Pay for Success Doesn’t Mean Wall Street Is Recruiting in Pre-K
By Katharine B. Stevens
BLOG
August 3, 2015
Last week, the National Journal (NJ) published an article on “social-impact financing”—often referred to as pay for success or social impact bonds—entitled: “Is Wall Street Starting to Recruit in Pre-K?” Most of the article’s focus is on describing this innovative new approach to public financing that uses private dollars from investment banks and other sources to scale promising social programs. (For more information on the approach, see my recent blog here.) But the title of the piece reflects a counterproductive misunderstanding on the role of investment banks—or any funder—in social programs.
“Is Goldman Sachs leading an effort to start recruiting future analysts and stockbrokers in preschool?” the article asks, referring to a recent pay-for-success initiative in which Goldman Sachs invested $4.6 million to help scale up a great pre-K program in Utah. The answer to that question is a resounding “no.” Think of it this way: If the federal government funds preschool does that mean they’re trying to recruit future bureaucrats? If wealthy private citizens fund preschool, does that mean they’re trying to recruit future rich people?
The effort Goldman Sachs is leading is not to recruit future stockbrokers in preschool. The effort they’re leading is to make preschool work well enough that solid results for children have staying power down the line. If—and only if—the Goldman-funded preschool shows clear results in children’s elementary school achievement the government will pay the bank back their original investment plus “success payments” based on the results achieved.
So Goldman wants to ensure the preschool gets strong results because making money (not recruiting stockbrokers) is the business they’re actually in. That works out well for children because Goldman’s investment affords them access to a good program that improves their lives. It works out for well for school districts because they avoid paying for expensive remedial services that would have been necessary if the Goldman-funded preschool hadn’t given kids a strong start in the first place. And finally, it works out well for taxpayers because they only pay Goldman Sachs back if the preschool is truly successful in helping kids.
The NJ piece also raises an important larger issue: the conflation between the source of dollars, on the one hand, and how they’re used, on the other. There are always risks of perverse incentives associated with sources of funding for social programs, whether the government or Wall Street or “private dollars.” People may worry more about one particular source than another. But the source of money isn’t the crucial issue. What matters is what it’s used for and how. We should focus less on where dollars are coming from, and more on the goals for their use, if they’re being spent wisely to achieve those goals, and if what they’re paying for gets results.
See Also
Op-Ed ~ December 9, 2015
Op-Ed ~ July 14, 2015
Event ~ February 2, 2016