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Case for Charity

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So as listeners may know by now, my year-long challenge was to thoughtfully research and choose some sort of charity to get involved with. I left it a little open-ended but kind of knew in the back of my mind that this mean donating money to something. I feel like life is good and I wanted to be the type of ‘good guy’ that does a little more than buy gift wrap from the kids that come to the door. Support something I believe in, and something that will make some sort of difference.
charity-foundation-1
Sounds like a great goal, and something that’s not that difficult to take some action on. We live in an internet world where it should be super easy for me to find something worth giving to and being able to follow/track etc. But every time I sat down to try and find something worthwhile, I get super overwhelmed. Turns out that there are a LOT of charities out there. Literally, over a million in the united states.

So how about some trivia about giving before we get started for the year 2012 in the US:
What percentage of households gave to charity? 88%
Total amount given by Americans? $316B (about 2% of GDP)
How much of that was from individuals? 72%
Average household contribution? Around $2K
Biggest recipients: Religion 32%, Education 13%, human services 12%, grantmaking foundations 9%

Charitable Index to compare to other countries
So this is a bigger space than I thought, and so when I sat down and googled ‘how to choose a charity to donate to,’ turns out it’s way harder than expected. I mean where else are you trying to choose between 1M plus choices? When deciding on a car or a phone or something, you’ve got at the most a few hundred to choose from.

So I did what all good guys do when they are faced with a problem like this, I procrastinated… And I was unsure of how to proceed, I decided to take a step back and examine my own views of charity and what I wanted to accomplish by giving. My favorite podcast, EconTalk, had a serendipitous podcast where Russ Roberts interviewed Dan Palotta about his book ‘Uncharitable’ and I decided to download and have a read myself. It did a great job of honestly changing how I think about giving and how we think about the charitable institutions in America and that’s what I’d like to talk about today.

The overall thesis of the podcast/book really hit home for me after trying to find a good charity to donate to. When I initially sat down and ceremoniously cracked my knuckles before googling ‘Best charities to donate to’ I was met with a bunch of sites that evaluated how ‘efficient’ charities were. There is a conception that all that matters with a charity is what percentage of donated dollars go directly to the cause. If I’m donating a dollar, I want most of that to go to the cause itself, rather than paying the employees’ salaries, or for fancy advertising spreads. I want my money to actually be put to work. Low overhead, and high efficiency have a huge premium when choosing a charity.

Palotta’s thesis is in direct contradiction with this seemingly well-placed intention. He argues in “Uncharitable,” that if we really want charities to grow to the point that they can enact real global impact and change with some of the world’s toughest problems, we need to let them use the tools and tactics that we know work for building growing organizations that can get big things done. This is deliberately a little vague, but we’ll get more specific with the 5 main things he thinks are a problem with the way charities are run today.

Just for a brief background on Palotta, he is somewhat of a ‘philanthropic entrepreneur.’ His organization basically invented the breast cancer 3-day walks and other events like it. Big events that brought a ton of awareness, and much more importantly, a ton of money to charitable causes. So I’m going to go through the 5 things that he says we have wrong when we think about charity. His book argues that this goes back to our puritan roots in colonial America.

First Error: Constraints on Compensation –
This was what really drew me to the topic and got me to buy the book because it reminded me of the conversation we had a couple years ago about how much we pay teachers. Here are some of the things that we say about compensation of people who work in charitable fields:
– There should be a limited amount of money people can make in charity
– People who want to make money off of charities aren’t doing it for the right reasons, they should do it out of the goodness of their hearts.
– People who donate to charities make a sacrifice, so people who work there should to.

There are a bunch more, but let’s just take these in order to give you a flavor of what Palotta is talking about. #1, that there should be a limited amount someone can make in charity. Limiting the compensation logically places a limit on outcomes. A quote from a charity professional that Palotta cites: “The nonprofit sector is not the for-profit sector… I don’t think we need to pay someone $350,000 to get the best and the brightest” Palotta asks, “Is there one kind of ‘best and brightest’ who is worth $350,000 and should work for the needy, and another kind of ‘best and brightest’ who is worth many times more and should not work for the needy?

Palotta goes on to compare the salaries of the highest paid CEOs of some major health insurance companies to the salaries of the highest paid CEOs of health and human services charity CEOs. (2002 numbers): CEO of Oxford Health Plans $76M. CEO of Stowers Institute: $717K. Could have a whole podcast on this but we don’t have time. It’s the same general argument that we talked about with teachers. If you place some artificial limit on what someone can make in a certain profession, you aren’t going to attract the best and brightest. So by extension, the best and brightest CEOs are naturally going to gravitate to the private sector instead of the non-profit.

“People should work for charities out of the goodness of their hearts.” This implies that making money, and doing something you’re passionate about are mutually exclusive. You can either a. make money, or b. help the needy. Palotta asks the question, ‘So does this mean that upper management of Apple like Steve Jobs isn’t passionate about creating an incredible technology product that touches millions of lives? Or that Bill Gates wasn’t passionate about Microsoft and making the PC a reality?” When you say it like that, it becomes easy to see, that ‘hey, you can be passionate about anything you do AND make money. Self deprivation is not a pre-requisite to do something you’re passionate and care deeply about.

