America's Nonprofit Sector: a Primer

by Lester M. Salamon

Introduction

Modern societies, whatever their politics, have found it necessary to make special provisions to protect individuals against the vagaries of economic misfortune, old age, and disability; to secure basic human rights; and to preserve and promote cherished social and cultural values.

Because of growing social and economic complexity, what could be handled at an earlier time, however imperfectly, by a combination of self-reliance, spontaneous neighborliness, and family ties has required more structured responses in modern times.

The nature of these responses varies, however, from place to place. In some countries, governments have guaranteed their citizens a minimum income, and a minimum level of health care, housing, access to culture, and other necessities of life. In others, private corporations or private charitable institutions shoulder a far larger share of the responsibility for coping with human needs. And in still others, complex, mixed systems of aid are in force, combining elements of public and private provision, collective and individual responsibility.

In few countries is the system of aid more complicated and confusing, however, than in the United States. Reflecting a deep-seated tradition of individualism and an ingrained hostility to centralized institutions, Americans have resisted the worldwide movement toward predominantly governmental approaches to social welfare provision, adding new governmental protections only with great reluctance, and then structuring them in ways that preserve a substantial private role.

The result is an intricate "mixed economy" of welfare that blends public and private action in ways that few people truly understand. In fact, the resulting system is not a system at all, but an ad hoc collection of compromises between the realities of economic necessity and the pressures of political tradition and ideology.

One of the more important features of this American approach to social welfare provision is the important role it leaves to private, nonprofit organizations, to nongovernmental institutions that nevertheless serve essentially public, as opposed to private, economic goals. These organizations do not operate only in the social welfare field, moreover. Rather, they play many other roles as well serving as vehicles for cultural expression, as mechanisms for political action, as instruments for social cohesion, and more.

Of all the components of American society, however, this is the one that is perhaps the most commonly misunderstood and about which the least is known.

The purpose of this "primer" is to overcome this widespread lack of knowledge about America's nonprofit sector and the role it plays in American life. To do so, however, it is necessary not only to examine the scope, scale, and structure of the nonprofit sector, but also to put this set of organizations into context in relation to government and private businesses operating in the same fields.

Clearly no work of this scale can offer a full evaluation of the nonprofit sector and its contributions to community life. The conscious attempt here, therefore, is primarily to be descriptive, to portray the major components of this complex system (see Figure 1) and show how they fit together, and to do so in as accessible and nontechnical a fashion as possible.

What is the Nonprofit Sector?

There is a vitally important set of institutions in American society that, despite many differences, nevertheless share certain common features. It consists of organizations that are private, self-governing, non-profit-distributing, voluntary, and of public benefit. Together they comprise what we will call the nonprofit sector.

The existence of this set of organizations is partly an accident of history. But it has more concrete foundations as well in the inherent limitations of the market in responding to public needs, in the inherent limitations of government as the sole alternative mechanism to respond to market failures, in the need that a democratic society has for some way to promote cooperation among equal individuals, and in the value Americans attach to pluralism and freedom.

The rationale for the existence of a nonprofit sector is not peculiar to American society, of course. The same arguments apply to other societies as well, particularly those with democratic governmental structures and market-oriented economic systems. But there is no denying that these organizations have come to play a particularly important role in the American setting. While there is reason to question whether American nonprofit organizations always live up to the expectations that these theories assign to them, it seems clear that the existence of such a set of institutions has come to be viewed in this country as a critical component of community life, a convenient and fulfilling way to meet community needs, and a crucial prerequisite of a true "civil society."

Overview: Basic Dimensions

As reflected in Figure 2, the nonprofit sector is not only a quite important, but also a quite sizable, presence in American society:

• As of 1995, this sector included approximately 1.6 million identifiable organizations, or more than 6 percent of all organizations of all types (nonprofit, business, and government) in the country.

• These organizations had revenues as of 1996 of $670 billion, which is equivalent to nearly 9 percent of the U.S. gross domestic product. (See Figure 3 for sources of income.) In fact, if the U.S. nonprofit sector were a separate country, it would exceed the gross domestic products of most of the countries in the world, including Australia, Canada, India, the Netherlands, and Spain.

• These organizations are also an important source of employment. Nearly 11 million people worked as employees of nonprofit organizations in 1996, or approximately 7 percent of the nation's workforce. This was more than three times the number employed in agriculture and larger than the number employed in construction, in transportation and communication, and in finance, insurance, and real estate.

• In addition to the paid employment, nonprofit organizations also employed the equivalent of 6.3 million full-time volunteers, boosting their workforce to 17.2 million workers, or about 11 percent of all paid and volunteer employment in the U.S. economy.

