Hard times hit charities, too

As Congress debates steep budget cuts in social services, and many states are already moving forward with such cuts, President Bush and congressional lawmakers have called on charities to play a greater role in helping Americans hurt by the economic downturn. Their arguments echo the themes of "compassionate conservatism," which stress that charities can do a better job than government at helping those in need. The problem, though, is that many charities have been even harder hit by the downturn than government and are in no position to fill the social-service breach left by budget cuts.

The endowments of many US philanthropic foundations have declined by a third or more in the past several years, and individual giving is also way down.

The plunging stock market has also devastated charitable giving by individuals and corporations. In the late 1990s, a new generation of philanthropists set out to harness high-tech fortunes to social change. Now many struggle just to stay in business. Across the nation, charitable organizations are being asked to do much more, even as they must make do with far less.

The bad timing of the downturn in charitable giving is a reminder of the danger of relying too much on civil-society institutions to provide a social safety net. Today, many of the large nonprofit organizations helping the poor rely both on philanthropy and on government funding. The economic downturn is causing revenue from both sources to decline even as the demands for charitable help go up sharply. Still, President Bush and other Republicans insist that nonprofit organizations should do more.

The current downturn underscores one of the central flaws of compassionate conservatism: A weak economy hurts giving at the pew and the office, just as it hollows out foundation stock portfolios. Inevitably, tax revenues fall steeply in downturns, which leads to government spending cuts - typically, social services are targeted for some of the deepest cuts. The state budgets are particularly volatile; today, state governments are experiencing their worst fiscal crisis since World War II. Recent cuts in state services are so devastating because, after two decades of "devolution" of federal roles to the local level, states have more responsibility than ever for maintaining the social safety net.

As charities and other nonprofits radically tighten their belts, a heady golden age for America's nongovernmental sector is coming to an end. Emerging hopes that this sector could do better than government at easing social ills - hopes championed by the right, but not uncommon on the left - seem naive in the context of recent funding trends. It should be recalled that the idea of legally entitling people to government assistance was developed in large part to save them from the vicissitudes of charity. This idea makes even more sense in an era where so much charitable giving hinges on the performance of the equities market.

It's not just conservatives who should be rethinking their ideas for social policy in this new and more austere era. Recent boom times - and a doubling of charitable giving in the past decade - also led many liberal-minded activists to imagine a much more expansive role for the nonprofit sector in solving social problems. Young "social entrepreneurs" founded nonprofit organizations like Teach for America and Do Something during the 1990s to achieve goals that, in an earlier era, they would have pursued through government. These efforts have been laudable, but are also proving to be extremely unstable, and leaders of many new nonprofit groups are now scaling back their operations.

Better economic times are sure to return, along with more generous giving to charity. And, over the next few decades, the funds held by US foundations are expected to grow dramatically - rising from nearly half a trillion dollars today to several trillion dollars. The nonprofit sector will be, and should be, an ever more central player in addressing America's social problems. For the foreseeable future, however, it will remain a junior partner to government. Charity, as Bismarck first acknowledged in the 19th century, is no substitute for social insurance.

• David Callahan is research director at Demos, a public policy organization in New York.