“People who donate to charities sacrifice, so the people that work there should to.” This is where Palotta flexes his economics biceps because he points out that this sentiment is talking about two different markets. One is the labor market, and one is the gift giving market, and a sacrifice means something different in both places. If I’m trying to decide to sacrifice $1000 to donate to a charity, that’s a fundamentally different than someone deciding to choose a career in non-profit which will certainly affect their earning potential for providing for their family.

So that’s the first error in ideology of charity, that we need to have a limit on compensation. And I spent the most time on that one because I feel it’s the most important and was the most jarring to me. Second one is a little more fun, that charities are discouraged from taking risks. Businesses do this all the time. They try off-the-wall products until they hit the jackpot, they try edgy marketing schemes. Pharmaceutical companies spend millions on R&D to develop drugs that may never pan out.

But we want charities to be different. We don’t want to feel like our dollar is going to waste. Palotta gives the example of the charity “Hands Across America” to raise money for hunger and homelessness. They had a goal to raise $50M for the cause. The event and coordination cost $17M to produce, and then they only raised $34M for the cause, so only like $16M went to the cause. They were absolutely torn apart by the media.

Palotta holds this up as an organization that tried something new, didn’t hit their goal, (They still donated $15M to homelessness that wouldn’t have been there before) and were lambasted for it. It’s indicative of a culture that frowns on risk. If I’m a charity and I know that I absolutely need to get a certain rate of return, I’m going to stick to what is safe, and not necessarily think outside the box and go for a huge win.

The third assumption follows nicely from this one, that there is an overall discouragement of long-term vision in the charitable industry. Donors expect their money to be used for current programs, rather than to be put into reserve. The example is given of the September 11th attacks. There was a huge outpouring of donations and the Red Cross wanted to set aside a portion of those for future disasters. Even saying that you kind of bristle because you want your money going to the cause you donated to.
The problem is that that is not how successful organizations work. They don’t simply spend every bit of money they get in. They invest in future programs and initiatives. They have vision statements and goals that last longer than just the current budgetary year.

A really powerful example Palotta brings up is Amazon.com. It was founded in 1994 but didn’t post a profit until 2002. 8 years! One early Amazon investor was quoted as saying “What few people understood was that in the first five years, every time there was a trade-off between making more money or growing faster, we grew faster.” Scaling was important to Amazon and preparing for future growth. Palotta imagines how we would feel about a charity that did the following:
– We want to create a huge charity to end hunger in Malawi within 15 years.
– First 5 years; raise tens of millions for the cause. None of these funds will go directly to help the hungry, but will create this community of constituents and then in the next 5 years do a huge $50M advertising campaign to raise serious money. We’re talking ads during the superbowl etc. to raise $2B.
– Then once we have $2B it’s 5 years of investing hundreds of millions per year directly in Malawi fighting the cause.

This scenario sounds awesome, but it means that for those first 10 years, none of the donated funds would actually go to the hungry. The media would tear it apart, and there would be huge public outcry. So to avoid this, charities end up raising a few thousand dollars a year and never get to that huge critical mass where they could actually do something valuable.

Which transitions into assumption number 4 – discouragement of paid advertising. I think by now you know where Palotta is going with this thesis, so I’ll just give a couple stats here. The mini-thesis here is charities are competing for your dollar with everything else. Economics is about trade-offs right? Should I buy the Iphone 6 for $600, or should I get a refurbished Iphone 5 for $400 and donate $200 to charity? I wonder who advertises more and asks me to make that decision?

The 2005 Advertising budget for a few popular charities:
Save the Children: $6.4M
Amnesty International: $40K
American Foundation for Aids Research: $7K
Compared to some popular consumer companies:
GM: $4.3B
AT&T: $2.4B
McDonalds: $1.6B

These numbers speak to the fact again that we want our money going directly to the cause, not to something that might bring in way more money and attention to the cause etc. I don’t want my money going to ad space! But guess what? That’s how you build brand awareness, loyalty, value. These are tools that we, as a society, don’t want the non-profit sector to use!

Finally, there is an implicit prohibition of investment returns on charity. This one I think is the most out there with Palotta’s thesis, but is a little bit fun to talk through. Basically he says that currently charities are forced to rely on pure altruism in their fundraising. People donate expecting -100% return on their donation. This is great for altruistic people, but is not great for high net worth individuals and institutions. What if, as in the scenario we laid out for the amazon.com model of a charity, I offered an investor shares of the charity for their INVESTMENT (not donation). If I believe that their marketing campaign will work (just like I believed that the amazon.com model would work), I may be apt to invest some of my retirement portfolio in the organization.

This sounds a bit like a Ponzi scheme to me in which future donor dollars will be used to pay off initial investors, but the overall gist of the argument still rings true, and brings me back to the original claim that Palotta’s trying to make; that we philosophically don’t let charities use the same tools as the for-profit sector, and this is a big reason why this sector doesn’t grow and innovate like the private sector does.

So I’m not sure where that technically leaves me in my challenge. But I certainly am looking at the whole non-profit sector in a new light. I’m not going to be distracted by overhead and efficiency ratios from these online tools, but more focused on charities that have a cool vision and maybe even some proven results.

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