Michigan Experiments with Social Impact Bonds

Just a few years ago we saw a dramatic example of privatized gain buoyed by socialized risk when taxpayers ponied up trillions of dollars to bail out big outfits like Goldman Sachs who made reckless investment choices. Remember that? Good times. Arguably it was among the worst examples of private/public interaction.

Today we're seeing a model for financing social programs called Social Impact Bonds. This strategy tries to turn that around, privatizing risk and socializing gain. To their credit, Goldman Sachs is on board with this one, too. They've invested ten million bucks in a strategy to stop young New York inmates from becoming repeat offenders. 

Social impact bonds, in theory, work like this: private investors work with a nonprofit group (or not) to finance a solution to a social problem. If the solution works, taxpayers then pay the investors back plus interest. If it doesn't work, tough luck for the investors. It's also called a "pay-for-success" program.

Michigan just became the seventh and most recent state in the U.S. to receive technical assistance for such a program from Harvard University.

The thing to know about social impact bonds is that they are a pretty new financing plan. And, I might add, kind of experimental. Hence the need for a Harvard guy to come to Michigan for a year to show us how such a thing might work.

Michigan is currently working to come up with a very specific social ill that needs addressing, at which point it will start finding investors who want to address it. I recommend a program for finishing high school and/or college. As a Michigander, that would be on my wish list.

This new and, I'd like to stress, experimental social impact financing solution is part of a larger national effort to make sure taxpayers are paying for "measurable outcomes" rather than "activities." It's a noble goal. One that goes right after this government waste we hear so much about, and takes advantage of the jittery wisdom we imagine people putting their own money at risk will have.

It sounds pretty theoretically awesome.

And it is.

Theoretically. Keep in mind, however, that this idea was first launched in 2010 in Peterborough, England in an attempt to reduce recidivism.  Not that long ago. By some measures, it was a success. But it's only one potential success in just two and a half years.

It will be interesting to watch how this new social financing strategy works over time. I have reservations about jumping into it whole hog, however, until the data comes in.

The program isn't without its criticisms, of course. There is a concern that objectives will still be selected by inept bureaucracies, or that for-profit interests will skew the results. For example, one such method of skewing results is through something called "cream skimming" or selecting "low risk" subjects in a pilot program, or a population more likely to do well in a given circumstance. The takeaway here is that the government still needs to do a good job at oversight, even if we mitigate risk to the taxpayer. There's still, and always will be, incentive for abuse in the name of profit. And that's where government needs to uphold its part and be vigilant.

[Photo Credit - erwinem - Source