Why do People Working in Nonprofits make less money?

Photo By Daniel Suchenski

If you do quick search on-line for ‘non-profits’ you are bound to come across ‘how-tos’ and ‘what to expect…’ websites. For example Joanne Fritz writes in her article entitles Eight Tips for Jumping Ship: For-Profit to Nonprofit Career, suggests that you “Make sure that you can accept the likelihood that you will earn less money. Nonprofit work can be 5-10% lower for entry-level jobs and mid-level employees. For top positions, compensation can be as much as 50% lower than comparable corporate jobs.”[1] This begs the question, why do People Working in Nonprofits make less money?

            Often times nonprofits, rely on donations for their revenue and this is not always consistent from one year to the next. Indeed, many would argue that there is a compensation wage differential between for-profit and non-profit organizations that leads them to need to incentivize employees other than wages. Dwight Ueda writes that instead of high paid positions, many nonprofits employees often receive attractive benefits packages which could include “generous vacation time and sick pay, low premiums on medical and dental insurance, good retirement plans, tuition reimbursement, and sometimes a convenient or flexible work schedule without significant overtime.”[2] Ueda highlights that many universities are nonprofit entities and they can typically “offer the use of facilities such as gyms and libraries, and sometimes membership in credit unions with guaranteed low-interest loans and other attractive features.”

           According to Dan Pollatto “in the for-profit sector, the more value you produce, the more money you can make. But we don't like nonprofits to use money to incentivize people to produce more in social service. We have a visceral reaction to the idea that anyone would make very much money helping other people. Interesting that we don't have a visceral reaction to the notion that people would make a lot of money not helping other people. You know, you want to make 50 million dollars selling violent video games to kids, go for it. We'll put you on the cover of Wired magazine. But you want to make half a million dollars trying to cure kids of malaria, and you're considered a parasite yourself.”[3] He goes on to say that this is part of the reason why some successful professionals prefer to make a hefty salary donate a large percentage of it to charity and then sit on the board thus having money, and helping a charity rather than being the executive director of the charity outright. Perhaps that makes sense. Applying the cost-benefit analysis this does seem to be a better alternative. The for-profit professional is acting rational and is able to specialize in comparative advantage to the benefit of all.

            When recent college seniors at Cornell University were asked if they would rather work for the American Cancer Society or Camel cigarettes -all else being equal- almost “90 percent of them chose the American Cancer Society. When asked how much more they would have to be paid to induce them to switch to the Camel cigarettes job, their median response was a premium of $15,000 per year.”[4] This is another example of a compensating wage differential. As the cigarette company can’t hope to compete unless they offer a higher salary.

            In the end, there seems to be many reasons why people working in nonprofits make less money, but a large part of that explanation is due to a suppressed market equilibrium because there is a glass price cap on salaries and people who donate to charities don’t like seeing their money going to anyone’s salary. And in the nonprofit world, donations are king.

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[1] http://nonprofit.about.com/od/nonprofitwork/tp/From-Profit-to-Nonprofit-Job.htm

[2] http://www.salary.com/advice/layouthtmls/advl_display_Cat14_Ser70_Par149.html

[3] http://news.rapgenius.com/Dan-pallotta-the-way-we-think-about-charity-is-dead-wrong-lyrics

[4] Robert H Frank and Ben S. Bernanke, Principles of Microeconomics. 5^th Edition. 2013 Mcgraw –Hill, page 342.

Why do Credit Cards still have raised numbers?

Photo By Daniel Suchenski

According to Creditcards.com, It once was necessary to have credit cards embossed, that is having the numbers raised above the surface of the card, that’s because “the common way of approving credit card transactions involved making a physical impression of the numbers via carbon packets and a "zip zap" machine.”[1] Today however, credit cards are rarely processed using this method. Indeed, as the world moves everyday toward more advanced payment methods like EMV (An international standard for smart credit cards that have a built-in CPU chip), why do credit cards still emboss their cards?

            The answer that seems most likely is that while the vast majority of people with credit cards don’t use the embossed feature, there remains a small minority that still takes advantage of the feature. If this is true then there is another issue that is raised. Since it requires an additional step to emboss the cards and the number and security information can be used manually input to process an order why are the credit card companies spending the money to emboss cards?

