Social Impact Bonds versus social impact

In the “impact economy” so many writers now eagerly foresee, private investors will underwrite creative, cost-saving solutions to our most vexing and costly social problems. Government will repay investors with future savings from the structural reduction in the demand for social services. That’s the idea behind Social Impact Bonds (SIBs).

The notion that stodgy old tax-funded social programs will soon wither away to be replaced by dynamic private sector social enterprises at no net cost to taxpayers has captured the imagination of  social entrepreneurs and is gathering believers among politicians facing brutal budget choices.

If that privatized future comes to pass, then Yvonne Fischer at PublicAdministration.net is right to remind us that government itself will not disappear from the social sector. Her recent article, Public Administration and the Impact Economy, looks ahead to the day when administrators in the public sector will play central roles in leading the impact economy, from capitalization to rulemaking to creative leadership.

So, will government bureaucrats and nonprofit fundraisers really be forced to make elevator pitches to venture capitalists to get money for social needs like child welfare services, group homes for disabled adults or immunization? Maybe. President Obama included $100 million for Social Impact Bonds in his recently proposed 2013 federal budget. And several states have already jumped ahead to offer “Pay for Performance” bonds on their own.

But hang on. The very first and so far only SIB was issued in the UK in 2010. It hasn’t paid off yet and remains an experiment in progress. We haven’t seen even one success so far.

But the fundamental problem with SIB-mania is this: truly transformative social innovation isn’t profitable.

As Kevin Starr argues in The Trouble with Impact Investing, you can’t have your cake and eat it too:  “… there really is only one bottom line. It’s either impact or profit.” Society does not have a single financial interest in any social circumstance. And potential financial savings do not drive transformative social change.

If cost (or common sense) were decisive, America would not now have 2.6 million of our people locked up in prison. Taxpayers might like to save money spent on prisons, but guards, construction companies, host communities and private prison operators all have a market interest in growing the prison industry regardless of its social impact. You really want to close wasteful prisons? Prepare for political battle.

Did anyone project a return on investment from abolishing slavery or child labor or racial segregation? How would social entrepreneurs monetize these huge social impacts?

Women’s suffrage did not reduce government expenditures as far as I know. Social Security and Medicare have vastly increased social spending, yet most Americans believe this is money well spent.

These transformative innovations in social organization did not solve financial problems. They changed conditions that society, as a whole, could no longer tolerate because their persistence violated new moral, political and intellectual beliefs.

Significant social innovations create social conflicts, making them painful, difficult and time-consuming to design and put in place. The final shape of change responds to far more than money. It usually disappoints those who worked for it.

Social Impact Bonds may help government save a few dollars here and there, although I think taxpayers will eventually balk at paying off bonds with notional savings to budgets created years or decades later. But I’m quite certain that true social impact will always be far too complex, contentious and messy to capture in dollars for investor profit.