The Failing Private Prison Experiment

The private for-profit prison industry stakes its claim for securing government contracts to warehouse prisoners on providing greater efficiency.  Executives for private prison corporations claim that they can better manage taxpayer monies by running prisons more cost effectively and more safely.  Recent research indicates that both of these claims are simply untrue.  Why any state or government would turn over prison care to private concerns is becoming a mystery in light of this emerging evidence.  Unless of course, greed is the primary motivator and massive profits for executives and shareholders is the end game.  Private prisons have become a money-grab, simply transferring taxpayer monies to private industry players, who provide failure in return.

To wit, the Lake Erie Correctional Institution that was purchased in 2011 for $73 million by the Corrections Corporation of America (CCA) from the state of Ohio.  A report out last month describes in harrowing detail the dysfunction and failures that have occurred at the prison since CCA's takeover.  The Executive Summary of the non-partisan report detailed the conditions of Lake Erie Prison since CCA took possession: 

"LAECI’s primary issue is safety and security. Staff interviews, inmate focus groups, the inmate survey, and institutional data all indicate that personal safety is at risk at LAECI. Assaults, fights, disturbances, and uses of force have all increased in comparison to prior years. There is a high presence of gang activity and illegal substance use. Inmates reported frequent extortion and theft.

Incident reports indicate that staff hesitate to use force even when appropriate and at times fail to deploy chemical agents prior to physical force, risking greater injury to both inmates and staff. Staff also do not appropriately sanction inmates for serious misconduct. At the time of the inspection, the facility had no options for sanctions other than the segregation unit, which was full. 

The above issues are compounded by high staff turnover and low morale. New staff generally do not have the experience or training to be able to make quick judgments regarding the appropriate application of force or how to handle inmate confrontations. Staff also reported that they are often required to work an extra 12 hours per week, which may impact their response."

More efficient?  Hardly.  The actual result at Lake Erie since CCA took charge is greater violence, increased gang activity and illegal substance use, higher staff turnover, less safety, and greater chaos.  Guards believe that CCA management is so concerned with being sued (and thus losing profits) that they do not allow the guards to properly police the prison population.  

The private for-profit prison experiment is failing.

[photo is in the public domain]

Incarceration Nation

Professor Paul Butler penned an opinion piece for the New York Times this week, Gideon's Muted Trumpet, where he traces the history of incarceration in the United States since the Gideon v. Wainwright case was decided fifty years ago.  Essentially, Gideon guarantees that a poor person will be given access to a lawyer when charged with a serious crime.  Often the Miranda warning, repeated on a loop in television police dramas, comes to mind when thinking about Gideon's guarantee of legal representation (i.e., You have the right to remain silent . . .  You have the right to an attorney.  If you cannot afford an attorney, one will be provided for you . . .).  But what has this guarantee wrought after fifty years? 

Per Butler:  "A poor person has a much greater chance of being incarcerated now than when Gideon was decided, 50 years ago . . . . This is not because of increased criminality — violent crime has plunged from its peak in the early 1990s — but because of prosecutorial policies that essentially target the poor and relegate their lawyers to negotiating guilty pleas, rather than mounting a defense."

Butler's op-ed discusses the underrecognized problem of prosecutorial discretion, which infuses an enormous amount of power in the men and women that prosecute federal and state crimes in the U.S.  Butler writes:  "The so-called war on crime greatly expanded criminal liability. A prosecutor can almost always find some charge: there are over 4,000 crimes on the federal books alone. Recreational drug use is one of the more popular activities in America, but racial minorities suffer the brunt of drug-related convictions.  In part because of federal grants to states to incarcerate drug offenders, the United States experienced the largest increase in incarceration in the history of the free world. Our population is less than 5 percent of the world’s but we have nearly 25 percent of its prisoners. When Gideon was decided, about 43 percent of defendants were indigent. Now, over 80 percent are."

