The Economics of Private Prisons

When it comes to incarcerating criminals, there are two options in the US: state or private. A state prison is entirely owned by the government. The government then needs to oversee almost everything, from hiring the guards to providing the building itself. Although, even with state prisons, much of the work, such as food service and prisoner transportation, is outsourced to private contractors. With a private prison, all the government needs to do is sentence and assign inmates to a prison and periodically look over them.

The private prison system came about in the 1980s and 90s during the war on drugs in the US: state prisons could not cope with the numbers and needed to offload inmates. The chart below clearly illustrates the sheer growth in the prison population during the 80s and into the 2000s. The number of prisoners rose from 750K in the 1980s to 1.7m in 1997. It is now around 2m, with operating costs skyrocketing from $3 billion in 1980 to $18 billion in 1997. With more than 2 million inmates across federal, state, and local prison facilities, the United States has the largest prison population globally, an inmate count that has quadrupled since the 1970s. Moreover, the U.S. has the highest incarceration rate in the developed world: despite accounting for only 5% of the world’s population, it houses nearly a quarter of the world’s prisoners. 

CoreCivic and GEO Group are the largest corporations behind private prisons. Out of the two, CoreCivic operates the majority of private prisons (60% of all private prisons) and raked in close to $2 billion in revenue in 2020. Private corporations run private prisons, so their end goal is to make money. The majority of the money comes in the form of government contracts which can be in the order of $100s of millions. These contracts usually have quotas that have to be met such as the number of beds filled. There will be a daily cost to house one inmate, let us say $50, but private prisons will charge $75, and if this is less than the cost of a public prison, then the government will go with this. The difference is where the prison makes money.

In 1987, CoreCivic charged $32 per day per inmate, but by 1997 it went up to $42, a 33% increase. CoreCivic’s cost per day went from 28$ to 30$, an 8% increase and alongside, revenue shot up 27X. To increase revenue, companies either need to charge more or cut costs, seemingly CoreCivic did both. Another strategy implemented to increase revenue is to avoid income tax. Private prisons are classified as real estate investment trusts (REITs), a company that owns, operates, or finances income-generating real estate. REITs must distribute 90% of taxable income to qualify, usually through dividends. This makes REITs exempt from federal corporate income taxes.

Private prisons are publicly traded: CoreCivic- CXW and GEO Group- GEO. Private prisons always need capital, to fund building new facilities and lobby lawmakers. Being public makes raising money easier, through the addition of new stock, which can be used to fund various projects. The lobbying of lawmakers is crucial for private prison companies, as it can be the difference between bankruptcy and a high-profit year, as some lawmakers are going to have different views on private prisons. As the prisons always need inmates in cells, they need to replace the ones that have served their sentence, typically relying on stricter laws and enforcement of such laws. The private prison industry got a taste of what happens when things go against them towards the end of the Obama administration, when they announced they would end the Department of Justice’s reliance on private prisons. Shares of the private prison titans tanked, as investors feared the end of the private prison industry.

Fortunately, for these companies, on the eve of the 2016 election, upon the news that Trump had won, shares skyrocketed; the Trump administration was a godsend for the private prison industry. The following year, contracts started to flow through, notably GEO Group’s $110 million contract to build a new Texan immigration detention centre. The Trump administration’s rules on immigration also played a huge role in boosting the revenue of the mega-corporations, as they also had large stakes in detaining centres.

Many government contracts contain a lockup quota, which is a guaranteed percentage of occupancy for the duration of the agreement, many are set at 90%, some are even 100%. The lockup quota means, even if cells are not filled, the private prison would still be paid as if they were. The quota puts an increase in pressure on arresting people and having them incarcerated. At a time when the crime rate is at its lowest in America, this is proving difficult.  

Having a business model where arresting more people increases revenue has led to many protests against private prisons, especially as it encourages mass incarceration. 

In 2008, the “Kids for Cash” scandal emerged, where two judges in Pennsylvania were found to be taking bribes from for-profit correctional facilities to pull extremely harsh sentences for minors. Thousands of children were sentenced to extended stays at these private facilities, many of whom were sent to fill quotas and beds. 

Another way of making money for these corporations are ‘slave wages’. The state of California frequently recruits inmates to fight wildfires. For putting their lives on the line, inmates are paid $2 per hour for fighting fires: the minimum national wage is $7.25. On average, incarcerated workers have a minimum wage of $0.12. However, some states like Texas do not even require a minimum wage. Notably, inmates have been put for work in companies such as McDonald’s, Wendy’s, Verizon, Sprint, JCPenny, Fidelity, and IBM.

Not only do the corporations running the prison profit off this, so do many Wall Street banks. Taking a look at financial documents filed with the SEC shows that six Wall Street banks play large roles in financing CoreCivic and GEO Group debt which by the end of June 2016, had reached $1.5 billion and $1.9 billion respectively. Bank of America, JPMorgan Chase, BNP parkas, Wells Fargo, US Bancorp, SunTrust, and more had contracts with private prison corporations. 

In March of 2019, JPMorgan Chase announced they would no longer bank with the private industry. 

Seven banks have followed suit. 

While this was bad news for the private industry, they have begun to look at Japanese banks who have provided interest in financing, particularly Nomura Holdings, who unfortunately are not on par with their American counterparts, having reported a loss of $2 billion in 2021, barely staying afloat. Another sign of worry for investors is that the largest public pension fund in the US, CalPERS, is divesting from GEO Group and CoreCivic.

What should governments aim to do with their prison system? The main problem in the US is that there is a larger focus on punishment than rehabilitation. An example of success is Norway. Norway has an incarceration rate of 60 per 100,000, whereas in the US it is 700. Norway focuses on rehabilitation: the Norwegian prison system caps sentences at 21 years and does not allow the death penalty. All correctional officers need to complete a 2-year degree and are ‘rehabilitation officers’. Norway’s recidivism rates are the lowest in the world: 20% of prisoners get arrested again in the next 2 years. In the US, 2 out of 3 people are rearrested.

While there will always be arguments on whether private prisons should exist, the Biden administration has publicly fought against them. In January, an executive order was signed to stop the renewal of DOJ contracts with private prisons. Overall, it is clear that private prisons have not worked: the US needs to take a step back and reconsider its incarceration system.

Photo by Kindel Media on Pexels.com

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