In the summer of 1986, President Ronald Reagan held a press conference in which he declared, "The nine most terrifying words in the English language are: I'm from the government, and I'm here to help." That got a big laugh back in the day when the government was half the size it is today. But as it keeps growing and growing, the danger is that it will crowd out all the good that can be done in the areas outside the government: The markets, the nonprofit sector and the grass-roots organizations that help so many Americans live a better life.
That space between the individual and the government is where American ingenuity thrives. It's the home of the free market, where the best and newest ideas have come from – miracle drugs, smart phones, online learning programs, social networks, even cars that can drive themselves. That space also includes all the nonprofits – the churches, community service organizations, hospitals, charities, arts organizations, medical research labs and charter schools that are on the front lines of changing lives for the better.
Thanks to ordinary Americans donating millions of volunteer hours and millions of dollars to causes we love, we've seen transformational benefits. As Bill Clinton is fond of saying, "There is nothing wrong with America that can't be cured by what is right with America."
But why, after many decades, do we still struggle with so much homelessness? Breast cancer death rates have stayed the same for years. The number of kids with autism-spectrum disorders is skyrocketing. Nearly 50 million Americans are now living in poverty. Clearly there are some problems that are not being solved.
One reason for the lack of progress is the way our society views nonprofit institutions that are working to address these issues. We have social problems that are massive in size, and yet the organizations working to solve those problems are small in comparison, and our system is keeping them that way.
"We have two rule books: one for the nonprofit sector, and one for the rest of the world," says Dan Pallotta, founder of AIDS Ride in a TED talk, "The Way We Think about Charity is Dead Wrong." As a result, he says, we are undermining all the good that could be done.
For example, Pallotta argues that nonprofits are barred from taking risks in pursuit of new ideas for generating revenue. "Disney can make a new $200 million movie that flops, and nobody calls the Attorney General. But you do a little $1 million community fundraiser for the poor, and it doesn't produce a 75 percent return in the first 12 months, your character is called into question," he says. So charities are afraid to take on any large-scale, innovative new fundraising ideas in case they fail because they fear their reputations will be ruined at the hands of well-intentioned, charity-rating organizations. And because they don't want to fail, charities lose their interest in taking risks and innovating, bringing in new revenues, and ultimately, growing to fit the scale of society's biggest challenges.
The result is that most charities can't generate enough scale to be effective: from 1970 to 2009, only 144 charities reached $50 million in annual revenues; meanwhile, over 46,000 for-profit businesses did. If we are going to unleash nonprofits, we have to start treating them more like startup enterprises and rethink the rules.
Here's one problem: there's a lack of compensation for luring the top talent from business into becoming leaders of nonprofits. "We have a visceral reaction to the idea that anyone would make very much money helping other people. Interesting that we don't have a visceral reaction to the idea that people would make a lot of money not helping other people," Pallotta argues. "You want to make $50 million selling violent video games to kids, go for it. We'll put you on the cover of Wired magazine. But you want to make half a million dollars trying to cure kids of malaria, and you're considered a parasite yourself."
Nonprofits are also held back by a public aversion to charities spending money on advertising and marketing; an inability to attract venture capital which is starving nonprofits of investment and hurting growth; an obsession over reducing "overhead" often to unsustainable levels; and a lack of patience while charities make investments in long-term goals. Pallotta points out that Amazon took six years to return a profit to investors while it built market dominance; if a nonprofit did something similar, "we'd expect a crucifixion."