in the United States are corrupt, decaying, or even collapsing, then plugging holes and filling in gaps — no matter how well we are guided by sophisticated logic models showing the wisdom of our interventions — will fail. This means that those stories about so-called alternative forms of economic organization may be more than “feel-good” narratives of community self-determination; in fact, they may be glimpses of another world emerging. In short, if our economic, political, and social systems are changing before our eyes, then community-based economics stops being a nice-to-have and starts becoming a must-have.

How Did We Get Here?

Before talking about the contemporary process of corruption, decay, or collapse, it is important to start out with the obvious: that for all of our society’s accomplishments, for many the United States has never been the shining “city upon a hill” that leaders dating back to colonial Massachusetts governor John Winthrop have envisioned. The “American project” has always been an imperial one. Noting the country’s history of genocide against Native Americans, Yale historian Paul Kennedy, for example, remarked, “From the time the first settlers arrived in Virginia from England and started moving westward, this was an imperial nation, a conquering nation.” And, of course, the nation was also built on the sweat and tears of Black slave labor. Another Yale historian, David Blight, points out, “Slaves by 1860 were worth approximately $3.5 billion. That was the largest single asset in the entire U.S. economy. That was worth more than all railroads, more than all manufacturing, all other assets combined.” As Ta-Nehisi Coates and others have demonstrated, the impact of slavery, Jim Crow, and ongoing discrimination has ensured the persistence of vast race-based gaps in income and, especially, wealth. And, without enumerating them all, the United States has been riven by many forms of inequality — among them, patriarchy, discrimination against Latinx and Asian Americans, homophobia, transphobia, and class divisions — throughout its history.

In short, there is no sense in idealizing the past. And yet, even with all of its shortcomings, the nation’s political-economic institutional structures were somewhat functional — for some — for a time. The result was that wages broadly kept pace with productivity. But that world hasn’t existed for a good four decades now, even though some often pretend that it still does.

To greatly simplify history, for the past nearly three-quarters of a century, the existing U.S. institutional structure has been based on a series of compromises that emerged out of the Great Depression and World War II. One can call this infrastructure many different things — common names include the New Deal institutional infrastructure, American liberalism, and the welfare state. Similar structures, with generally more generous social benefits, emerged at roughly the same time in Canada, Europe, and Japan — often under the guise of social democracy. But call it what you will, two critical elements of the economic model that emerged after World War II were the following:

• A relatively strong central (federal) government, funded by relatively high taxes and growing welfare state protections — especially Social Security, Medicare, and Medicaid, but also many other benefits, such as subsidized student loans, job training support, food stamps, and welfare
• A relatively strong labor movement that could effectively pressure corporations for higher wages and benefits, and lobby government for greater social benefits

Note that nonprofits do not appear above; this is because initially nonprofits were not major players. Broadly speaking, if one looks at the economics of the period spanning from 1945 to the present, it is clear that the United States has experienced two markedly different periods within the past seventy-plus years. The first era — the one that coincided with a relatively strong labor movement — was marked by a relative degree of economic equality; this began to shift, however, in the 1970s, and the period of 1980 to the present has been marked by rapidly rising inequality.

In 1945, 35.4 percent of private sector, nonagricultural workers were in unions. According to the U.S. Department of Labor, figures for 2017 reflect that the number in the private sector is a paltry 6.5 percent. Only the continued strong (34.4 percent) presence of unions among public sector workers keeps the overall union membership rate in double digits (barely), at 10.7 percent.

The economic contrast between these two periods is quite clear. As Jared Bernstein, who served for a time as the chief economist and economic adviser for Vice President Joe Biden, testified to Congress, “Over the three decades from 1947–79, real median family income grew almost in lock step with productivity growth.” Bernstein added that while between 1947 and 1979 the top 1 percent of Americans saw a 119 percent increase in real income, the median household also saw incomes climb a similar 112 percent. Disaggregating by race, median income for Black families (adjusted to 2011 dollars) rose from $14,216 to $32,537 between 1947 and 1969, a 128 percent increase, and faster than white incomes rose. In 1949, Black median income was 51.1 percent of white income; by 1969, the ratio had improved to 61.3 percent. (In the 1970s, Black income growth slowed as deindustrialization hit Black workers first and harder than white workers, at least initially.)

By contrast, between 1979 and 2010, the top 1 percent of Americans saw their real incomes rise by 80 percent, while the median income increased only 11 percent. Meanwhile, the ratio of Black income to white income has been stuck at 61 percent. Because overall income growth has slowed, median Black household income since 1969 has risen only to $39,715, a much more modest 22 percent. To reiterate, over a span of twenty years (1949 to 1969), Black incomes increased by 128 percent, compared to a much more modest gain of 22 percent in the forty-year “post-civil rights movement” period that followed.

As labor unions receded — and as economic inequality increased — nonprofits have grown. Colin Burke, writing in the Nonprofit and Voluntary Sector Quarterly, finds that in 1945, nonprofits contributed a rather paltry 0.9 percent of gross domestic product (GDP). By 1980, that number had gradually climbed to 2.9 percent of GDP. Today, nonprofits generate 5.4 percent of GDP.

Moreover, it is worth noting that the GDP figures understate the importance of the nonprofit sector. For example, in 2013 the nonprofit contribution to GDP was $905.9 billion, while nonprofit revenues were nearly twice as high, at $1.73 trillion. As a percentage of employment, nonprofits employ an estimated 10.2 percent of the workforce. The difference between nonprofit revenues and their contribution to GDP derives from the need to avoid double counting. It gets complicated — but, to give one example that might illustrate the complexities: if government pays for insurance that individuals use to purchase services (for example, Medicare or Medicaid), that counts as a nonprofit contribution to GDP; and, if government pays for a government employee’s insurance to use the same nonprofit hospital, that counts as a government contribution to GDP.

