Tag Archives: perverse incentives

Private Prisons And Perverse Incentives

Every once in a while, my city gives me something to brag about. Most recently, that’s the current administration’s approach to Criminal Justice.

A recent article from Fortune Magazine, of all places, sets it out.

When the city heads to Wall Street Thursday to borrow $610 million to build a jail and criminal justice complex on the site of an old coking factory, it’s betting it can better house criminals and rehabilitate them on its own. That means CoreCivic, which has run a Marion County jail for two decades, will lose the contract when the new one opens.

The decision to sever ties with CoreCivic is part of a shift in policy-making that seeks to address a cycle of recidivism that keeps sending repeat offenders back to jail. It joins other governments nationwide, including California, that are reconsidering a reliance on the private companies that stepped in as the war on drugs and mandatory minimum sentencing laws caused inmate populations to soar, leaving more than half of the states paying businesses to incarcerate their residents.

There is a mountain of data detailing what’s wrong with private prisons. (When my graduate students choose to write their research papers on the subject of for-profit prisons, their conclusions range from highly critical to horrified, and for good reason.) Zach Adamson, Vice-President of the Indianapolis City-County Council is quoted in the article with what may be the best summary of the problem with prisons for profit:

“The idea that there would be profit to be made through the imprisonment of our neighbors is something that’s abhorrent to a number of people—many of our constituents cannot process that,” said Zach Adamson, vice president of the council that oversees the consolidated government of Indianapolis and Marion County. “Criminal justice is not getting better as long as our primary concern is looking to cut corners and save costs.” (emphasis supplied)

In 2016, the city convened a task force to consider ways Indianapolis could cut crime and address jail overcrowding. The task force recommended addressing “underlying causes,” in an effort to reduce both crime and the $440 million dollars Indianapolis spends on criminal justice each year–far and away the city’s biggest expense.

The issues facing Indianapolis are hardly unique: some 40% of people detained in the country’s jails are mentally ill and up to 85 percent suffer from substance abuse (with respect to those who are mentally ill, psychiatrists tell us that substance abuse is an effort at “self-medicating.”)

The complex will consolidate the courthouse, its jails, and rehabilitation operations in one modern site. The city-county council voted in April 2018 not to privatize the new lockup, dealing a blow to CoreCivic, which has managed a facility there since 1997.

“The goal of the jail system shouldn’t be to fill the beds,” said Andy Mallon, corporation counsel for the government. “We’re trying to reduce crime and reduce the number of people who are involved in crime.”

Mallon’s observation is at the heart of what’s wrong with privatizing these elements of the criminal justice system. Private prison companies are in business to fill beds, and to do so as cheaply as possible, not to rehabilitate offenders. Their lobbyists work to criminalize additional behaviors and increase prison terms for offenses already on the books–measures that feed their bottom lines.

Their goal isn’t public safety, it’s profit, and the big private prison companies donate generously to politicians in order to protect those profits.

During the Obama Administration, the Department of Justice and several state governments  responded to the research, recognized the existence of the perverse incentives, and began  terminating contracts with companies like GEO and CoreCivic. Then, of course, we got Trump, and headlines like these:”Trump’s First Year Has Been the Private Prison Industry’s Best.”  and “Trump’s Immigrant-Detention Plans Benefit Private Prison Operators.”

In Indianapolis, I am happy to say, the city has chosen to bring best practices to bear on its criminal justice problems, to evaluate those it incarcerates in order to determine appropriate interventions– and to stop paying for-profit companies to warehouse offenders.

Comments

Design Defect?

In the short time it has existed, Vox has proved to be one of the smartest sources on the internet; its “explains the news” feature, credible reporting and excellent writing have made it a “must go to” for many of us.

Recently, the site had a political science meditation by Lee Drutman, titled “Yes, the Republican Party has become pathological. But why?”

The article began by quoting an often-cited paragraph from Mann and Ornstein:

In Thomas E. Mann and Norman J. Ornstein’s now-classic and still-true description of the party, “The GOP has become an insurgent outlier in American politics. It is ideologically extreme; scornful of compromise; unmoved by conventional understanding of facts, evidence and science; and dismissive of the legitimacy of its political opposition.”

