Nonprofits are sapping the progressive project

We need to bring back state capacity.

Photo by Katt Yukawa on Unsplash

This Friday, the internet was treated to a highly amusing spectacle: “La Sombrita”, a new piece of infrastructure created by the Los Angeles Department of Transportation, in cooperation with the nonprofit Kounkuey Design Initiative:

What you’re looking at is a combination sun shade/lamppost. After traveling to several global cities, the good folks at the Kounkuey Design Initiative reached the amazing and counterintuitive conclusion that people waiting for buses need shade during the day and light at night. This would also advance gender equity, they reasoned, since, well, women are in greater danger from lack of light. So for a total cost of $200,000 — including $10,000 for the structure itself, not counting the existing pole it was bolted onto — they developed this innovative structure, “La Sombrita”. The L.A. Dept. of Transportation released this helpful diagram demonstrating how the shade component would function:

Source: LADOT

The question of what would happen if two people want to wait for the bus in the shade was not addressed. But LADOT did think about the possibility that someone might want to sit down while they wait. Their answer was that La Sombrita would also cast its protective shade onto a nearby bench during “some times of day”. Unfortunately, it was quickly observed that the structure’s shadow only passes over the benches for a very short period of time; the rest of the time, it looks more like this.

It also isn’t particularly good at projecting light.

As for why the city didn’t simply install a standard bus shelter combined with a (much more powerful) standard lamppost, the city explained that this would cost over $50,000, which they apparently viewed as a defense of their thriftiness in creating La Sombrita rather than an admission that they can’t build even the simplest infrastructure for a reasonable cost. More cynical observers suggested that the city may not have wanted to create a structure that homeless people could sleep in.

It’s tempting to see this as just one small, cherry-picked example of wasteful government spending in the name of progressive causes. $200,000 is really not that much money as city budgets go. But those who follow politics in San Francisco, or any number of other big progressive American cities, know that La Sombrita is emblematic of a very widespread and deeply entrenched practice: outsourcing essential government functions to nonprofit organizations. Nor is the practice limited to cities; at the state and federal level, handing off government cash to nonprofits has become a standard tool of progressive policymaking, including the Biden administration’s new green industrial policies.

This is worrying. I am not claiming, of course, that all spending that goes through nonprofits is waste, or that nonprofits should have no role in helping the government do its job. But I think we’ve reached an odd political equilibrium in America where we overlook the failure modes of this form of privatization. And those failure modes present a real danger to the progressive project.

Outsourcing government functions to nonprofits is a form of privatization

Until the mid-1970s, U.S. government spending — including federal, state, and local — grew in tandem with the amount spent on the government workforce. This doesn’t mean the government did everything in-house, but it did a constant fraction of its expenditure via in-house work. Then in the mid-70s a gap opened up, and total spending left spending on government workers in the dust:

Some of this is in the form of cash handed out to people directly, and some of it is in the form of outsourcing, either to the for-profit private sector or the nonprofit private sector. Examples of the former include private prisons and charter schools, both reviled by progressives, as well as defense contractors, infrastructure contractors, etc.

It’s hard to say how much of this cash was spent through nonprofits. We do know that about a third of nonprofit funding comes from government purchases and grants, and that nonprofit revenue rose by about 70% in inflation-adjusted terms from 1998 to 2016. A rough back-of-the-envelope calculation — $2.62 trillion in nonprofit revenue in 2016, 32.3% from government — says that this would equate to around $850 billion in government spending on nonprofits in the U.S.

That’s about 13% of all government spending, including state and local, spent via nonprofits. Compare that to about 18.4% of government spending spent on actual government workers as of 2022. We’ve outsourced a significant amount of our government to nonprofits. Here’s a brief overview of some of the ways this work is outsourced. Of course the number includes things like public university funding (universities are also nonprofits). But a lot of it is just paying organizations to administer government spending.

This is a form of privatization. Nonprofits are a part of the private sector. Having nonprofits do things like design infrastructure or administer welfare benefits instead of having government employees do these things is outsourcing government functions to the private sector. There is very little difference between paying the Kounkuey Design Initiative to create infrastructure and paying a for-profit consulting firm to do it, except that no one is officially making any profit on the former.

That difference, I suspect, is one reason why many progressives have embraced nonprofit spending. There is a tacit assumption — probably inherited from the socialist movement — that profit is wasteful. And it feels slimy for some fat-cat capitalist to be getting rich off of taxpayer dollars that were meant to help the public.