It would be remiss not to point out the obvious — namely, that healthcare is a major driver of nonprofit sector growth. The Urban Institute estimates that 49.8 percent of all nonprofit revenues are from hospitals, and 59.1 percent are in nonprofit healthcare, broadly defined (including nursing homes and clinics). According to the 2016 Nonprofit Almanac, healthcare under that broader definition generates 76 percent of commercial nonprofit revenue — that is, the number that feeds into GDP. Still, the growth of the nonprofit sector has been remarkable. Even if you wanted to assume — incorrectly, of course — that health played no role at all in the nonprofit sector in 1945, and subtracted all healthcare nonprofit income from today’s numbers, nonprofits still would have outpaced overall economic growth in the postwar period by at least 50 percent. More reasonable assumptions would likely show that the nonprofits’ share of GDP outside of healthcare has doubled.

And, of course, GDP numbers fail to consider the nearly $800 billion gap between nonprofit total revenue — this latter figure includes donor contributions and government and business contracts, as well as commercial revenue — and direct nonprofit contribution to GDP. Of course, many of these noncommercial sources of revenue speak to shifts of service responsibility from government to nonprofits. Data for total nonprofit revenue can’t be tracked as far as GDP numbers, but a 2008 IRS study found that nonprofit sector revenue, adjusted for inflation, increased by 174 percent from 1985 to 2004, far outpacing GDP growth of 58 percent during the same period.

What has caused the growth in the nonprofit sector, in short, is not an increase in generosity. Indeed, Burke shows that total U.S. voluntary giving relative to national income was three times as high in the 1940s as in the 1990s. And even as a percentage of personal income, U.S. giving peaked at a little over 2.5 percent of income in the early 1960s before dropping back down to 2 percent, where our sector has seemed stuck ever since, be what the tax laws may be.

The main driver of nonprofit growth, in fact, has been government funding. At first gradually, then more rapidly (as one of the critical elements of the initial post-World War II model — namely, strong labor unions — eroded), nonprofits have filled the gap. Indeed, the pace of nonprofit sector growth (sixfold, relative to GDP) is almost a mirror image of the decrease of private sector unions, which have declined more than 80 percent, relative to the size of the nation’s workforce.

Of course, correlation is not causation. But as unions and the politicians that they had backed saw their power decline, they often still had enough power to shift government services to the nonprofit sector when the government cut back on service provisions. Healthcare is the most obvious area, but hardly the only one. Such a shift was bipartisan in nature, as Democrats could claim victory for preserving social programs while Republicans could claim victory for limiting the role of government.

An example of this process at work is the growth of the neighborhood-based nonprofit community development corporation (CDC). The first CDC formed in 1966; forty years later, approximately forty-six hundred CDCs exist in cities, suburbs, and rural communities across the country. Back at the start of the millennium, the late Louis Winnick, formerly of the Institute of Public Administration, perhaps too gleefully wrote in a Public Interest journal article that the “meteoric growth of CDCs and related grassroots initiatives owes much to their appeal across the political spectrum.” He continued:

The anti-statist Right saluted community development as a proxy for government, which might shield the succored poor from the dead hand of bureaucracy.…On the opposite end of the ideological spectrum, radical activists envisioned community-based organizations as weapons of political empowerment, instruments to liberate the poor from chronic neglect.

It is probably not necessary to observe here that nonprofits have been a continuing source of innovation, and that the United States would be a much colder, harsher place were it not for the intervening role of nonprofits in the wake of government cuts. But even as nonprofits win battles, the war has often been a losing one as wealth and income inequality reach record highs.

And it’s not just about money or who controls the wealth — it’s fundamentally about how people live. As James “Gus” Speth found in 2011 — basing his analysis primarily on data culled from the Organization for Economic Cooperation and Development (OECD), which ranks the status of the group’s generally wealthy member nations in manifold issue areas — the United States has the following:

• The highest poverty rate, both generally and for children;
• The greatest inequality of incomes;
• The lowest government spending as a percentage of GDP on social programs for the disadvantaged;
• The lowest number of paid holiday, annual, and maternity leaves;
• The lowest score on the UN’s index of “material well-being of children”;
• The worst score on the UN’s gender inequality index;
• The lowest social mobility;
• The highest public and private expenditure on health care as a portion of GDP, yet accompanied by the highest:
• Infant mortality rate
• Prevalence of mental health problems
• Obesity rate
• Portion of people going without health care due to cost
• Low birth weight children per capita (except for Japan)
• Consumption of anti-depressants per capita
• The shortest life expectancy at birth (except for Denmark and Portugal);
• The highest carbon dioxide emissions and water consumption per capita.

And there is more — for Speth’s complete list of woes is even longer. Of course, the United States does better in some areas, and has a respectable ranking (tied for tenth) on the overall United Nations Human Development Index. Nonetheless, the growing signs of a fraying of the U.S. economy, polity, and society as a whole have never been more obvious. Since promoting a flourishing civil society could be thought of as our sector’s raison d’être, these trends require a nonprofit sector response.

And yet nonprofits cannot do it alone. I once asked a United Way staff member about the organization’s goal to end poverty, and whether that was something the United Way could reasonably hope to achieve. The woman replied that when she had first heard that her organization had set a (then more modest) goal to cut poverty in half, she had said under her breath, “If that is possible, it should have already been done.”

Her considered response touches on something that I think in our hearts we already know: we are not going to program our way out of poverty. She added that while nonprofits — using the best data and methods — can play an essential role, ending poverty would take “multiple sectors…a social movement, the people who are in poverty playing a part.”

Read more at nonprofitquarterly.org.

Originally published at nonprofitquarterly.org on July 9, 2018.