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The Origins of the Nonprofit Industrial Complex


Claire Dunning (@clairemdunning) is assistant professor in the School of Public Policy at the University of Maryland, College Park, and author of Nonprofit Neighborhoods: An Urban History of Inequality and the American State.

Of the many myths about the United States, few rival the longevity of the supposed independence of the voluntary or charitable realm: the idea that nonprofit organizations stand apart from both the state and market. That story dates to Tocqueville’s accounts of associational life of the early republic and his assessment of self-organized civic action as a key ingredient in the democratic experiment. It has been sustained in more recent decades with the advent of terms like “third sector” or “independent sector.”

While not completely unfounded, the myth of an independent third sector obscures how deeply intertwined nonprofits are with the state and market. True, nonprofits can and do provide an important check on government authority, deliver goods and services in the absence of public provision, and operate with a different set of economic principles. At the same time, they receive more revenue from the U.S. government than they do from private donors, and while not profit-distributing, nonprofits are nevertheless revenue-seeking and participate in the market economy, albeit with certain tax-advantages.

Of course, not everyone has been taken in by this myth. Most famously, in 2004, the INCITE! Women of Color Against Violence Collective published an edited volume on the “nonprofit industrial complex.” This concept, which has moved from academia to the pages of Teen Vogue, highlights how the nonprofit sector, far from being independent, serves to reinforce the status quo and discipline efforts to disrupt it. Others, mostly working in the field of American Political Development, have traced the co-dependence and co-evolution of voluntary associations with state institutions, and framed these developments as, often purposefully, eclipsing the presence of the state in the lives of its citizens.

Yet, like most myths, this one endures because it serves an important political function—it is used to perpetuate a particular vision of what the role of the state is and what it should be. Also like most myths, it is the product of a particular historical moment. In this case, the myth of the independent voluntary realm gained renewed prominence during the racial activism of the post-WWII period and the expansion of neoliberalism in later decades. By bringing this history to the fore, we can shift the conversation from one, say, about maximizing nonprofit efficiency or improving fundraising strategies, to one about governance, democracy, and how we might better meet the needs of all people in the United States.

Grantmaking as Governing

One of the central mechanisms by which the government has bound nonprofit organizations to the state is through grantmaking. On the surface, grants are a rather prosaic or neutral tool of governance. They distribute resources in targeted ways, allowing for degrees of experimentation, flexibility, and local control not typically afforded in government operations. By decentralizing the delivery of services, they simultaneously expand the state’s reach and operations, while also making such influence more difficult to see. And, as an entirely discretionary form of funding, grants also serve as a tool for funders to engage in surveillance, evaluation, and control of the recipient. For all the talk of “partnership” that aims to put funders and recipients on equal footing, grants reinforce power differentials between those with resources and those seeking them. This is true of private grantmaking from foundations, of course, but raises a fundamentally different set of questions—if not concerns—when these become the mechanisms for meeting local needs and distributing public goods and services via public dollars.

In Nonprofit Neighborhoods: An Urban History of Inequality and the American State, I spatially and temporally locate the emergence of the nonprofit industrial complex in the postwar city where segregation persisted and demands for freedom and equality grew. Fear of the “urban crisis” prompted a government response in the form of expanded federal government grant programs, first under urban renewal, and then under the Committee on Juvenile Delinquency and Youth Crime, the War on Poverty, and Model Cities, all of which transferred resources to local nonprofits. Through these grant programs, the federal government, for a time, was able to circumvent local governments committed to maintaining segregation.

Many of these government grants provided much-needed goods and services—affordable housing, after school programming, clean parks, health screenings, community gatherings—and did so in ways that extended degrees of authority to nonprofits led by minoritized urban residents. The Roxbury Multi-Service Center in Boston, for example, used funding from the federal Office of Economic Opportunity to hire a housing specialist in the mid-1960s to assist residents in the majority-Black neighborhood facing displacement from urban renewal and to track the disproportionate removal of Black children from public school classrooms. Community leaders fought for autonomy and found ways to maneuver within systems designed to constrain. Using funds nominally for a community security program, neighborhood organizer William Shabazz began a surplus food distribution program at a public housing development in Boston’s South End. Governance had become more decentralized, participatory, and diverse. It was also becoming more private and more precarious, and the increasing reliance on nonprofit organizations had begun to reinscribe new forms of inequality.

