84. "The Untapped Potential of the 'Third Sector'," Business and Society Review, No. 1 (Spring 1972), pp. 39-44.


The philosophy which underlies President Nixon's domestic efforts in his first term in office is now evident. The Administration's hand has been tipped, in spite of what Congress may do to family assistance, revenue-sharing, and health insurance, and and regardless of how successful the "full-employment budget" may be in performing the triple trick of reducing unemployment and jacking up the GNP while holding down inflation. No new domestic plans of similar scope or significance are to be expected this year or next, with the possible exception of election campaign hysteria, when new ideas are mentioned every other day.

A NIXONIAN PHILOSOPHY?

It is said that our President is basically a very practical politician, unhampered by doctrine. He borrows many Democratic ideas (family assistance, revenue-sharing, and the "full-employment budget") because he is, so it goes, philosophically neutral and much more concerned with finding an opportune platform for the 1972 election than with winning the GOP elders' medal for ideological purity. Monroe W. Karmin, reporting in the Wall Street Journal from Washington, observed (as did many other Washington-based reporters): "President Nixon's 'new American revolution' is not only rakish new garb for this pin-striped administration but also a political blueprint for re-election in 1972."

Garb or political blueprint it may be, but it also implies a significant decision in matters of social-political philosophy. Whatever his motives, in domestic affairs Nixon has clearly shown that he endorses the states' rights school of conservative thought rather than the one which stresses reliance on private enterprise. Both conservative schools of thought start with the idea that Big Government is bad for the nation's economy, polity, and spirit. If we've heard it once, we've heard it a thousand times: Government bureaucracies are stifling for individual initiative, are remote from the people, and are un-American, quasi-socialistic beings. The two dogmas differ significantly, however (albeit not always with complete clarity), in what they view to be "the government" that must be cut back, and how this is to be achieved.

For the more old-fashioned, more conservative school, Big Government means, first of all, federal government. It sees the nation's salvation in the restoration of the authority and jurisdiction, of the states in all matters domestic. The state (and other local) authorities, we are told, are closer to the people and are hence more responsive to their needs and wishes than the federal government ever could be. Nixon embraced this position in his speech on revenue sharing, stating: "In fact, giving states and localities the power to spend certain Federal tax monies will increase the influence of each citizen on how these monies are used. It will make government more responsive to taxpayer pressures."

The more modern conservative ideology sees evil in the proliferation and expansion of government in any and all forms, state and city included. Rather, it claims, we should place greater reliance on the profit motive: efficient, innovative, energetic private enterprise. Accordingly, tasks and funds should be shifted from the governmental to the private sector. This change has been called "re-privatization" by one of the spokesmen for this point of view, Peter Drucker. The government, he writes, should act like the conductor in a concert--initiating, guiding, coordinating, but not actually carrying out the missions itself. Voluntarism, the very opposite of government's coercion, is stressed by this school.

In the first days of the Nixon Administration, before the domestic die was cast, Attorney General Mitchell talked about an Anti-Crime Community Chest. Although his audience cheered the idea and had their pens and checkbooks poised, not much has been heard about this plan since then, nor about scores of other preelection schemes designed to involve Americans in non-governmental efforts to further domestic goals. And those few we have heard about are very limited in scope. For example, the budget for school voucher experiments, in which parents are given vouchers to buy whatever education from whatever source they wish for their children, is a mere $15,000 per school district--for a total of two districts.

DOMESTIC PLANS BELIE CONSERVATISM

It is true that Nixon frequently uses the rhetoric of both conservative schools of thought and that he even stressed the voluntaristic private sector way in his campaign speeches. When we turn to the President's major domestic plans, however, the only piece of legislation that does not entirely involve either the expansion of the federal or local government is his health plan. The Administration has not turned to voluntarism or the profit motive to fashion any new major programs.

Thus, the family-assistance plan increases federal contributions to the financing of a welfare program which is to be run by local bureaucracies. With the full-employment budget, attempts to give an added boost to the economy by expanding the money in circulation, increasing the national debt, reducing some taxes, etc., are all to be made on the federal level. Nixon's "revolutionary," "bold," "most significant" domestic proposal--revenue-sharing--only involves the transferring of some moneys from Washington to states, cities, and other local governments. Most recently, the Administration's "new economic policy" places even more emphasis on government control, the federal in particular. The major exception to this general trend is the health plan, which calls for a "partnership" between the business community, its employees, and the federal government. Private insurance companies would administer a plan whereby the business community would have to provide health insurance for employees, who themselves would contribute about one-third of the necessary funds for their health care. The federal government would supply the funds for the poor and the unemployed. Rather than be an exception, the national health insurance plan adopts a style many new domestic plans should imitate.