Drutman doesn’t quarrel with this observation, but says that the pressing question is why did the GOP go insane? And unlike those who pin the problem on flawed leadership, or the Christian Right, or even the racism that has become embarrassingly obvious, he argues that the opportunities and incentives that are built into the system are “design defects,” that have caused the astonishing dysfunction we now see.

My argument is that the modern Republican Party is a direct result of the design flaws of the American political system — our winner-take-all single-member electoral districts, our reliance on private money to finance elections, and our increasingly presidentialist system of government. You simply can’t understand the GOP’s pathologies without understanding the larger political system in which it operates.

Drutman’s argument begins with America’s  two-party system. When voters are given only two choices, the key to victory is being less unappealing than those other guys. “Such is the twisted logic of negative partisanship.”

Drutman dismisses the widespread belief that American politics are ideological; that may be true for the so-called “elites” who are perhaps 10-15% of the voting public, but it doesn’t hold true for the average voter. Instead, voters look to their political parties to decide what policies they embrace, and they choose their party affiliation by deciding which “tribe,” is composed of people “most like me.”

At heart, when we vote, we ask the question: “Who represents people like me?” We support candidates who we think share our values. And here, party is a very strong cue…

Certainly we shouldn’t overstate the level of blind partisanship. But one of the most remarkable and consistent political science findings is how little voters really think for themselves. This is why many previously moderate Republicans didn’t leave the party as it moved rightward — they just became less moderate. Their ideology was far more flexible than their partisanship, because it was less deeply rooted.

All well and good–but if it is the system that has produced today’s cult-like GOP, why haven’t the Democrats similarly gone off the rails? Drutman quotes Jonathan Chait:

The] Democratic Party is racially and economically heterogeneous. Even if he had wanted to take vengeance upon white America for its sins, Obama had far too many white supporters to make such a course of action remotely practical. (A majority of Obama’s voters were white, in fact.) On economic issues, the Democratic Party relies on support and input from business and labor alike.

… There is little such balance to be found in the Republican Party. Republicans concerned about their party’s future may blanch at Trump’s pardoning of the sadistic racist Joe Arpaio or his gleeful unleashing of law enforcement. In the short term, however, they have bottomed out on their minority support and proven able to win national power regardless, by using racial wedge issues to pry away blue-collar whites.

But what about Drutman’s assertion that America’s political design has incentivized the GOP’s troubling behaviors?

One factor is that the past three decades have been a very unusual period in American politics, in which national elections have all been quite competitive, with the balance of partisan control of institutions hanging in the balance. Because American institutions are majoritarian, and because the president has considerable power, a small number of votes can mean the balance between two very different outcomes. When the stakes are this high, the political incentives push hard on gaining every little advantage.

Drutman points to gerrymandering and the single-member plurality-winner district  design feature that makes gerrymandering possible. And at the end of his essay, he comes back to the (considerable) drawbacks of a two-party system.

It’s long, but the entire thing is well worth reading.

Comments

Changing Perverse Incentives

The Brookings Institution has released a report that I can only describe as “compelling.” Titled “More Builders and Fewer Traders,” it focuses like a laser on the perverse policy incentives that have contributed to dramatic levels of inequality.

In our new paper “More builders and fewer traders: a growth strategy for the American economy” we identify a handful of obscure but important shifts—in laws, regulations, and standard practices—which, taken together, have changed the incentive structure of leaders in American corporations. This set of incentives has led to short term behavior on the part of corporate leadership. These incentives are so powerful that once they became pervasive in the private sector, they began to have broad effects. No one set out to create this myopic system, which arose piecemeal over a period of decades. But taken together, these perverse new micro-incentives have created a macroeconomic problem.

The report zeros in on four trends that have contributed to what the authors call “short-termism.”  One consequence of these trends is that–while cash distributed to shareholders as a share of cash flow has surged– the share devoted to capital investment has fallen to a record low.

I don’t disagree with the authors’ focus on these trends, the problems they pose for the economy, or their contribution to inequality.  I do wonder, however, how much of the lack of investment in the future of American industry can be traced back to the way we  finance corporations and the separation of ownership from management.

