Nonprofits, Foundations, And Capital Formation

 On Sean Stannard-Stockton's Tactical Philanthropy blog, he commented that "One of the most bizarre criticisms of the Giving Pledge is the idea that it will hurt the economy." He quotes Forbes columnist John Tamny, who wrote:

“But while it’s exciting to contemplate the giving nature of Gates and Buffett, if their true desire is to help their fellow man, they should hoard every penny of their significant wealth..."

Stannard-Stockton's  response is demonstrate how nonprofits contribute to the economy, saying, in part:

"Nonprofits employ people, nonprofits buy goods and services from for-profits, nonprofits are an important economic engine of the US economy. In fact, nonprofits are a bigger portion of the economy than many other industries."

Certainly, for all the reasons mentioned in his post, nonprofits contribute to and benefit the economy of our nation and our individual communities.

But, in relation to the Gates-Buffett pledge, there's another "dirty little secret" of why the Forbes readers (assumed captains of industry) should support philanthropy of this scale: Endowments.

Of the money pledged by the 40+ billionaires, most of it will not be heading directly to our community service organizations; it will be sitting in foundation endowments, being granted out at a rate of 5% each year.

With that 5% barely being the earnings on the endowment, where's the principal of that endowment going? It's being invested. It's purchasing stocks and shares of mutual funds. It's in long-term bank accounts, giving banks the capital to loan to small businesses.

If John Tamny (and Forbes Magazine) is sincere when he says that "money saved and invested constitutes capital... and... capital formation... naturally stimulates job creation" then he should be encouraging more billionaires to tie up their wealth in foundation endowments.

Yes, nonprofits help build the economy, both through our direct actions assisting in our communities with job training, treating addiction, feeding the hungry, distributing gently used clothing, and offering counseling, support, and affordable housing (not to mention enriching our lives through the arts, cleaning our environment, protecting our children, etc.), but our sector is also responsible for the creation of dedicated capital for investment, something that our nation desperately need right now.

Stand up for the nonprofit sector; the most productive sector of all.