            As limited but persistent use of the cards by a minority seems unlikely from a simple cost analysis point of view, the answer must lie elsewhere. Without having relevant data to support this claim, it seems reasonable that the marginal benefit of not producing the cards embossed is at least as great as the marginal cost to change the manufacturing process to simply exclude the embossing stage. This cost-benefit principle also rings true for the efficiency principle. Not only is the added cost to emboss cards unnecessary and costly, this stage also delays the time between requesting a card and actually receiving it. These are both fundamental efficiency problems that diminish credit card issuers’ ability to more instantly gratify customers, while also saving money and time. This also seems like a good example of a low hanging fruit that, while it may not make as much money as other products and services of a large company is certainly a perfect example of a quick fix to a problem that is uncomplicated. This example is echoed in the principle of increasing opportunity costs. While it would only be a one time savings, it is far easier and simpler to make this manufacturing change than to come up with a more complex credit default swap to make money.

Given the above mentioned examples of why it makes more sense to discontinue the use of embossing credit cards why is it likely that we will continue to see them in the near-future? One possibility that was raised and the one that seems most plausible as the correct, or at least most, prevalent reason, is that people consider credit cards without embossed numbers to be “unreal”. The perception of the cards has a very strong correlation to their appearance. According to Chunk “One of the reasons that our company still issues embossed cards (in Europe) is that non embossed cards aren't taken seriously. This is obviously a public perception issue but when you have a piece of plastic with a printed PAN, expiry, etc., it just looks like a bit of a cheap imitation of a "real" card.”[2]

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[1] http://www.creditcards.com/glossary/term-embossed.php

[2] http://portalsandrails.frbatlanta.org/cards/

Gold Standard: America’s Future as Well as its Past?

Photo By Daniel Suchenski

As part of the recent political debate for the presidency as well as the overall party platforms of the Democrats and the Republicans, an idea that has only provoked mild interest since 1984, again saw light. At the Republican National Convention in Florida back in August of 2012, the decision was made to set up a “gold commission” as part of the official platform to examine the feasibility of returning the US to a gold standard, a system by which the US dollar would be fixed to some quantity of gold. The United States, has been off a “gold standard” since 1971 when U.S. President Richard M. Nixon, “facing huge budget and trade deficits, and a plunging dollar – enacted a series of economic moves, including the unilateral cancellation of the direct convertibility of the U.S. dollar into gold”[2] According to a recent CNBC article, the RNC’s recent shift “shows how five years of easy monetary policy — and the efforts of congressman Ron Paul — have made the once-fringe idea of returning to gold-as-money a legitimate part of Republican debate.”[3] Despite its recent resurgence in the media and in the Republican Party, what would a return to the gold standard mean for the country?

Largely absent from public discourse for decades, the last time a return to the gold standard was mentioned in the Republican Party’s platform was back in the 80’s. The Republican platform in 1980 references a “restoration of a dependable monetary standard," while the 1984 platform states that “the gold standard may be a useful mechanism” for national stability.[4] Ron Paul and his supporters in the Republican Party are not the only ones pushing for this idea. Indeed, Marsha Blackburn, a Republican congresswoman from Tennessee and co-chair of the platform committee, said the gold commission was not adopted merely to placate Paul and the delegates that he picked up during his campaign for the party’s nomination. “These were adopted because they are things that Republicans agree on,” Blackburn told the Financial Times. “The House recently passed a bill on this, and this is something that we think needs to be done.”[5] In addition to prominent politicians on Capitol Hill, some in the business community are also taking up the banner. In a recent interview with Steve Forbes, Chairman and Chief Executive Officer of Forbes Media and Editor-in-Chief of Forbes magazine, said “I try to promote free-market economics every chance. In addition to chucking our tax code, one of the key issues in the next few years will be getting this country on a gold standard. That's just beginning but, sadly, I think circumstances are going to propel this happening.”[6] Clearly there is a growing interest in the US to returning to the gold standard. Right? Satyajit Das, a former banker and author of Extreme Money and Traders Guns & Money, states that the revival of interest in gold in general is “underpinned by debate of a return to the gold standard. Advocates as varied as Libertarian US presidential candidate Ron Paul and the Islamic Liberation Party (Hizb ut-Tahrir) have argued that the gold standard is a solution to the deep problems of the global economy.” He goes on to say that “the gold standard, it is argued, would foster economic stability and prosperity, primarily by creating price stability, fixed exchange rates and placing limits on government deficit spending as well as trade imbalances. It will also limit credit driven boom bust cycles through constraints on the supply of money.”[7]