Scope and Structure

Four principal conclusions flow from this overview of the American nonprofit sector:

(1) The nonprofit sector is composed of many different types of organizations. Some of these are essentially member-serving organizations, and others are primarily public-serving. Among the public-serving organizations, a great deal of specialization also exists. Some organizations are essentially funding intermediaries, others are places of sacramental religious worship, and others provide the human and other services for which the sector is best known.

(2) The nonprofit sector is much larger than is commonly believed. America's nonprofit, public-benefit service organizations had operating expenditures in 1996 that were the equivalent of 6 percent of the gross national product. In many locales, the expenditures of the nonprofit sector outdistance those of all local governments.

(3) Private giving comprises a much smaller share of the income of the nonprofit sector than is commonly recognized. Important as private giving is to the vitality and independence of the nonprofit sector, it is hardly the largest source of nonprofit service-organization revenue. Rather, most of the income of this sector comes from fees and service charges, with government a close second.

(4) While the American nonprofit sector is larger than its counterparts elsewhere in absolute terms, it is not in relative terms. Nonprofit organizations have long been present in other countries as well, and their role and scope appear to be on the rise almost everywhere.

The Government and Business Presence

Government is a major presence in the social welfare field in the United States. In fact, over half of all government spending in the United States goes for social welfare purposes, broadly conceived. Although the growth of federal government spending has been critical in creating this government presence, state and local governments have played an important part as well and retain a significant presence. In fact, fully 40 percent of all government social welfare spending originates at the state and local government level, and state and local governments help to implement many of the federally financed programs as well.

Although sizable, the level of government social welfare spending in the United States, when measured as a share of gross national product, lags significantly behind that in most other advanced industrial societies. In part this reflects the greater reliance Americans place on private charity and the nonprofit sector. But in even greater part it probably reflects the greater reliance Americans place on private purchase of social welfare services. Reflecting the importance of private purchase of social welfare services, for-profit firms have established a significant presence in the human service field, equaling or exceeding the nonprofit sector in many areas.

Finally, despite the significant presence of both government and the for-profit sector, the nonprofit sector has maintained a very significant role. In fact, the level of nonprofit expenditures on welfare services outdistances the levels of either federal government or state and local government expenditures on these same services. Far from withering away with the growth of government, the nonprofit sector seems to have blossomed as well, though it now faces increasing competition from for-profit firms.

In short, a complex "mixed economy" of welfare exists in the United States, with nonprofit, for-profit, and governmental institutions all deeply involved, sometimes on their own, but increasingly in collaboration with each other. This reality flies in the face of some of our political rhetoric, which tends to portray these sectors as inherently in conflict. But it seems to be the reality that actually exists. Moreover, it is also a reality that has developed over a considerable period of time.

Nonprofit Growth Fueled Mainly by Increased Fee Income

That nonprofit organizations were able to survive the important shifts in government policy during the 1980s and experience substantial growth is due in important part to the continued inflation in health care costs as well as to social and demographic changes that boosted the demand for the services that nonprofit organizations provide. Thus, for example, the lengthening of life expectancy and growth in the labor force participation rates of women have increased the need for nursing home care and child day-care. In addition, many nonprofit organizations were apparently able to adapt to changes in government funding policies by repackaging traditional social services as behavioral health services and secure government support through the rapidly expanding health programs.

Although sizable governmental expenditures are made for social welfare, much of this goes for old-age pensions, veterans' payments, and public schools. Expenditures for the poor and the disadvantaged, by contrast, represent only a fraction of the total, albeit still a sizable amount.

Alongside the governmental system, moreover, stands a private nonprofit one that rivals it in size. Private philanthropy plays an important part in supporting this nonprofit system, but income from government and fees play an even larger part.

Recent changes in government spending have placed considerable strains on both of these systems. The nonprofit sector has been affected significantly by these changes, although the impact has been disguised somewhat by the aggregate totals and muted by a number of steps nonprofit organizations have taken in response. Thus, while the sector as a whole has grown, most of the growth has been concentrated in a few areas, principally health and, to a lesser extent, social services. These segments have grown, first, because they have cultivated fee income, and second, in the case of health, because the government support flowing to them has been much less affected by the budget stringency of the past few years. In the process, however, the nonprofit sector may be having to shift its focus more heavily away from those in greatest need.

What these observations make clear, among other things, however, is that the American nonprofit sector cannot be understood at the aggregate level alone. To make sense of what is going on, it is therefore necessary to move from the sector overview provided here to a more in-depth look at the separate components into which the sector is divided. It is to this task that we therefore now turn, beginning with the largest component, health.

Health

The health care sector is the largest component of the American social welfare system outside of old-age pensions. It is, moreover, a complex sector, containing many different types of institutions and multiple sources of funds. The primary access to this complex system for most people is through private practitioners operating as for-profit businesses. But much of the institutional care is provided through nonprofit organizations. Although for-profit firms have recently made significant inroads here as well, nonprofits still account for over half of the hospital care, 45 percent of the outpatient clinic care, and nearly 30 percent of the nursing home care. They thus form a vital part of the nation's health care delivery system and have demonstrated durability in the face of rather dramatic recent changes.

