Privatizing Public Charity: Why the State Fails To Alleviate Poverty

Although volumes have been written about the failures of government welfare programs, the academic and scholarly community has paid surprisingly little attention to private sector charity. Yet the private sector is in fact playing an extremely important role. In 1984 total charitable contributions reached $74 billion, with contributions by individuals accounting for 83 percent ($61.5 billion) of that total. More than 85 percent of all adult Americans make some charitable contribution each year. Almost half of all adults (47 percent) volunteer their time to charitable causes — an average of three hours per week per person. The total dollar value of these contributions of time is at least $65 billion. If the value of volunteer labor is included, private sector contributions to charitable causes exceeds the poverty budgets of federal, state, and local governments combined.

In this essay we contrast some of our best private charities with the federal welfare programs in terms of the characteristics of an ideal welfare system.

Entitlement programs for welfare are structured so that benefits are granted solely on the basis of personal circumstances. Applicants do not have to give the reasons for their circumstances, nor are they required to explain how they plan to change them in the future. They don’t even have to show a willingness to change. In the AFDC (Aid to Families With Dependent Children) program, for example, the requirements for eligibility essentially amount to: (1) low income, (2) very few assets, (3) dependent children, and (4) no man in the household. Anyone satisfying these requirements is entitled to benefits. Moreover, the word “entitlement” means right: benefits cannot be withdrawn simply because the recipient refuses to modify his behavior.

The philosophy of the private sector is quite different. Because of the emphasis on a behavioral approach to the problem of poverty — which understands poverty to be the result of individual choices and behavior, rather than a condition over which one has no control — our best private charities do not view the giving of assistance as a “duty” or the receipt of assistance as a “right.” Instead, charitable assistance is viewed as a tool which can be used intelligently, not only to provide relief but to change behavior. At many private charities, for example, the level of assistance varies considerably from individual to individual. Private agencies usually reserve the right to reduce the level of assistance, or to withdraw assistance altogether if recipients do not show behavioral changes.

Many private charities require that a caseworker and a recipient of aid establish a plan designed to move the recipient to a condition of self-sufficiency. For instance, at Jessie’s House, a transitional home for the homeless in Hampton, Massachusetts, shelter beyond a week’s stay is contingent upon positive evidence of individual improvement. At the Dallas Salvation Army, caseworkers are not significantly bound to grant a minimum or a maximum level of assistance. Aid varies according to the caseworker’s evaluation of the recipient’s condition and record of behavioral improvement.

Whether receipt of welfare is viewed as a “right” or a “privilege” is at one level an ethical and philosophical question. At another level, the question has profound implications for how our society is going to function. Under entitlement programs, recipients and potential recipients of aid have full freedom to exercise their preferences at will. In many, though not all, cases they can choose poverty over non-poverty. Once this choice is made, the rest of society is presented with a welfare bill which it is obligated to pay. Thus, in a sense, under entitlement programs the preferences of the recipients determine the behavior (in terms of the tax burden) of those who pay the bills.

In contrast, private agencies generally view the preferences of those who pay the bills as the standard, and the recipients are expected to change their behavior to satisfy the givers. In other words, under the private sector approach, welfare recipients must adjust their behavior to the preferences of the rest of society, not the other way around.

If we accept the view that individuals should take responsibility for supporting themselves and their families, and that welfare assistance should be administered in a way that encourages rather than discourages this behavioral ideal, then it follows that the approach of our best private charities is far superior to the approach of entitlement programs. Because individuals differ, and because individual circumstances differ, it is only through a program of “hands-on-management” of charitable giving that we can give relief without at the same time encouraging anti-social behavior.

By “hands-on-management” we mean tailoring aid to meet individual needs and individual circumstances. For example, take the St. Louis Salvation Army’s transitional housing project. The program is administered in four stages: (1) the crisis stage, when a family is provided with immediate, temporary shelter; (2) the stabilization stage, when the family is provided psychological support and counseling; (3) the relocation stage, when the family is assisted in finding a new, permanent dwelling or returned to their old dwelling after resolving the initial crisis; (4) the follow-up stage, when the family is assisted in adjusting to their new environment.