The United States continues to wage an internal war against its own citizens, particularly if a U.S. citizen happens to be poor and minority.  It is simply the easiest way to appear tough on crime and to fill our nation's prisons, increasingly operated by private prison corporations for profit.

Wall Street Pay Rises; Worker's Pay Does Not

Bonuses on Wall Street rose 9% in 2012, nearing former record highs, at the same time that pay for U.S. workers continues to stagnate.  Up until the 1970s, worker compensation and productivity rose simultaneously, rewarding workers for gains in productivity.  However, since 1978, worker compensation has flatlined while productivity has increased markedly.  The benefits of greater productivity have gone almost exclusively to shareholders and corporate executives and not to the employees driving the gains.  "Companies are on a tear in terms of productivity and profits, but they aren't sharing much of the gains with their workers. . . .  Productivity, which measures the goods and services generated per hour worked, rose by 80.4% between 1973 and 2011, compared to a 10.7% growth in median hourly compensation . . . ."

With unemployment still hampering many American workers, bonus pay on Wall Street is projected to rise another 8%  in 2013.  Despite the increase in compensation, Wall Street banks continue to slash jobs to cut costs and spur profits. Meanwhile, "[e]mployers are achieving their gains with fewer workers []. U.S. economic activity is now 2.5% higher than it was when the recession began in late 2007, but there are more than 3 million fewer workers on the job, said Mark Perry, a scholar at the conservative American Enterprise Institute." To that end, Wall Street continues its tone deaf march intent on enriching its executives at the expense of its employees and the United States economy.

Wealth Inequality Gap Widens

Wealth inequality between white families and African American families continues to worsen. According to a new study out of Brandeis University “[t]he wealth gap between blacks and whites has nearly tripled over the past 25 years, due largely to inequality in home ownership, income, education and inheritances . . . .” The largest driving factor in this inequality is in homeownership, more specifically, where homes are purchased as home appreciation is severely limited in non-white neighborhoods making it much more difficult for black families to gain value based on home equity and appreciation. On average, white families are able to purchase a home eight years sooner than a black family and often with larger down payments such that white-owned mortgages have lower interest rates. Further, predatory lending, particularly in the run-up to the mortgage meltdown of 2008, often targets minority communities. 

Additionally, white families benefit at substantially higher percentages than do black families when it comes to inheriting family wealth. “Among the families studied, whites were five times more likely to inherit money than blacks, and their typical inheritances were 10 times as large.” 

While the wealth gap has widened in the past two decades, the financial market crisis exacerbated the problem as African American and Latino wealth dropped by more than 50%, while white wealth dropped by only 16%. According to Pew: "The Pew Research analysis finds that, in percentage terms, the bursting of the housing market bubble in 2006 and the recession that followed from late 2007 to mid-2009 took a far greater toll on the wealth of minorities than whites. From 2005 to 2009, inflation-adjusted median wealth fell by 66% among Hispanic households and 53% among black households, compared with just 16% among white households."

Bankers Above the Law. . .There Will be Hell to Pay

Earlier this week, Attorney General Holder testified to Congress that:

"I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy. And I think that is a function of the fact that some of these institutions have become too large."

Not only is this testimony flat wrong, I argue that Holder must know that it is at best deeply misleading to Congress and the American people. Here is why:

1) If the DOJ were indicting individual bankers for fraud, then this explanation might explain why banks themselves are never indicted. It does not explain at all the absence of indictments against bankers. In fact, we know that high-level bankers can be incarcerated with zero impact on the economy. This is proven by the case of Raj Gupta, the Goldman board member indicted for insider trading. So, Attorney General Holder's explanation of the lack of criminal prosecution at big banks explains nothing about why no individual or senior manager of any Wall Street bank has been indicted for any crime at all related to the subprime debacle. In short, in announcing a new DOJ policy of "too-big-to-jail," Holder completely failed to justify its most important element--immunity for individual bankers for financial crime.

