I wrote it here.
Too many Americans have a romantic view of nonprofits. People on the right view nonprofits as a civil-society bulwark against big government. People on the left think that profit is inherently bad, and therefore they view nonprofits as inherently good. Both views can be questioned.
I agree. As I’m sure you know, nonprofits are facilitated by various codes in the IRS regs (e.g., 501(c)3, etc.). I would venture that the primary criteria for qualifying for nonprofit status is that there are no shareholders, and thus all of the entity’s excess of revenues over expenses (what a layperson would define as “profits”) are either paid out as compensation or donated. There are other criteria, and I believe some of these relate to the stated mission of the entity and compensation, but I believe these aren’t substantive differences relative to the for profit world. Also, I believe that the the limits on employee compensation are pretty limited. Many employees at “non profits” make a lot of money. Thus the label “non profit” is misleading in my opinion.
Second, as you probably know, the commanding heights of education and healthcare are dominated, and heavily populated, respectively, by non profits. That’s where the money and power are, so I’m not surprised that entrepreneurial capital is flocking there. Because nonprofits have political advantages relative to “for profits”, they often have competitive advantages.
Entities that can seek 501(c)(3) determination from the IRS include corporations, trusts, community chests, LLCs[1], and unincorporated associations. The overwhelming majority of 501(c)(3) organizations are nonprofit corporations.
Qualifying Purposes
In order to qualify for 501(c)(3) status, an entity must be organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals.
http://501c3.org/what-is-a-501c3/
It’s not just M&A activity that keeps costs high in healthcare, it’s nonsense like this, also:
http://en.wikipedia.org/wiki/Certificate_of_need
I suppose it would have been too much to ask for the visionaries who drafted the Affordable Care Act to have done something to address the issue in the 2000+ odd pages of legislation they rammed through Congress. But apparently, in the mind of the average progressive, competition in health insurance is good, because it leads to lower prices, but competition in actual healthcare services is bad because it could lead to cost-cutting and thus lower quality. Even though monopolists aren’t exactly renowned for providing high quality services in other industries…but I guess asking people to make that mental connection is a bridge too far. Okay, I’m ranting now, too, so…..
ColoComment, I agree with your post. What I intended to convey was that, if you talk to many defenders of the idea of “nonprofits” they will say that these organizations are altruistic because there are no shareholders that stand to profit. What I’m saying is that with both for-profits and nonprofit, the concepts of employer comp and shareholder dividends/cap gains are very blurred. Consequently nonprofit organization “stakeholders” (most of whom are employees) can become very rich and/or powerful. This is even more true today than in the past because there is much back scratching (I.e. cronyism) and career migration between nonprofits, for-profits and government.
I hope you caught the irony that, at the end of the article, the “further reading” links to your piece on “Congress Should Support Charter Schools,” which are of course state funded non-profits!
-Neerav
I take exception with using hospitals and universities as representative of the nonprofit sector. Yes, they are nonprofits, but are also vastly different from the other thousands of charitable nonprofits that help people in need and improve the quality of life for everyone. They not only help abused and neglected children, the elderly, and people with mental illnesses. They provide arts in our communities and help keep our environment clean. And, most of them are struggling to survive. They are consistently paid less than the actual cost of the services they provide by government, and many donors don’t want their contributions to pay for any necessary administrative costs either–things that would allow them to be more efficient and effective.
The notion that they are only responsible to donors could not be farther from reality. Community nonprofits undergo numerous audits, inspections, program reviews, etc. every year by multiple entities. They are not high paid. Right now many are trying to figure out how they are going to be able to pay increases in the minimum wage since the reimbursements for their services aren’t covering wages now. Perhaps as a 501(c)(3) that chooses to rely primarily on private donations and does not take government funds, the Cato Institute lacks an understanding of what most nonprofits have to deal with on a daily basis.
To say people in nonprofits are anti-profit is simply an inaccurate characterization as well. In 30 years I have yet to meet someone who thinks for- profit companies are inherently bad. What we believe is that there are some things so basic and important that they should not be profit driven, but there is a place in our society for both profit and nonprofit businesses.
If you want to rant about hospitals and universities, that’s fine. But, rant about hospitals and universities, not nonprofits. Most are mission driven and work hard every day to make this world a better place for everyone.
“Most are mission driven and work hard every day to make this world a better place for everyone.”
Yes, but this is a perfect illustration of the intention heuristic, is it not? Non-profits are mission driven, but that doesn’t, in and of itself, mean that they’re generally more effective at improving people’s lives than for-profit companies. But because they are mission driven, people generally assume they’re efficacious, and actually do make the world a better place for everyone. As someone who works in the Service-Learning field of higher education, I see non-profits privileged over for-profit companies day after day.
I think there is clearly a place for nonprofit organizations, but it wrong to assume they are “better” in some way than for-profit organizations, or that working for a non-profit is a more noble calling (as an aside, how can we say with a straight face “public service”? the real public service is providing goods and services people want, through the marketplace).
As others have emphasized (I think Dr. Kling too), the non-profit aims to make donors happy. The for-profit aims to make customers happy (because that is usually the way to generate profit to provide investors a return).
Both forms play an important role, but I don’t know how we say there are “too few nonprofits” or “too many.”
i. Consumption taxes discourage spending and favor hoarding of capital.
ii. Income taxes discourage income and favor rapid spending.
My sense is that we mainly use (ii) above. While (i) encourages what I think is better for society longterm, switching to mainly using (i) would be as easy as teaching fish to breath air.