Blog author: jballor
Wednesday, August 19, 2009
By

There’s more evidence that amidst the economic downturn people are becoming more careful and intentional about the kinds of charities they fund. We’ve seen that those likely to continue to flourish are those that have cultivated a “family-like” connection with their donors.

Often more local charities do well in this kind of climate. And, of course, the focus of the charity matters, too.

Robert J. Samuelson reports (HT: Theolog) that charitable giving was down $308 billion in 2008, and will likely be down even more this year. This will undoubtedly be due to less excess out of which to give, as well as potential changes to the tax code discouraging high levels of giving by the wealthy.

But Samuelson points out an exception to this trend. Feeding America, a group dedicated to providing resources for local food banks, has seen funding jump by 42%. Ross Fraser of Feeding America said, “Charities such as ours do well when times are hard. If you have to choose between giving to the ballet and feeding a hungry child, who’s going to win?” As Samuelson writes this dynamic “compounds the pressure on other nonprofits: colleges, hospitals, and environmental groups.”

Givers can be quite savvy, giving to the areas they perceive to be the most pressing. That’s why giving patterns can change quickly and respond to broader economic and social trends. With unemployment up and foreclosures on the rise, it makes good sense that food banks and other similar aid groups would have a competitive advantage relative to other kinds of non-profits.


  • http://www.thecharisgroup.org Mark Brooks

    I tell our clients that Good vision trumps bad economy. People do have money that they are willing to give. You simply have to tell your story in a compelling way.

  • Roger McKinney

    It breaks my heart to hear the stories of charities who are suffering because of less giving, but also those who rely on the income from invested funds who have had to cut back due to losses in the stock market.

    Thanks to Austrian econ, I got out of the stock market before the crash, thereby avoiding huge losses, and got back in at the bottom and earned a good return recently. I mention this not to brag, but to encourage people to learn the Austrian business cycle theory, especially that of Hayek, in order to benefit from business cycles.

    I believe business cycles are God’s judgment against rebellious people in that they are the natural consequences he established for people who defy his rules regarding free markets, money and the sanctity of property. At the same time, God doesn’t want to judge his people who strive to follow him. But many will be harmed if they don’t understand Biblical principles of economics. Austrian economics follows Biblical principles and explains the immorality and deceit of the modern system. Those who follow Austrian principles can be rescued from the wrath of God in business cycles.

  • DavidW

    Business cycles and Austrian School in Action:
    Hey Roger, wouldn’t it serve to the benefit of many readers, if you’d explain a bit more how you put Austrian economics into practice and action?
    There is a certain Christian illiteracy when it comes to economics and prudent applications – I could serve as an example through many years of my life (trying to catch up)

    The best would probably be, to post it as an article, not just as comment, if you’d be ready for this.

  • Roger McKinney

    David, You can find the essence of it in Hayek’s “Profits, Interest and Investments”. The main thing is to avoid the collapse in the stock market. The stock market appears to peak some time after profits peak, which was about mid-2007 in the recent cycle. Profits peak because excessive investment in capital goods industries (caused by low interest rates from the Fed) exceeds savings (reduced consumption). Capital goods makers are hiring lots of new workers who spend their incomes on consumer goods. But because other consumers haven’t reduced their consumption, a shortage of consumers good develops and their prices rise. Higher prices mean great profits for consumer goods makers.

    Mainstream economists and the media think these profits will last forever, but as Hayek shows, they’re the sign of trouble. Artificially low interest rates caused overinvestment in capital goods industries, such as housing and autos. Capital goods producers are competing with consumer goods producers for materials and labor, and the capital goods producers lose every time. Soon you start seeing profit losses in the capital goods industries, followed by lay-offs and the whole economy heads south.

    When I saw the high profits reported in the mainstream media in mid-2007, I got out of stocks and into cash. However, I should have purchased government bonds, because at the peak of the business cycle, interest rates will be at their highest level for the cycle. Then, as the economy tanks and the stock market tanks with it, people flee stocks for the security of gov bonds and interest rates fall, which means the principle on bonds rises. Had I been in gov bonds instead of cash, I could have earned up to 12% (interest plus capital appreciation) for 2008, instead of nada.

    Getting back into the stock market is tricky. The recovery will start when prices have hit bottom and profits are at their lowest. In the most recent case, I watched home prices as well as corp profits. Don’t worry about picking the exact bottom; that’s impossible. I got back into stocks in late Feb and the market kept going down, but I was about 10% from the bottom. That much was luck.

    The recovery begins when profits hit bottom because of the Ricardo Effect. Hayek wrote a lot about it, but essentially, it’s the efficient allocation of resources between capital and labor that is taught in microecon 101. When profits are low, labor is expensive relative to income, so consumer goods makers start buying equipment from capital goods makers.

    What Hayek teaches is that the first sector to recover from the depression will be capital goods because of the low interest rates. I invested in manufacturing, materials, tech, oil and gold ETF’s. The first three returned 35% in the next six months. Oil and gold didn’t do well, earning about 9% and bringing my average down to 25%. Oil and gold were emotional investments, not based on Hayek. I thought price inflation would explode because of the multiple stimuli, but on further reflection of Hayek I realized that that won’t happen until most of the idle resources are used up in the next boom.

    Another strategy might have been to just by a NASDAQ index fund, because it jumped 35%, too, and is heavy with capital goods producers, especially computers.

    Another Austrian point to keep in mind, though not necessarily part of the business cycle theory, is that much of the new money created by the Fed through artificially low interest rates goes into assets. Fritz Machlup wrote about this in 1935. That’s one reason the stock market jumps just before the economy turns around. The Feds lower interest rates in hopes of tricking producers to borrow and hire more workers, but early in the depression business owners are too scared to do anything. But financial firms will borrow the money and invest it in stocks while both are cheap.

    In sum, get ready to exit stocks when the boom has lasted a few years and the mainstream media are reporting on record profits. Get out of stocks and into government bonds or high-grade corporates. Sit on your butt until the media is reporting the end of the world with record losses, business failures and price declines. Then get back into stocks, but mainly in NASDAQ or other capital goods producers. About mid-way through the boom, you could switch to consumer goods makers and retail because they will benefit from price increases. Also, late in the cycle, when the mainstream media is proclaiming the end of business cycles, get into commodities, especially oil, copper, aluminum, because the capital goods producers will be competing with consumer goods producers for these and prices will soar.

    Hope that helps!

  • DavidW

    I’m glad I asked. Thank you very much, Roger!