2) Giving TBTF banks even more in government indulgences is not going to help the economy it is going to drag the economy to the gates of hell. As Bloomberg recently reported the megabanks make little or no money; instead, all of their profits are attributable to the implicit subsidy provided by the perception of government backing which lowers their cost of funds by .80 percentage points. So instead of giving the banks the ability to skirt financial fraud laws, we should be breaking them up, like we did under the New Deal. Perhaps the one silver lining to Holder's comment is that "too-big-to-jail" creates one more reason to break up the megabanks ASAP.

3) Holder is clearly allowing political connections to play a role in prosecutorial discretion and this comment proves it. We know that criminality occurred at MF Global. Yet, no prosecutions occurred. They failed, and no economic dislocation ensued. So clearly no TBTF issue is at play with MF Global. The only issue at play with MF Global was the patent political power of major Obama fundraiser and former Senator and former Governor Jon Corzine. So how does Holder explain MF Global?

4) A key point of my recent book, Lawless Capitalism, is that "investment and financial markets can only be built upon trust." How can any investor trust a financial system dominated by megabanks that are above the law? Capitalism requires trust and trust can only be inspired by a rational rule of law applicable to all. Exemptions for the most economically powerful are likely to be the most economically damaging as they control the most concentrated resources. In other words, giving legal indulgences to those with trillions under their control means that trillions will be deployed with no care towards illegality. Only profit, no matter how cravenly grabbed, will matter. The American people are already rapidly losing trust in the system. In a recent Northwestern/Univ. of Chicago survey, only 22% of Americans trust the financial system.  Holder's bold power-grab on behalf of the banks is sure to accelerate this unraveling of trust. That means severe economic pain.

5) Another key point of Lawless Capitalism (as well as Daron Acemoglu and James Robinson's instant classic Why Nations Fail) is that laws and regulations must tether elite interests to macroeconomic growth and under conditions of high inequality that challenge intensifies. Holder's statement is simply further proof that elites will eschew the law and seek to operate outside legal constraints once too much economic wealth is concentrated in too few hands. We learned that in the run up to the subprime collapse and Holder seems intent on repeating that painful lesson. This can be termed the injustice of inequality.

Trust and alignment of elite interests are simply two sides of the economic rule of law. A sound economic rule of law must inveigh against elite privilege, mitigate disempowerment and secure rationalized law and regulation. Allowing some to operate above the law is inimical to these goals. Indeed, giving the most powerful in your society a green light for lawlessness tempts the creation of a kleptocracy.

According to Webster's a kleptcoracy is "government by those who seek chiefly status and personal gain at the expense of the governed." In a kleptocracy, the politically connected can pilfer the investments of others with criminal impunity. This past week, the Attorney General of the United States' testimony to Congress signals that those holding the most economic power are indeed above the law--this creates the most perverse incentives.

I graduated law school in 1986. I practiced for 10 years, almost exclusively focused on financial regulation--at the SEC as well as the FDIC. In all that time, I have never heard more nonsense about the law than that spouted by the Attorney General of the United States before the United States Congress earlier this week.

Will A Stadium "Naming" Deal Celebrate the Perverse Private Prison Industry?

The GEO Group, one of two nationally prominent private prison corporations in America has just signed an agreement with Florida Atlantic University to "name" the football stadium at FAU.  Understandably, this has caused an uproar from many on the faculty and in the student body at Florida Atlantic.  "The GEO Group Stadium" at Florida Atlantic University immediately conjures up images of the now retired "Enron Stadium" where the Houston Astros used to take the field, except that The GEO Group is undoubtedly more sinister and harmful to United States citizens than Enron ever was (a fact absolutely lost on FAU President Mary Jane Saunders until student and faculty protests erupted).