“Ownership” can mean many things, but it is difficult to square our common-sense understanding of ownership with the purchase of a few hundred shares of stock in a major corporation. Such “ownership” carries with it no meaningful control, no right to make decisions, and “risk” only to the extent that there may be a decrease in the value of one’s stock.

The reality is that American corporations borrow money two ways–through the sale of bonds, which are more secure but which carry only a stated rate of return, and the sale of stock, the proceeds of which represent a gamble on the future of the enterprise: more risk, but the chance of a superior “reward.” Let’s be honest: Neither the bondholder nor the small or medium-sized shareholder is an owner in any meaningful sense of the word.

Meanwhile, the people managing these companies are frequently not “owners,” either. They’re hired hands, often with little investment in the business. Their compensation and continued employment depend significantly upon their ability to keep short-term stock prices high, thus they have every incentive to keep workers’ wages down and their own paychecks as high as possible.

None of this fosters the capitalist virtue of pride in the product, or good corporate citizenship (except as a marketing tool), or decision-making that is in the long-term best interests of the enterprise.

When a company is truly owned by an individual or small group, when those owners see their own prospects intimately bound up with the long-term success of the venture, corporate behavior changes. Such owners are certainly focused upon earnings and the bottom line–but they understand what innovations and behaviors will be needed to protect that bottom line into the future. Concern for long-term fiscal health provides incentives to care about their reputation, their workforce, the quality of their products and the health of the communities in which they operate.

When public policies incentivize short-term gains over long-term decision-making, the focus turns from producing goods and services to playing financial games–with broad negative consequences for job creation, wages, economic stability–and ultimately, American competitiveness.

Comments

Socializing Risk, Privatizing Profit and Evading Referenda

Let’s talk about the proposed Criminal Justice Center, shall we?

First: I think the project itself makes all kinds of sense.

Second: The way it is being planned, financed and constructed makes no sense at all–if by “making sense” we mean serving the public interest and creating a long-term public asset.

It’s the parking meter fiasco redux. The city could have upgraded the meters for a relatively reasonable sum, raised the rates as the vendor did, and retained additional millions of dollars to be used for public purposes. Instead, we enriched a private contractor and ceded control of our parking infrastructure for fifty years.

The proposed approach to the construction of the Justice Center promises to be far, far worse, because all of the incentives are perverse. The current plan (to the extent the Administration has shared any information, which it has been largely unwilling to do) has private developers designing, constructing and financing the center, then leasing it to the city.

The “virtue” of this approach is simple: the Administration has devised a clever financing mechanism that allows it to avoid the pesky requirement of a public referendum and the level of public scrutiny such a referendum would require. (Any project that would result in taxes exceeding the now-constitutional tax cap must be submitted to public vote.)

The defects of this approach are numerous.

  • It will cost more. Cities with excellent credit ratings (Indy’s is triple A) can borrow money at lower rates than private entities.  I’m told the interest rate spread is at least 2%; on 500 million dollars, that’s a chunk of change. Furthermore, private entities must include a profit (and usually cover taxes) in the quoted price.
  • That need to build in a profit margin is a powerful incentive to cut corners on design and construction–decisions will be based on return on investment considerations rather than quality and/or the long-term value of what will eventually be a public asset. (As my husband says, public financing gives us buildings like the old Federal Courthouse; leasebacks give us buildings like the post office on South Street.)
  • Public projects of this size and scale provide lots of opportunities for crony capitalism–for spreading the goodies among one’s political donors and friends.

And there remain important unanswered questions.

For example, what happens if the City defaults, or finds future revenues insufficient to make lease payments high enough to cover those higher costs? The Administration’s estimate of available revenues includes some highly problematic “savings” it anticipates by reason of the new construction. Which City services will be sacrificed to ensure that the required payments are made? Will our already underfunded public safety budget be cut? Will even more roads go uncleared or unrepaired? Will our public parks be even more neglected?

The problem with “deals” like this one– delivered to the City Council as “take it or leave it” propositions with no meaningful opportunity to ask tough questions or consider potentially superior approaches–is that we taxpayers get stuck with decades-long liabilities agreed to in the dark by people who will be long gone when the bills come due.

Comments