THE THIRD SECTOR: THE NEGLECTED ALTERNATIVE

It is true that the very idea of allowing one level of government to spend the revenues collected by another is novel; and, surely, the family-assistance plan, which implies the right to call on government for a minimum income, is a rather new notion. I believe it will become increasingly evident, however, that the most effective way to carry out our domestic business is one the Nixon Administration has chosen to neglect.

The situation is analogous to the early days of the capitalist era. Rapid industrial growth "took off" only after a new legal and organizational concept paved its way--the limited-liability corporation. It allowed for the accumulation of the large amount of capital necessary for industrialization and large-scale marketing--amounts which most families or partnerships could not amass. Industrial capitalism found its vehicle in the private corporation.

In the present era, when society increasingly seeks to provide public goods such as education, health, and welfare, the search is on for appropriate legal and organizational tools. There is no doubt that some public goods are provided by the private sector (keypunch schools, for example). And, of course, the government provides many services, like social security. But sometimes the profits are not great enough to attract business and/or costs are too high for the government to step in. And we are now interested in "decentralization," including the removal of missions from overly bureaucratized governmental hands. A method must be developed to combine "the best of both worlds"--efficiency and expertise from the business world with accountability, public interest, and planning from government.

It should become increasingly evident that a large variety of new forms are developing, to carry out our domestic missions. All of these may be seen as attempts to find the appropriate vehicle by which to conduct the social as well as the economic "business" of mature capitalism. These developing forms are mainly in the third sector; they are neither governmental nor private but are generally created out of a mix of private business and governmental elements. Some organizations that would fit in this category of third-sector alternatives are the voluntary associations (e.g., the Red Cross or the League of Women Voters) and the nonprofit corporations (e.g., the Ford Foundation). Not all are successful, not by a long shot; but many seem to do work significantly superior to that done by either the Federal or local governments, and they are able to carry out missions which are not profitable enough to attract the private sector. In fact, the most promising solutions to our domestic problems are among the third-sector approaches now evolving-the ones our President has seen fit to essentially ignore in his planning for our domestic future.

SUCCESSFUL MODELS

I would. like to present some clear examples of government- private sector mixes which should serve to illustrate how such arrangements can work to produce public goods. The first is the student loan program, a plan which has been supported by Nixon's Administration.

The guaranteed student loan is taken from a private lender by a matriculated student, with the interest paid by the government during the school years, and with the loan and interest after graduation paid by the student at a rate of 7 percent. The program is administered differently in different states: Some states guarantee a part of the loan against default; others play no role whatsoever. There are, however, a number of features common to all the loan programs:

(1) The federal government guarantees the loans against default or the death or disability or the borrower.

(2) The family income of the student must be below $15,000 after adjustment for number of dependents, number of dependents in school, and so on.

(3) The student may use the loan for tuition or for living expenses.

(4) The total amount of each loan may not exceed $7,500.

(5) Only United States citizens are eligible for the program.

(6) The schools play no part in the loan procedures other than to certify the student's good standing.

The growth of the guaranteed-loan program has been large and the ambitions held for it still larger. As reported in the Chronicle of Higher Education (based on Office of Education figures), in 1969, approximately 75,000 students received $670 million with government financing totaling $71.2 million. In 1970, 923,500 students received loans adding up to $794,241,000 with $114 million of government financing. For 1971, the total loans insured by the government are expected to reach almost $1 billion. In addition, the demand for these loans is growing, at such a rate that the Office of Education expects it to exceed the supply of funds by 1972. Many college officials share this expectation.

It must be pointed out that in comparison to federal fellowships, with their monumental paper work (announcements, application forms, recommendation letters, grade transcripts, evaluation forms, accounting) and high cost to the taxpayer, the student loan program involves little red tape, and the costs to the taxpayer are minor. The administrative costs of the program are also remarkably low. For instance, the appropriation for 1969-1970 included $62.4 million for interest subsidies, $10.8 million for default insurance, and only $1.5 million for computer services.

The program is far from perfect; the interest rates are still too high, and many fear that the funds will soon run out. It is criticized for not being responsive to the needs of poor and minority-group students. The "Survey of Guaranteed Student Loan Accessibility," made by an independent firm (Chronicle of Higher Education, March 16, 1970), found this to be true. Although 42 percent of the applicants were female, females accounted for 51 percent of the refusals, and although 11.7 percent of the sample was nonwhite, nonwhites accounted for 36.4 percent of the refusals. The report concluded that "the proportion of females and non-whites not receiving loans was significantly higher than could be explained by chance occurrence." But these shortcomings are being overcome by an increase in the federal contribution and the development of closer cooperation between banks and financial-aid officers of universities. By and large, the student loan program provides a fine model for management of federal aid, in which the effects of dollars spent are multiplied many times through the economy.