Meanwhile, conservatives probably held their noses and tolerated the growth of nonprofit outsourcing, because it shrank the size of the civil service. Ronald Reagan famously said “The nine most terrifying words in the English language are: I'm from the government, and I'm here to help.” That quote typified the long-standing conservative opposition to the existence of the bureaucracy. Nonprofits, in contrast, weren’t exactly private free enterprise, but they did include lots of charities, which conservatives have generally been favorable to as an alternative to government. And of course nonprofit workers were mostly non-unionized, while government workers were more likely to be unionized, so outsourcing to nonprofits helped to break the power of organized labor.

Therefore I suspect that nonprofit privatization became a tacit grand bargain that everyone felt they could live with — a product of the political economy of the late 70s and 80s. And now this bargain is beginning to show its downsides.

Outsourcing government functions invites inefficiency

The main downside is inefficiency. Theories that nonprofits are just for-profits in disguise, with executives as the shareholders, don’t fit the data; instead, available evidence suggests that nonprofits try to maximize the total amount they spend. That means that nonprofits have an internal incentive to hire people they don’t need to hire and spend money on things they don’t need — such as flying out to Europe to look at bus stops, instead of simply doing a 30-minute Google Image search to see what other countries’ bus stops look like.

Nor should we expect the government bidding process to control costs. Government bidding suffers from an asymmetric information problem — if the government doesn’t have in-house employees who know how to evaluate contractor quality, then it won’t be able to tell whether a nonprofit offering a low bid is simply offering a lower-quality product. This will give the government a tendency to overpay, because without competent civil servants the government is the dumb money. (Note that this problem exists just as much for for-profit contractors.)

The idea that outsourcing government functions is an invitation to inefficiency goes against the longstanding intuition of many American conservatives, who have internalized the idea that government is inherently less efficient than the private sector. But the thing about outsourcing is that you haven’t actually removed the government from the process — you’ve just added another layer on top of it. When the government controls the purse strings but only the contractors know how much things should really cost, you get the worst of both worlds — a government that doesn’t know how to save taxpayer money, paying contractors who don’t want to save taxpayer money.

“But how much money is really being wasted?”, you might ask. “How can we measure it?” If you think about this for a second, you’ll realize why this presents a huge problem. The government itself is the only one who could collect data on how much money nonprofits waste. Except that if the reason the money is getting wasted in the first place is that the government isn’t able to tell how efficiently their money is being spent, well there goes that idea!

You can see this process at work in San Francisco, which is notorious for spending lots of government money through a network of nonprofits. Here are some excerpts from an article in the SF Standard back in March:

San Francisco nonprofits receive more than a billion dollars in taxpayer money every year, but the level of scrutiny they face varies greatly by department—and, in some cases, oversight of operations has been left to the honor system since the pandemic…

City records show that two nonprofits—Baker Places and the United Council of Human Services (UCHS)—received mostly glowing marks from city agencies last year, not long before they were accused of mismanaging public funds…

A review of reports found low performance in some cases and inconsistencies in documentation, particularly within the Department of Homelessness and Supportive Housing…

In August 2022, the City Controller’s office released an audit that found city departments operated in silos when monitoring nonprofits, creating redundancies and allowing organizations to escape notice when falling short of their objectives.

In 2023, the city paid $25 million to nonprofits that had already had their nonprofit status suspended by the state!

Nor is San Francisco the only place where we see this pattern. New York’s comptroller, observing that the city keeps spending more and more on homelessness via nonprofit providers only to see the unsheltered homeless population increase year by year, has put the nonprofits on a “watch list” for two years in a row.

You can see from these articles that city governments are trying to get a handle on how much they’re wasting on inefficient nonprofits, and they’re just having a lot of trouble doing so. That’s the problem with low state capacity created by chronic outsourcing. But there’s also another, darker reason the government might allow nonprofits to waste public funds. That reason is corruption.

Corruption and clientelism

Outsourcing government functions easily turns into clientelism. Clientelism is basically a form of patronage politics where politicians pay people to vote for them. This is different than the standard “spoils system” of pork-barrel politics, where politicians try to direct money toward groups that generally back them in elections. Clientelism is more targeted — it means you actually direct public money to the specific people who help you win elections, and you make the public funds conditional on the election help. This could mean, for example, elected officials granting government contracts to nonprofits who help mobilize people to vote for those officials.