The GEO Group is a private prison company.  As I have written about extensively, private prison corporations essentially collect taxpayer funds from federal and state governments (a "per diem" or per bed fee) in order to house prisoners on behalf of these governments and do so with an immoral profit maximization motivation. Private prison companies profit on human misery.  Shareholders of  GEO Group stock expect the board of directors and executives to return handsome profits from imprisoning United States citizens (and increasingly illegal aliens).  The perversity in this arrangement, of course, is that in order to increase profits for shareholders, private prison companies, including the Corrections Corporation of America (the other prominent U.S. private prison company), seek to aggressively imprison more Americans by lobbying legislatures to increase sentencing laws, divine new laws/ways to imprison individuals, and even engage in drafting model legislation like SB 1070 (Arizona's "show me your papers" law) and three-strikes laws.  In "All Eyez on Me: America's War on Drugs and the Prison Industrial Complex," I describe the perverse incentives that motivate the private prison industry by examining the immorality attendant in leadership of private prison companies debating successful ways to increase profit by incarcerating more United States' citizens.

Private prison companies have flourished in recent years based upon the increasingly dubious claim that they provide prison services for less cost than do governmental agencies.  While numerous studies dispute this assertion, the bottom line economic transfer is that taxpayer funds are being funneled to private prison companies (and its executives and shareholders) without those companies providing any genuine public good or manufacture of product.  Indeed, recent reports indicate that private prison companies engage in gross human rights and constitutional violations, more egregious than government run prisons.

And now, FAU has signed an agreement to partner with The GEO Group allowing GEO to prominently appear on the facade of its' football stadium and increase its corporate branding.  FAU's President appears to have not engaged in any due diligence when signing the naming right, relying singularly upon the fact that the GEO Group Chair is a proud alumnus of FAU.  This is particularly egregious in Florida, where private prisons have attempted to seize on opportunities to stealthily motivate state legislators to sanction massive expansion of the private prison industry.  Students recently orchestrated a "sit-in" where President Saunders was forced to speak to the group, though she claims the naming agreement is a "done deal."  Whether students protests will lead to a repudiation of the agreement remains to be seen.  Sans repudiation, Florida Atlantic University may go down as one of the first American Universities to openly celebrate the incredibly perverse and immoral private prison industry and lobby.


(hat tip to Dave Zirin at The Nation)
cross posted on the Sports Law Blog

The State of the Real Economy

For all of its terrible consequences, lawless capitalism has not destroyed the US economy which is a testament to the fundamental strength, character, and resilience of the American people.

Let's start with productivity. The US is the third most productive economy on earth in terms of GDP per capita. In terms of output per hour worked today's American worker is five times more productive than in 1945. In fact, since 1995 America has seen an above trend productivity surge as evidenced below:



Indeed, American workers are the envy of the world in terms of productivity growth:


Similarly, the US was recently ranked the 7th most innovative nation in the world by Insead business school.  The US ranks third in the world in patents per capita behind only Japan and South Korea.

According to the OECD the US worker ranks 9th in the world in daily minutes of actual work. As recently as 1997, the US worked more hours per capita than any other nation.

We as a nation face serious economic challenges. First and foremost, we failed to deleverage after the crash of 2008 (by, for example, letting all the excessively leveraged banks fail which would have permitted them to discharge massive debts) and now live in an economy addicted to unsustainable debt (which bond guru Bill Gross terms a credit supernova).

Second, due largely to our failed efforts to revive our economy (because mainly we just pumped massive liquidity into the megabanks which they hoard), our employment participation is still stagnant.

Third, in the wake of the crisis too many Americans took shelter in disability and other forms of government aid which is also unsustainable. More Americans need to return to work.

Finally, unfunded liabilities in terms of entitlements have soared (up to $100 trillion) as growth and employment contracted. As I have argued before we must reform entitlements and gradually raise taxes to the historic norm of 18% of GDP. If there are freeloaders in America today it is clearly the same economic elite that crashed capitalism in 2008, which now refuses to impose a rational tax burden upon themselves:



 

ALL OF THESE PROBLEMS ARE ROOTED IN LAWLESS CAPITALISM.