Does charity make economic sense?

Factual Questions
1

The recent events in Haiti, coupled with reading the book *Freakonomics *has rekindled my interest in an issue I have often wondered about. That is, are charitable donations the best way to help others?

My gut feeling is that there are numerous factors to consider when deciding how much we as a nation should give. Therefore this decision would best be handled by the government aid agency, which gets its funding from the tax payers.

Is this correct, or is there a need for charity also? Is there a consensus amongst economists / academics on this issue?

2

Any money given with no strings attached, and no expectation of payback - whether given by the government or by NGO’s - is charity. Your question reduces to how much charity should be given, and who gets to decide.

This is likely to end up in Great Debates. But I will offer this article for your consideration, which outlines (in the second half) the ways in which a country’s budding economy/government can be smothered by excessive/chronic aid.

3

Let me offer the suggestion that it depends entirely on what “makes economic sense” means. There is a very real way in which buying insurance mades no economic sense – you are paying money to Mutual of Marlon Perkins for something you do not currently need: car repairs, medical care, support of your wife and children, whatever. The idea is, while you have life, health, and employment, you pay money so that in the event you lose one or more of the above, you will then have provided for that which you will not then be able to afford. I could not have paid cash for my heart surgery – but I could certainly set up a bet with the insurance company that I might someday need heart surgery, them betting I wouldn’t and me betting I would, and when I did, they paid for it. (This presumes insurance will work as it is supposed to, none of the “we’ll find an excuse not to pay” chicanery that has been repeatedly mentioned in HCR debates.)

In a very real sense, insurance is the Golden Rule at work – I’m prepared to pay in money to cover the present needs of others, the pool ensuring that when I need help, I too will be covered.

Charitable giving is along the same lines: having resources, one gives to help others who are in need, just as one would wish that they would in turn help if the shoe were on the other foot.

For me, the Nineties were sandwiched between two natural disasters that I lived on the edge of: Ice Storm '91 and Hurricane Floyd. Help from this area flooded into the area impacted by Ice Storm '91; help from the Northeast was sent down here when Floyd struck.

Morally, we help those in need in the expectation that someday we may be in eed and will likewise be helped. The same logic as underpins the principle of insurance also underpins the principle of charity. And that makes perfect economic sense to me.

4

I think the OP’s question was not about reciprocity/payback. Rather, given that one wants to help the downtrodden, how much help should be provided (there is such a thing as too much), and in what manner should that help be given.

5

Even on that basis, there are too many factors to consider. How much of the aid goes directly to the people? Do they spend it well?

I don’t know of any economist who thinks voluntary charitable giving is a bad idea. The questions involve whether its sufficient to solve the problem and whether government programs are also needed.

6

how do you jump from “many factors to consider” to “government agency ought to decide”? Do you happen to think that American federal government nowadays is better skilled at considering many factors than various private organizations, such as American charities?

Case in point - there were probably “many factors to consider” about how to get gasoline to American troops in Iraq, so some agency ended up giving the contract to Haliburton reputedly for exorbitantly inflated prices. Perhaps in a more competitive environment (as in, you know, different private entities offering different solutions and not being told to get lost on account of factor complexities) that gas might have gotten there much cheaper.

The same quite possibly applies to the work being done by American military in Haiti as well. Come to think of it, by definition if you have American soldiers doing something (moving the rubble, handing out water, tear gasing the locals, etc) it is going to cost ten times more than having the same thing done by private contractors (who might be Chinese and so on, with much lower salaries and force protection expenditures).

7

I believe this interpretation is closer to what the OP asked.

I would also restate the question as… which method is more efficient and effective?
tax payments → government aid MINUS their overhead → humanitarian products & services
donations → charity organizations MINUS their overhead → --> humanitarian products & services

Probably depends on a case-by-case basis for what types of services. Does the Red Cross provide more bandages and tents per dollar than US military peacekeepers? I have no idea.

