The fraud cases involving Minnesota’s Somali immigrant community highlight nonprofit non-governmental organizations (NGOs) providing social services for government. Do private NGOs improve social services?
Reporting by Ryan Thorpe and Chris Rufo at City Journal brought attention to the fraud. The investigations have already led to indictments or convictions.
The frauds total around $1 billion and have occurred with three separate programs: Medicaid Housing Stabilization Services, the Federal Child Nutrition Program and services for autistic children under the Early Intensive Developmental and Behavioral Intervention program.
Americans donate over $500 billion to charity annually, making the philanthropic sector sizable. Conservatives are on average more generous than liberals, but that’s a topic for another day.
Private philanthropy has a long history in the United States. Fraternal organizations provided a private safety net before the modern welfare state. Charitable giving assisted after natural disasters like the 1871 Chicago fire and 1889 Johnstown flood.
Each dollar spent through private charity generates more impact than a government dollar. Government assistance arose over concerns about the amount of private assistance, not its effectiveness.
NGOs today constitute a new mix of public and private. Much government assistance, and not just in Minnesota, is now delivered through NGOs. Stephen Eide at City Journal describes New York City’s system.
Many of these NGOs were established to pursue government contracts instead of decades-old charities. One of the Minnesota NGOs, Feeding Our Future, was founded in 2016 and grew rapidly on government COVID cash.
What advantages do NGOs offer? A first is a workaround for government inefficiency. Highly paid union workers with generous pensions and strict work rules deliver social services for New York. NGOs pay many employees less than comparable city workers, but top executives make more than city officials.
Beyond salary savings, NGOs allow greater flexibility. New York uses NGOs to scale up any form of assistance. NGOs also allow reductions in service, although they have become a potent lobby in local politics.
Economists studying not-for-profit charities have identified two sources of inefficiency. One is the loss of discipline without a residual claimant able to keep an organization’s profit. I think, however, that mission commitment adequately substitutes for profit for many private charities.
The second inefficiency arises with donors and not customers (the aid recipients) paying the bills. Donors may give to feel good about themselves, or for what is called “warm glow.” Warm glow donors should still want the hungry and homeless helped, but will be less sensitive to quality than, say, diners at a restaurant.
Nonetheless, charities compete for donors so any charity surviving for years must do something right. But today’s NGOs are ultimately about getting government contracts, not helping people.
The Minnesota fraud cases highlight a vulnerability in government operations. The bureaucrats who approve contracts act on a presumption of the authenticity of applications and documentation; verification is left for others.
The IRS illustrates this division of labor. A tax refund is paid if the return is complete and has all required documents attached. Other IRS agents later do audits. Auditing requires specialized skills, so dividing these tasks makes sense.
Some contend that the Somalis exploited America’s high trust society, as reflected in the presumption of veracity. I think that the flaw is more accurately the division of labor combined with inadequate forensic investigation.
News reports suggest that the Somalis accused anyone asking too many questions of racism and xenophobia to forestall investigations. This illustrates the importance of color-blindness under the law. Any exemption from scrutiny – whether due to race, religion or political contributions — invites attack by fraudsters.
The potential for fraud with privatized social services ultimately threatens effective assistance. California has spent at least $24 billion on homelessness since 2019, mostly through an array of NGOs. The state’s homeless population increased by 30,000 during this period.
Charities can effectively assist Americans. But poverty industry NGOs are ultimately in the business of getting government contracts, not assistance. Privatization without oversight is unlikely to improve social services.
Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
