by by Britt Harwood

This year, Rhode Island has found itself in an unfortunate position at the front line of the economic crisis. The state is dealing with the collapse of more than just its traditional industries: the nonprofit sector is struggling to survive as well. While nonprofit directors face major reductions in corporate support, decreased prospects from charitable foundations and deeply indebted local governments, the unemployment rate continues to rise, placing more and more people in need of social services and charitable help. For many nonprofits, there is a bottomless pit of demand.

"Insolvent organizations need to be dissolved, weak ones need to be merged and acquired, and only the strongest should receive the stimulus they need to become more financially sound," Dr. Larry M. Gant, a professor of Social Work at the University of Michigan, told the New York Times, referring to the similarly dire nonprofit situation in Detroit. This kind of nonprofit "triage" is becoming more common as the economic crisis shrinks everyone's budgets. This year in Rhode Island, the United Way has helped over 20 entities merge part or all of their operations. Family Services of Rhode Island, for instance, consolidated the "back-office" operations of many of its agencies, including AIDS Project Rhode Island. Some nonprofits are even looking to other states for help: Planned Parenthood of Rhode Island turned over its operations to Planned Parenthood of Connecticut in September.
It's difficult to say whether the loss of small nonprofits is a tragedy, or, as many believe, a long-overdue process of weeding out underperforming organizations. Seeing both sides of the coin is an uncomfortable exercise.
Each closure creates a very real loss for local communities that rely on the work of small nonprofits. However, scholars and economists from both inside and outside the sector argue that nonprofits bleed billions of dollars each year because of inefficiency. Without competition, many argue, there is no incentive for individual nonprofits and the sector as a whole to improve itself. Following this line of reasoning, the current economic crisis is like a nonprofit ice age--only those who use resources most efficiently will survive.
The "third sector" has attracted more attention in recent years in part because it is so big. In 2006, the nonprofit sector constituted 5 percent of GDP, 8.1 percent of the economy's wages, and 9.7 percent of jobs, according to the Urban Institute's Nonprofit Almanac 2008.
The explosion of nonprofits is tied to other economic trends; The tech bubble created a new generation of billionaires in the 1990s, and those computer nerds turned around and started the Gates Foundations and Kivas of the 2000s. Exponential investment growth encouraged the Baby Boomers to give more of their savings during their lives (as opposed to the traditional practice of bequeathing wealth after death), which has increased charitable giving by a large margin. And foundations, which determine how much money they will give out each year based on the average performance of their assets over a set period of months, found themselves in a position to give a lot while their investments continually brought in high returns.
There is another trend, though, which contributed to the rise of social service organizations in particular. Since conservatives put an end to Johnsonian Great Society-era social programs in the 1980s, the government has pushed the majority of its do-gooding onto the nonprofit sector. Before the War on Poverty's massive investments in low-income families could take root, conservatives had already declared that the programs were a failure. Aghast at big-government spending on the poor, they conjured the archetype of the lazy, corrupt welfare recipient, a racist ghost that continues to haunt the Senate halls. Reagan exemplified this disastrous turn during his 1976 presidential campaign, when he told his now-infamous "Welfare Queen" story, conflating various news articles about an African American woman who was arrested for welfare fraud: "She has eighty names, thirty addresses, twelve Social Security cards and is collecting veterans' benefits on four non-existing deceased husbands," Reagan declared to his audiences. "And she is collecting Social Security on her cards. She's got Medicaid, getting food stamps, and she is collecting welfare under each of her names."
Amid these conservative polemics, the government thrust poverty onto the social sector and said, "If you care so much, you figure it out." At the federal and state level, the government basically contracts out services through grants, relying on nonprofits to fix hunger, education, joblessness, drug addiction and everything in between. Any discussion of the nonprofit sector has to acknowledge this double bind: the more the nonprofit sector grows and assumes responsibility for fixing social problems, the more the government pushes the burden off its own shoulders.
Even more disturbing is the possibility that the nonprofit sector unwittingly creates a false impression that America is making progress toward social justice. This is the "soup kitchen" problem: while the government supports the expansion and success of soup kitchens and food banks, it does not pair that effort with the kind of major social and economic changes that would eliminate poverty in the first place--nonprofits are often a treatment, not a cure.
