The Dynamic Center: Market Solutions to Poverty? Jason Easley Sparks a Column Idea

Posted by Dan Martin on 12.08.2006

Harvard has an endowment of over $29 billion dollars. It grew at a 21.1% rate in 2004 and 19.2 % in 2005. Could university funding systems be a model for addressing social problems?

I got an idea from 411's political czar Jason Easley. His 12-5-06 Political Universe stated:

"Dan Martin's latest column about The Free Market and Social Problems is a really good one. Dan's column points out the good that can from businesses in a free market that decide to act in a socially responsible way. If I were to expand on his column a little more, it would be to add that when the free market is applied to a social problem when there is no profit motive for the actor, the free market will decline to resolve the problem."

First, I thank Jason for his kind words. They are especially appreciated since Easley's motto for managing 411 political contributors is "The Floggings Will Stop When Morale Improves."

Second, I think Jason Easley is dead right that if the profit motive is removed the free market will decline to address or solve various social problems. Paul Newman has no profit motive so he can contribute $200 million in salad dressing revenue. Otherwise, when Wilson sells pink tennis balls or Yoplait sells yogurt with pink labels to raise money for breast cancer research, one can imagine that some profits are finding their way back to the corporate offices. This is not to knock the charitable behaviors of Wilson and Yoplait; it is just to reaffirm Easley's point that profits are part of the equation too.

I am a believer that the free market is wonderful at producing things, but not always good at distributing what it produces. I would submit the 2.4 billion of earth's population that live on less than $2 a day as my evidence. Thus, I support what I would consider sensible modifications to the market such as unemployment insurance, minimum wages, brake systems to prevent stock market crashes etc. However, it is important to take points of view seriously that I do not hold. Thus, I have come up with something that might work as a free market attempt at addressing social problems – issue specific endowments set up along the lines of Harvard's endowment.

Harvard University is the nation's oldest and likely richest university. Harvard alumni such as Tommy Lee Jones or Al Gore are motivated to contribute money to their dear old alma mater. Much of this money winds up in their endowment. This money is managed and invested and it grows. A percentage of the endowment is spent on improving the university and in theory the endowment should provide a sustainable pool of money for a given university.

I think if one were to seriously think about moving away from government aid to the poor as many conservative talk radio programs harp on, then one also has to provide a reasonable alternative that ideally improves the situation. At a minimum, alternatives to a government safety net need to provide a program that leaves the given problem in stasis.

Perhaps a system of issue specific endowments could be set up with seed money from either the extremely wealthy or the government (or both). One could imagine endowments for Appalachia, inner-city poverty, the Mississippi Delta region, refugees, impoverished school systems etc. Each endowment could raise further donations and be invested and managed a la Harvard's endowment. If these funds grew at anywhere near Harvard's 20% rate of growth, one would have a large pool of money set aside to address perennial areas of social concern.

I would speculate that for the first five years a regional endowment would raise money and direct 50% of the funds it raises to immediate problems and the other 50% would be directed into the endowment to grow. If the endowment grew by 15% in a given year due to various stocks and bonds doing well, perhaps half of that growth would be used to rebuild schools, feed poor people, improve dilapidated homes etc, and the other half of the growth would be reinvested.

Obviously, a board of directors would need the power to release more funds if an unexpected situation such as Hurricane Katrina occurred. However, for the first five years the goal would be to create a large amount of capital that would continue to grow at a rate that was hopefully vastly superior to inflation. Once an endowment hit the point of being self-sustaining it could release greater funds into the given area.

One advantage of this solution is that it would keep solutions more localized than a Federal Government program. If a given group in the Mississippi Delta wanted money to build an orphanage or improve a local health clinic, it would need to apply for a grant and perhaps meet certain goals. Greater local sensitivity might mean the money was directed more effectively.

A major weakness of this approach is its focus on developing a war chest. In the interim period between establishing the endowment and it reaching a self-sustaining level based upon returns and donations, many people might have to do without donations upon which they currently depend. Another weakness is motivation. Many are motivated to give to their alma mater, how many are willing to give to those on skid row?

Thus, people would have to give more for any shift of this nature to occur smoothly. This gets back to an issue I raised last week. Unless, people, civic groups and corporations become more charitable it is unlikely that the free market alone can address these problems. Whenever I have volunteered at various non-profits such as food banks, I hear fear of government cuts. Full time workers/volunteers express that their organization cannot handle the added stress such cuts to public sector funding would bring. Thus, if some are ready to dismantle the social safety nets in the U.S., the burden of proof lies with them as to how they hope to improve the situation. I am all for producing more charitable and responsible citizens, but it strikes me that until that happens some form of social safety net must remain. This does not mean that such a safety net cannot encourage better decision making and avoiding self-destructive behavior. It does mean that I am dubious for what I think are good reasons about calls for dismantling government aid when no plausible alternative is offered.

Finally, I think savings bonds could have been issued to fund Home Land Security or rebuilding the Gulf Coast. As Easley pointed out, the profit motive is a key component for many when it comes to addressing social ills. If the bonds had a modest rate of return that was slightly higher than inflation, I think many U.S. citizens would have bought them in order to help defend the nation after 9/11 or to rebuild hurricane ravaged areas. Heck, I think the U.S. government could issue bonds for moving beyond oil dependence. I am open to heterodox approaches to the issues of our day.