To make some sense of what returning to the gold standard would mean for the country, it's first important to have some background on our current financial system of money referred to as "fiat" currency. Instead of having currency pegged at a fixed rate against a tangible good, i.e. gold, the fiat system is largely influenced by the actions of the government. Since government actions largely determine the value of the currency, these “currencies aren't backed by commodities, but rather by the reputations of their governments.”[8] According to Bruce Watson, writing for DailyFinance.com, the fiat system allows a government to “control the flow of money into the economy. When prices are dropping too fast (think of the housing bubble burst, for example), the government can "print" more money, slightly inflating the currency and steadying prices. Conversely, when prices are rising too rapidly, the government can decrease the flow of money, making the currency slightly more valuable and steadying prices again.” He goes on to state that “in the U.S., the Federal Reserve controls this ebb and flow by regulating banks, adjusting the flow of money into the economy, and lending capital to banks when necessary. Chartered to prevent and temper the sorts of massive financial panics that were once regular occurrences.”[9]

Because a return to the gold standard in the US would significantly limit the government’s ability to use monetary policy to temper highs and lows in the global markets, many opponents of the gold standard argue that the limited “flexibility of governments and central banks in managing economies, restricting the ability to adjust money supply, government budgets and exchange rates”[10] are ample enough reasons to stay with the fiat system. Additionally, a return to the gold standard would “confer a natural financial advantage to countries that produce gold, such as the US, China, Russia, Australia and South Africa.” And that current geopolitical considerations and global competition would make this an unlikely, if not untenable situation.[11]

Paul Krugman, a prominent economist in the US and professor at Princeton University, in an article in the NY Times this summer stated in no uncertain terms that a return to the gold standard is a “very bad, no good, truly awful idea.”[12] To make his point Krugman noted that under a gold regime, the US had financial panics in 1873, 1884, 1890, 1893, 1907, 1930, 1931, 1932, and 1933.[13] Matthew O'Brien, associate editor at The Atlantic covering business and economics, detailed in a recent article “Why the Gold Standard Is the World's Worst Economic Idea, in 2 Charts” His first chart shows the volatility of the Consumer Price Index (CPI) during June 1919 to March 1933.

The second chart shows the Consumer Price Index (CPI) from 2008 to today.

Based on these charts, it seems that the gold era is characterized by deeper price swings, and more crises. According to O’Brien, the gold standard “should guarantee price stability in the long run, but you know what they say about the long run -- we're all dead. In the short run, prices can change violently under the gold standard, as the balance of trade changes or the physical stock of gold changes. Remember, price stability isn't just about avoiding inflation; it's about avoiding deflation too. The gold standard wasn't good at either -- especially compared to our modern inflation-targeting system.” [14]

So if stability is not a likely goal what is the appeal of a return to the gold standard? For Joe Weisenthal, “It's actually pretty simple. The ability to create fiat money out of thin air is a stealth form of taxation, because the creation of more dollars diminishes the value of those already in existence. Conservatives have a constitutional opposition to taxation, ergo a system of money that makes it hard to create more money is pretty logical.”[15] Add to that the fact that a recent survey conducted at the University of Chicago Booth school of business, concluded that  exactly zero economists (of those surveyed) endorse a return to the gold standard,[16] and that it may be impossible to actually acquire enough gold bullion to once again fix the price of the US dollar, and the reality of the situation starts to sink in.

 Under the gold standard, the government must have enough gold on hand to redeem every single dollar in circulation. According to John Waggoner writing for USA Today, there is 170,000 metric tons of gold in the world. This translates into about “5.5 billion troy ounces. (Troy ounces are 1.1 ounces.) All that gold would be worth roughly $9 trillion at $1,639.10 an ounce. U.S. gross domestic product is about $15 trillion. Even if the U.S. had the entire world supply of gold, the gold standard would run into practical problems” For Waggoner, the only way this deficit could be bridged would be if the “price of gold would have to soar to accommodate U.S. trade in goods and services.”[17]

While the rhetoric and the prominent personality fervor over a return to the gold standard has ignited interest and passion among some in the US. It seems clear that a return to the US dollar being pegged against a commodity is doubtful. Putting aside the challenges of actually acquiring enough bullion to make it possible, there is little evidence to support that a return to the gold standard would actually stabilize the national or international markets. Indeed, a return to the gold standard actually has the ability to further destabilize the American dollar and the world in general. To borrow the concluding remark of Matthew O’Brien from his article, “Whether it's 1896 or 2012, it doesn't make sense to crucify our economy on a cross of gold.”[18]

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[1] http://www.telegraph.co.uk/finance/personalfinance/investing/gold/8117300/Bring-back-the-gold-standard-says-World-Bank-chief.html

[2] http://etfdailynews.com/2012/11/05/the-secret-return-to-the-gold-standard-gld-iau-sgol-slv/

[3] http://www.cnbc.com/id/48770752/Republicans_Eye_Return_to_Gold_Standard
[4] http://www.cnbc.com/id/48770752/Republicans_Eye_Return_to_Gold_Standard

[5] http://www.cnbc.com/id/48770752/Republicans_Eye_Return_to_Gold_Standard

[6] http://www.rightsidenews.com/2012112517457/editorial/rsn-pick-of-the-day/steve-forbes-on-the-future-of-the-gop-obamas-next-four-years-and-the-advent-of-a-gold-standard.html

[7] http://www.abc.net.au/unleashed/4404080.html

[8] http://www.dailyfinance.com/2012/08/30/gold-standard-return-how-it-affects-you/

[9] http://www.dailyfinance.com/2012/08/30/gold-standard-return-how-it-affects-you/

[10] http://www.abc.net.au/unleashed/4404080.html

[11] Ibid.

