DATA DRIVEN VIEWPOINT: The concept of "social-impact bonding", presented below, seems like an interesting alternative to just collecting sufficient taxes from major corporations so that social services are not so underfunded. (OK, perhaps too cynical.) More to the point, our whole system of privatized social service delivery isn't working. [Please read my essay on this subject: http://bit.ly/zK5pfJ ]
In essence, the private funding of social services mirrors the problems inherent today with the development and distribution of pharmaceuticals. Illnesses that are less common, more prevalent among the poor or confined to underdeveloped nations get less attention because there is less of a profit motive. This leads to a wildly uneven distribution of life saving products and product development. Social-impact bonding would greatly exacerbate existing disparities. Betting investor dollars on what is judged the most potentially profitable outcomes would only heighten selectivity of what gets funded and who gets ignored.
Brian T. Lynch, MSW
I'll put $2.4m on recidivism to fallAug 6th 2012, 12:32 by M.S.
GOLDMAN SACHS is apparently feeling charitable these days. On August 1st the bank reportedly helped Knight Capital Group by buying some of the hundreds of millions of dollars in trading positions Knight had accidentally acquired due to a catastrophic computer glitch. And on a much smaller scale, David Chen reports in the New York Timesthat Goldman Sachs is staking the city of New York to a $9.6m loan to pay for an anti-recidivism programme for people who served their time at the Rikers Island prison. The innovative part is that the loan is actually a position: Goldman only makes money if the programme works. This is known as a "social-impact bond". Mr Chen explains how it works:
The Goldman money will be used to pay MDRC, a social services provider, to design and oversee the program. If the program reduces recidivism by 10 percent, Goldman would be repaid the full $9.6 million; if recidivism drops more, Goldman could make as much as $2.1 million in profit; if recidivism does not drop by at least 10 percent, Goldman would lose as much as $2.4 million.
The potential loss is capped at $2.4m because the charitable foundation of Michael Bloomberg, New York's billionaire mayor, has insured the loan up to $7.2m. If the programme fails, the foundation gets stuck with the bigger portion of the bill.
Social-impact bonds are a new strategy to shift traditional social-services expenditures into bets on performance that are underwritten by private financial institutions and only pay out based on results. In June, Tina Rosenberg wrote a glowing article about the promise of such bonds, which have so far been tried only on an experimental scale in Britain. On the one hand, she wrote, the bonds illustrate the "welcome trend" of "measuring outcomes, not outputs." Too many social programmes measure only how many prisoners have been counseled, for instance, rather than trying to measure whether the counseling actually achieves anything. On the other hand, measuring whether the counseling actually works is extremely hard to do, and forcing cash-strapped counseling or prisoner-aid organisations to assume the financial risk for meeting goals would be so onerous it may well drive them out of business. Having financial institutions take on that risk by placing a bet on the outcome seems to be a logical solution. And Jeffrey Liebman writes that the bonds, by tapping private capital, could speed up the adoption of new programmes that have been shown to work but that governments are slow to implement when doing so requires allocating taxpayer funds.
And yet, as with so much financial innovation, social-impact bonds fill me with a nameless dread. At root, I just don't believe that this attempt to turn non-profit goals into for-profit ones will succeed where prior attempts have failed. I cannot quite see how letting financial institutions bet on worthwhile social outcomes will accomplish much.
Mark Rosenman, director of Caring to Change, sums up some of the issues, starting with the problem of where non-governmental social-service agencies are supposed to get the core funding that allows them to offer the capacity to carry out the programmes on which social-impact betting is based:
Where does a nonprofit get the funding to provide the services from which they are to later show a monetized gain to government? How far out in time does the performance metric need to go before quantifiable economic value can be shown and the charity repaid its expenditures? What happens when a nonprofit is providing superb and highly effective services to individuals, but other institutions and variables deteriorate and affect its outcomes?
These are basically pragmatic issues. Along the same lines, what I'd envision is that if financial institutions' return on investment is dependent on achieving certain metrics, those metrics are going to end up being defined such that they're always achieved. There will be a brief period after the adoption of social-impact bonds during which they may serve as a meaningful guarantee that service providers will deliver their promised results efficiently. But after a few years, if the bonds become all the rage in the non-profit sector, they will become another meaningless charade of pseudo-accountability that teams of grant-writers know how to plug in to get the money flowing, with the metrics selected such that the financial institutions are almost guaranteed of receiving their full payout. Basically, they'll become a means for government to use the prestige of financial institutions to claim to taxpayers that their money is being well spent. "Our elementary-school music programme must be an efficient use of tax dollars—after all, the social-impact bond is provided by Goldman Sachs!" Will taxpayers buy that pitch? Alas, they may.
More broadly, this seems an instance of a society-wide effort to annihilate any kind of valuation that money cannot measure. And that's a hard problem to describe. Michael Sandel, in his recent book "What Money Can't Buy: The Moral Limits of Markets", tries to outline some of the ways that money cannot be used to value certain things. But when he gets down to what it is, exactly, that happens when you try to put a dollar value on, say, romantic affection, he ends up saying that doing so "corrupts" the good in question. The word "corrupt" feels a little squishy for contemporary moral and political vocabulary. What does it mean, exactly? What's wrong with targeting socially valued goals by getting financial institutions to place bets on them? I haven't yet put my finger on it, but I'm pretty sure it's a sucker's bet, and that the reason why it ultimately won't work is that it betrays a society that is losing track of what values actually are and where they come from.