8

How does one calculate the likelihood that a private charity is corrupt, versus the odds that a given government is corrupt?

9

Thanks for sharing that article Joe it was an interesting read. Strangely, I had never considered the possibility that there could be a limit on how much aid could be usefully received, what I had in mind when I asked my question was how much could be usefully given.

I realise by reading the replies from other posters that I was not clear enough with my question. Sorry about that, maybe an example would help.

Lets say that we use 1% of our GDP on aid annually. With this level of spending our GDP grows at 4% per year.

Then suppose we increase the amount of aid we pay to 2% of the GDP. This results in our GDP shrinking by 1% per year.

Using these (made up) numbers, over a 30 year period, we would actually pay more aid by spending 1% as opposed to 2%.

Based on this idea, I conjectured that there is an optimum amount of aid that should be given. You can imagine how this would manifest itself - if we give everything we have, there is no money to invest in improving technology etc.

After doing a Google search I found that there is a government aid agency, whose objective is “to assist developing countries reduce poverty and achieve sustainable development”. I imagined that this agency would be devoted to figuring out this optimum aid amount.

The next thing that occured to me was the impact of NGOs. The government can control the aid amount precisely, unlike organisations reliant on donations. If the aid agency is already giving the optimum amount, would further donations hurt the GDP, resulting in less aid overall?

According to my little calculation, the answer is yes. But it is very simplistic, and I just made up the number for impact on GDP. However, the effect above may be the dominant one, I don’t know, hence my quesiton.

So, I was really trying to ask whether the source of NGO funds is economically sensible, not how the funds are spent. Does anyone know the answer, or of any studies on this?

10

Are we just talking large scale disasters like Haiti? Or are we extending it to poor relief at home?

Consider the case of Million Dollar Murray (an oft/over-used example, to say the least). At what point do we recognize that the limitations that taxpayers and voters place on welfare programs is ultimately costing us more money than it would if we spent more up front? What if, instead of waiting for people to allow chronic conditions to fester and force them into the emergency room, or providing such little services that the emergency room is the only form of assistance they can receive - we spent quite a bit more money up front? Got Murray into housing -no questions asked - and stabilized him so that he wasn’t going into the emergency room every other day?

There are places this example doesn’t match up with the question, but I think it still works.

11

Anything only makes economic sense if it results in profit. Keeping a failed country running saves lives but to some extent simply prolongs the state of failure–which might not be as flamboyant as sudden massive deaths–but often a constant, steady bleed ends up worse than a single massive wound that doesn’t last very long. And often it’s that they are a failed nation that keeps people in poorly constructed houses with poor infrastructure that makes an earthquake or storm or anything damaging. Propping all this up is an economic sinkhole. Until you turn the place around, you’re not going to see any sort of trade-born profit from the money.

If you have a plan for turning the country around, then the money isn’t really charity, it’s capital.

Of course, that’s only talking about failed/impoverished nations. For different acts of charity, it might be more on the order of capital or insurance or whatever.

12

I’m a little puzzled by your definition of optimum. Given the way you’ve framed the problem, the optimum level of charitable aid is zero. You are only looking at costs and aren’t accounting for the benefits. No one gives to charity to help the economy, clearly it’s a net loss for the economy.*

*At least at a crude level of measuring domestic GDP. I suppose you could make the argument that $1 of aid produces $5 of GDP value in some cases, but I don’t think that’s where the OP is.

13

Million Dollar Murray would be unthinkable in a society where medical care is delivered in an efficient manner. Just because American emergency room care costs a zillion dollars per hour doesn’t mean that this is an inevitable situation (just look at the foreign competition, so to speak). Inferring from all this horrendous, government regulations driven inefficiency that we need more-streamlined, more inclusive, more “fair” government regulations to finally get things working is a favorite practice of the Commies (as well as the healthcare administrators) of the world.