This form of support counseling, along with its follow- up services, are virtually unheard of in federal welfare programs, whose administrators view their jobs largely as a matter of giving away money, not assisting people with personal or family problems. Indeed, when public welfare recipients request counseling from the bureaucracy, they frequently are referred to private sector agencies to get it.

A basic principle of the American philosophy of government is that we turn to government only as a last resort. In other words, it is generally assumed that the role of government is to do those socially desirable things that the private sector either will not or cannot do. Ironically, in the field of social welfare this philosophy has been turned on its head. In the early years of the War on Poverty, federal welfare programs were designed to provide a social safety net — to provide services which the private sector, for one reason or another, had failed to provide. That just the opposite has become the case is, however, becoming obvious: increasingly, the private sector provides the social safety net by reaching persons whom government fails to reach, and by providing the essential services that government welfare programs fail to provide.

If a humane welfare system means anything at all, it means getting aid first to people who need it most. One of the most astonishing and little-known facts about the welfare state is what a miserable job it does in pursuing this goal. Consider the following: Only 41 percent of all families officially designated as impoverished families receive food stamps; yet 28 percent of the families which do receive food stamps in fact have incomes above the poverty level. Only 23 percent of all poverty families live in public housing or receive subsidized housing benefits; yet almost half of the families receiving housing benefits have incomes above the poverty level. Only 40 percent of all poverty families are covered by Medicaid; yet 40 percent of all Medicaid beneficiaries have incomes above the poverty level. Amazingly, 41 percent of all poverty families receive no means- tested benefit of any kind from government; yet more than half of all families who do receive at least one means-tested benefit have incomes above the poverty level. Of children living in poverty, 42 percent receive no AFDC benefits; yet 60 percent of the children who receive AFDC benefits are not poor.

Where do people in need turn for help when they are not receiving government assistance? They turn to private charities. For example, 94 percent of all shelters for the homeless in the U.S. are operated by churches, synagogues, non-religious groups, and other voluntary organizations, whereas only six percent are operated by city and county governments.

The private sector is also very heavily involved in emergency food distribution. The Second Harvest network (comprising 79 of the more than 300 food banks in the U.S.) distributes about 118 million pounds of food each year, worth about $78 million. This food is donated by the food industry and by private donors; about 40 percent of it goes to food centers patronized by the homeless.

Several studies of low-income families confirm the fact that when people get into trouble, they turn to the private sector first. A study in Detroit found that 80 percent of low- income persons, when faced with a crisis, turned for help to individuals and agencies within their own neighborhood, rather than to government agencies. Similar findings were reported in a study conducted by the University of California.

Providing Relief Without Encouraging Dependency

A major issue in the welfare-poverty industry is whether the recipient of aid should have to “do anything” in order to qualify for continued receipt of welfare benefits. Nowhere is the controversy more evident than with respect to the issue of workfare. Throughout the 1970s there was a continuous political battle at the national level over whether workfare should be tied to welfare. Lawrence Mead has written a fascinating account of the politics of this battle. (See Lawrence M. Mead, Beyond Entitlement, Free Press, 1986). Documenting the great lengths to which the welfare bureaucracy lobbied against any workfare requirements, Mead shows that the bureaucracy lost the battle when Congress passed the Work Incentive (WIN) program and the Community Work Experience Program (CWEP).

However, because the welfare bureaucracy administers these two programs, it eventually, in fact, largely won the battle. Among the welfare programs utilizing the WIN program, only 20 percent of adult recipients were found by the welfare bureaucracy to be appropriate for referral to the WIN program. Most of these adults went into training or school activities rather than into job positions. Only two percent actually entered jobs. Among the welfare programs utilizing the CWEP program, only 39 percent of adult recipients were found by the welfare bureaucracy to be appropriate for employment with the CWEP program, and only seven percent participated regularly.

