Friday, April 4, 2014


Social impact bonds. Are they just another way to justify low taxes on the rich while gutting programs that the private sector dislikes? Check it out.

Social impact bonds are being sold to the public as a way to get private market players to foot the bill for social programs. They get paid, with interest and bonuses, but only if the programs they lend money to are successful.

So, what's wrong with this picture? Plenty.

One of the reasons we need social impact bonds is because the Republicans decades long tax cut jihad has deprived state and local governments of money. This race to the bottom strategy has made governments at all levels so desperate for cash that they need to get private market players and clueless but socially conscientious rich people to put up cash for projects and programs they like.

If the programs are successful the governments involved must come up with the cash to pay back the loans with generous profits for investors, many of whom have lots of cash laying around after decades of low taxes and bailout subsidized profits.

On the flip side of this equation, if the projects aren't successful the market players who made the "investment" - which are really loans to local and state governments - get to write it off as a tax deductible charitable donation. The American taxpayer, in essence, foots the bill for the market players deduction. The end result is that private market players either make a killing on social impact bonds or get another tax break.

Financially it's heads they win, tails we lose. Again.

If you're looking for an example of  how social impact bonds undermine the public good think about Head Start. After three decades of America's race to the bottom successful programs like Head start have been getting whacked for years. Rather than pay their fair share in taxes - keep in mind that we were running budget surpluses in 2000 - private market players are offering to step in and play social justice super hero by putting money into programs that they get to cherry pick, like Head Start.

Because Head Start saves the American taxpayer $7 for every dollar that's put into the program private market players who loan money ("invest") in Head Start can claim that they deserve a big chunk of the $7 dollars in savings the government generates from the Head Start program. Rather than helping to fund pilot programs or current expenses Head Start's savings end up in the private sector.

The best part for the private market players is they can justify not paying more in taxes.

Worse, anti-government zealots can continue to claim that we don't have enough money for programs they don't like, like social security, Medicare and Medicaid.

Don't get me wrong. There is merit to social impact bonds. The problem is I can see them being used as a backdoor policy to continue gutting social programs while rewarding the rich with tax breaks and public subsidized profits.

You can read more about social impact bonds herehere, and here.

- Mark

UPDATE: Here's another social impact bond story involving Goldman Sachs.

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