The Nixon Administration has put forward plans for an increased student loan program. The key proposal is to set up a secondary market modeled on the Federal National Mortgage Association. The to-be-created National Student Loan Association would buy up the loans, creating more money for the banks. Nixon has requested $400 million to start the nonprofit organization, but Congress has yet to act on the proposal. The main objection is that the money available to borrowers will not necessarily be increased unless the banks are required to use the proceeds from loan sales to give out more loans. This requirement is not included in the Nixon proposal. If Congress approves the Nixon proposal after amending it to require banks to use their profits to make more loans, the effectiveness of this third-sector being would be greatly enhanced; there would be closer ties between the government and the private sector in the provision of public services.

Perhaps the most famous of the government private sector mixes was developed under NASA for Project Apollo. The successful completion of the project was made possible by the combination of government facilities and funds, third-sector "beings," and private corporations. Thus, aeronautical engineers at universities and research foundations worked on government contracts with the businessmen from the aerospace industry to build spacecrafts that were tested and launched on government land.

The details of this necessarily well-coordinated operation are not important for our discussion. But remember: No such approach has been attempted to solve our domestic problems. Imagine the effective attack that could be launched against heroin addiction if government funds, hospital staffs, community groups, and local businesses got together to tackle the problem with a well-coordinated and well-financed system! The same holds for pollution control, crime reduction, and consumer protection.

Sometimes third-sector "beings" are created by governmental fiat. The U.S. Postal Service is an example of such a public corporation. While the pre-1970 Post Office Department was dependent on Congress for rate hikes, the new corporation must become entirely self-supporting. Approval by the Postal Rate Commission is the only requirement for rate increases. Local postmasters used to have to turn to Washington for every decision; now, the local branches seem to be remarkably free from overcentralization.

Before the Postal Service was formed, postmasters were often outsiders, appointed because of political connections. Now men and women selected for these jobs are experienced and qualified. Their skills, rather than their contacts, qualify them for their jobs. Since it is much more conceivable now for an employee to rise through the ranks of the new postal system, we can expect higher morale, and probable greater efficiency. And although the average letter writer may not notice any difference other than the color of the mailboxes, it is inconceivable to me that the new system, which cuts through many of the bureaucratic hassles created by an overly centralized operation, could be doing as poor a job as the old Department did.

There are other branches of our federal government which may be profitably cut off from the bureaucratic maze and made into what the press refers to as semiprivate agencies. It has been suggested that since the U.S. Office of Economic Opportunity is becoming mainly a research unit, it would function better if it were isolated from political pressures. One way to remove it from direct bureaucratic control would be to set up a public corporation and semiprivate agency that would be partially funded by Washington. In an earlier article (published in the Conference Board Record, Oct. 1970), I suggested a reorganization of the Food and Drug Administration which would be similar to the one our postal system recently underwent.

The Food and Drug Testing Corporation, as the liberated FDA might be called, could be a public corporation endowed by Congress. Its trustees would be appointed from the scientific community, the National Science Foundation, the consumer-protection movement, labor unions, etc. The newly formed nonprofit corporation would charge a nominal fee to industries desiring certification of their products, thus covering some of the costs of testing and research. The new organization would be removed from the political pressures which now hamper the FDA's effective operation. Its long-term endowment could insure its semi-independent status and its financial security.

The possibilities of the creation by government of public corporations are tremendous. For example, it seems clear that the public would be willing to try a radically different approach to our welfare problems. According to a poll conducted by the Center for Policy Research (New York 1969), 48 percent of Americans would pay an average of $6 a month (or $72 a year) to insure themselves against poverty. Since about a million Americans fall into poverty every year, the income generated by the premiums would suffice to keep all Americans above the $1,600 poverty level. Welfare could be handled at least in part through the development of a public corporation that would be in charge of antipoverty insurance.

These governmentally created public corporations do not have to be on the national level. In New York City, the massive hospital system has recently been converted into the New York City Health and Hospitals Corporation to improve the rapidly deteriorating quality of hospital care in the city. If the budget for the corporation is not cut too drastically, we will be able to see the difference the third-sector approach can make in this area. It is hard to imagine that the newly formed corporation will do nearly as poor a job as the worn-out agency did. And given the terrible financial condition of our cities, it is quite conceivable that they will turn to the formation of more public enterprises for revenue. This has been done successfully in Vienna, Austria, where the city owns banks, movie theaters, restaurants, cemeteries, etc.--a total of fifty-four in all. New York's Off-Track Betting Corporation is a step in this direction.

There have been other corporations that have been public, third sector from inception. The Public Broadcasting Corporation, although far from an unmitigated success, is widely regarded as more effective than governmental agencies in the same business (e.g., New York City's own TV program on Channel 31) or commercial TV, as far as broadcasting education and information is concerned.

