Posts Tagged ‘markets’
I got a letter from my health insurance company today saying that my employer and I would be getting a rebate because under Obamacare, insurers are required to spend at least 85% of premiums on hospitals and health care services, and no more than 15% on “administrative costs such as salaries, sales, and advertising.”
The kicker: just for New York State, the amount of customer premiums for this one insurer in this one year is $2.2 billion. That would have put it at number 27 in the list of top 50 foundations by assets in 2011. So 0.7% of those premiums is about one-seventh of what that hypothetical foundation’s payout would be – call it one grant program. $15 million, give or take. (Now whether I as a policyholder ever see a dime of that rebate is an open question: my employer subsidizes my premiums, so they may decide to use whatever we get toward defraying those costs.)
I bring that up just as another reminder of the scale of philanthropy relative to other parts of the economy. And to observe that in the aggregate, even relatively small-seeming instances of inefficiency (missing the target by less than 1%!) can conceal some serious dollars.
But the larger issue is, do we want an overhead ratio in healthcare, is that actually a useful thing? For once, the nonprofit sector may be ahead of the game relative to other sectors. I worry we may have to really evangelize some of this thinking beyond our own sector – where it’s hard enough to get the word around. And it’s a tough sell in healthcare – hard to argue that we need more hospital marking. It’ll be interesting to monitor how this “Medical Loss Ratio”, aka the “85/15 rule”, plays out in practice. God, I hope the authors of the healthcare bill didn’t get that number from nonprofit overhead ratios….
Oh, and like everyone in philanthropy, I read and thought and talked about Peter Buffett’s blog on the “Charitable-Industrial Complex.” For me the definitive word on this is from Zack Exley here. The upshot: the unglamorous way to reduce poverty quickly is aggressive state-led development. Viva varieties of capitalism!
I’m pretty sure that it’s a spam account, but one of my Twitter followers seems to exist to spew out random questions about fundraising and the nonprofit sector, and solicit people to contribute answers. At the risk of further spam, I’ll take the bait and answer a question that showed up in my feed and piqued my interest:
“What if every company were non-profit including Wal-mart?”
My favorite kind of question, one that invites consideration of an alternate reality, in a way that questions the premises of our current reality. Lot of good sci-fi out of that conceit. (RIP Fringe, so good until the last season.)
There are different ways to answer this, but I’ll choose this approach: what if every company, instead of returning value to shareholders, were obligated to reinvest surplus in the mission?
To start with, would all companies be private? Would there be any reason to take a company public? There would if you thought that other people might like to share the risk of ownership with you because they believe in the mission. They might risk losing their money if the business goes belly-up. But wait – how is that any different from receiving donations from individuals? They don’t expect to get a financial return – in essence, they’re sacrificing that money, in return for the hope of social impact. (See last week’s post on the three returns and “third heat” of impact investing.)
Are we just talking about membership organizations, where people pay a certain amount to belong to an institution, like a film society or a museum? No, they’re not assuming any risk for anything other than their own money. Someone has to be accountable for the assets of the organization.
So a public non-profit company would be…just a regular non-profit. What would a private non-profit company be? A foundation? No, those have particular obligations to pay out 5% of their assets. And they’re insulated from market pressures other than on their endowments. A private non-profit company would have owners who would directly assume the risk of failure if expenses exceed revenues to the point where all assets are depleted. It would have beneficiaries, and purchasers of its services, but only a relatively small number of owners assuming the risk. And they would do so without expecting value returned to them from a surplus.
So this seems to come down to ownership and risk. What’s different about a world where all companies are non-profits is that, at first blush, it’s not clear why anyone would start a company, or try to grow it. But I suspect if we look beyond the profit motive, there would be other reasons to do so. For another post….
Last time, I was fretting about the counter-majoritarian nature of philanthropy, coming to the conclusion that maybe it’s not such a bad thing. There are such things as democratic failures, and it can be good to have a corrective element in the ecosystem – albeit not in a dominant position.
The latest kerfuffle in the nonprofit space is about the for-profit company GOOD buying the non-profit social network Jumo. People have fretted about it, said “get used to it,” said, “actually, there’s something more interesting going on over here.” There are valid points made in this discussion about getting beyond the superficial discussion of tax status.
But the real issue is remembering why there’s a “nonprofit” sector in the first place (however you want to label it). And that’s because there are some things for which there are no “natural” markets. Robert Kuttner pointed this out years ago, that the “markets” for health care and labor are fundamentally different from markets for other kinds of commodities because the former are about human beings and the latter are generally about physical objects. Human beings have a unique moral status, so it simply doesn’t work to treat them like any other widget, no matter what the textbooks say. Those markets will always be different and always inherently political.
