The Economic Impact of Nonprofit Organizations (Part One)

The American economy—and much more, the global economy—is incredibly complex. The economy is composed of multiple moving pieces that each interact with and influence each other’s successes and failures. Because there is not one single component of our economy that could possibly exist in a vacuum, in order to gain a comprehensive understanding of the way our economy works, it is important to examine its many moving pieces.

Non-profit organizations play a vitally important role in the American economy. In fact, recent estimates show that non-profits account for roughly 5.3% of the nation’s total GDP and 9.2% of all wages and salaries—that makes nonprofit organizations roughly a trillion dollar industry.

The United States non-profit sector alone would rank as the 17^th largest economy in the world.

What is the historic role of non-profit organizations in the United States?

Non-profit organizations can be defined as organizations that reinvest their surplus revenues in pursuit of achieving some cause (mission) rather than using these revenues to increase shareholder wealth. Some nonprofit organizations, such as the Catholic Church, are thousands of years old; but most are much younger. In fact, well over 90% of all non-profit organizations have been founded since the year 1950.

Many non-profits have emerged largely out of the need to provide a good or service that the rest of the private sector has been unable or unmotivated to produce on its own. Examples of nonprofit organizations include charities, political organizations, religious organizations, educational institutions, museums, and numerous others. In a country that is so intensely driven by a love of the free-market, these organizations have uniquely been able to provide necessary social goods without having to rely on government intervention.

At first, it seemed unlikely that non-profit organizations would be able to stand much of a chance in the United States. After Henry Ford attempted to reinvest his tremendous profits in charitable causes—ignoring the potential increase in wealth of his shareholders—he was overruled by the Michigan Supreme Court in the since frequently sited case of Dodge v Ford Motor Company (1919).

The Ford ruling thus established what has often been called “shareholder primacy”. This sort of primacy has long been interpreted to mean that a corporation has a legal obligation to maximize shareholder wealth above all else. However, due to various legal, political, and financial battles over time, the distinctively recognizable nonprofit economic sector was able to eventually begin to formalize itself in the 1970s and 1980s.

This formalization involved numerous reforms, particularly initiated through legislative changes and the actions of the Internal Revenue Service. Though some organizations (mostly religious) have had the option of filing as non-profits since the Revenue Act of 1913, most were not able to do so until the IRS decided to tremendously expand its definition of what a tax-exempt organization could be (section 501).

Since the reforms that have taken place in the late 20^th Century, the non-profit sector has been tremendously expanding. There are now more possible ways to acquire tax exempt status than ever before, and because of this, 1.6 million non-profits are able to currently operate in the United States and tens of thousands are now choosing to open their doors every year.

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What is the current role of non-profit organizations in the United States?

As stated, non-profit organizations play an incredibly important role in the American economy and account for nearly $1 trillion in economic activity. Additionally, non-profit organization have tremendously boosted the overall employment rate, and have been noted for providing over 14.4 million jobs in 2013 (the last year a full set of data is available for).

Even during the years 2007-2009, despite the fact that the overall economy was experiencing a ‘Great Recession’, the non-profit sector was able to continue growing. While the rest of the private sector was actively losing jobs at a rate of 3.7% per year, the non-profit sector was able to continue gaining jobs at a modest—but still positive—rate of 1.9% per year.

Even when the average person has been strapped for cash, the non-profit sector was still able to experience positive growth.

The fact that the non-profit sector has been able to experience positive growth virtually every year since its formalization in the 1970s demonstrates the fact that it is an important component of the economy that is here to stay. The non-profit sector creates jobs, provides systematic financial security, and is able to help move financial assets to where they are objectively needed the most.

Perhaps the reason why the non-profit sector of the economy has been able to do so extraordinarily well is that it is a sector that is willing to put people before profits. Most non-profit organizations are founded with a mission; they want to be able to do something that will benefit people other than themselves. As long as people will have a drive to care for one another and provide something that is able to benefit society as a whole, then it seems nonprofit organizations will continue to thrive.

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