NONGOVERNMENTAL PUBLIC INSTITUTIONS

One of the problems we frequently run into in this area is caused by semantics. The difference between "public" and "private" often hides the possibilities and the achievements of nongovernmental enterprises. For example, we have public universities, like the New York State University system, and private ones, like Harvard. The same holds for hospitals: the Veterans Administration Hospitals are viewed as public; hospitals like Brooklyn Jewish are private.

The really "private"-sector schools are created for profit. Famous Artists and Career Academy would be examples. And the truly private hospitals are proprietary. Nonprofit hospitals, research organizations, universities and colleges, legal aid societies, abortion-referral agencies, etc., differ markedly in organization, accountability, and cost-effectiveness from either governmental or private-sector "beings" which produce the same kind of public goods.

Given our present situation, where the private sector has not been sufficiently mobilized to produce public goods on a large scale, the best services and facilities can often be found in the third sector. In the educational system, for instance, the universities most highly thought of (Harvard, M.I.T., Yale, Princeton, Columbia, etc.) are neither governmental nor commercial. And the state-run universities that are highly respected, are treated as if they were in the third sector (e.g., Berkeley and the University of Wisconsin). Interestingly, those whose autonomy from state control is being violated are the ones which are on the decline.

"Voluntary" hospitals are considered the best in our country. The Ladies Home Journal (Feb. 1967) asked ten experts on hospital care, "If you or your family required major hospital services--diagnosis or treatment--which twenty-five hospitals in the United States would you select as representative of the best?" The following hospitals were the most popular: 1. Massachusetts General, Boston. 2. Johns Hopkins, Baltimore. 3. University of Chicago, Chicago. 4. Columbia Presbyterian, New York. 5. New York Hospital, New York. 6. (tied) Barnes, St. Louis, and Henry Ford, Detroit. 7. Mount Sinai, New York. 8. St. Mary's, Rochester, Minn. 9. (tied) Palo Alto-Stanford, Palo Alto, Cal., and Yale-New Haven, Conn. 10. (tied) University Hospital, Ann Arbor, Mich., and the University of Minnesota Hospital, Minneapolis, Minn. All of these hospitals are nonprofit teaching institutions. They are all in the third sector--none are proprietary and none are governmental.

Of course, not all third-sector "beings" are superior on all counts, as is illustrated by the New York Triboro Bridge and Tunnel Authority. The Authority is reported to use its monopoly power to generate excessive income and keep its facilities in unnecessarily good condition. The New York Port Authority is certainly not known for its efficiency. Maybe the reason is that most of the ineffective bodies within the third sector are on the less "privatized," more "governmental" side. Those third-sector beings which have been relatively more "privatized" seem to be, on balance, much more successful. Two major cases in point are COMSAT and Fannie Mae (Federal National Mortgage Association).

COMSAT was governmentally created by congressional act in 1962. Federal money appropriated for defense and space financed the development of its chief technology--the world hugging satellites. Civilian use was made possible through a corporation which was financed half by the taxpayer and half by stocks. COMSAT's board of directors includes representatives of the industries involved, presidential-appointed directors, and public officials. The Economist referred to it as "a marvelous managerial machine" and characterized its record in orbiting a worldwide system within seven years, as "magnificent."

Fannie Mae is reported in the press daily as a high-volume stock on the New York Stock Exchange. But it is far from just another stock of a typical corporation. (Even technically it has a special status which reflects its government support: The "margin" required for it is much lower than for other common stocks; it is closer to that required for government bonds.) Originally a government agency which issued some nonvoting stocks to the public, the balance being funded by the Treasury, it was "privatized" in 1963. All the stocks were sold to the public and converted into voting stocks which elect up to ten of the fifteen board members. (The rest are appointed by the Secretary of HUD.) In the process, Fannie Mae has been reorganized in a more efficient manner by cutting its staff substantially as the volume of work rose.

Surely other third-sector types, either those composed of government and business elements or third-sector "beings" from inception, can be identified, and others could be evolved if there were greater experimentation. There is no doubt that we need more information and evaluation on the production of public goods in the various sectors and mixes of sectors. But it seems that enough is known for us to be able to state now that greater reliance on the third sector, both as a way of reducing government participation on all levels and as a way of involving the private sector in the service of domestic missions would be significantly more effective than either expanding the federal or other levels of government which so far has been the main Nixon thrust.

"Even though the activity may have no immediate profit orientation, it still may well represent a business-oriented decision to advance the long-term position and interests of the corporation, with the expenditure regarded as a politically inevitable cost of doing business."
-Philip F. Blumberg, "Corporate Responsibility and the Social Crisis," Boston University Law Review, Spring 1970

Amitai Etzioni, formerly chairman of the Sociology Department, Columbia University, is director of the Center for Policy Research in New York City. Dr. Etzioni's books include The Active Society, A Comparative Analysis of Complex Organizations, Political Unification, and Modern Organizations. For additional discussions of private/public-sector mixes and the third sector, see his Active Society, published by the Free Press.


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