THE GIVING BUSINESS

The IRS approves more than 99.5% of all charitable applications, creating some 50,000 new charities a year—many of them fraudulent.


With Charity for All

By Ken Stern
(Doubleday, 258 pages, $26.95)


Readers of a certain age will remember tedious elementary-school experiences with Drug Abuse Resistance Education, or D.A.R.E. Founded in 1983, D.A.R.E. was, at its height in the 1990s, used in 75% of U.S. school districts and in 54 countries around the world. There was just one problem: D.A.R.E. didn't work. Long-term studies have shown overwhelmingly that the program produced no meaningful reduction in drug use and in some cases actually made kids more likely to use drugs. Yet the nonprofit survives, having consumed an estimated $10 billion to $15 billion in donor and taxpayer funds over the past decade. (click below to read more)



As Ken Stern documents in "With Charity for All"—his survey of what ails America's nonprofit sector—stories like D.A.R.E.'s are common. From one-person startups to powerhouses like the Red Cross, charities have plenty of good intentions, slick fundraisers and promotional "happy sheets," but they often fail to solve the social problems they are intended to address. As an example, Mr. Stern highlights fashionable water charities that drill wells in Third World countries with much fanfare but are then unable to maintain them. Consequently, these charities make little progress toward their ultimate goal of reducing disease and death.

The charitable sector is also plagued by corruption and fraud. Even when nonprofits obey the letter of the law, many defy the spirit of their tax-exempt status, differing in no meaningful respect from for-profit enterprises. Among the more laughable examples are the nation's college-football bowl games, which defend their charitable status by pointing out that they donate some of their proceeds to other nonprofits. In reality, the games are cash cows for schools and broadcasters, serving "charitable" purposes about as real as Manti Te'o's girlfriend.

Many of these problems are caused by bad government. The nonprofit sector lobbies powerfully and enjoys cozy relationships with lawmakers, practicing a crony philanthropism every bit as pernicious as crony capitalism. Moreover, charities are too easy and inexpensive to launch: The IRS approves more than 99.5% of all charitable applications, creating more than 50,000 new charities each year. Once a nonprofit is started, the IRS and state regulators exert negligible oversight; even charities exposed as scams can be nearly impossible to shut down.

Consider the Association for Firefighters and Paramedics, a charity ostensibly dedicated to helping burn victims. As Mr. Stern writes, "in its most recent filings, the AFP acknowledged that of the $2.6 million it raised . . . a miserly $82,000, or about 3 percent, went to actual program expenditures." In 2010, California sued the organization for false and misleading fundraising practices. But because "the lines between illegal fraud and lawful inefficiency are so blurry," Mr. Stern notes, the state had to settle for a modest fine. The AFP remains in business.

Donors share some of the blame. As the author, a former CEO of National Public Radio, argues, misguided big-dollar benefactors meddle in operational decisions that should be left to nonprofits' administrators. Smaller-scale donors, meanwhile, are indifferent. According to one survey, 65% of donors don't research the effectiveness of the organizations to which they contribute; the remaining 35% tend to make only a cursory effort. And donors of all types are too eager to reward sob stories with happy endings—which almost any charity, no matter how fly-by-night, can produce.

Independent evaluators like Charity Navigator—which rates nonprofits on their financial health and accountability—should pick up the donors' slack but do the job poorly. This failure results from a misplaced obsession with overhead costs, taken to be a close proxy for effectiveness. But as Mr. Stern notes, many charities would achieve more with higher overhead, by making crucial investments that could improve the organizations' services and reach.

The author would like to see an investor mentality applied to the charitable sector. He cheers organizations that take a venture capitalist's approach to analyzing and funding nonprofits. He also wants donors to insist on measurable results. These are common-sense proposals and might in fact yield significant improvements. But he errs in treating an investor approach to the charitable world as a panacea when in fact many of the same problems—fraud, corruption, cronyism, ineffective ratings agencies—exist in the for-profit universe. Shareholders and members of corporate boards can meddle just as much as big donors can. Whether the aim is dividends or do-gooding, people will always want a say in what happens with their money.

Although "With Charity for All" suffers from some unnecessary repetition, imprecision and score-settling with NPR, this lack of polish doesn't diminish the book's value. It will be particularly beneficial to those conservatives whose reflexive answer to every question about how to limit government is "civil society." Conservatives' belief in charity as an alternative to the welfare state has a great deal of merit, but it also rests on two premises.

The first is that private charity is truly distinct from government. But as Mr. Stern makes clear, the charitable sector is thoroughly fused with government. Many charities exist simply as government subcontractors; indeed, it was Lyndon Johnson's War on Poverty programs that led to the explosive growth of the nonprofit sector in the 1960s and '70s. Today most estimates put direct charitable resources from government at around $500 billion a year. Hardly an alternative to the welfare state, America's charities are some of its biggest clients and can be expected to resist reform accordingly.

Conservatives also assume that America's nonprofit universe is more nimble, accountable and efficient than government. But as "With Charity for All" documents, this is wishful thinking. Conservatives seeking to diminish the state must therefore devote serious attention to the health of the charitable sector, pursuing both policy reforms and changed practices. This is a tall order; fortunately, Ken Stern offers essential guidance on where to start.