That’s obviously an open invitation to a vast waste of public funds, because it creates a bargain where elected officials have an incentive to pay ever more public money to their clients. Of course in the U.S., we have laws in place to prevent — or at least minimize — clientelist partnerships from getting too explicit, and public funds from being abused. If you violate those laws, we call it “corruption”. But there are often a lot of loopholes and gray areas in these laws.

An example of a nonprofit that lives in the legal gray area is San Francisco’s notorious Tenants and Owners Development Corporation, or TODCO. This is an organization that is supposed to provide subsidized housing for low-income SF residents. But as a recent article in the SF Standard showed, more and more of its money is being spent not on housing, but on A) salaries for the people who work for the nonprofit, and B) political campaigns on behalf of the elected officials who give TODCO city money. Some excerpts:

All of these incidents—overdoses, pest infestations and generally deteriorating conditions—have taken place as TODCO ramped up spending on political campaigns at the expense of investing in its buildings…

[A]nnual revenue for TODCO’s main nonprofit entity has more than doubled over the last decade while it has steadily reduced the share of revenue it spends on its residents, who are low-income and disabled seniors and formerly homeless people. Meanwhile, the nonprofit has splurged on lobbying, political campaigns, salaries for executives and grants to other political groups. TODCO also appears to have underreported the value of a free apartment given to its leader…

TODCO also spends tens of thousands in election cycles on polling that it shares with its political allies at City Hall, along with mailers that serve to prop up preferred candidates under the guise of issue-driven campaigns. Nonprofits are barred from explicitly supporting individual candidates…Nonprofit experts who were contacted for this story said [TODCO’s] political activity appears to be legal, though it may raise ethical concerns. 

Here we see how nonprofits’ inefficiency problem reinforces, and is reinforced by, the clientelism problem. Elected officials who count TODCO as a key political ally will be less inclined to police how efficiently it spends public funds. And the less capable the government is of monitoring how money is spent, the less it’s able to police possible corruption, even if it wants to.

Bring back state capacity!

I don’t think the U.S. is going to be brought down, as a civilization, by nonprofits wasting government money. It’s just one of many factors that appears to be a drag on our economic efficiency. But I do think that the overgrowth of nonprofits poses a danger to the progressive project as a whole. The more that progressive spending priorities are seen to funnel money into a black hole from which few actual services or social improvements emerge, the more the whole project will be discredited in the eyes of a weary public.

Fortunately, the grand bargain in favor of nonprofit outsourcing seems to be breaking down — or at least, starting to. Hardcore leftists have always criticized the “nonprofit industrial complex”, but now mainstream progressives are starting to pick up on the meme. Meanwhile, conservatives are starting to realize that nonprofits can easily turn into a black hole that eats up more and more taxpayer money with little to show for it. And urbanists who decry America’s high infrastructure costs have begun to realize that much of the wasted money goes into the pocket of consultants — and many nonprofits, including the Kounkuey Design Initiative that created La Sombrita, are officially listed as consultants.

Of course, in the absence of a political grand bargain will come a political fight. Conservatives will naturally want to just cut government spending altogether; progressives will have to come up with their own alternative solution. It is my hope that this solution is increased state capacity. In the words of John DiIulio — who was very early in terms of seeing the problem of government outsourcing — we need to “bring back the bureaucrats”. The civil service should be expanded, made more meritocratic, and given higher salaries to attract top talent. That would allow us to bring more government functions back in-house. That’s what “state capacity” means, and even some libertarians have begun to remember its value.

Because Ronald Reagan was wrong. "I'm from the government, and I'm here to help" is what you WANT to hear. The most terrifying words in the English language are actually "I'm from TODCO, and I'm here to take all your money and do nothing except line my own pockets."

Update: The city of Los Angeles has released a statement saying that the project was paid for with a private grant from a foundation, rather than out of taxpayer funds. I’m not sure this makes much difference, since money is fungible and that $200k could have been used for some other city function if it hadn’t been used for La Sombrita. Additionally, there is some evidence that that $200k was actually the price tag for another consulting project that the Kounkuey Design Initiative did for the city of Los Angeles, meaning that whatever funds paid for the project that produced La Sombrita, including the international travel etc., were in addition to that $200k.

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