The Obama administration has a plan to make it harder for poorly performing for-profit colleges to receive funding while ignoring poorly performing non-profit colleges. While a move in the right direction, this generally reflects the non-profit bias we have in this country. Tax laws contain numerous benefits that vary state by state but can include state property, sales, and income tax exemptions. In addition, there are federal tax exemptions for certain types of non-profit organizations. Why should it be that organizations which generate a profitable amount of value be privileged over activities which generate only as much or less value than is profitable?

The implicit notion here is that activities that are profitable are less socially valuable than activities that aren’t, and this strikes me as a pretty poor proxy for welfare. I would venture that Google and all other web companies create more consumer surplus than every non-profit in the country combined. Before you start singing the praises of the Salvation Army or some other charitable organization that does good, keep in mind that the total value of non-profits includes the value of James Dobsons’ Focus on the Family and Swift Boat Veterns For Truth, which is significant and negative. Compare the combined net value of any given 1,000 non-profits to the value of Google Maps, Gmail, Youtube, and all of the other free services Google provides and I would wager that Google wins.

Internet companies are not alone in generating lots of welfare either, think of the welfare generated New York Times, the Washington Post, and the L.A. Times that they are not capturing in revenues.

According to the National Center for Charitable Statistics, as of 2005 and measured by expenses, 15.1% of non-profits are education oriented and 60.5% are health oriented, the majority of which are hospitals and other primary care facilities. Now health is a valuable thing, but it is not the same thing as health care. Most experts would agree that a lot of money spent on health care is unnecessary or even harmful, and because of the public subsidies to health care, prices are inflated. Pretty much the same thing can be said of education. This is not to say that these things aren’t valuable, but that every dollar of spending from these organizations does not necessarily generate a dollar in value, and on average the value created may be equal to or less than the total amount spent. If I were Robin Hanson I would argue that the value generated is certainly much less than the total amount spent.

Of course some health spending, like basic research, would also qualify as non-rivalrous public goods, and the value there is probably much higher than what is spent. But that is likely a small percentage of the total non-profit healthcare spending in this country.

Much of what’s produced by Google and the New York Times, in contrast, is to a large extent non-rivalrous, public goods. Every dollar of revenue they receive reflects more than a dollar of value they generated, because they only capture a very small fraction of the value they provide to consumers. It is not hard to imagine that for every $1 of Google’s $23 billion in 2009 revenue they generated $25 in value, meaning a consumer surplus of $552 billion. Does that number sound crazy? Just looking at the U.S., that would mean they’re generating $1,840 of value per person per year. That sounds believable if not conservative to me. If all websites could perfectly price discriminate, most people would be willing to pay much more than that for all of the services Google offers.

All U.S. non-profits in contrast spent $1.4 trillion in 2007. If they’re getting around than $2 for every $1 they spend, it means the welfare Generated by Google alone is equal to 1/6 of the welfare of all non-profits combined. Again, I’m sure Robin Hanson would argue nonprofits do even worse than that.

I can understand why we want to subsidize activities that generate lots of social welfare, but there has to be a better proxy than a promise to not profit.