It follows that there are areas of human endeavor where market dynamics will not function in the same way. Think of it like the upside-down mountains in Avatar whose magnetic field throws off conventional instruments. Our basic assumptions about how markets function – rational actors optimizing utility defined in terms of immediate material gain, etc – are called into question. Our tools – our business plans – don’t work in the same way; input A, instead of generating output A, leads to output Q. Behavioral economics helps here, but there’s something more needed.
I’ve written about the imp of the perverse, that dark impulse that leads people to do things against their own self-interest. And about how our theories of human behavior are just so boring.
The problem is, there are just some areas of human endeavor where money isn’t the point. The profit motive isn’t enough to motivate action. Something more has to get people to do it. And that something else is like a flame; it can grow, it can spread, but it can also go out. It may endure as embers, waiting to be rekindled, but its going out spreads a chill, dims light, causes the huddled crowd to disperse.
The [insert a better word for nonprofit] sector is where that flame is kindled. My mentor Jeff Weintraub points out that what gets called “civil society” or the third sector actually has two components: civil society, the realm of private business for private gain, and political society, the realm of collective action for collective gain that is not as all-encompassing at the state. Political society is where advocacy happens, where organizing happens, where (shudder) political parties exist. We conflate civil society and political society – however we label them – at our peril.
One of my two questions behind this blog is “What is the role of philanthropy in a democratic society?” I struggle with the idea that philanthropy, with its privileging of the perspective of a particular donor and her/his trustees, has a fundamentally undemocratic element.
At the same time, I’m sure that, against the tendency of the day to conflate the two, that democracy and the market are not automatically compatible – that in some respects they are in fundamental contradiction.
But I’m wondering, what if philanthropy, with its counter-majoritarian tendencies, is a corrective to both the market and democracy?
Let me explain. I think people want to say democracy and the market are compatible because both are about the will of the majority. Get more than 50% of the votes, you get to be President. This creates a “mandate.” Or something. In the market, if a product or service becomes popular, passes some kind of tipping point of adoption, it wins. I don’t know how well Google Plus is doing, but I know I haven’t been on it in at least a week, and I spend at least 20 minutes a day on Facebook. People go where the people are; winners keep winning; you have to have money to make money; etc. “Massification” is an important dynamic in market economies – we call it “scaling” in the nonprofit sector.
Philanthropy has counter-majoritarian tendencies, in two ways.
One of the main roles often ascribed to philanthropy is to be a “laboratory” for social programs. Private funders can take chances on risky new ventures, and when they prove their mettle, promote them to public funders and ask that they be adopted as part of public policy. So goes the theory.
There’s something counter-majoritarian about this. Nobody put it to a vote whether paying people to stay in school was a good idea before cities like New York City tried it. But it may turn out to be a good thing.
The other way philanthropy can be counter-majoritarian is in protecting the rights of minorities. Foundations like Gill and Arcus fund LGBT rights, and with a lot of actors and advocates pushing, pushing, pushing in municipalities and states over many years, as well as in popular culture, the needle starts to move on majority acceptance of gay marriage. The funders are far from the only actors promoting this, but they’re part of a movement and help fuel it. To protect the rights of a minority.
The first of these roles is about correcting market failures, the second is about correcting, I guess you could call them democratic failures.
So perhaps one of the roles of philanthropy in a democratic society is precisely to be counter-majoritarian. It’s undemocratic on one level, but on another, it’s about perfecting democracy. Hunh.
Of the vinyl I’m purchased since getting a turntable for my birthday last December (thanks dear!), the vast majority has been “vintage” – used records. In part that’s because I’ve long been in an older-music period (most of my records are either music from the 30s or albums recorded between the late 60s and early 80s), but in part it’s because I enjoy the idea of rescuing a physical artifact from the flotsam of history. I prefer to take an object already in circulation and gain value from it rather than call another object into being by purchasing something new. At least with records.
And I choose where to shop with care as well. There’s a cluster of record stores within a 10-block radius of Bleecker and 7th Avenue South (a quiet culinary mecca, with John’s Pizza, L’Arte del Gelato, Centro Vinoteca, Ottomanelli’s butcher shop, and a Five Guys all within sight of the same intersection). But my true vinyl source, the place that inspired me to ask for a turntable as a birthday present in the first place, is Toonerville Trolley Records in Williamstown, MA, where I went to college (and met my wife). We went up for our annual summer visit (Porches Inn, MassMoCA, W’town Theater Festival), and I had my fingers crossed that the same dude who ran the place when I got there (gulp) 20 years ago hadn’t decided to pack it in since last October. He hadn’t. (Whew.) I spent at least an hour in there and staggered out with a boxful of vinyl. (As I write this, side 2 of Ella Fitzgerald Sings the Gershwin Songbook is spinning and crackling its way along.)
