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Government Safety Nets and Private Safety Nets

by Matt Mitchell on December 12, 2011

in Safety Nets

Extensive research has found that government provision of charitable services tends to crowd out private charity.

In a pair of papers, for example, Andreoni and Payne found that when U.S. charities receive an extra $1,000 in government grants, they tend to receive about $750 less in other donations (2003, 2011). That is, public charity crowds out about 75 percent of private charity.

It appears that the effect cannot be explained by individuals giving less. Instead, it appears that charities themselves tend to reduce their fundraising when they receive more government money.

In a new paper, Andreoni and Payne exploit a more detailed Canadian dataset to delve deeper into the question. They find that crowding-out exceeds 100 percent. Of this, “77 percent can be attributed to reduced fundraising by the charities.” Interestingly:

Direct giving by individuals (tax-receipted gifts) is only reduced if the charity reduces its fundraising—crowding out of gifts from individuals is fully the result of reduced fundraising. In fact, the government grants have a small effect of crowding-in individual donors, which is consistent with a view that individuals are either unaware of changes in government grants, or are using them as signals of the quality of the charity.

Thus:

Each $1000 in grants reduces revenue from other sources by about $1000, but this total crowding out is not due to declining individual donations, but rather due to reduced revenue from foundations and other charities, and from holding fewer fundraising events.

In other safety net news, the University of Chicago’s Casey Mulligan finds that the government safety net has gotten more generous in the last few years:

Inflation-adjusted spending on means-tested subsidies have increased sharply since 2007, and most of this growth was due to changes in eligibility rules, and increases in subsidies per eligible person, rather than increases in the number of people who would have been eligible under pre-recession subsidy rules. The non-elderly parts of the safety net have increased from about $10,000 per year of non- or under-employment by non-elderly household heads and spouses in 2007 to almost $15,000 per year in 2010, adjusted for inflation. From 2007 to 2010, inflation-adjusted safety net spending increased $35,000 for every added year of non-employment or under-employment. As a result, the average private returns to employment are substantially less than they were in 2007.

If you are interested in giving to charities that do not rely on taxpayer funding, this article uses Charity Navigator data to evaluate the best charities that take no government cash.

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