Critic of Report on Philanthropy’s Value Got Facts Wrong

To the Editor:

Leslie Lenkowsky’s comments on our study merit a response (“In Philanthropy, It’s Not Just About the Numbers,” Opinion, January 29). We respect his concerns, but his criticisms generally seem to reflect a hasty reading or a misunderstanding of economic analysis.

His first argument is that “philanthropy’s value goes far beyond its social and economic benefits, and its defenders ought to be more forthright about saying so.”

Our report is an objective analysis of the social and economic benefits of foundation support — as its title plainly states.

Mr. Lenkowsky’s remarks continue that “[n]either the direct nor the indirect benefits the report calculates can be specifically attributed to foundation spending. Instead, those are estimates of the benefits provided by organizations that work on causes that attract private and community foundations.”

Foundations largely create value through grant activities and other means of supporting nonprofit organizations in diverse fields, rather than by engaging directly in projects that generate social and economic value. Therefore, the soundest way to value the work of foundations is to value the work of the organizations they help support, and calculate the return on the support provided by the foundations. In economics, the value of money is the value of the goods that money helps buy, and this is the approach of our study.

Our analysis estimates average rates of return on the funds that foundations provide across diverse areas. Mr. Lenkowsky is concerned that these estimated rates of return apply to organizations that depend more on independent donations and other sources of support, rather than foundation giving, and therefore are not accurate estimates of the return on foundation support. His concerns are misplaced, as economics students would recognize: The rate of return calculation refers to the return per dollar of investment, whether that dollar came from foundations, private donations, or the nonprofit’s fees or own funds. This is the same approach commonly used for shareholders in private companies or mutual funds: All shareholders gain or lose at the same rate when the market rises or falls, although the absolute return will vary across shareholders depending on the size of their investments.

Mr. Lenkowsky also is concerned that we include examples of public-sector investments in our analysis of rates of return. We do so, as do other researchers in this area, because government and foundations often support very similar activities — such as programs for educational or housing assistance for indigent people, or support for arts organizations — and government and foundation funding often complement each other.

Mr. Lenkowsky also questions the “large” numbers we obtain for employment generation linked to foundation support. His concern rests again on perhaps a hasty misinterpretation of the analysis. The report states clearly that the employment figure of nine million represents actual employment in American charities as estimated by the Johns Hopkins Center for Civil Society Studies and that “we use employment by nonprofit, 501(c)(3) charities as a proxy for employment by the organizations and entities receiving foundation support.”

In fact, these employment data are used primarily to calculate the employment levels across the diverse fields served by charities, relative to employment by arts and cultural nonprofits, rather than as a direct measure of employment creation. These ratios then are used to estimate the indirect benefits generated by different sectors of the nonprofit world, such as household incomes and taxes. This is the standard for economic analysis of such questions.

As to Mr. Lenkowsky’s general complaint about the lines between government and foundations, one should not be surprised that a former official of the Reagan administration would have a different view of this question than myself, a former official of the Clinton administration and an adviser to the campaign and transition of our current president. These differences, however, played no part at all in our analysis.

Robert Shapiro
Chairman, Sonecon
Senior Fellow of the Progressive Policy Institute
Washington

Aparna Mathur
Research fellow
American Enterprise Institute
Washington