Herein I'm re-stating Stern's 5 myths in my own words, with comments that may seem very bah-humbug and un-Christian, but so be it:
1. Charities and non-profits are founded, primarily, to meet the ego needs of the rich and emotional needs of the aggrieved, and secondarily, to help the needy.
How many celebrities and professional athletes have their own charities? How good do you think most of them are? Enough said.And then think about what happens when a tragedy like a deadly illness strikes a well-to-do family: they immediately establish a memorial foundation or charity to help fight that illness, or help other victims of that illness. It's more about making those people feel like their loss wasn't in vain, and that they must save somebody else since they couldn't save their loved one. Sorry for being so un-PC; and I acknowledge that such charities do some good; but such non-profits are usually more about the grief and "making sense of it all" of the aggrieved family than they are about curing diseases and social ills. The government is better at both -- the Centers for Disease Control, government-funded research universities, passing commonsense laws, etc.
2. It doesn't really matter what your charity does, as long as it's "good," or how effective it is in its stated mission, as long as it does it cheaply (i.e., low overhead).
We don't judge businesses or government agencies by this yardstick, so why should we think that a charity's primary mission is to do things on the cheap? I'll tell you why: because we're cheapskates who are quite comfortable with our (mostly small) private charities working on the fringes and margins of our society, making feel-good, good-faith efforts to do things but not really succeeding.If we really cared about effectiveness, we would acknowledge that there is way too much overlap/redundancy in charities, and that size and economies of scale matter -- and we would actually demand monitoring of results by charities! ... But if we were to acknowledge that economies of scale matter and demand accounting for results, then we'd be forced to acknowledge that our government is better in both regards.
3. It is a truism that higher income taxes discourage charitable giving; and charitable giving should be deducted from the giver's income taxes because he is partially replacing the government safety net (that depends on his income taxes) with his wise and effective choice in how to help the poor.
Except both of these assumptions are empirically false.
4. It's OK for a charity to have hundreds of millions of dollars in the bank as long as it's not-for-profit; meanwhile, the median salary of a U.S. charity's executive director is $133,000.
I'm not actually saying that big charities are bad, I'm just saying that most charitable givers don't like to think about it. In fact, many prefer giving to "small" charities for the exact reason that they are resource-starved. But think about that logic for a moment. Does "smaller is better" make any sense if the idea is to muster a lot of resources and deploy them in the most efficient way to achieve desired results?Again, neither business nor governments tend to think this way. Very few analysts say that McDonald's needs to be smaller in order to feed more people cheaply. The Pentagon doesn't tell Congress it can keep us safer if our armed forces are "leaner" and "hungrier."
5. Good luck finding an effective and worthwhile charity to support -- it ain't easy!
Since there are so many registered charities out there and scant data on their effectiveness (because no donors demand it), unless you know the charity personally and its work... you're probably just shooting in the dark, making yourself feel good.
By Ken Stern
December 27, 2012 | Washington Post
The last few days of the year may be a time of celebration and indulgence, but it is also when many people think about helping others. Though much of the roughly $240 billion in individual charitable contributions comes in December, these donations are often made hastily, based on poor information. Before writing those end-of-the-year checks, here are some things to remember about how charities work and how to evaluate them.
1. Charities are principally dedicated to serving the poor and needy.
The term “charity” is associated with helping the poor and downtrodden, but American charities — 1.1 million organizations with $1.5 trillion in annual revenue — make up a large, rapidly growing economic sector that includes health care, higher education, scientific research, social services and the arts. There is incredible diversity among charities, from tiny neighborhood food banks to multi-state hospital chains boasting lavish concierge services and million-dollar salaries for executives. In fact, hospitals are the largest component of the U.S. charitable sector, but they are more likely to be profitable than for-profit hospitals and aren’t much more likely to serve the needy.