While this government-nonprofit paradox is real, it's also circular and complicated in an endless number of ways. It fails to take into account, for instance, that the government probably shouldn't deliver direct social services; local nonprofits are much more attuned to the needs of particular communities, and the clunky program replication that characterizes government services draws endless criticism. As Lisbeth Schorr, one of the strongest voices in the nonprofit world and a professor at Harvard, continues to argue, the government kills good programs through rapid expansion and corner cutting. When it intervenes in the lives of the poor, rather than empowering communities, the government tends to be viewed as an occupying force.
Perhaps it's good, then, that nonprofits are responsible for solving the country's major social problems. The problem is that nobody knows whether or not nonprofits' attempts at social change are working--and it seems, on the macro-level, that they're not. There are certainly too many nonprofits: hundreds of thousands of tiny organizations with budgets under $500,000 provide social services, and there is little coordination or cooperation between them. With such a fragmented sector, it's impossible to know which programs have lasting social impact. The donors, government agencies and corporations that are invested in the nonprofit sector are getting impatient.
Meanwhile, the rise of the "social entrepreneurship" movement has convinced some social reformers that not-for-profit entities may not be the most effective harbingers of social change at all. The news is full of stories about new businesses that make a profit while achieving social goals. Micro-lending agencies and banks reinforce this suspicion by proving that people in extreme poverty, worldwide, can pay back loans with a tiny default rate. To channel the frustrated voice of eBay billionaire Pierre Omidyar, who has become a major player in microfinance, why give money away if the poor can pay you back?
All of these pressures have created a dangerous confusion about the nonprofit sector in the United States. We do not entrust nonprofits to alleviate poverty and deliver services; we thrust that responsibility onto the sector through neglect, apathy and governmental incompetence. Nonprofits' bread-and-butter work is trying to fix the perpetual inequalities that the government refuses to rectify through serious policy reform; if this economic crisis has taught us anything, it's that under the government's watch, the rich have gotten richer and the poor have gotten poorer for decades in the United States, and our social safety nets have made a negligible difference in the lives of average and low-income Americans.
Similarly confused are the calls for competition and market instruments to be adopted in the nonprofit sector. The sector is already competitive--nonprofits fight over a limited pool of money from foundations, donors and the government, and many more lose out than win. Critics from the private sector seem to think that just because nonprofits struggle to accomplish their missions, they must be wasting money somehow--inefficiency is the only thing, from a business perspective, that can stop an organization from producing its product.
The problem with the nonprofit sector is not insufficient competition; it's that nonprofits compete in a bizarre, backwards, incredibly chaotic market. There is no rational framework to determine how and where money in the social sector should flow.
The result of these mixed incentives is that money goes not to the organizations that are most successful at their missions, but the ones that are most successful at fundraising. In a perfect market, where each nonprofit had equal access, and where the effectiveness of each was clearly linked to an easily identifiable outcome, market forces would push nonprofits to either improve their programs or be shut down. In reality, however, the funding marketplace for nonprofits continues to be unbalanced and imprecise.
Instead of focusing on the improbable hope that competition will improve the sector, the government should take this opportunity to step in and assume a major regulatory role in the nonprofit world. An irresponsible lack of communication between federal and local government, charitable foundations, nonprofits of every size, intermediary organizations and even corporations has kept these stakeholders from holistically organizing efforts to work toward concrete social goals.
President Obama's economic stimulus bill allotted two-and-a-quarter billion dollars to support the general work of nonprofits, not including the funds he allocated to specific national nonprofits like AmeriCorps and YouthBuild. Most of that money will be distributed through governors and mayors. Those leaders should take this opportunity to fundamentally reorganize the nonprofit sector; they have more power and more need to act now than they have had before. There is no telling how much more effective the nonprofit sector could be if it were rationally coordinated, nor how much money it could save. Money from Washington has already started to flow--let's hope it's not too late to change course.

BRITT HARWOOD B'09 is currently unemployed.