N.Y. Nonprofits' Killer Prosperity

After Sept. 11 intensified the economic slump already under way in New York since last summer, many of the city's nonprofits warned that they faced a desperate crisis. Now it turns out that the city's private nonprofits actually grew robustly in 2001—even after 9/11.

Last fall, hospitals claimed to be hemorrhaging hundreds of millions of dollars, and social-services organizations complained that they'd have trouble raising money with so much charity now going to victims of the terrorist attack.

In fact, hospitals and social services agencies were the two fastest growing sectors of the city's private economy last year, each sprouting more than 3,000 new jobs, even as the city economy as a whole shrank by roughly 120,000 jobs.

It's like a rewind of New York's previous recession, from the late ‘80s to early ‘90s, , when the nonprofits escaped the downsizing that slashed the city's private-sector workforce by more than 10 percent, or 325,000 jobs. Over the course of that steep recession, private social services mushroomed by 20,000 jobs, or 16.7 percent, and the city's private hospitals swelled by 16,000 jobs, or 11 percent. The reason that Gotham's nonprofits, despite their cries of hardship, don't suffer from economic downturns is that they rely on government contracts, not private charity or revenues, to pay for their operations. And in New York's profligate welfare-state economy, that means the money always keeps coming, even when city and state budgets run steep deficits.

During the last recession, for example, city spending on private nonprofits swelled by $1 billion—a full 33 percent rise. The same pattern is plain in the current downturn: Gov. Pataki has agreed to pump $2.7 billion in public funds into private hospitals in order to protect the jobs of workers and guarantee them pay hikes. Such extravagance means that government spending on private nonprofits makes up an ever-larger percentage of the city economy. A quarter of a century ago, health and human services employment accounted for just 8.7 percent of all private-sector jobs in the city; today, it's 16 percent.

For New York, there's a cost for this excess even in good times, since the high taxes needed to pay for all the government-supported jobs make the city far less economically competitive than it could be.

And in a downturn, for New York to subsidize a growing wealth-consuming nonprofit sector is especially irresponsible, since it increases the burden on individual taxpayers and wealth-creating for-profit firms already staggered by a slumping economy, making it harder for the economy to revive.

Instead of bankrolling nonprofit expansion, government should cut taxes and red tape to make the city friendlier to the private sector.

Steven Malanga is a contributing editor to City Journal. From the magazine's Web site, www.city-journal.org.