The funding mechanisms that enabled these local successes carried a flip side: the power to fund is also the power to withhold and extract. Bureaucrats overseeing grant programs at every level flexed these powers by trimming already meager budgets, denying grant extensions, and demanding reams of documentation. Despite the success of his surplus food program, Shabazz was fired for engaging in what a city bureaucrat deemed “extra-programmatic activities” beyond the scope of the federal law enforcement program that underwrote his salary. His firing and this mark on the nonprofit’s record made any future grants to the organization unlikely, leaving the South End neighborhood without the food program and community security team, and at risk of not accessing future grant programs. Across town, La Alianza Hispana won Model Cities funding to provide translation services for Boston’s growing population of Spanish-speaking residents and help them navigate city government, but when funding dried up, the program was forced to close up shop. Government funders encouraged nonprofits to turn to private donors, to which one beleaguered executive retorted, “We’ve used ingenuity up. What’s desperately needed is more money.” Even when funding did exist, it rarely covered the full expense of a program, leaving groups like the Roxbury Multi-Service Center and, by extension, their communities, dependent on the whims of private philanthropy.

The failure of this approach is bigger than the ending of any one program. Instead, it lies in the recasting and, subsequently, the weakening of social provision. Beginning in the 1960s, the U.S. government outsourced necessary goods and services to private entities as a policy strategy—a strategy to mitigate the unevenness of late capitalism, to manage the diversity of the postwar city, and to compensate for historical wrongs—and then subjected those entities to administrative rules that created vulnerable organizations. The patchwork nature of this approach proved no match for structural problems that exceeded the reach and capacity of neighborhood-based organizations. Further, the cumulative impact of underwriting nonprofit programs with temporary, discretionary funding cast the efforts as optional luxuries rather than essential functions of government and reified the needs of populations traditionally excluded from the full rights of citizenship as best met by private, nonprofit supplement rather than by a more expansive, more equal government provision. Funding for the translation services at La Alianza Hispana, for example, simultaneously recognized the importance of enabling non-English speakers to participate in and access government functions, while also deeming such services the responsibility of a non-governmental organizational.

Despite clear inadequacies, the political popularity of appearing responsive to local communities and championing private provision perpetuated the use of government grants funding to nonprofit organizations into the 21st century. Far from the “win win” that Boston’s mayor Ray Flynn and others claimed, this sort of privatized inclusion became a way for marginalized communities to simply lose by a smaller margin. The consequences of this approach, which has become a pillar of the neoliberal agenda, remain with us today in the form of reduced government capacity, rampant inequality, and an unwavering expectation that small, private organizations can and should solve large, public problems.

Rethinking Public Provision

The danger with the myth of independence—and a driving point behind the notion of a nonprofit industrial complex—is not simply that it is inaccurate. The danger is that it masks the existence of government funding of nonprofits in ways that naturalize whose needs are met by charity and whose are deserving of government support, and it that subjects the needs of some to the pressures of grantmaking. As a tool rooted in scarcity, selectivity, and short-termism, government grants are a poor vehicle for reinforcing rights. It was no accident that they were precisely the tool used beginning in the 1960s to realize the rights—including democratic rights to participate, be represented, access public services, and receive social welfare—of those traditionally denied them.

The way forward, however, does not lie in the ending government grantmaking nor in the elimination of the sector. Such efforts are simultaneously too small and too dramatic. Nonprofits have an important role to play in our society and funding from both public and private sources enable life-saving and life-affirming services. At the same time, public funding is not the same as public provision—as everything from charter schools, housing vouchers, and, yes, nonprofit services—attest.

What is needed is a wider reimagining of what public goods are and who should provide them, and a wider reckoning with what it has meant to routinely subject the needs of those traditionally excluded and harmed—particularly on the basis of race—to a system shown to be partial, privatized, and inadequate. Only then can we begin to dismantle the nonprofit industrial complex and inequalities it continues to reinforce.