The public sector also plays a major role in the nation's health care system, but less as a deliverer of services than as a financer of them. Indeed, government involvement in the delivery of health services has declined sharply in recent years. By contrast, about half of overall health expenditures are financed with public funds. And in the fields of hospital, clinic, and nursing home care, where nonprofit organizations are most involved, the public sector accounts for an even larger share (more than 60 percent of the expenditures).

In short, the health field provides an excellent example of the "mixed economy" that lies at the heart of the American social welfare system, with nonprofit, for-profit, and governmental institutions all playing vital roles, often in close collaboration with one another. At the same time, as pressures for cost reductions have intensified, the position of the nonprofit providers in this mixed economy has come under particular stress, and that of the for-profit providers has grown. What this will mean for the quality, cost, and accessibility of services over the long run, however, remains very much open to debate.

Education

Public institutions have long been the predominant providers of education at the elementary and secondary levels in the United States, while private institutions have historically had a major role at the college and university level. During the past several decades, however, public institutions have expanded rapidly at the higher education level in response to growing public demand for education in the aftermath of World War II. As a result, they now constitute almost half of the institutions and enroll the preponderance of students at the higher education level as well.

Nevertheless, private nonprofit institutions retain an important foothold in the education field. Not only do they account for nearly half of the higher education institutions, but also they account for at least a third of the enrollments and expenditures and slightly over half of the advanced degrees. What is more, they play a significant, and recently growing, role at the elementary and secondary level as well. Thus, nonprofit organizations are a pivotal part of the American educational system, just as they are of the American health system, with a reputation for quality and independence that helps them provide both at the elementary and secondary level and at the higher education level an important measure of diversity and choice.

As in the health field, however, recent years have witnessed a growing for-profit presence in the education area as well. For-profit firms have secured a commanding position in the rapidly growing field of vocational and special education and have been a growing, if still small, presence in higher education. Nonprofit providers in this field are therefore confronting competitive pressures on two fronts at once. How this will affect their operations, and their future, is one of the critical questions that the nonprofit sector faces in the years ahead.

Social Services

The social services field is a true mixed economy, with active involvement on the part of nonprofit, government, and for-profit agencies; and extensive support from government revenues, fee income, and private philanthropy. Traditionally, however, private nonprofit agencies have dominated the delivery of social services, and, at least since the 1960s, government sources have dominated the funding of them. This partnership formed the heart of the nation's human service delivery system for the past three decades, and, at the local level, for numerous decades before that.

During the 1980s, however, a significant disruption occurred in this established pattern, as government support dwindled considerably. Social service agencies seem to have weathered this storm, but they did so largely by moving social services increasingly into the market system. Growth also occurred in private giving in this field, but the really dynamic element appears to have been the growth of commercial forces. In the process, nonprofit organizations have come to rely far more heavily on fees and service charges of various sorts, and they have had to contend with increasingly vigorous for-profit competition in their traditional fields of action. A central question for the future is how this will affect the social role that these organizations are also expected to play.

Arts, Culture, and Recreation

Nonprofit organizations play a critical role in the recreational and cultural life of the United States. Many of the central recreational institutions of local communities swimming clubs, tennis clubs, Little Leagues, soccer leagues, country clubs are nonprofit in form. Even more importantly, nonprofit organizations form the backbone of the nation's cultural life, producing most of the live theater, symphonic music, and opera, and providing venues for art and for cultural artifacts.

Much of the expansion of this structure of nonprofit cultural institutions took place over the past 40 years as the product of an important partnership that emerged between government and private philanthropy. Beginning in the 1980s, however, this partnership came under serious strain when government support was significantly reduced. Despite this, nonprofit arts and cultural institutions continued to expand. In part this was due to the generosity of private benefactors. But in somewhat greater part, it was due to the willingness of patrons to pay for the services they received and the ability of arts institutions to find other, semi-commercial, sources of support. It remains to be seen, however, whether the values that gave nonprofit culture its distinctive flavor can be retained in this new funding environment.

Advocacy, Legal Services and International Aid

Beyond their significant domestic service roles, American nonprofit organizations play other vital functions in American national life. For one thing, they provide critical vehicles for advocacy and civic action, ensuring a free and open "civil society" in which different groupings of individuals can make their views known in the policy process at both the national and local levels. Nonprofit organizations are in this sense "empowering" institutions, providing a mechanism for joint action on behalf of even the least well-represented groups or views.

