Rooted in Reason: Nurturing the Seeds of Liberty

Thinking Beyond the Welfare State by grassroothawaii
August 19, 2010, 12:24 pm
Filed under: Uncategorized

By David Jaress

Dealing with persistent societal problems like poverty and poor education has been a hot-button issue in government for generations. For a time, solving these chronic issues fell on the shoulders of the government: from Lyndon Johnson’s “Great Society” to the British Welfare State, first-world governments in the latter half of the last century attempted to tackle many of society’s ills through extensive social programs and spending. To their credit, many of these governments were able to amass large quantities of capital in order to address critical problems in their respective nations, pouring millions of dollars into programs designed to combat the numerous social ills that are passed down from one generation to the next.

The problem with the welfare state was that government programs are frequently far too cumbersome to put their resources to efficient use. Centralized initiatives like former President Bush’s “No Child Left Behind” Act, for instance, often end up disrupting a child’s education more than helping by establishing unrealistic or even arbitrary federal mandates for progress. The large bureaucracies the federal programs must utilize also tend to be highly resistant to change, and wasteful or ineffective social policies often continue to operate due to the strength of their own inertia. The State of Hawaii is all-too familiar with such issues given the bloated and grossly under-performing history of its Department of Education, which has continued to increase in costs despite persistently lackluster student achievement.

In more recent years, an increasing amount of emphasis has been placed on non-profit and private philanthropic sources for social programs and support. These so-called “third sector” organizations are often much more flexible than their public sector counterparts, and due to their initially smaller size are generally more susceptible to new ideas. Small charter school initiatives such as the Harlem Children’s Zone, for example, have managed to test new ideas about education and public health long before their government counterparts. Unlike federal initiatives, however, third sector programs often lack the financial support required to implement new ideas on a broader scale. Indeed, one important criticism of schools like the Harlem Children’s Zone is that they are overwhelmingly dependent on philanthropic donations in order to operate, making them particularly susceptible to fluctuations in the business cycle.

The significant benefits of effective childhood education and public health programs make them crucial for the nation’s development, however. Numerous studies, most notably a 2007 report by James Heckmann, have detailed the extensive cost savings gained by society through better-educated children and a populace that is responsive to public health issues. While the external nature of these benefits means that private sources alone are often inadequate to meet society’s needs, important new policies taking hold in both England and the United States have the potential to wean the public off of unwieldy public-sector support by using market forces to provide the third sector with broad financial backing. These programs rely on so-called “social impact bonds” in order to attract private investment to non-profit groups. Essentially, the bonds are derivatives tied to the performance of a non-profit in addressing a particular issue, for example reducing prison recidivism amongst youths. If the program manages to achieve established benchmarks, the government-backed bonds pay a given rate of return to investors; if the program fails to meet expected goals, however, the private investors receive nothing.

Profit motives can thus be used on the free market to attract private investors to assume the risks in financing third-sector work; in the event that the government does pay a return, it receives a tangible benefit for its use of taxpayer dollars. While such programs are far from perfect and would require a great deal of oversight, they are nevertheless a promising step towards granting more flexible and innovative third-sector organizations with the broad funding and financial stability available to far clumsier public-sector projects.


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