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The Selling of the World, Cont’d

This sounds like a right terrible idea:

New York City, embracing an experimental mechanism for financing social services that has excited and worried government reformers around the world, will allow Goldman Sachs to invest nearly $10 million in a jail program, with the pledge that the financial services giant would profit if the program succeeded in significantly reducing recidivism rates.

The city will be the first in the United States to test “social impact bonds,” also called pay-for-success bonds, which are an effort to find new ways to finance initiatives that might save governments money over the long term.

First used in Britain and now being explored in Australia, the bonds are rapidly capturing the imagination of some public officials in the United States: on Wednesday, Massachusetts announced that it was completing negotiations with two nonprofit groups to finance juvenile justice and homelessness programs, with the promise of repayment only if the programs work.

These are small investments for now, but given everything we’ve seen over the last several years, especially in the municipal bond market, why would you want to facilitate something like this? Will Goldman securitize the social impact bonds, divvying them up around the country? Will they fleece the municipalities with floating interest rates and fine print designed to ensure profits? Will they sell credit default swaps on the bonds?

The deal is allegedly structured so that Goldman doesn’t make a profit unless the particular human service involved meets their metrics. But why should the public sector deliver a profit to a financial entity at all? To quote Mark Rosenman, professor emeritus at Union Institute and University in Cincinnati, “When we get into a situation where we are encouraging investment in order to generate private profit as a substitute for government responsibility, we’re making a big mistake.” And surely Goldman isn’t above using their power and influence to ensure a profit through massaging of the metric data or some other restructuring. And I’m sure human needs won’t come first in that scenario. Meanwhile, the local governments just see the promise of short-term easy money and plugging a budget hole, neglecting the longer-term dangers. They probably won’t be in office by then, anyway; it’ll be someone else’s problem.

This shows how insulated the rich have become and how the idea of raising revenue through progressive taxation is practically off the table. If we have human services needs to fight homelessness or reduce recidivism or increase access to foster care or medical treatment or whatever, you can simply tax the public. All of these things would lower costs over time; they’re investments in the commons that eventually pay off. Why should they pay off for a Wall Street banker, exactly, instead of the public?

Local governments have been fleeced by Wall Street firms for years (Most of them don’t have a Wall Street daddy like Michael Bloomberg at the helm). It’s been a defining feature of the crisis. Facilitating that through another Wall Street innovation seems like the height of folly.

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David Dayen

David Dayen