I’ve written about a nostalgic mode of philanthropy. What I’m describing is a nostalgic mode of commerce. I’ve yet to read the new book Retromania on how pop music is eating itself by being obsessed with the past, but as far as music appreciation, retromania is fine with me – and extends not just to the music and artists, but the physical medium of receiving them. I like the idea of an artifact that was originally purchased and enjoyed 30 years ago providing pleasure again today. It’s a flat black time machine.
Sometimes vinyl is cheaper (8 bucks for this 2-record, 30-song Ella/Gershwin set is a pretty good deal compared to iTunes), and sometimes, especially with new vinyl, it’s quite a bit more expensive. One of my rare new vinyl purchases was the latest Belle and Sebastian. It came with a code for a download of the full record plus two bonus tracks, and the gatefold sleeve was sumptuous, a modest art object of its own. Totally worth the markup ($17 at Kim’s Video & Music in the East Village).
Alongside my recent infatuation with vinyl, my wife and I have been doing the locavore shopping and cooking thing for a few years now. (While it’s 95% her, tonight I perfected the recipe for farmer’s market ají casero). And I’ve often wondered – if locavores can create a market for local agriculture, why can’t there be a market for local manufacture? Hello, job creation!
Now here’s what I’m getting at – and where philanthropy might have a role to play. Can we tap into the nostalgic mode of commerce – and other emotional-commercial narratives – to foster a locavorism for manufactured goods? (Locamechanism?) This is beyond my beloved records, which are made wherever. But can we tap into that kind of nostalgia to get people to buy local goods, even if they’re more expensive, so as to generate good local jobs, particularly blue-collar ones?
The L3C, a low-profit limited liability corporation, is an intriguing idea for helping to do this – and private foundations can have a role by making program-related investments. Bob Lang of Americans for Community Development, whom I met at a conference earlier this year, has been tirelessly working on this new vehicle for years. The intriguing case is using it to foster North Carolina’s flagging furniture industry by providing a way for charitably inclined investors like private foundations, who could be willing to forgo short-term financial returns in the interest of long-term community benefit, to jumpstart that industry by providing “patient capital” that helps them to recreate a market for locally manufactured goods. I haven’t been able to find articles online about how that effort in North Carolina is actually going since the law authorizing L3Cs was passed last year, but I’ll be intrigued to follow it.
‘Cause we need all the ideas we can get (HT to Marginal Revolution) about job creation these days, and if philanthropy can play a role, well even better.
Carl Schramm, head of the Ewing Marion Kauffman Foundation, has a piece in Forbes arguing philanthropy exists to advance and perfect democratic capitalism. In response, Albert Ruesga, head of the Greater New Orleans Foundation, laments that if this is why foundations exist, “could there possibly be a better reason for dismantling the private foundation as an institution?” Ooh, CEO throwdown!
Less flippantly, what’s going unexamined here, I think, is the term “democratic capitalism.” My guess is that Schramm sees that adjective, which goes unexplained, as significant. Capitalism within the context of a democratic system presumably is different than unmodified, raw capitalism. But here’s where I think the difference lies. My hunch is that Ruesga’s image of democracy and Schramm’s may be different in one significant way.
As I’ve written about, and I owe this insight to my mentor Jeff Weintraub, in one respect democracy and the “free” market are fundamentally at odds. The invisible hand of the market aggregates the individual pursuit of self-interest into social welfare (or so the story goes). But this aggregation is strangely delicate. Try intentionally to generate social welfare, and the aggregation falls apart. This is some of the thinking behind mistrust of government.
Do you see what’s going on here? To avoid suboptimal outcomes, you have to give up the ability to consciously pursue the collective good. So the free market is really unfree, in an important respect.
And democracy is actually, in one version I happen to like, about a community consciously defining and intentionally pursuing the collective good (what Tocqueville called “self-interest properly understood”). Which is the opposite of letting the free market operate through the individual pursuit of self-interest. So democracy and the market are in one respect fundamentally at odds.
This is if you define democracy as I just have. It’s sometimes called “participatory” democracy, and associated with Isaiah Berlin’s vision of “positive freedom” – the freedom to do X or Y.
