March 24, 2014 - In 2012, Mayor Michael Bloomberg announced that New York City would be the site of a new experiment very dear to his billionaire's heart. He declared that Wall Street megabank Goldman Sachs would provide a loan of nearly $10 million to pay for a program intended to reduce the rate at which adolescent men incarcerated at Rikers Island reoffend after their release (currently almost half reoffended within a year). The city government was short of money, so Goldman Sachs would step in to do what anemic public investment could not accomplish on its own: keep young men out of jail.
If the program succeeded, the giant bank would profit. The more recidivism dropped, the more taxpayers would have to pay Goldman Sachs. On the other hand, if recidivism didn't drop significantly, Goldman would lose its investment.
So far, it's too early to tell whether or not the program, which focuses on cognitive behavioral therapy, will meet its goals, but according to reports from the Department of Corrections, fighting has already been reduced at Rikers, so Goldman may just cash in.
The Rikers experiment is an example of a new trend in what are called "social impact bonds." Burning questions about who profits and who loses in these schemes have become the subject of debate as the trend catches hold. Let's explore.
1. So what exactly are social impact bonds?
Social impact bonds, a.k.a. pay-for-success bonds, are billed as an "innovative" way of linking private investors, nonprofits and government to deliver social services with demonstrable outcomes. Private financiers or foundations pay for the costs of a new program, and the government later repays the investors, often with a bonus, if program accomplishes its goals.
While social impact bonds are still a fairly new concept — the first such bond was launched in the U.K. in 2010 — lots of people are buzzing about them. The New York Times reports that in 2011, the term was one of the top 10 philanthropy buzzwords.
Advocates say that problems like homelessness, juvenile delinquency, and preventive healthcare can be improved through these bonds, and claim that they will save governments money. Big players like McKinsey, Goldman Sachs and the Rockefeller Foundation are getting into the game, boasting that such innovative financing schemes are a big win for everybody. President Obama has expressed enthusiasm for the concept, and the Center for American Progress, the Democratic Party-affiliated think tank, has released research supporting the idea.
2. When I hear "innovative financing" and Wall Street banks in the same breath, shouldn't I be nervous?
Yes, you should. There's a long, nasty list of innovative schemes pushed by Wall Street and billed as ways to save governments money that have drained city and state coffers.
As Alexander Arapaglou and Jerri-Lynn Scofield have pointed out on AlterNet, big banks have hauled in boatloads of money from their flawed, and even fraudulent, schemes directed at public funding needs, such as financial contraptions and deals involving complex derivatives and whatnot that were supposed to help governments pay for things like bridges and waterworks. As you might imagine, these products often didn't work as the banks advertised, and cities and states frequently get hosed.
In the case of a social impact bond, a government must budget money to pay back the private financier or foundation for the program. If the program doesn't work, the government doesn't owe anything, and the money loaned could be considered a charitable donation. But if it's successful, the taxpayer, through the government, is forced not only to pay back the loan, but to pay for the profits of the investor. Some people object to the idea of private profit provided by taxpayer dollars.
3. But social impact bonds deal with things we want to change. What's the problem?
Mark Rosenman, professor emeritus at the Union Institute & University, has argued that while the programs themselves may be helpful in some cases, the problem is that companies like Goldman Sachs are profiting from them at the expense of taxpayers. He cites the example of Head Start, which 57,000 children have lost as a result of tax cuts and the sequester.
Meanwhile, Goldman Sachs has leapt into the breach, launching a social impact investment to provide private money as an alternative to public investments in early childhood education. As Rosenman explains, Head Start saves the government at least $7 for every dollar spent, but if Goldman Sachs has its way, we will be paying them and their clients part of that savings for having replaced taxpayer funding for such programs. "Let's call it what it is," writes Rosenman, "private profit crowding out a public good."
This is precisely the sort of thing conservatives who worship the market and hate the government want: An excuse to reduce taxes for the wealthy while cutting services for everybody else. It's really just a return to the 19th-century model of charitable contributions for the poor instead of government intervention and public investment. Goldman Sachs CEO Lloyd Blankfein has repeatedly argued that programs like Social Security, Medicare, and Medicaid must be cut "because we can't afford them." But evidently, we can afford to pay Goldman for doing things that look exactly like what he says "we" can't afford. It's clear he would prefer to cut these programs to lower his tax bill and just toss out a bit of charity from time to time. With a social impact bond, he gets the bonus of profiting if the result of his contribution is deemed successful.
