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Privatize the Welfare State


Privatize the Welfare State

March 9, 2006
Urban PolicyWelfare

No matter whose priorities prevail in this year's budget debate, it is a certainty that the federal government will continue to devote billions to activities known as "social services." These include support for everything from foster care to drug abuse prevention; indeed, the Administration for Children and Families alone supports no less than 60 such programs at an annual cost of nearly $13 billion, in addition to the cash welfare payments it handles. Billions more are spent on such purposes by state and local governments, often through contracts with private "providers." Robust public debate has developed as to whether other parts of the New Deal legacy still make sense, but the central role of government in providing or paying for social services appears settled -- with the only question being how best to achieve efficiency and effectiveness.

But should this role be considered beyond debate? It is a question worth pondering today because of a historic confluence of circumstances: an impending wave of charitable giving at an unprecedented level; long-term projections of federal deficits, undermining the assumption that social programs can best be funded by government; and a new generation of so-called social entrepreneurs, looking to try creative approaches to help those in need, and to do so on a large scale. These circumstances, moreover, emerge in the context of heightened, post-Katrina public dissatisfaction with the quality of government-provided public services. Together, they suggest the possibility of imagining a modern society where major social service efforts are provided on a large scale outside the government, through privately funded, not-for-profit charitable organizations.

In the era before passage of the Social Security Act in 1935, whose Title V provided for such spending, privately funded agencies yielded the bulk of U.S. social services, augmented by such local public institutions as poorhouses, asylums and orphanages. Nevertheless, such agencies -- and groups like the Child Welfare League of America -- assumed that government services would be at least as good as their private, often religiously inspired predecessors, as well as more universal in reach and standardized in approach, and thus preferable. They did not oppose government social-service spending, and, indeed, were often among its leading advocates.

In any event, greater government social service spending was certainly achieved. In terms of quality, however, it is hard to argue that things have worked out the way reformers intended. Consider services for children. Over the past 10 years, 22 to 36 children have died each year under the watch of New York City's Administration for Children and Families. A recent federal review of state child welfare agencies found that not a single state complied fully with federal standards. Then there's Head Start, whose potent name, and the fact that it provides grants to local organizations in every state, has made it immune to budget cuts. Yet a 2005 federal study involving 383 sites and 4,600 children found it led to no gains in math learning, oral comprehension or motivation to learn.

This record of government-provided services plays out today in a dramatically changing environment for philanthropy. In recognition of the wealth of soon-to-retire boomers, the Boston College Center on Wealth and Philanthropy estimates that philanthropic giving will total some $6 trillion between 2003 and 2050. Already, over the past 10 years, there's been an 88% increase in the number of foundations. Over the last decade there has been a 67% growth in the overall number of U.S. nonprofits.

Meanwhile, a wave of capable persons has come forward to establish effective new social service organizations, based on new ideas and with little or no government support. Indeed, it can be argued that we are now in an unprecedented period for the emergence of such people, who have started new types of job training, mentoring and immigrant-assistance efforts. The term "social entrepreneur" -- for those who establish such organizations -- has entered the language and become current on college campuses, where courses and research centers (Harvard, Duke, Stanford) on the topic have been established.

Thus the stars are aligned for nongovernmental organizations to play a much larger role in assisting those in need. To date, however, the Bush administration, in part as a matter of political pragmatism, has seen such groups less as substitutes for the welfare state than as potential new beneficiaries of it -- directing federal resources toward faith-based groups formerly independent of government, in an effort to "level the playing field" with nonreligious contractors. A case can be made, however, that a truly independent, philanthropically supported nonprofit sector can better sidestep the pitfalls that have plagued government. Such a sector would be likely to attract committed employees and volunteers. This was certainly the case pre-New Deal. More to the point, the willingness of Americans to answer a call to service continues to be strong, as reflected by the emergence of major new "brand name" nonprofits such as Teach for America, Prison Fellowship and Habitat for Humanity.

What's more, service organizations which rely on private donations -- whether from individuals or foundations -- might actually prove to be more accountable for their performance than their public or publicly funded counterparts. It is hard to imagine a private organization surviving the bad publicity and subsequent fall-off in donations which might follow the death of children in its care. Indeed, the possibility of organizations being punished for poor performance was demonstrated by the sharp drop in donations to the national United Way organization following corruption charges involving its executive director. In contrast, public employee unions, influential with legislatures, make it more difficult to discipline public social service agencies similarly.

The transition to a diminished government role in social services would be complex, as Americans have been conditioned for several generations to view government as the provider of first resort. And the substitute for government could not be small, volunteer-based organizations, 19th-century style -- although small, voluntary groups will, and should, always be with us. Rather, large-scale, professionally staffed brand name agencies of proven effectiveness would be needed -- much as brand name chains of charter schools are now emerging. This would require the development of sophisticated tools to match the coming wave of philanthropy with the places where it will do the most good.

Such tools might include a stock market equivalent for major service-providing nonprofits. This is not as odd as it sounds; serious people are already considering such an idea. They include George Overholser -- a founding member of the financial services firm, Capital One, now with the National Nonprofit Finance Fund -- who argues that a means must be developed so that donors can distinguish between "build" capital and "buy" capital. The former would support new, unproven ideas, the latter the expansion of proven successes. Mr. Overholser envisions a quasi-stock market in which "venture philanthropists" might put their funds at risk to support a social entrepreneur's new idea. If the idea can be implemented effectively, a second wave of donors would repay the original venture philanthropists with interest, allowing the latter to have their capital back and be free to move on to new nonprofit startups. A philanthropic "market" of this kind would, naturally, require the equivalent of rating agencies.

Such a system would, to be sure, have to emerge gradually -- after all, the general replacement of private with public sector social services did not occur overnight. But the question of whether and how to do so should be part of any discussion about the present and future of the welfare state.