As we have noted, the attitude of our best private charities is quite the opposite of that of the welfare bureaucracy. These private agencies see independence and self-sufficiency on the part of their “clients” as one of their primary goals. Often this goal is accomplished either by encouraging or requiring the recipients of aid to contribute their labor to the agency itself. For example, at Merillac House, an emergency food and assistance organization in Chicago, unemployed adults with no dependents must contribute time and services toward program operations after receiving assistance. At the Good Shepherd Ministry, a low- cost restaurant, soup kitchen, and food bank in Auburn, Maine, recipients assist with cooking, serving, truck driving, and other tasks — many of which provide valuable job training.

The attitude toward the family on the part of private sector charities usually stands in stark contrast to the incentives built into federal programs. AFDC eligibility rules in nearly half of the states do not allow families with a father who is employed to receive assistance, regardless of how low the family income is. In the other half of the states, the family is ineligible if the father is present at all, regardless of employment. At the Dallas Salvation Army shelter for battered and abused women, the mothers of young children are required either to work with professionals to repair their relationship with their husbands, or to find employment in order to receive continued assistance.

Temporary vs. Long-Term Relief

A prevalent philosophy in the private sector is that most people are fully capable of taking responsibility for their lives in the long-term, but that, nevertheless, emergencies and crises occur in which help is both necessary and desirable. As a consequence, private sector agencies make it surprisingly easy for recipients to obtain emergency relief. It really is true that in America almost everybody can get a free lunch.

The almost universal characteristic of the private sector is: It is easy to get on welfare, but hard to stay there. Most government programs, by contrast, have the opposite characteristic: It’s hard to get on welfare, but once on it, it’s easy to stay there. In the public sector, there are often long waiting times between applying for assistance and actually receiving aid. In Texas, for example, the waiting period for receiving food stamps is typically two to three weeks. For ADFC benefits, the waiting is typically a month after the completion of complicated and cumbersome application forms. The Dallas Salvation Army has had to hire special staff to decipher public welfare regulations and forms before they can refer persons to the proper public agencies.

Once accepted into the public welfare system, however, it is relatively easy to stay there for a long time. Of all women who receive welfare in any given year, about 60 percent will receive welfare the next year too. Among women receiving welfare for two consecutive years, about 70 percent receive it a third year. Of women receiving welfare for four consecutive years, about 80 percent receive it a fifth year. At any one time, about one-half of the mothers receiving AFDC benefits will continue to receive, or will already have received, assistance for a period of eight years or more.

Minimizing the Cost of Giving

There is considerable evidence that private sector charity makes far more efficient use of resources than do public welfare programs. Private charities hold down costs in a variety of ways.

Requiring evidence of need. Although temporary relief in the form of food or shelter is fairly easy to obtain from private agencies, long-term assistance or assistance in the form of cash is far more difficult. Before the Dallas Salvation Army will provide cash to help people defray the cost of rent, recipients are required to present a court-ordered eviction notice showing failure to pay rent. Similarly, before financial aid to defray the costs of utilities is given, the recipient is required to present notice of termination of service for failure to pay his utility bills.

Checking other sources of support. Even when there is evidence of need, good private charities often seek to deter-mine whether the potential recipient has access to other, untapped sources of assistance. Before the Dallas Salvation Army will provide continuing assistance to an individual, a caseworker informs the family — including in-laws — and requests assistance from them first. The caseworker also makes sure the individual applies for all other public and private aid for which he or she is eligible before continued assistance is provided. These procedures stand in stark contrast to those followed under the food stamp program, AFDC, and Medicaid. Indeed, most states could cut significantly their Medicaid expenditures by following precisely the same procedures as those followed by the Salvation Army. Under current law, Medicaid is supposed to be the payer of last resort, paying only those medical bills not covered by private health insurance or by Medicare. Yet in most states there is no routine procedure for making sure that all claims against private health insurance and Medicare have been filed before Medicaid funds are granted.

