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Thursday, October 2, 2008

Good News in the Bad Economy

At this point the economic downturn has affected just about every single person in our country. The housing market has collapsed, investments are dwindling fast, jobs are disappearing, and a bailout plan is being hotly debated. As we have mentioned previously on this blog, charitable organizations are suffering as a result. Not only have a majority of organizations seen private contributions, government funding and other revenue drop, but simultaneously, demands for services have increased. The impact this has on charities will change the shape of the non profit world.

We have noted in the past that the IRS has a tendency to give out non-profit charity approvals "like candy". The current number of charities registered in the U.S. is over 900,000. In the midst of a suffering US economy, where it is anticipated that donations will be down in all categories, the competition for dollars will be fiercer than ever. Furthermore, the incredible number of charities that are soliciting donors can be overwhelming and confusing. So what is the good news in this?

We do think some positive changes for donors will occur as a result of the bad economy. We may finally see some poorly operated agencies close, and some providing redundant services merge. In other words, in some cases, there are more charities that are working on an issue than are necessary, and usually some are bad at it. This leads to an inefficient allocation of resources and by extension, a less effective impact. As agencies go through retrenchment, the smaller and less financially efficient charities will not be able to cut back enough to survive. This will leave more room for other, well prepared organizations to step in. These organizations should be able to expand their services, since there will be less competition for their donations. It is also conceivable that similar minded organizations will consider merging their operations, thereby cutting down on overhead costs and creating more efficient and leaner organizations.

This is not to minimize the down side. As we have noted elsewhere, the bad news in the bad economy is that vitally important services may be closed or downsized. However, the good news is that some of the worst-run organizations will no longer be competing for donations and it will be easier for donors to choose which organization to support. Also, due to mergers, more efficient organizations will be operating. This is good for donors and for the causes we care about.

Note: It is my pleasure to have collaborated on this blog entry with my colleague Leonie Giles who is a Program Analyst here at Charity Navigator. It was her idea to do this week’s entry and much of the content is in her own words. Thanks for your wonderful insights Leonie!

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