In addition, however, nonprofit organizations are also active in the international sphere, extending the reach of traditional, government-to-government relief and development aid, and mobilizing considerable quantities of private resources as well.

To be sure, in neither respect does the nonprofit sector respond adequately to all the needs that exist. What is more, important changes have challenged these roles of the nonprofit sector in recent years. Yet the sector nevertheless provides a mechanism for channeling what energies and resources can be mobilized for these purposes to useful ends.

Religion

In short, the nonprofit sector includes not only institutions that deliver services and advocate on behalf of public issues. It also houses the institutions that look after the spiritual health of the nation. These institutions have long played a vital role in sustaining a tradition of voluntary giving and voluntary action, and they retain that role today.

At the same time, like so many other components of the American nonprofit scene, the religious institutions face important challenges. A significant secularization has affected major areas of American life, leading to a weakening of the historic bonds to established religious institutions. This is manifested in declining memberships and declining shares of personal income devoted to religious giving. At the same time, new religious bodies are emerging, many of them more traditional in their approaches and more evangelical in their style. Which of these two streams of development will gain the upper hand, and how the two will be reconciled, is difficult to predict at this time. But it seems clear that some significant institutional adjustment still lies ahead.

Trends and Challenges

The building of sustainable nonprofit, or civil society, sectors has been a focus of immense concern in many parts of the world in recent years, from the newly emerging democracies of Central and Eastern Europe to the post-colonial regions of Africa, Asia, and Latin America. Taken for granted in these deliberations, however, has been the assumption that such a sector is already securely in place in much of the developed world, and certainly in the United States.

What the discussion here has made clear, however, is that the survival and prosperity of nonprofit institutions is not only at issue in the emerging democracies of the East and South, it is also very much in question in mature market economies such as the United States. Indeed, the very maturation and growth of nonprofit institutions may paradoxically pose challenges to their continued viability and support. Certainly in the United States, where a somewhat naive myth of voluntarism has long enveloped the nonprofit sector, recent years have witnessed a steady broadening of the gap between what nonprofit organizations have had to do to prosper and grow and what popular mythologies have expected them to do to retain public support. The upshot has been a crisis of legitimacy for America's nonprofit sector that has manifested itself in declining public confidence, growing demands for greater accountability, challenges to tax-exempt status, questioning of the sector's advocacy role, and a growing unease about a whole range of pay and perquisite issues.

What this suggests is that the nonprofit sector is an inherently fragile organism, even in societies like the United States where commitment to this type of organization is an integral part of national heritage. More than that, the role and character of these organizations can no more be frozen in time than those of other types of institutions: they must evolve in response to new circumstances and adapt to new opportunities and needs.

Those committed to the sustenance of a sphere of independent action outside the market and the state, whether in the United States or elsewhere, can therefore not afford to take the survival of this set of institutions for granted. To the contrary, they must continuously re-examine this sector in the light of broader societal trends and re-position it as needed to keep it vital as conditions change.

Conclusions

Perhaps the central conclusion that flows from the foregoing is that private, nonprofit organizations continue to play a significant role in American society despite the expanded role of government over the past half-century or more.

Because of American hostility to centralized government bureaucracies and the presence of significant nonprofit providers in many of the fields that government has entered, we have tended to rely heavily on nonprofit providers to deliver even publicly funded services in health, in education, in social services, and even in arts and culture. As a consequence, the growth of government has helped to expand the nonprofit role, not limit or eliminate it, and as a consequence nonprofit organizations retain a significant foothold in virtually every sphere of human service.

If "public-private partnership" is not a perfect way to characterize the reality that exists, it certainly comes closer than any of the other alternative concepts. But even this concept has limitations, because nonprofit organizations are often also in the position of criticizing and prodding government rather than simply cooperating with it to carry out public objectives. Indeed, as we have seen, these organizations are far more than deliverers of services: they also promote cultural values, facilitate citizen engagement in the policy process, build community, embody important national norms, and help us satisfy our spiritual needs.

While the "mixed" character of the American social welfare system makes it more difficult to comprehend and explain, it may also make it stronger and more capable of change. In a sense, Americans have surrendered the comprehensiveness and coherence of the social welfare systems of many European countries for the pluralism and adaptability of a much looser and more diverse system of mixed public and private care.

Unfortunately, ideological stereotypes and political rhetoric have kept us from meeting this challenge very effectively. As a consequence, the nonprofit sector remains shrouded in myths and barely perceptible to large portions of the American public. This is problematic not only because of the vital place these organizations continue to occupy in our national life, but also because of the serious risks they confront at the present time, risks arising from shifts in government policy, increased competition from for-profit providers, and a growing questioning of the contribution these organizations make. Penetrating the myths and improving understanding of this important set of institutions has thus become a matter of special urgency. If this primer has helped to contribute to such understanding, it will have served its purpose well.