Out of the Woods

Getting Something for Nothing:

  Goldman Sachs is at it again.

A small item in the newspaper caught my attention. ”Goldman Sachs to Fight Recidivism” read the headline. “Oh good” I thought, “Goldman Sachs is finally seeing the error of its ways.” They are not going back to their bad old ways of making lots of money. But no such luck. The article did not disclose a change of heart at Goldman Sachs but referred to a new moneymaking strategy called “Social Impact Bonds.”

This is the new scam.

The government would like to reduce the recidivism rate among young men who end up in jail for drug or other, not terribly serious offenses. But unfortunately the government doesn’t have any money.

Enter private investors. They advance the cost of the recidivism fighting program to the government. If the program works, the government pays the private investors. If the program does not work, the private investor loses.

This program is promising if you look at it this way: suppose the recidivism program works. Fewer young men who have been incarcerated will be returning to the same life once they are released from prison. More of them will find legitimate jobs, start stable marriages and contribute to society by working, and paying taxes, and being good parents. As a consequence less money is needed to incarcerate young men for their second or third stint in prison. The government saves money and therefore is able to pay for the recidivism funding program which before it could not afford.

Everybody wins. The government is able to afford social programs it did not have the money to pay for without the social impact bonds. The private investors make money. It is clearly a win-win situation. Hallelujah!

Looked at more closely, this program is not quite as attractive.

To begin with, the government needs to pay a number of different subsidiary agents. Someone needs to study different anti-recidivism programs and recommend the one which they regard as the most promising one. The social program experts will surely want to get paid for their services. The government will have to pay for that.

Then a bunch of lawyers will have to draw up a contract between a social service provider – the people who will actually put the anti-recidivism program in place – and the government. Those lawyers will certainly want to get paid. The government will have to spring for that too.

Once the program is in place, someone needs to evaluate it. The evaluators will also need payment and the government will be the one to pay.

These and other costs will cut substantially into the supposed savings the social impact bond will provide for governments that should enable them to pay back investors in successful social programs.

But of course the government is not going to be able to realize those savings anyway. The government does not keep its funds in very many different separate accounts. No account is dedicated to anti-recidivism efforts from which, if less is paid out, more money is left over to repay Goldman Sachs for their investment. If some expenses are cut in one place, that money easily flows out into another expenditure.

Remember the peace dividend? In 1989 when the Soviet Union collapsed, the Cold War came to an end and there was a lot of talk about the money we were going to save because we would no longer be on military alert against possible Russian attacks. A significant amount of money would be saved that could now be spent on various social programs. Well, that never happened because the money saved just trickled into this government program and that new military procurement effort and no one ever saw any of the so-called “peace dividend.”

While Goldman Sachs is promising to reduce recidivism among young black men in the big cities, they are up to their old tricks, selling clearly unpromising investments to unsuspecting clients. At Goldman Sachs recidivism is alive and well.