Sunday, February 09, 2014

On the macroeconomics of the private prison industry

At the Motley Fool, a widely read investment analyst site, Bradley Seth McNew had an item Feb. 6 titled, "Why I sold Corrections Corporation of America" despite the companies recent high dividend yields. His concern was over the long-term trends facing the private prison industry. Here's a notable excerpt explaining why McNew thinks the private prison stock is headed south:
Why the stock, and the industry, is now heading for a long-term decline The prison population in the United States has finally reversed its growth trend, and populations fell by 1.7% in 2012.  In New York City alone, incarceration rates have declined 32% since 2001. Other cities will likely be following. Attorney General Eric Holder, the country's top law enforcement official, said that "[too] many Americans go to too many prisons for far too long, and for no truly good law enforcement reason." With political actions toward legalizing marijuana, relaxing strict immigration laws, and relaxing judicial punishment for non-violent crimes, this trend will likely continue during the foreseeable future.

The political environment is changing, with activists and officials alike seeking to decrease the federal and public burden of detaining such a large population of people that probably don't need to be locked up, as opposed to other forms of punishment, such as fines and public service. CCA has tried to stop this trend. According to ProPublica, CCA has donated $1.9 million in political contributions from 2003 to 2012 to favorable candidates, and has spent an astounding $17.4 million on lobbying during that time.  Unfortunately for the private prison company, the money doesn't seem to be flowing as strongly as before because the trend is reversing.

Additionally, Corrections Corp. has been the recipient of some bad attention lately concerning their management of inmates. The company was recently under suit from prisoners and families of prisoners after issues involving inmate violence in facilities in Idaho. This is only the most recent in a series of such issues.

According to reports, 132 inmate-on-inmate assaults were recorded at the Idaho facility during the one-year period of Sept. 2007-Sept. 2008 alone. Compare that to the 42 recorded at the equally sized state-run facility during the same time frame. These rises in assaults have been blamed on poor management and lack of security personnel due to cost cutting. 
McNew thinks the GEO Group is a better financial bet than Corrections Corporation of America - perhaps because of recent sweetheart deals in its home state of Florida - but Grits would point out that GEO is much more laden with debt than its biggest competitor and faces the same long-term trends described above. With state and local incarceration rates declining and the prospect of federal sentencing reforms on the horizon, these companies' only real prospects for growth stem from continued, large-scale immigration detention. So if and when immigration reform ever becomes a reality, Grits fails to see from whence their long-term growth could possibly come. That said, these have been highly profitable companies for the last three decades. But the Motley Fool analysis above suggests the coming decades may not be so kind to them.

RELATED: More CCA troubles: "One of the world’s largest private prison firms agreed to pay Idaho $1 million on Tuesday to compensate the state corrections department for thousands of hours in falsified staffing records while key security positions were left vacant."


Anonymous said...

I have never once heard a reasonable explanation as to why these companies should even exist. Incarceration facilities are one thing that ought to be strictly government owned and operated.

Anonymous said...

Grits, I would greatly appreciate the opportunity to contact you personally regarding a matter for which I would like your opinion. I have no interest in airing dirty laundry via the Internet. Is there any way for me to send you a private message?

Thank you very much for your time and consideration.

Gritsforbreakfast said...

@7:58 - My email is That said, airing dirty laundry over the internet is more or less a blogger's go-to move. You're welcome to correspond, though.