It’s also astonishingly easy to start a charity. The Internal Revenue Service approves more than 99.5 percent of charitable applications, often in very short order. Because of this, the sector includes more than a few organizations that have little connection to common notions of doing good: the Sugar Bowl, the U.S. Golf Association, the Renegade Roller Derby team in Bend, Ore., and the All Colorado Beer Festival, just to name a few.
2. Donors should reward charities that have low overhead.
The notion that charities should put as much money as possible into services and as little as possible into overhead expenses is widely accepted. Overhead ratios, which measure the relationship between a charity’s income and expenses, are one factor in popular rating systems such as Charity Navigator and the Better Business Bureau’s Wise Giving Alliance. Charity Navigator, for example, suggests that administrative spending greater than 30 percent is unreasonable, and it rewards its highest ranking to organizations that put less than 15 percent of their resources toward such costs.
Low overhead has become a point of pride — and marketing — for charities such as the Brother’s Brother Foundation, a Pittsburgh-based relief organization whose Web site boasts that “less than 1% of the value of donations [is] used for overhead.”
But charities need to spend on research, training and financial systems, all classified as “overhead,” to be effective. Those that shortchange these investments — and many do — are less likely to achieve their goals. The American Red Cross, for instance, struggled during Hurricanes Katrina and Sandy in part because it hadn’t invested enough in the infrastructure necessary to handle complex emergency relief.
That lack of investment is partly due to public pressure, rather than a shortage of funding. When then-Red Cross chief executive Bernadine Healy tried to appropriate unused money from the 9/11 Liberty Fund to correct weaknesses in the group’s broader emergency response capacity, she was forced to resign.
3. Tax incentives are critical to charitable giving.
People with income in the lowest quintile give a higher percentage of their earnings to charity than do more wealthy Americans. This pattern persists despite the fact that low earners have less disposable income and rarely take advantage of itemized tax deductions for charitable donations. Sure, some contributions are tax-driven: Almost a quarter of online giving occurs in the last two days of the year as taxpayers rush to qualify for deductions. But Americans’ generosity may be more resistant to changes in the tax laws than most people think.
According to Congress’s Joint Committee on Taxation, the charitable tax deduction will cost the federal government $230 billion from 2010 to 2014. Some economists believe that charities would lose less than that amount if the exemption were eliminated or modified, since people give for many reasons unrelated to tax incentives. Because of the perceived unfairness and inefficiency of the current system, many analysts, including at the Congressional Budget Office, have begun to look at substantial changes, from establishing floors or ceilings for deductions (sometimes in combination with making incentives available to non-itemizers) all the way up to eliminating the deduction.
4. Nonprofits are not profitable.
In 2010, U.S. charities reported more than $2.7 trillion in assets. Even putting aside the multibillion-dollar endowments of Harvard and Yale universities, many lesser-known charities have substantial war chests. In 2007, Ascension Health, a large Midwest charity hospital chain, reported reserves of $7.4 billion, more than twice the cash on hand at the Walt Disney Co.
Some donors look for small, underfunded charities, thinking their gifts will make a bigger difference. But that is not necessarily an effective strategy. Many of the charities with strong track records in delivering results — organizations such as Youth Villages of Memphis and the Nature Conservancy — are also quite good at building financial reserves. Charities like these identify clear goals and have third parties evaluate their work, practices that are more important than how much they have in the bank.
5. It is easy to find a good charity to support.
In fact, it is enormously difficult. Not only is there considerable confusion among charities — for example, there are more than 60,000 with the word “veteran” in their names — there is little information on groups’ effectiveness. The mutual fund industry employs 159,000 people to help investors make good choices. But there are fewer than 100 people nationwide whose jobs are to help the giving public make wise donations. So what is a conscientious donor to do?
Put in the work. On average, Americans spend more time watching television in one day than they do researching charities in an entire year. Finding good charities takes time. It means using the few organizations, such as GiveWell, that do in-depth studies of charities’ effectiveness. And it means remembering that the best organizations, charitable or otherwise, are built on more than a good story or a charismatic leader.
As Warren Buffett once said: “I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.” That’s good advice when trying to make sure donated dollars actually do good.
