On Wednesday, February 9, in the New York Times, author David Leonhardt painted a rosy picture of social impact bonds, ignoring the potential risks of such schemes. The article, “For Federal Programs, a Taste of Market Discipline,” praises social bonds, suggesting they should replace public funding of federal human services programs. The idea is that private foundations and/or investors would pony up the start up funds for a program such as, say, job training. Then, the recipient would have to exceed pre-determined outcomes to get a dividend or a profit. Failure to meet the outcomes would mean failure and the end of investment.
It is a viscerally attractive idea, but fraught with dangers.
The government “invests” about $76 million per year in competitive grants to the Department of Labor’s National Farmworker Jobs Program, which 52 AFOP members operate. Data comparing programs to each other and against national goals is published quarterly. If a grantee is under performing for several consecutive quarters, the government cracks down and begins a set of sanctions that can ultimately lead to penalties at the next round of competition. This seems to be a strong incentive to succeed or improve if necessary. I can say this with some confidence, because most of the 52 programs exceed the Department’s challenging goals each and every quarter. That is remarkable considering migrant and seasonal farmworkers face significant barriers to growing their job skills and entering new careers. Yet, the grantees are currently able to train and place over 80% of the eligible farmworkers who seek their services into good jobs. And they follow them for about a year, during which time about 80% of those who got jobs are still working. Pretty good record, I would say by any standard.
Could federal job training programs do better? Always. Is complete privatization the best way to improve the program? Doubtful. Here’s why: in a social bonds environment, the temptation to cull the best and brightest customers (“creaming”) and leave the rest behind would be incredibly powerful. Public funds aimed at getting the unemployed and underemployed into good jobs should incentivize grantees to try to work with those who need the most assistance. Otherwise, why should public funds be spent at all on these services? I fear the social bonds idea would quickly leave behind exactly those who need public services the most. Added to that is the likelihood that recipients of the social bond funds would try to cut corners to reduce costs and increase margins, thereby shortchanging the customers of the service.
I think a better way exists: set the public performance standards and hold those that implement them to those performance standards with clear and effective consequences for not meeting or exceeding the standards. Instead of culling out the neediest recipients, it will cull out the providers, be they public or private, that are not up to the job of producing good results. I’m all for accountability and productivity, but not at the cost of losing the public’s right to control the funding and the goals.
And about that opening sentence: who determines whether or not a refund is due? I could argue that the tax breaks that hedge fund managers get has backfired, and not worked at all. In fact, those tax breaks may have contributed to the Great Recession we are just beginning to come out of. Will/should they pay us back?