Unhealthy Charities: Hazardous to Your Health and Wealth.

Lee, Dwight R.

Most economists are by their nature contrarians. Let any proposition become widely accepted and some economist will begin attacking it with the heavy fire power of economic analysis. Contrariness does not always make economists popular, but it does make them useful. Comfortable beliefs are tempting, but often misguided because they ignore harsh realities that good economists were put on Earth to constantly and, if need be, obnoxiously remind people of. Few economists are better contrarians than James Bennett and Thomas DiLorenzo, and their latest book, Unhealthy Charities, is a great example of how useful the critical application of economic analysis to widely held views can be.

Some of the most trusted organizations in America today are health charities, in particular the Big Three: the American Lung Association, the American Cancer Society, and the American Heart Association. Because they are so trusted, the Big Three health charities can raise large sums of money and have considerable latitude in how that money is used. There is a widespread belief that most of the money contributed to the Big Three is being used to fund medical research and to help disease victims who, because of their income or circumstances, are most in need of help. Bennett and DiLorenzo put this belief in the crosshairs of their analytical artillery and unleash a devastating barrage of theory and fact against it.

Bennett and DiLorenzo examine the three major health charities the way good economists examine any organization. Of primary importance is to consider how people who have not yet fully mastered the art of ignoring their self-interest can be expected to respond to the relevant incentives. And if the analysis suggests that people will behave differently than indicated by their pronouncements, it is the pronouncements that are questioned unless supported by a hard look at the evidence.

Competition for consumer dollars serves as an effective means of channeling self-interested behavior into public-interest outcomes in most private settings. Such competition is not completely without force in the case of charities, and one implication of a self-interest model is that those who operate a charity will not appreciate competition from rival charities even when that competition promotes the charitable objective. Indeed Bennett and DiLorenzo have a fascinating chapter (Chapter 8) on attempts by the Big Three health charities to use their political power to eliminate competition that they would welcome if their only concern was to advance their stated objectives.

But a crucial difference in the competition faced by most private organizations and the competition faced by charities results from different motivations of those paying for the service. In most cases those who pay for a service provided by an organization are the primary beneficiaries of the service. So those who pay for the service have the ability and motivation to determine whether the service meets their expectations. This is obviously not the case with charities. Those who pay for charitable services (donors) are not those who receive the primary benefit (the poor, the infirm, the worthy, the artistic, etc.).

Why then do donors donate? Primarily because of private benefits from donating to what are seen as worthy causes, positive benefits that come from feelings of virtue and not-so-positive benefits that come from social pressure. Donors also receive the benefits of living in a society with less poverty, better care for the ill, greater artistic appreciation, etc., if the contributions are used wisely, but these are public goods and in most cases do little to motivate charitable contributions. So once a contribution is made, the donor has little motivation to determine how the money is actually spent. Indeed, there may be a negative motivation to do so, since information on what a charity does with your donation may be hazardous to the sense of virtue you received when making it. It is not surprising then that, as Bennett and DiLorenzo point out on page 96, "Only a miniscule proportion of donors takes the effort to check out charities to which they contribute."

An important implication of "rationally ignorant" donors is that those who operate charities have more latitude than most people realize to put their own interests ahead of the interests of their donors and putative beneficiaries. Far less money donated to the Big Three actually goes for the worthy purposes they supposedly promote than most people realize. For example, despite the widely accepted claims by the Big Three that they are contributing large amounts to medical research, in fact they contribute very little. And what they do show as research expenditure is usually seed money to help medical researchers prepare proposals for federal funding, with tax dollars funding almost all of the actual research. The researchers selected for receipt of seed money are, of course, appreciative, and happy to lend their scientific prestige to enhance the reputation and credibility of the Big Three with the public. The Big Three use this public support to lobby the federal government for more funding for the National Institutes of Health (greatly appreciated by these Institutes), and to urge the NIH to support favored researchers. The result is a closely knit network of professionals from the health charities, established research organizations and the National Institutes of Health which Bennett and DiLorenzo argue fosters an "in-group" mentality that may have retarded progress in medical research.

The authors document a host of other instances of how donations to the Big Three are allocated in ways that do more to serve the private interests of charity professionals than to promote their stated objectives. Although economists should not be surprised by the activity Bennett and DiLorenzo uncover, some of it will shock even us. Bennett and DiLorenzo make suggestions for reform in their closing chapter, such as applying state freedom of information acts to health charities. But their previous discussion does not inspire much hope that these reforms will be implemented any time soon, or do much good even if they are.

It should be emphasized that although the authors concentrate their attention on the Big Three health charities, their analysis is quite general. So if you want to secure at least a warm and fuzzy feeling of virtue in return for being pressured into donating to the United Way this year, then don't read this book. But if you enjoy a provocative discussion, backed up by solid theory and compelling evidence, then I highly recommend Unhealthy Charities.

Dwight R. Lee University of Georgia