Arnold Kling  

The Nonprofit Boom

Why is Africa Still Under-deve... Odyssey Years...

Eugene Steuerle writes,

in a few decades we'll find that most people will produce services and products that could be produced as easily in the nonprofit sector as in the profit-making one. Some cities like the District are harbingers of that new reality. It's not just that nonprofits employ 25 percent of private-sector workers in the city and more than 10 percent in the region, according to a report of the Nonprofit Roundtable of Greater Washington. Roughly half of the area's private-sector workers are in fields related to information and health care. Add in government workers, and these fields dominate.

For several years, my line has been, "I'm hoping that one of my daughters works for a profit." I thought that their goal of working for non-profits reflected misplaced idealism. Instead, it apparently represents catching the wave of business trends.

In fact, daughter #2's first job is as a research assistant for what amounts to a consulting firm organized as a nonprofit. It shows that Steuerle is correct about the fuzzy boundary between profit and nonprofit.

Why the trend toward nonprofits? Steuerle says that on the demand side, as we get wealthier, there is more government spending, some of which is channeled through nonprofits, and also more private charitable spending.

On the supply side, the information-intensive white-collar sector does not require much in the way of capital. If you don't need investors, then you do not need to organize as a for-profit corporation. I would add that if you organize as a nonprofit then you can avoid paying corporate income taxes, which are unusually high in this country.

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COMMENTS (9 to date)
Karl Smith writes:

I've actually been thinking about this causally for a while. As an undergrad I wondered why consulting firms were set up as for-profit entities.

I imagined a firm where the residual claimant was an African Relief Fund. The firm would still pay market wages at the bottom of the pay scale and near market at the top. Rather than being Partners the head honchos would be Principles within the non-profit and receive incentive compensation rather than a cut of the profits. Money wise it could work out to being the same structure just a little less take home.

Giving the top earners a bit of a haircut didn't seem like a big deal, most top earners give generously to charity anyway.

The difference is a few people might know that you gave X to this charity or Y to that charity, but everyone will know that you are a Principle at that firm that feeds starving children.

Moreover, campus recruiting would get a boost because of the distinction of being a business that benefits the poorest people on earth.

In short, in an environment where human capital is the primary source of capital, the distinction between profit and non-profit seems to be loose and there are definite advantages PR wise to being non-profit.

Dan Weber writes:

You can change a for-profit firm into a non-profit by just transforming would normally be called "profits" (and distributed to the shareholders) into "salary" (and distributed to the executives).

It's often more honest than the sham that most boards-of-directors are. And it gets you a whole bunch of suckers to give you their business.

Milton Friedman always referred to the 'taxed and non-taxed sectors'.

Nathan Smith writes:

Some labor economists have distinguished the "intrinsic rewards" (love of the work itself) and the "extrinsic rewards" (money, benefits) from working.

By working for a non-profit, you may sacrifice some extrinsic rewards for some intrinsic rewards. As people get more and more affluent, it makes sense that more and more people will be willing to make that trade-off.

I think of non-profits as the "purpose-driven voluntary sector." It's distinct from the pure profit sector, officially dedicated to profits, and the government sector, which is ultimately financed through coercion. If more and more public goods can be provided through the purpose-driven voluntary sector, government can shrink.

Dan Weber writes:

Oh, right, Nathan reminds me that by funneling your profits to your executives instead of your shareholders, you can also get people to work for less salary.

Bill Stepp writes:

For crying out loud, the solution is to abolish the Tax State. Then non-profits will go the way of the dinosaur, no one will pay a tax-tribute, and liberty and justice will prevail. And innovation and economic growth will boom.

At a simplistic level, non-profit vs. for-profit is merely an IRS 'designation' for taxes...and there is an increasing trend to apply the same biz principles and practices to the non-profit side...and as the 40/50yr olds (and some 20 and 30's!) make their mark and move into philanthropy, the level of accountability for non-profits - and hopefully the level of impact, should increase dramatically....

liberty writes:

"Why the trend toward nonprofits? Steuerle says that on the demand side, as we get wealthier, there is more government spending, some of which is channeled through nonprofits, and also more private charitable spending. "

Aren't we really talking about public sector firms then? If they don't have a profit motive and are subsidized by government, they can't be called non-profit, really. They should be called what they are: state firms.

If you want to ask about the reason for a trend toward non-profit, I think you need to separate two trends: the trend toward nationalization or subsidy-driven public sector employment and the trend toward private non-profits. The two could be diverging, for all we know.

Also: the trend within the DC metro area may be quite different from the national trend. Obviously.

Chris writes:

Isn't looking at DC a bit misleading? most non-profits are looking for handouts and where better to get them than DC?

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