Using Measures That Really Matter

Dan Pallotta, a thought leader in the nonprofit sector, delivered a rousing TED Talk at TED2013 that seems to have served as a clarion call for the nonprofit sector and the general public over the past few years. In his talk, which has been viewed more than 3.9 million times, Pallotta sends a clear message that we need to change the way we think about overhead costs in the nonprofit sector and start realizing that nonprofits can be more effective if we allow them to operate more like for-profit businesses. He’s absolutely right. However, in the process of building his argument, he used a small, well-packaged statistic that is just begging to be shamed out of existence. Consider his words, below:

Charitable giving has remained stuck in the US, at two percent of GDP, ever since we started measuring it in the 1970s. That's an important fact, because it tells us that in 40 years, the nonprofit sector has not been able to wrestle any market share away from the for-profit sector. And if you think about it, how could one sector possibly take market share away from another sector if it isn't really allowed to market? And if we tell the consumer brands, "You may advertise all the benefits of your product," but we tell charities, "You cannot advertise all the good that you do," where do we think the consumer dollars are going to flow?—Dan Pallotta, TED2013

Pallotta’s point, in the above paragraph, is that charities should be able to advertise in the manner that corporations advertise. That’s valid, and important. More money would flow to charitable causes if nonprofits were able to advertise as corporations do. However, his reference to the country’s gross domestic product (GDP) is distracting, and worse, misleading. Social sector leaders need to disassociate with GDP.

To understand why, consider the background. Established in the 1940s, GDP has been the standard measure of a country’s economy for over half a century. It’s current-day definition is the total value of all goods and services produced within a country during a given time period. That is, it’s the sum of consumption, investments, government spending, and net exports (represented in the equation below).

GDP = C + I + G + NE

Does anyone see anything missing? Perhaps an entire sector of the economy? It seems the architects of this great formula forgot about civil society, also known as the nonprofit or social sector.

This is troubling. And yet, even if we give them the benefit of the doubt, and assume that they included the nonprofit sector in the accounting, but not the formula, there’s still a big problem. Any government spending that goes to nonprofits, in that scenario, is accounted for, as well as foreign aid and consumer giving. But volunteer services are still left out. The most rigorous and diligent nonprofits may report quality data on in-kind service donations to the IRS, but that data generally relates only to professional services and doesn’t include simple volunteerism.

Basic volunteerism, ignored. Isn’t that reason enough for the social sector to refrain from relating its work in any quantitative or qualitative way to GDP?

The only work captured in GDP is the work we do for our jobs. GDP does not capture unpaid care work, voluntary work, or creative expression. (Image courtesy of Human Development Report 2015)

If not, consider the words of Simon Kuznets, one of the most influential economists of the 20th century. His work developing some of the first measures of national income eventually resulted in a Nobel Prize. Kuznets knew that any simplified measure of an economy could be abused and misused. As he put it: “Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what.”

GDP was developed before the Information Age, before the interstate highway system, before we landed on the moon, and before we really understood climate change. GDP doesn’t include any insight on the health of a population, the national debt, the availability of water, the poverty rate, the affordability of health care, or access to high-quality education. As a result, GDP has absolutely no use to nonprofit professionals. In fact, GDP has no use to anyone trying to solve the world’s social problems.

Still need convincing? Consider what happens when one tries to use GDP as a measure of the size of an economy. First of all, GDP can’t be a measure of a size, because it doesn’t have the appropriate units. The units of GDP are dollars per year, which indicates that it is a rate of activity. Therefore, a “rise” or “growth” in GDP is actually acceleration or a rate increase. This should make everyone wonder what we are accelerating toward. Are we accelerating toward a better tomorrow? An iceberg? A cliff? The social sector has always been very mindful of sustainability. Using the nonprofit share of the GDP pie to validate the effectiveness or growth of the nonprofit sector violates the sustainable and enlightened identity of the social sector.

Even the simple use of charitable giving dollars as a measure of the nonprofit sector’s performance or growth should make social sector leaders uncomfortable. Of course we should all strive to give more and continue to push for increased charitable giving. But every once in a while, we also need to ask the question: “To what end?” It is clear that we are far from solving global challenges such as poverty and climate change. But how far are we from solving these global challenges? Let’s keep the conversation focused on numbers that matter, like the number of people living below the poverty line or the tons of carbon dioxide emissions.

If the social sector wants to have a money conversation, perhaps the question we should be asking is this: “How much money do we need to completely solve the given set of problems over a given time period?” Answering that question would put the sector on more solid ground than suggesting that more good can be done with a bigger piece of an economic pie.

The social sector exists to make the world better. Making the world better is a complex dynamic multidimensional hyper-local endeavor. The dichotomy between doing good for society and making more money can be made very clear by using a thoughtful and intentional language that utilizes meaningful, substantive, relevant metrics of performance and growth. GDP is not meaningful, substantive, or relevant.

It is time for changemakers to set the tone. Let’s not get sidetracked by pretending that the social sector is two percent of the GDP. Let’s not get sidetracked by pretending that the GDP is a useful measure at all. Instead, let’s stick to the point and use measures that really matter. 

Read more stories by Joseph Plummer.