[12] http://krugman.blogs.nytimes.com/2012/08/26/golden-instability/

[13] http://www.businessinsider.com/why-conservatives-like-the-gold-standard-2012-8

[14] http://www.theatlantic.com/business/archive/2012/08/why-the-gold-standard-is-the-worlds-worst-economic-idea-in-2-charts/261552/

[15] http://www.businessinsider.com/why-conservatives-like-the-gold-standard-2012-8

[16] http://www.igmchicago.org/igm-economic-experts-panel/poll-results?SurveyID=SV_cw1nNUYOXSAKwrq

[17] http://usatoday30.usatoday.com/money/markets/story/2012-04-23/return-to-the-gold-standard/54493710/1

[18] http://www.theatlantic.com/business/archive/2012/08/why-the-gold-standard-is-the-worlds-worst-economic-idea-in-2-charts/261552/

5 things international cities could learn from Philadelphia’s Mural Arts Project.

Photo By Daniel Suchenski

Graffiti, community dysfunction, violence, economic distress, and poverty are just some of the issues that face major cities around the world. Philadelphia, America’s fifth-largest city, prides has come up with an uncommon solution, public art. The mural capital of the world, Philadelphia’s Mural Arts Program is the largest public arts program in the United States. Responsible for the creation of over 3,000 murals throughout the city, the program was founded in 1996 as an outgrowth of the Philadelphia Anti-Graffiti Network which was established by the City in 1984 to work with youth arrested for graffiti or other minor crimes. The vision of the Anti-graffiti network was to channel the abilities of graffiti artists into projects that would elevate rather than deface the community.

According to the Mural Arts program website, there are a host of benefits that the program has been able to add to the city in the 25 years that it’s been operating. A sampling of five of those benefits include:

1. 66% of ex-offenders return to prison within three years of their release. Through 2011, only 10% of re-entry workers employed by Mural Arts re-offended within a year of their release.
2. Mural Arts provides more than 1500 under-served youth with a positive learning experience every year and boasts a 100% graduation rate among those in the program.
3. Each year Mural Arts employs more than 250 artists, as muralists, assistant artists and instructors, contributing $2.2 million to Philadelphia's creative economy.
4. Mural Arts Projects are one of the top five investments the city can make on commercial corridors, reducing blight, increasing retail sales, and raising property values (Econsult Corporation 2009).
5. Philadelphia’s murals have become big business, with books, audio tour narratives downloadable via cell phone or podcasts, and a variety of themed guided public tours.

In a recent published article entitled ‘The Art of Recovery in Philadelphia: Murals as Instruments of Personal and Community Healing’, authors Evans, Heriza, and White, declare that “Philadelphia, through its Mural Arts Program, is discovering the power of art as an expression of community resilience and a vehicle of personal and community healing. In images that honor the past, freeze present moments, and excite future possibilities, Philadelphia is celebrating the resilience and character of its people and of the City itself. The murals that fill the city of Philadelphia are artifacts of a process of community resilience and recovery.”

The success of the Philadelphia Mural Arts Project has already had lasting effects on other cities in the US. In June 2011, Trenton the capital city of New Jersey completed its first mural as part of its own newly started Trenton Mural Arts Project (TMAP). According to an article from TMAP’s website, “TMAP is led by ArtWorks Trenton and the Trenton Downtown Association/Destination Trenton, with the support of the Capital City Redevelopment Corporation and the City of Trenton, and the assistance of Princeton University and Philadelphia MAP”.

Guided by the philosophy that “Art Saves Lives,” MAP has been extremely successful and serves as a model for similar programs around the world. The Mural Arts Program has essentially created a huge outdoor, geographically distributed museum with the entire city as its canvas. MAP has also become an international training center for mural artists.

References:

http://www.facesandvoicesofrecovery.org/pdf/White/2011_The_Art_of_Recovery_in_Philadelphia.pdf http://philadelphia.about.com/od/attractions/a/Murals-In-Philadelphia.htm http://muralarts.org/ http://trentonmuralartsproject.org/