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Social spending meets market discipline
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Kai Ryssdal: States and counties don't have a lot of extra money right now. Same thing can be said for the federal government. So there's more pressure than ever for them to get taxpayer's money's worth from the spending they do. President Obama, the state of Massachusetts and New York City are all testing a British idea to pay for social services. One that uses private investors, nonprofit groups and for-profit market discipline.
Alex Goldmark explains.
Alex Goldmark: Social programs often require a leap of faith. The government pays to retrain the unemployed in the hope that they'll find jobs. It funds inner-city school programs in the hope of boosting graduation rates. It can take years to bear fruit. But what if the government paid for these services only if they produced results, without ever putting a dime of taxpayer money at risk? That's the idea behind something called a pay-for-success bond.
The Brits call it a Social Impact Bond, and former investment banker Toby Eccles created the first one last year.
Toby Eccles: A social impact bond is a contract and it is a contract which is new and different for a very simple reason: It allows governments to try to pay for outcomes they want to happen.
In Eccles' case, the specific outcome is cutting the number of ex-cons who return to crime. Right now in Britain, over half the men released from short prison terms end up back behind bars within a year. That poor track record makes it harder to find fresh government funds for rehabilitation programs.
Eccles: This solves that problem by using other people's money to do that.
Here's how the pilot project works: Instead of paying charities up front as it usually does, the British government asked Eccles' nonprofit to manage rehab programs at one prison. Eccles raised $8 million from private investors to fund services like emotional counseling, drug therapy and job training for 3,000 short-term inmates. The government doesn't pay a penny unless the plan works. The repeat-offending rate has to fall by at least 10 percent over four years before the investors collect.
Eccles: We are measuring the number of times that they get convicted post their release, and we get paid for the reduction in the number of offenses that our service provision creates.
The better the results, the better the pay out, up to 13.5 percent annual return for the investors. Not bad for doing good. Even if the government pays investors the top rate, it's still bound to save money as the cost of jailing repeat offenders falls. And if too many ex-cons can't stay honest, it's Eccles' investors who are on the hook.
Jeffrey Liebman: It's basically a no-lose proposition for government.
Jeffrey Liebman is a professor at Harvard and former White House budget official. Now he's studying how these bonds might work in the U.S.
Liebman: It's really the perfect tool for these tight fiscal times where so many core services are also being cut.
The latest White House budget proposes $100 million for pilot projects using pay-for-success bonds. Massachusetts this month called for proposals, to use the new concept to reduce homelessness. Liebman says these can work for most social programs, as long as results can be measured.
Toby Eccles, adds, the new bonds finally make it economical for governments to invest in preventing social ills -- not just cleaning up afterwards.
Eccles: The are a whole range of social issues where if we get better at preventing them, then prevention is cheaper than the cure.
Eccles says American foundations and investors are eager to finance pilot projects. And his nonprofit, called Social Finance, has opened a branch in the U.S. to get in on the action.
In New York, I'm Alex Goldmark for Marketplace.
This idea seems born of the myth that private companies are necessarily better and more efficient at tasks than governmental agencies. Of course the newly elected Conservatives in the UK endorsed this idea, but it hardly has a track record. Further, you need look no further than healthcare in this country to find that this truism of private vs. public is false. Medicare delivers $0.90 on the dollar of healthcare, while private insurers, at best, are delivering $0.40.
We have heard this pitch before. Didn't we hear that banks would issue a security that would package mortgage debt who would sell to investors eager for higher returns? In that scheme - which was endorsed by Greenspan who argued that banks issuing the securities better understood the risks than governemnt agencies - the risks were poorly understood and the securities provided incentives to take more risks, not fewer.
Securitizing mortgage debt and reducing risk proved to be a mirage as taxpayers were called upon to bail out the private players in the securitization game.
This scheme wants to securitize government obligations and shift the gains to private investors. The professor argues that investors will pick up the tab if the government fails to hit their numbers. Nonsense.
Putting aside two big issues: first whether prison recidivism can be easily boiiled down to one metric and second whether we can really expect that the investors will be solvent if called upon to pay, the professor has to know that if the incnetives to cheat are there, cheating will occur. Gaming the system will undoubtedly occur.
When the investors set the numbers, who do you think will win most often? As the commenter above notes, can we expect prisoners to get jobs in a failing economy?
How does the public benefit when investors monetize social gains but the downside falls squarely on the taxpayers again? This game looks like the investors create the casino and invite taxpayers to play. I hope the taxpayers are not suckered again.
I too, criticize Marketplace for not providing analysis in this report.
It's another privatization scheme masquerading as an improvement for services.
This falls under the guise of if it's too good to be true it probably is. As the article stated, it's not clear how the performance will be rated. It sounds like there are companies lining up for this opportunity. All of these facts should be enough to raise many large red flags.
How can these companies be so certain of their ability to manage social services with greater success than the current system they are willing to base payment on "success"? Are we expected to believe these companies know the secret to all phases of government and human nature so much better than professionals who've devoted their lives in these fields?
It's safe to assume they don't - but they're confident they can control the details of the contracts to insure successfully meeting the requirements for success.
Unless there are stringent auditing processes included in the process many contractors will manipulate the reporting as well.
One example given in the story was the problem of prisoner recidivism, it was stated the criteria for success was a released prisoner not go back to jail within 1 year. I foresee contractors lobbying parole officers, lawyers, judges and policemen to avoid parole violations, convictions, jail sentences, arrests or just slowing the process to achieve the 1 year schedule to achieve "successes".
Another privatization target is law enforcement. Combine the recidivism and law enforcement almost certainly will compromise public safety.
Privatization of prisons is not saving money and with budget cuts preventing building more prisons companies are looking for new "opportunities" and the myth of privatization providing better service for less money keeps getting repeated without question by news organizations such as Marketplace.
Sure there are government inefficiencies but based on recent experience there's no reason to believe wide scale privatization will improve this.
Privatization of government services rarely lowers costs, often provides worse services and lowers compensation for middle class and blue collar workers.
Hiring mercenaries like Blackwater security didn't lower costs and certainly didn't improve performance. Contracting military services to private companies takes their employees out of the chain of command, makes them less accountable for their actions and has a negative impact on how the U.S. is perceived.
Another bad result of the privatization movement is the difficulty of returning to using public workers when the privatization doesn't work out. The structure and expertise will have been disassembled and will be used as a reason to keep using private contractors even when it's not working.
Charlie Berry
Chapel Hill, NC
919-225-4686
This is an excellent idea. But we should extend it beyond social programs, and especially beyond third-party programs that the government funds via grants. If taxpayers only paid for programs that worked, the federal budget would probably be less than a quarter its current size.
I am really disappointed by Marketplace's coverage of this story. I heard absolutely no critique of this approach to social service delivery.
What happens if a program aimed at reducing prisoner recidivism fails to perform because the prisoners have no jobs to go to (despite job training), or can't get hired (because of racism or stigma associated with ex-cons), or re-use or deal drugs (because their communities are infected)? Do we stop doing our best to offer ex-cons a chance at a decent life because "investors" get no return?
The implication on public investment in social services could be chilling. Evaluation, accountability and wise use of tax dollars are important; but treating human beings like they are nothing more than a pay-off for investors raises very serious ethical and societal issues.
It's not Marketplace's job to decide the answer to that question, but it is your job to offer perspective that can help listeners form opinions. Failure to do so helps feed the narrative that government and social programs are a waste of money, which I for one think is false. Marketplace failed to adequately report this story, and as a long-time listener, donor and supporter of public radio, I'm deeply disappointed.