It really must be pointed out that Goldman Sachs, one of the country's most profitable companies, has also been named one of the top tax deadbeats in the U.S. A recent study by Citizens for Tax Justice shows that one of the biggest tax breaks claimed by corporations is stock options for top executives, which are deductible from corporate income taxes but don't reduce earnings reported to stockholders. Between 2008 and 2012, Goldman Sachs claimed just over $1.5 billion in deductions from stock options. All this tax-dodging, of course, is a key reason for the lack of public funds for social programs!
If big companies like Goldman Sachs paid their fair share in taxes in the first place, then the government would have more money for social programs and wouldn't have to turn to private financing. "We don't need financiers working for private gain from social programs," states Rosenman. "We need citizens working for greater public revenue and its more effective use by government in funding nonprofit services and programs that reduce inequality and raise the quality of life for all of us."
Rosenman has also pointed out that monetary incentives could potentially distort the programs and their evaluations, and warns that encouraging investment in order to generate private profit as a substitute for government responsibility might be a big mistake.
Political scientist Thomas Ferguson likens the idea of banks like Goldman Sachs financing social programs to what the Catholic Church used to do back in the Middle Ages: "Church officials would hand out alms for the poor while living the high life in their palaces at the Vatican or Avignon. This is simply the modern version."
As Ferguson points out, rich people have long gotten a tax break on the interest on state and local bonds, which is why they've been attracted to them. He notes that what schemes like the Goldman Sachs/Rikers Island deal do is effectively keep down the demand for social services and starve the state. Instead of a reasonably funded state, you have a state unable to meet the basic needs of its citizens — and one that ironically is forced to turn to the very people who have been robbing and pillaging the citizens to throw them a rope. Then the rest of us are supposed to be grateful to them.
4. Shouldn't we be focusing on what puts young men in prison in the first place?
Excellent point. Part of the problem with social impact bonds is that private investors are less likely to look at big-picture problems with long time horizons. They want a discrete, limited program in which results can be easily measured and demonstrated.
Many social scientists would argue that things like poverty, the war on drugs, high unemployment and racism are the things that cause young men to end up at Rikers Island. Perhaps cognitive behavioral therapy for individuals while they are incarcerated will be beneficial in terms of recidivism, but if we really want to address a problem as big as young men in prison, we need to focus on underlying structural issues. And that requires large-scale government investment and a tax code in which everybody, including Goldman Sachs, pays their share.
CEO Lloyd Blankfein may say he wants to keep young men out of jail, but he is an enthusiastic advocate of cutting the very government programs that help them and their families survive.
5. And while we're at it, shouldn't we be focused on putting criminal bankers in jail instead of adolescent males who smoke pot?
You really hit the nail on the head there! We all know by now that a great way not to end up in jail is to be a powerful banker, so perhaps instead of cognitive behavioral therapy, the Rikers program could offer to send young adolescent men to business schools where they could learn to become financiers. Top Goldman executives appear to have engaged in plenty of misconduct that might well deserve to be prosecuted as crimes, but our two-tiered justice system ensures that they not only don't go to jail – but they continue to be repeat offenders.
Matt Taibbi, who memorably dubbed a Goldman a "great vampire squid" in a 2009 article in Rolling Stone, noted that a 650-page report on the financial crisis put out by the Senate Subcommittee on Investigations revealed plentiful details of Goldman Sachs' crime spree leading up to the disaster:
"...The mountain of evidence collected against Goldman by Levin's small, 15-desk office of investigators — details of gross, baldfaced fraud delivered up in such quantities as to almost serve as a kind of sarcastic challenge to the curiously impassive Justice Department — stands as the most important symbol of Wall Street's aristocratic impunity and prosecutorial immunity produced since the crash of 2008."
According to the report, Goldman Sachs executives viewed the impending financial crisis — which they helped create! — as an opportunity to enrich themselves both at the expense of clients and eventually of taxpayers through the bailouts. Yet in 2012, the Justice Department announced that it would not pursue criminal charges against the bank. Attorney General Eric Holder gave us a hint as to why when he explained to Congress in 2013 that some banks were too big to jail.
How many of the young men at Rikers Island ended up there in part because of the wreckage in the economy caused by that crisis and the subsequent cuts in services demanded by people like Lloyd Blankfein?
Perhaps we could create a social impact bond focused on sending criminal bankers to prison. The more who end up serving time, the more the bondholders will get paid. That would be a very interesting experiment. Any takers at Goldman Sachs?