With Republicans signing pledges not to raise taxes and the likelihood that increased government austerity is going to make matters worse for struggling Americans, the only way out of the current debacle may be to entice the wealthier member’s of our society to put their money to work for the good of the country.
According to a recent report by JPMorgan, the need for social investing by the wealthy is acute because the scope of our social problems vastly overwhelms the ability of government and nonprofit organizations to finance solutions.
Wealthy American’s on average donate about 3.1% of their income to charitable causes, but much more is needed. To increase their level of financial commitment to bettering society is going to take significant monetary incentives. Fortunately, there is a new investment vehicle called a Social Impact Bond, which could potentially attract enough private capital to solve some our countries most egregious social and environmental problems.
What is a Social Impact Bond?
The UK investment firm, Social Finance, came up with the concept of Social Impact Bonds in 2009 as a scheme to fund large scale social innovation.
Social Impact Bonds enable governments to contract with private investors to provide funding for nonprofits working on long-term preventative programs that if successful would save taxpayers serious money. For example, if capital raised from the sale of a Social Impact Bond were used to funded ex-offender reentry programs that nationally reduced recidivism rates by 10%, state and federal governments could potentially save $3 to $5 billion per year.
Thus, conservatives are happy because taxpayers save money and progressives are happy because reducing recidivism will help end the new Jim Crow cast system brought on by the drug war and mass incarceration policies of the past 40 years.
Here’s how they work. First the government contracts with a mission-driven financial organization (MDFO), such as Social finance, to fund solutions to some social problem (e.g. reducing high school dropout rates). On the basis of this contract, the MDFO issues Social Impact Bonds to raises capital from investors. The MDFO uses this capital to hire qualified social service providers (i.e. non-profits) that can deliver the services necessary to meet performance targets set by the government. If the social targets are met (e.g. high school dropout rates decline by 10%) the government repays investors their principal plus a financial return. The size of the return is dependent to the degree to which outcomes improve.
This is really a Win, Win, Win scenario. The government takes on no financial risk, mission driven financial organizations have the financial freedom to experiment with potential solutions to serious social/environmental issues, and the investor receives a return if the outcome successfully saves the government money.
Are Critics Missing the Boat?
Not everyone is elated about the potential of Social Impact Bonds to solve social problems. Critics of this approach believe that its government’s responsibility to fund the public good and that commercializing this process will eventually jeopardize services that don’t actualize a monetary gain for taxpayers.
This argument, however, seems spurious as Social Impact Bonds don’t cut out government services. Instead, they target preventative solutions to reduce spending on programs that are often the result of massive bureaucratic inefficiencies. Such inefficiencies, such as programs that increase spending on prisons while decreasing spending on the rehabilitation of prisoners, arise from short-term political thinking, special interest lobbies and the fear of making a mistake with taxpayer’s money.
Many of us may feel that government has a moral duty to alleviate social injustice – especially those resulting from the institutional failures of our economic system. In reality, however, this approach has rarely worked because those in power have little incentive to pursue long-term creative policies. Social Impact Bonds offer a mechanism by which those with wealth and power (as well as those of us with more moderate means) can become part of the solution. Monetizing the social good may sound distasteful to some, but in the economic system we live in today, it may be the only chance we have for solving some of our most entrenched social and environmental problems.