14

Coming back to the OP’s discussion of optimal resource allocation in charitable aid, I think his argument is an interesting one, but it misses, once again, the efficiency/results emphasis. If America sent a million dollars worth of aid to a foreign country last year and two million dollars this year, is that “twice as good”? Suppose last year the money was spent by a smart charity to get some incredible results in cost-efficient manner. Further suppose that this year that charity went broke (government taxed its supporters out of business and into bankruptcy) and the increase “aid” is actually money poured down the drain by the Department of Wasting Money In 3rd World Countries In Socially/Environmentally Responsible Manner? Such considerations would have been irrelevant in a “perfect world” where the aid money usually does in fact get spent productively, but that’s not the world we live in right now.

15

I believe you have interpreted the OP’s question the best. I would posit that charitable giving should be an individual’s choice. The government should not be in the business of using my tax dollars for charitable purposes that I may not agree with. So reduce my taxes and let me give to the charities I want to.

16

OK. So when we got those tax rebates a few years ago, which charity did you give yours to?

17

Another effect the OP should consider is that aid money is often spent on goods and salaries in the donor country. In this sense it works as stimulus spending (with corresponding economic benefits and drawbacks depending on the state of the donor economy).

18

I didn’t receive a tax rebate a few years ago, because my adjusted gross income was/is too high. So don’t even get me started about that.

But I have given to numerous charities and continue to do so, one of my favorites is Doctors without Borders.

19

Thanks to everyone for your replies, there were many good points raised. I think I now understand part of the question I was trying to ask. Let me summarise what we have covered to make sure it has sunk in.

  1. The provision of aid to needy countries is an important action for all developed nations. This is true both from diplomatic and moral standpoints.

  2. In general, the amount of money that is spent on aid is positively correlated with the improvement in quality of life felt by the recipients. However as the amount spent increases an upper limit (or at least a region of diminishing returns) is reached.

  3. This upper limit may be due to restrictions on the supply side or the recipient side.

  4. The restriction on the supply side arises when the amount spent restricts growth of the nation’s economy. This causes a decrease in the potential to give aid in future, lowering the total amount of aid that can be provided over a given period.

The corollary of this point may illustrate the idea better. Consider a project requiring a set amount of resources, say, bringing the standard of living in a developing country up to developed nation standards.

In my example above, this would be completed *quicker *by using a lower fraction of the GDP for aid. It would be *slower *to use a higher fraction as it would hurt the growth of the GDP, reducing future aid repayments.

  1. The limit on the recipient side arises due to a number of effects. These include logistical problems, reduced efficiency and complacency by the recipients.

  2. From points 2 and 3 it is clear that in order to complete a project (eg restoring Haiti) as quickly as possible, the amount of aid cannot be too small (as it would take longer) or too large (as we would encounter one of the limits mentioned in 4 and 5). The amount that would solve the problem most quickly (which is what I meant by the term optimum, muttrox) lies somewhere in between (or at the upper boundary in the case of a hard limit).

That is what I have taken away from this so far. Does anyone spot any flaws with the points above? If so please tell me so I can learn.

The remaining part of my question is to what happens in reality. Specifically:

A. Are the upper limits of constructive receipt or provision of aid ever approached? Some of the articles and replies mentioned instances of reaching the recipient limit, but are these exceptions or the norm?

B. When governments decide how much they will spend on aid, do they take the provider limit and recipient limit into account?

C. What role does this leave for private donations to NGOs?

20

I don’t see how your question can be objectively answered. The targets for “improved quality of life” are subjective.

Take the USA, for example. It’s the richest country on the planet. And yet I’m sure we wouldn’t mind being the recipients of donations from other countries. If Germany and Japan were to give the USA billions in aid, even the relatively wealthy citizens of USA could put the donations to use: provide free healthcare, scholarships for more students, renovate Detroit Michigan, build a high-speed rail from New York to Los Angeles, etc, etc.