But there’s another version of democracy – a “procedural” one, associated with Berlin’s other vision – “negative freedom,” or freedom from X or Y. This version of democracy is not about the outcomes but about the rules and fair play – freedom of expression, and free elections. There’s a lot to recommend this version! And its achievement and sustainment are to be celebrated.
But for many people, I assume Ruesga included, it’s not enough. “Democratic capitalism” based on procedural democracy and negative freedom is sadly perfectly compatible with high levels of inequality and unjust economic outcomes. In fact, it probably encourages them. But for a vision of the good based on positive freedom and participatory democracy – what you might call social justice – “democratic capitalism” would need to look pretty different than it currently does to make that phrase other than a cruel irony.
And whether philanthropy can contribute to that effort – or whether the most it can and should aspire to is supporting “democratic capitalism” as Schramm might have it – is the real question. One of two, you might say.
Was at a philanthropy conference today, and one of the panels was about trends in the financial markets and their implications for foundation investment management. Unfortunately, the second part of that topic wasn’t really touched upon, but the three old white guys they had talking about the first part were pretty interesting. Half the conversation was about China: how long it’s going to rule the world, what that’ll be like. Turns out China has been the leading economic power in the world 17 of the last 20 centuries, so according to one guy, there’s a feeling of, “oh, we’re just reclaiming our rightful place.”
But the part that most caught my attention was the discussion of how China has managed to achieve spectacular economic growth in the last 30 years, not in spite of an authoritarian government, but because of it. I appreciated that one of the panelists pointed out that authoritarian governments may be good at the early stages of economic growth, but have a harder time with the more complex dynamics of the global economy. I’ve also seen the argument that China’s growth is not sustainable because the environmental shortcuts they’re taking will catch up with them sooner rather than later. I’d like to think these will be sufficient incentives to democratize, but I kind of doubt it.
I’ve written a fair amount on here about varieties of capitalism, and the types of innovation that different types of economies are good at. But I haven’t considered the Chinese model – particularly in the light of Gates and Buffett’s challenges bringing the Giving Pledge to China. Sounds like the start of another series…..
Too easy on the title of the post. Traveling for work this week, staying with a friend in DC. Enjoyed a great meal, fun company, and stimulating conversation.
One of the topics we discussed was the political power of shaping public sentiment. I think one of the things that the right has been most successful at doing in recent decades has been normalizing a pretty heartless version of market thinking. If some people are poor, too bad; not everyone is going to get ahead. It’s interesting, by which I mean terrible, how inequality of endowments (some people are more capable than others) has been equated with inequality of outcomes (the poor will always be with us). Can philanthropy overcome this kind of thinking when it’s so rooted in inequality of outcomes (the rich set aside funds they don’t need for charity)?
Last week I talked about intentionality and coordination, and expressed my dissatisfaction at market-based metaphors that would make it difficult for philanthropy to proceed in terms of “coordinated voluntary participation.”
Well, it turns out I’ve written a fair amount about coordination in the context of “varieties of capitalism,” the idea that the U.S. mode of doing business is not the only effective one. In addition to the “liberal market economies” of the U.S. and England, there are “coordinated market economies,” like Germany and Japan, where there is more intentional coordination, and the pieces of the employment/jobs system fit together more: vocational training fits with trade unions that have strong, long-term relationships with employers, who are willing to take risks on high-quality, labor-intensive products (think Mercedes-Benz) because they’ll have a supply of high-quality workers and relative labor peace.
I’ve also said that philanthropy and the nonprofit sector in the U.S. have a weird hybrid model of LME labor relations and CME finance. What would a fully-CME enclave, perhaps at a state level, look like in the U.S. nonprofit/philanthropic sector?
It would have to involve institutions working together to enable mutual risk-taking, on a path toward higher-quality, more labor-intensive outputs. Like, say, more attention to measuring results. What the German economy has to teach us is that all the parts need to fit together and assume some of the risk. (That means you, philanthropy). Firms (nonprofits) will produce higher-quality goods (better evaluation) if they can be assured that capital and labor will play nice; that is, that capital will be patient, and that labor will be high-quality enough to make high-quality goods. Foundations need to be patient with capital for evaluation, and be willing to pay for it, AND there need to be incentives for labor (in this case, the clients or nonprofit workers who provide the data for evaluation) to participate in this. German unions go along to get along because they’re more or less guaranteed job security and a steady flow of trained young people from the vocational system. That’s what’s missing in the U.S., the equivalent of the German-labor side of the equation. Where’s the incentive for nonprofit staff or clients to collaborate in the gathering of high-quality evaluation data? We haven’t made that connection (or rather, most orgs haven’t), and so the coordination breaks down.
What might those incentives look like? To be continued….