The New Normal Economy & The Social Sector

This is my latest column for the Chronicle of Philanthropy. You will find a full archive of my past columns here.

Donors and Nonprofits Face a Defining Moment in Responding to a Crisis
By Sean Stannard-Stockton | Chronicle of Philanthropy

The economic crisis of the 21st century’s first decade did not cause the apocalypse for American philanthropy that many experts had feared. In fact, charitable donations topped $300-billion during each year of the recession, a sign of philanthropy’s resilience.

But now as the second decade opens, we may well face philanthropy’s defining moment.

How donors, foundations, and nonprofits handle the challenges and opportunities of the coming 10 years will determine if philanthropy in the first half of this century is an important player in shaping how the world works or merely an honorable effort that has limited influence.

Many economists have described the post-recession economy as “the new normal,” a term coined by Mohamed El-Erian, former director of the unit that manages Harvard University’s endowment, in his book When Markets Collide.

Mr. El-Erian, who crafted the term before the global financial crisis erupted, used the phrase to describe his view that the engine of economic growth would no longer be the United States but emerging market economies. He believes the new normal will ultimately be healthier for the global economy, although he acknowledges that it will cause many problems in America and elsewhere as the engines of growth in the economic world shift gears.

For philanthropy, the new normal would make an enormous difference to donors and charities that have been working to increase standards of living for the billions of people who live in poverty in the developing world. Efforts to promote global health and international development and to aid struggling entrepreneurs could be accelerated as the economies of developing nations grow stronger.

But as history shows, accelerating economies do not always increase standards of living equally across all income levels. The new normal presents philanthropy a chance to demonstrate that it can strengthen the connection between economic growth and broad-based increases in standards of living.

In the United States, philanthropy also must focus on what the new normal means. Ballooning budget deficits and debt at the federal, state, and municipal levels of government are problems that people of all political beliefs agree must be solved. Even a rapid increase in charitable giving could not possibly make up for the cuts in government spending that will probably be made over the next decade. The billions of dollars contributed to charities each year are minuscule compared with government outlays.

However, to the extent that philanthropy can help build high-performing nonprofits that are able to deliver effective programs and services in low-cost ways, it can be a major part of solving the nation’s deficit woes. Perhaps just as important, however, are philanthropic efforts that prevent the problems that end up costing society the most to deal with—problems like drug addiction, illiteracy, and criminal behavior.

The U.K. is moving to formalize that idea. It now issues “social impact bonds” that will provide government payments to private investors who finance nonprofit programs that are able to reduce the government’s costs. For now, the bonds apply just to groups that reduce the number of people who commit crimes after they are released from prison. But that idea should be expanded to other causes and to the United States. Philanthropy must embrace this sort of sophisticated financing strategy that aligns the interests of government, donors, and private investors.

The nonprofit world must not let itself be a victim of government spending cuts but instead offer solutions that help close the deficit by offering social programs that deliver better results at a lower cost to taxpayers.

Nonprofits will also need to get more involved in helping America climb out of the unemployment crisis.

One reason job growth is so sluggish is the misalignment between the skills of American workers and the skills needed by companies in the United States. Nonprofits and philanthropists can help fix that problem.

Nonprofits themselves already contribute mightily to the employment market—after all, they employ one in 10 workers and as a group have produced faster growth in new jobs than their for-profit counterparts.

But nonprofits also play a critical role in the job market by offering retraining classes for workers, by employing individuals who otherwise wouldn’t find jobs and preparing them to enter the traditional job market, and by stimulating job growth in critical areas such as education, health care, and clean energy. Retooling the American work force for the new normal must become a top priority for philanthropy.

When a crisis ends, it is natural for people to breathe a sigh of relief and attempt to return to the status quo before the crisis. While the financial emergency is behind us, the challenges ahead will take every ounce of creativity and hard work we can muster.

Philanthropists and nonprofits must not relax and retreat but instead must redouble their efforts as active players in shaping how society works. If philanthropy ignores the big issues caused by the changing economy, it could become little more than a morally righteous activity—and not a vibrant, powerful force for social good.