Last month, the U.S. House of Representatives passed a sweeping $1.7 trillion federal spending bill that expands the scope and control of the federal government from cradle to grave. As the cornerstone of President Joe Biden’s domestic agenda, the Build Back Better Act (BBB) creates new entitlement programs for paid family and medical leave, child care and universal pre-K; expands social safety net programs in housing, health care, poverty, higher education and workforce development and funds new climate change initiatives.
As the bill moves to the Senate for consideration, the debate over the merits of its priorities, provisions and price tag will rightly continue. There are many reasons for different groups to be concerned about the effects of these policies on the labor force, inflation, small businesses, economic growth and household decision-making. However, those in the philanthropic sector also should be concerned about the impact this supposed one-time government expansion will have on private organizations. It’s quite possible that a massive influx of federal dollars into the nonprofit sector may crowd out some private giving.
Crowding out is an economic term that refers to the phenomenon of increased public investment in an industry directly leading to less private investment. In the charitable world, crowding out occurs when government funding replaces money that would have been raised privately. As we have explained before, the roles of philanthropy and government are different. Philanthropy is innovative and often provides the seed for new ideas that, when proven effective, can be scaled by the government.
Donors themselves may determine whether government funding partially or fully crowds out private dollars. According to a Congressional Research Service report, when crowd out is full, that means “each additional dollar of government spending on the public good corresponds to a dollar decrease in private funding.” When donors only care about the total amount of a good that is provided, and that good is subsequently offered by the government, crowding out would be full. However, “most economists expect that crowd-out is partial,” meaning donors might still give to causes for reasons such as the “warm glow,” or positive feelings derived from giving. The level of crowding out may also depend on the charity type. Studies show there’s no crowding out for public radio, but for each dollar of government spending, nearly a quarter ($0.23) in private donations is crowded out for international relief, and 50 cents in private funding is lost for shelter, human services and similar organizations. In some cases, government grants may crowd-in donations.
In addition, researchers have found recently that nonprofits tend to reduce their fundraising efforts as public support increases. With nearly two trillion additional dollars proposed in federal spending, some nonprofit organizations are celebrating the possibility of increased and new government grants. However, this may discourage groups from raising money themselves. By relying more on public funding, which is not guaranteed for the future, organizations may find themselves in a precarious financial position if public grants disappear.
Impacts on early childhood education
Individuals, families, and communities often come together to meet their own needs, including child care and early childhood education. While private options abound, some child care and pre-K programs are at risk of being crowded out by massive new entitlement spending.
The Build Back Better Act provides $380 billion in funding for states to create universal “free” pre-K programs in public schools, community-based programs and Head Start centers. Additionally, it creates a subsidy for parents to pay for child care, theoretically making it free for low-income households and capping costs at 7% of income for higher income earners. One of the goals of the legislation is to increase maternal labor-force participation.
Despite the benefits touted by its advocates, one concern with this plan in particular is it will crowd out family-based child care and flexible alternatives that families utilize, as well as other private options which may not qualify to participate in the programs. Some 41% of children are cared for entirely by their parents and another 22% receive care from a relative, often a grandparent. The BBB will not fund these arrangements, and thus, could drive families to choose government-approved options outside the home and family. Other options like religious schools and alternative or part-time child care arrangements, such as “cooperative” preschools staffed by parent volunteers and professional teachers, simply may not qualify for government subsidies under the bill’s rigid requirements.
Other countries have tried government-provided child care with negative results. In Japan, for example, publicly-provided child care replaced private, family-based care as parents swapped care by grandparents for accredited programs. Sadly, it resulted in more families living apart from grandparents. Maternal employment did not rise.
Child care and pre-K are just one area where this federal bill will expand the role of government. If passed, it could transform many other sectors where private philanthropy is already successful.
Role of government versus civil society
Beyond the effects of crowding out, we should tackle the philosophical question of what happens when the private sector yields more to the federal government. Part of America’s exceptionalism is the tradition of voluntary association and citizen engagement that French philosopher Alexis de Tocqueville admired. Americans fix problems in their communities without the control, direction or green light of elected officials and government bureaucracies.
On the other hand, those who view government as the rightful provider for the public good are not concerned with crowding out. They support increased taxation of private money and bureaucratic control. The current trend in Washington is to move away from private solutions and toward government expansion. When this happens, however, the results are not always to everyone’s benefit.