The Economics of the American Prison System

prison-mainBy Brian Kincade

The American prison system is massive. So massive that its estimated turnover of $74 billion eclipses the GDP of 133 nations. What is perhaps most unsettling about this fun fact is that it is the American taxpayer who foots the bill, and is increasingly padding the pockets of publicly traded corporations like Corrections Corporation of America and GEO Group. Combined both companies generated over $2.53 billion in revenue in 2012, and represent more than half of the private prison business. So what exactly makes the business of incarcerating Americans so lucrative?

Most of it has to do with the way the American legal system works, and how it has changed over the last 40 years. In the 1970’s, lawmakers were dealing with a nationwide rash of drug-use and crime. By declaring a nation-wide war on drugs in 1971, President Richard Nixon set a precedent for hard-line policies towards drug-related crime. New York governor Nelson Rockefeller followed suit declaring “For drug pushing, life sentence, no parole, no probation.” His policies once put into action promised 15 years to life in prison for drug users and dealers. His policies catalyzed the growth of a colossal corrections system that currently houses an estimated 2.2 million inmates.

The runaway growth of US corrections did not come overnight, and did not come from the government alone. Since the 1970’s federal and state correction agencies have consistently struggled to meet the increased demands brought on by the US Department of Justice and strict drug laws. In 1982, three Texas businessmen, Tom Beasley, John Ferguson, and Don Hutto saw an opportunity in the shortcomings of the Texas corrections system’s inability to deal with this influx of incarcerations. They devised and executed a plan to secure the first government contract to design, build, and operate a corrections facility from the Immigration and Naturalization Service and the Texas Department of Justice.

Contract in hand, the trio was given 90 days to open a detention center for undocumented aliens. As their January 28 deadline neared, Hutto, Ferguson, and Beasley had no facility, no staff, and their experiment seemed doomed to fail. On New Year’s Eve, 1983, Beasley decided to get crafty, “Well, we’ll just go to Houston and find a place,” he told Ferguson. Incredulous, Ferguson replied, “Tom, you’re crazy. There’s no possible way. This is New Year’s Day. There is no possible way we can find a place today.” Beasley simply responded, “We have to.”

The three men immediately got on a plane and began their search. After a litany of rejections they came upon the Olympic Motel at 1am on New Year’s Day and immediately began negotiations that lasted for three days. After hiring motel owner’s family and promising to return the motel to its original condition, the group was in business. They then converted all of the motel rooms to secure cells, procured secure transportation and opened shop on January 28, 1983 when 87 inmates were brought in. Hutto, Ferguson and Beasley formed Corrrections Corporation of America, the largest prison private prison network in the United States.

With the precedent it set with the first private detention center, CCA changed the face of US corrections for good. The private sector came to be seen as a quick-fix to the problem of overcrowded, understaffed public prisons. Today, privatized prisons make up over 10% of the corrections market—turning over $7.4 billion per year.

The average cost of incarcerating an American prisoner varies from state to state. Some states, like Indiana have managed to keep prices low at around $14,000 per inmate. While states like New York pay around $60,000 to keep its citizens behind bars. The costs of running the American prison system is expensive and has become increasingly so despite public opposition.

According to a 2012 Vera Institute of Justice study, the number of those incarcerated has increased by over 700% over the last four decades. The cost to the taxpayer? $39 billion.

Where is all of this money going? The Vera institute study contends that that many corrections-related costs, such as employee benefits and taxes, pension contributions, retiree health care contributions, legal judgments and claims are deemed central administrative costs. Moreover, many states fund inmate services—such as hospital care in 8 states, and education and training in 12 states—outside of their corrections departments. It’s a nice accounting trick but this amounts to a $5.4 billion gap between the reported corrections budgets of the 40 states examined by the study—$33.5 billion—and the actual cost to taxpayer of $39 billion.

The ideology behind this peculiar industry is that private companies, forced to compete with state government prices and one another for contracts, will provide correctional services more efficiently than the government itself can. Moreover, these private companies offer a correctional solution that prevents the government from having to sink capital into the brick-and-mortar of new prisons and other long term costs such as pensions, salaries, and health-care for new prison staff. Private Prisons like CCA not only provide states, and the federal government with lower “per-diem” costs, but they also provide a means for them to balance their budgets by buying off and refurbishing state-owned prisons.

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