The Magazine

The Nonprofit Industrial Complex

Is there such a thing as too much civil society?

Apr 23, 2007, Vol. 12, No. 30 • By GERARD ALEXANDER
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As if the United States doesn't stand out enough these days, yet another trend is making us more and more distinct in the world: the massive growth of our nonprofit sector. Some people hope, and others fear, that this might change the very nature of American society. Western countries have already been transformed by industrialization, the rise of the service sector, and the growth of big government. The result has been wealthy economies, middle-class societies, and vast bureaucracies. Our country might now be transformed again by the spread of what Richard Cornuelle dubbed the "independent sector." The growth of nonprofits--from the Getty Museum to Seattle's Children's Hospital, Emory University, and your aunt's country club--has created the world's largest sector that is neither business fish nor government fowl. It has the private sector's diversity and independence but the government's lack of a profit motive. It is a different way of doing business. It may be a different way of making a country. But is it a wholesome one?

The sheer scale and rapid growth of America's nonprofit sector make it difficult to ignore. In most of history, private not-for-profit organizations weren't a topic of much attention because they weren't especially important compared with the markets from which people drew their sustenance and the governments that often extracted whatever they could from them. But with the growth of our national wealth, nonprofits have been expanding relentlessly. The Independent Sector, which is basically the industry group for nonprofits, reports that the combined annual expenditures of all the not-for-profit organizations required to file Form 990 with the U.S. Internal Revenue Service had grown to nearly $1 trillion in 2004. (That's about half what the federal government spends each year, not counting defense.) In 1977, nonprofits employed around 6 million Americans; by 2001, that was up to 12 million. Roughly 85 percent of this work is in health care (primarily hospitals and nursing homes), social services like child care and job training, and education. If volunteer time is counted, nonprofits represent over 10 percent of all U.S. employment.

If anything, statistics like these underreport the size of America's nonprofit sector, because they often don't include large religious organizations, which have a distinct tax status. And they generally don't include state universities and colleges, which are technically government entities but now often register as nonprofits, frequently get only a minority of their funding from government, and function as nonprofits in almost every meaningful sense. Colleges add real heft to the numbers. In 1940, there were only 147,000 faculty members nationwide. By 1970, there were 474,000, and by 2003, almost 1.2 million, 54 percent of them full-time and most of them at state schools. And this doesn't include hundreds of thousands of college administrators.

All these nonprofits get the bulk of their money either through donations, from government subsidies, or by charging fees like tuition, hospital bills, and AAA memberships. They also get a healthy slice of their revenue from tens of thousands of foundations that are the financial heavyweights of America's nonprofit world. The Foundation Center estimates that the combined assets of these grant-making bodies (in current dollars) grew from $30 billion in 1975 to $227 billion in 1995 and about $525 billion in 2005. The Gates Foundation is the largest, with about $29 billion even before Warren Buffett's $30 billion, multiyear pledge. The Ford Foundation is in second place with around $12 billion. All U.S. foundations (including corporate foundations) gave away $33.6 billion in 2005, more than double in real terms what they gave only a decade earlier.