A non-profit bubble?

When I googled the phrase "non-profit bubble" in quotes recently, I found an article by Gara LaMarche of The Atlantic Philanthropies, writing last year:

Now we are learning that there has been a "nonprofit bubble," too [. . . and it] has burst . . . Most foundations are working hard just to meet their existing commitments, and many are eliminating staff jobs and trimming other expenses to do so . . .

Gara's prescription for dealing with the situation:

First, foundations must be more rigorous in scrutinizing their own operations and the management and budgets of the groups they support. . .

Second, small groups should consider merging with other like-minded organizations. . .

Third, large nonprofit groups should streamline their operations.

The Nation picked up on her article. And then GrantsPlus picked up on The Nation's article.

Of course, Instapundit was on the case even earlier in 2008.

I think that the "nonprofit" sector has grown out of all proportion because of its tax-exempt status, and we ought to consider eliminating tax exemptions for nonprofits entirely. Failing that, we ought to limit them to organizations that provide direct services to those in need, and only to the extent of such services. The rest is a big subsidy that has created a nonprofit bubble in the economy.

One of Glenn's reader's, Doug Levene, chimed in with a comparison to pre-modern China:

Your comments on the growth of the non profit sector as a refuge from taxation are very important.

As part of my East Asian Studies M.A. at Yale many years ago, I studied a lot of pre-modern Chinese history and one fact that struck me then was the growth of tax-free "religious" institutions to the point where the tax base was severely eroded. Indeed, that was one of the major problems for the Chinese central government, such as it was. I wonder if that is happening in the US generally today? It obviously does happen locally - consider what percentage of the property in Cambridge, Massachusetts is tax exempt. What is the impact nationally? Have any economists or tax lawyers looked at this?

Any thoughts from the economists and tax lawyers out there?