Private sector agencies appear to be much more adept at avoiding expenditures that do not benefit the truly needy. Consider the amount of waste in public sector charities. In 1981, improper payments in the AFDC, food stamp, and Medicaid programs reached $3.5 billion. In the food stamp program alone, about one in every ten dollars was spent on overpayments or on payments to ineligible families. In 1980, improper spending in the school lunch program went as high as $500 million.

Using volunteer labor. Private charities also keep program costs down by utilizing volunteer labor. At Jessie’s House in Massachusetts, one-third of the personnel costs and 70 percent of the food costs are donated by volunteers. The organization utilizes some 400 hours of volunteer labor per month. A study of nonprofit charities in the Twin Cities (Minnesota) area found that the average human services organization, with a budget of $664,500, had 19 full-time employees, 13 part-time employees, and 60 volunteers. The study concluded that if all of the volunteers utilized by these organizations were paid the minimum wage, the total worth of this labor would be $3.2 million.

An interesting and instructive comparison has been made of the use of volunteer labor in public and private sector programs in Dallas and the surrounding area. In 1985, the private, non-profit Volunteer Connection placed more than 38,000 volunteers in programs and projects in the Dallas metropolitan area. Over the same period, the Texas Department of Human Resources, Region V (which covers Dallas and 18 other counties) placed only 7,000 volunteers.

The number of persons actually volunteering through the state agency is only a rough guess; however, the private agency employs a staff of seven people and a computerized coordinating system to keep an accurate account of placements. By contrast, the state program is run by one coordinator working with a secretary. The coordinator frequently learns of volunteer work only from reports submitted by the various agencies and programs. Unfortunately, no consistent method of reporting is followed by all agencies. From the data that is available, however, we were able to learn that about one-third of the volunteers “coordinated” through the state program are actually working in private sector agencies. Less than one-fifth of one percent of the volunteers who are “coordinated” through the state agency choose to work in the AFDC or food stamp programs.

Using donated goods-in-kind. Another way in which private charities hold down the costs of their operations is by using donated goods-in-kind. Operation Food Search in St. Louis provides about $8 million worth of food annually to local food banks and soup kitchens at a cost of only 1.5 cents per pound.

Most of this food consists of slightly damaged canned goods, slightly out-of-date food stuffs, or rejected but otherwise usable bulk foods that commercial food producers would have thrown away.

Other evidence of efficiency. Private sector charitable activities are diverse and widespread in cities and counties throughout the country. Our knowledge of these activities is skimpy. However, as more research is done, the evidence mounts that in area after area, the private sector outperforms government. Private sector foster care agencies have shown they can outperform government. Private agencies engaged in job training for teenagers and for the mentally and physically handicapped have shown they can outperform government. Public housing placed in the hands of tenants costs less and is of higher quality than the same housing when owned and maintained by government. Private sector crime prevention programs, alcohol and drug abuse programs, and neighborhood preservation programs also have proved to be superior to public sector programs.

By a number of criteria, our nation’s best private charities consistently outperform government programs. Even so, many who care about the poor and support efforts to help them fail to appreciate the magnitude of private charitable giving and the vitality and diversity of private sector agencies which provide benefits to the poor and needy. In the perceptions of such persons, government remains the resource of first resort for the alleviation of poverty — the argument for its preeminence being that “if government doesn’t do it, no one else will.” As we have seen, this argument is simply false.


  • John C. Goodman and Michael Stroup

    John C. Goodman is a libertarian economist and the founding president of the Dallas-based, free-market think-tank the National Center for Policy Analysis and Research Fellow at the non-partisan, scholarly Independent Institute. Michael D. Stroup is a professor of economics at Stephen F. Austin State University and a senior fellow with the National Center for Policy Analysis.

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