13 May 2011

Freakonomics Philanthropy Flop

Freakonomics is giving James Altucher another go to explain why he does not donate to major charities. The first time took on the topic, Altucher garnered a lot of justified criticisms in regards to his post. The second time around does not fare much better. In fact it further exposes some of the major misconceptions he has about how nonprofits work.

3) I don’t like paying administrative overhead. For every $1 someone donates to the American Cancer Society, 9.8 cents goes to administrative costs. I’m happy that people have jobs and are hired and I have nothing against those that work for the ACS. But I bet if I used that money to start my own company (or, again, directly help people through my own micro-charity), then more people would have jobs as a result, and more people would get their problems solved. And the ACS is probably one of the best-run major charities out there.

4) I don’t like paying marketing costs. I didn’t realize this until I looked it up. But for every dollar I give to the American Cancer Society, 21.8 cents goes toward furthering their marketing efforts. I thought I just gave them money. Now they need more money already? So only 70 cents of my dollar goes to actually helping the families with cancer.

Nobody, except for people working for a nonprofit, actually likes overhead. It is just like nobody likes paying taxes. However, how does Mr. Altucher expect his donation to be used effectively? If 10% of his donation goes to people who ensure that the rest has a far-reaching impact it is a small price to pay for high impact. Mr. Altucher comes from the world of stocks where he can make the personal decision to make investments and live with the consequences of his own choices. The services provided by a nonprofit cannot be evaluated by simply looking at the return on investment through personal satisfaction and making a person fell better. Major charities exist to address the root causes of poverty and work to alleviate them. Not one is perfect, but they are not as bad as Mr Altucher would like his readers to believe. If that is not sufficient he starts to unravel long before the end of the list, claiming that global warming has "a lot of mixed evidence" did a sufficient job in undermining his thoughts.
Example: there are many charities that try to do something about global warming. However, there is a lot of mixed evidence of global warming. If people stopped donating to these charities, even if all the evidence suggests that their cause is meaningless, a lot of jobs would be lost.

Finally, I am disappointed by Freakonomics in posting the two from Mr. Altucher. I have admired their book and recently blogging. Dean Karlan has had a post or two talking about RCTs and effective interventions. Opposing views and ideas should be encouraged, but well reasoned.