Charity Inequality

In America today, culture, education, and health care are increasingly provided by charities. Over half of all hospitals, one-third of colleges and universities, and most cultural organizations depend on charitable donations. These institutions contribute to the social capital of a city, helping the neediest residents and providing important cultural amenities for wealthier residents. In turn, the not-for-profit world is increasingly dependent on the for-profit world. Much of this link is local in nature.

The research that I undertook in collaboration with David Card and Kevin Hallock shows that the presence of a corporate headquarters in a city is associated with about $10 million in additional public contributions to local nonprofits each year. Surprisingly, it is not the corporations themselves that are driving this generous giving. Rather, it is their highly paid corporate executives. We have found that the addition of a new headquarters in a city significantly increases the number of highly paid individuals. Their salaries are often tied to their company’s performance, and when their company is doing well, they tend to give generously to local charities. We estimate that for each $1,000 in market value for the firms headquartered in a city, about $1 goes to local nonprofits. By contrast, corporate donations do not appear to be very important for local charities. In retrospect, this makes sense. With customers and employees scattered across the country, large corporations have limited incentive to contribute to local causes.

The same cannot be said of individuals. When Microsoft moved to Seattle, it did not just reshape the labor market of the city, it also changed its nonprofit sector. Cofounder Paul Allen alone has donated more than $1 billion, 60 percent of which has gone to local charities to finance, among other things, the building of two new museums—the Flying Heritage Collection and the EMP Museum—and a new library at the University of Washington, the restoration of the historic landmark movie theater Cinerama, and the expansion of the University of Washington Medical School.7

 Which American cities have the most charities per capita? Among large U.S. metropolitan areas, charities in five brain hubs—Stamford, Boston, Raleigh-Durham, Washington, D.C., and New York—receive the highest contributions relative to their population. Seattle is not far behind. The difference between communities with a strong nonprofit sector and those with a weak one has been growing, both in terms of per capita number of not-for-profit organizations and per capita contributions. In other words, the Great Divergence across American communities is causing a corresponding divergence in the resources available to local charities. Cities with many corporate headquarters and a prosperous local economy are the very cities that generate the most charitable contributions for local nonprofits. By contrast, cities with few headquarters and struggling local economies—arguably the ones that need charities the most—are the ones that attract the fewest contributions. This further magnifies the distance between winners and losers.

The growing differences in life expectancy, divorce, political participation, and charitable contributions are just examples of the many ways in which American communities have been diverging over time. They are not the only ones. Many other aspects of American society have followed similar dynamics. Crime, for example, exhibits diverging trends, with cities such as New York and Boston experiencing large improvements over the past two decades and cities such as Flint and Detroit experiencing smaller improvements. At the end of the day, all these social differences are a stark reflection of differences in economic conditions. American communities have always differed from one another, some richer and some poorer. But the economic distance between the communities at the top and those at the bottom is larger today than it was fifty years ago, and it is affecting all aspects of life.

 In order to begin to address these enormous shifts—and the challenges they present to our society—we must come to terms with the fundamental economic causes of the divergence. Why are some cities magnets for high-paying jobs and healthy, skilled workers while others are not? What is so special about brain hubs? And why is the gap between the hubs and the rest of the nation growing every year? As we are about to discover, the Great Divergence is not a historical accident but the inevitable consequence of far-reaching economic forces.