Nonprofit Groups Have Role in Economic Policy

By BRUCE E. TONN

The nonprofit world accounts for an estimated 12 cents of every dollar in goods and services produced in the United States. Yet, in managing the nation’s economy, the Federal Reserve System ignores the huge impact of nonprofit institutions.

In fact, the Fed controls the nation’s money supply — and with it, the rate at which the economy grows and the ease with which businesses and consumers get credit — with nary a thought about how nonprofit activity affects commerce. Neither does the Federal Reserve effectively employ the billions of dollars in assets held by nonprofit groups to help sustain national economic health.

With charitable assets now totaling $2-trillion or more, policymakers should adopt additional monetary-control methods that take into account the economic power of the nonprofit world and that use that power to help the nation prosper.

Such a strategy would, in turn, raise the profile of the nonprofit world, make it a more effective participant in national social-policy deliberations, and help give it the financial wherewithal to achieve its philanthropic goals.

In addition, controlling monetary policy in part through the nonprofit arena would be a more environmentally friendly way of managing economic policy. Consumption spurred through nonprofit securities or bonds is likely to be less energy- and manufacturing-intensive than consumer and business consumption stimulated by traditional bank investments in commercial goods and services. A bank loan to build a factory leads to the consumption of raw materials and energy and the emission of pollutants. A nonprofit group’s spending on drug-addiction counseling or environmental education has no such liabilities.

Indeed, it is ironic that the “good works” of nonprofit groups, and especially of grant-making foundations, are so dependent on income drawn from investments made in the corporate arena — the very part of the economy that is the source of many of the problems that nonprofit groups are committed to solve. Counting on more consumption to raise stock prices and dividends so that additional money can be spent to cure environmental and other problems stemming from over-consumption is a strategy fraught with conflicts.

Three approaches, each tailored to the nature of the nonprofit world, would accomplish the goal of integrating the nonprofit world into the realm of monetary policy. They are:

Asset return. With this mechanism, charitable organizations — those registered under section 501(c)(3) of the federal tax code — would be allowed to convert any portion of their financial assets, including stocks and bonds, into federal funds that could be deposited at any Federal Reserve bank. The Fed would provide a guaranteed minimum return on those deposits. For example, deposits of grant-making foundations would earn at least 5 percent from the Fed — the same rate as the minimum percentage of assets that foundations must distribute annually to avoid penalties — and probably more to cover administrative and other costs and to allow the Fed room to make rate adjustments.

When the Fed wanted to increase the nation’s money supply to help spur economic growth, it could raise the interest rate paid on nonprofit deposits. When the Fed wanted to decrease the money supply to cool the economy and fight inflation, it could lower the interest rate paid on nonprofit assets, though not below the 5 percent threshold.

While an asset-return mechanism would probably provide nonprofit groups with lower average returns than they could get by investing in the stock or bond markets, charitable organizations could nevertheless benefit from a guaranteed return on part of their portfolios. And under this proposal, they would be able to sell federal funds back to the Fed at any time to gain maximum flexibility in managing their assets.

Nonprofit Treasury bonds. The U.S. Treasury would issue these special bonds to finance federal debt. Only charitable organizations could purchase them, and the charities would earn the same interest rate as any other Treasury-bond holder.

The Fed could buy bonds from and sell them to nonprofit groups as a means of controlling the money supply. Like most investments, these instruments would change in market value over time. Still, they would give nonprofit groups a guaranteed source of revenue, and they essentially would be a risk-free investment. Their value would not change drastically, as can the value of stocks. In addition, the bonds would carry no risk of default.

Nonprofit securities. The Fed would issue, at no charge, special securities to charitable groups in a one-time offering, based on the size of the charity. Initially, the securities would neither have value nor pay interest or dividends. But if the Fed decided to increase the amount of money in the banking system — a strategy used to expand credit and spark economic growth — it would pay interest to charitable groups that held the nonprofit securities.

Charities would use this money to increase spending related to their missions, which in most cases would spur local economies. They could also deposit that interest income in banks or use it to buy stock or bonds, also helping to stimulate the economic expansion intended by the Fed.

As soon as the Fed began to pay interest on the nonprofit securities, the securities would gain value, and nonprofit groups could trade them as part of their investment strategies. The Fed could also enter this market by buying and selling nonprofit securities.

These three approaches — an asset-return mechanism, nonprofit Treasury bonds, and nonprofit securities — are similar in some ways to those currently used by the Federal Reserve to control the money supply. Right now, the Fed can adjust the money supply by buying or selling government securities on the open market, raising or lowering a key interest rate it charges to banks for loans of government funds, and tightening or loosening requirements on how much cash banks must hold in reserve.

In other words, the Fed’s three established approaches influence the amount of money that is available for investment in the private, nongovernmental part of the economy. Likewise, the trio of new approaches would influence the amount of money that is available for social needs, including education, health care, and economic development, and for the environment.

It should be noted that the government would exert no centralized control over the investment decisions of nonprofit groups. Because the Fed would control only the returns paid to nonprofit groups on assets deposited in Federal Reserve banks or on their holdings in nonprofit securities, charitable groups would maintain the freedom to spend their money in ways that best meet their missions. That policy would coincide with the current approach of the Fed, which merely provides more or less money to thousands of banks, which then make their own decisions about how to lend it.

New monetary-control mechanisms related to the nonprofit world would have significant benefits that may not be so apparent at first glance. For example, the Fed may find that to meet its economic and employment goals, more investment in social capital may be necessary than investment in equipment and buildings — the kinds of things that banks normally finance. Increased investment in social capital would help nonprofit groups fulfill their human-service and other philanthropic missions.

What’s more, conventional wisdom holds that when the nation is faced with an economic downturn, the best response is to spur economic growth through increased business and personal consumption. Increasing the money supply through banks is the traditional way to accomplish that. The nonprofit world is, at best, a secondary beneficiary of economic growth under this approach.

The new monetary-control mechanisms would reverse this model. They would primarily affect the consumption of social, health, educational, and environmental services, which then would have ripple effects on the consumption of goods and services in the for-profit arena. In other words, money would first be exchanged among people and organizations in the nonprofit part of the economy rather than among banks, businesses, and purchasers of consumer-oriented products and services. With the new mechanisms at its disposal, the Fed could adopt a broader and more inclusive economic framework as it decides how best to manage the economy.

For all these reasons, then, it makes sense for the nonprofit world to devote its full attention to matters of economic policy and to the important role that charitable organizations could play in helping to shape the nation’s economic future.

To be sure, implementing these ideas would require considerable thought and debate, with special attention paid to how they would affect the methods that the Fed already uses to manage the economy. But one thing is clear: Monetary policy should include the nonprofit world, and the debate on how to make that happen should begin soon.

Bruce E. Tonn teaches in the graduate school of planning at the University of Tennessee in Knoxville and is a policy analyst at the Oak Ridge National Laboratory in Oak Ridge, Tenn.