8% of U.S. prisoners are held in private prisons, and the two largest prison companies are traded on stock exchanges. It’s a lucrative business, but it has its own risks and potential conflicts of interest.
History of U.S. private prisons
Various U.S. states have been introducing and banning private prisons since the 19th century – Louisiana, for example, legalized them in 1844. David Hines, who sat in the Louisiana prison of McHatton, Pratt, and Ward, wrote in his memoirs that the jailers “forgot the duties of re-education and instituted the strictest tyranny in order to make dollars and cents from human misery.”
When slave labor was still permitted, prisoners were often treated as slaves and used for free labor. Private prisons even then operated like factories. Thus, five years after it opened, the first private prison in Texas became the state’s largest enterprise.
After the Civil War and the abolition of slavery in 1865, prison privatization only accelerated. The 13th Amendment to the Constitution prohibited slavery and forced labor “except as punishment for a crime.” Prisoners were outnumbered, so former slave traders became involved in the prison business.
The labor of prisoners was also used by large companies – for example, the steel company US Steel, which was the first in U.S. history to reach a capitalization of $1 billion. Journalist and activist Shane Bauer describes how strongly prison owners sought profit: for example, Thomas O’Connor of Tennessee sold bodies of dead prisoners to the Nashville Medical School.
The system was indeed profitable: in 1880-1904, for example, it was taxes from private prisons that made 10 percent of Alabama’s profits, and in 1886 the U.S. Labor Commissioner noted that privatized prisons brought the state four times more profit than maintaining them independently.
Unlike slave owners, prison owners had no motivation to care about prisoners’ health and conditions, so death rates in some prisons were as high as 25 percent per year.
According to Bauer, the state refused to privatize prisons (then called convict leasing) not for moral but for economic reasons: states bought their own plantations and began to send prisoners to them themselves.
Labor efficiency was ensured through corporal punishment: for example, Texas banned whipping prisoners in 1941, while Arkansas banned it only in 1968. In addition, a prisoner could be sent to solitary confinement for failing to meet the standards.
Selected prisoners were responsible for supervision. They had the right, for example, to use weapons to prevent another prisoner from escaping, for which the “wardens” were given reduced sentences. In 1970, the Supreme Court ruled the system unconstitutional.
The first modern private prisons
Beginning in the 1970s, after the declaration of the War on Drugs, the number of prisoners began to rise – though it had been declining before, despite the overall population growth. One reason was Nelson Rockefeller’s program: for any attempt to sell more than two ounces (about 56 grams) of drugs, he called for life in prison without clemency. The program did not pass, but the minimum penalty for selling large quantities of drugs was 15 years in prison.
In addition, in 1984, Congress standardized the sentencing system. By design, the reform was against racial and other discrimination, but in practice it resulted in harsher sentences and longer sentences. Consequently, more prisoners were incarcerated.
The state had to build new prisons to accommodate the growing prison population. Activist lawyer and former head of the National Criminal Justice Commission Stephen Donziger explained, “If crime rates go up, we need to build more prisons.
And if crime is going down, it’s because we’ve built more prisons – and if we build more prisons, crime will go even lower.” This vicious cycle has been called the “prison-industrial complex” – similar to the “military-industrial complex.
The U.S. state penal system was no longer able to cope: prisons were overcrowded. Because of this, for example, in 1985, 19,000 prisoners had to be released. Because of government bureaucracy, prisons were inefficient. For example, prison procurement was based on a bidding system that worked slowly and at the same time gave bidders opportunities to cheat.
Some members of the prison system felt that private prison companies could solve the inefficiencies. In 1983, the world’s first private prison company, Corrections Corporation of America (now called CoreCivic), appeared, and in 1984, Wackenhut Corporation (now GEO Group), the largest private prison companies in the United States. Both companies are part of the S&P indices, which aggregate U.S. mid- and small-cap companies.
CoreCivic was founded by Tennessee Republican Party head Thomas Bistley, real estate businessman Robert Krantz, and T. Don Hutto, a prison official. It was Hutto who led the 1970 reform of the Arkansas prison system when it was declared unconstitutional. And in 1984 he became president of the American Correctional Association, a status that helped the young private company gain credibility and orders.
Revenue and risk
By 1998, CoreCivic had just five prisons; by 2008, it had 100 locations. The company had revenues of $1.5 billion in 2008 and $1.9 billion in 2019.
Today, inmate labor is more a source of savings than profit: they do jobs that prisons would otherwise have to hire outside staff. For example, they wash dishes or the floors and get $1 a day for it, according to a 1979 law. The main source of revenue for private prisons is government funding: the government pays a set amount for each day an inmate is held.
The intention of the founders of CoreCivic and the GEO Group was that this partnership would be mutually beneficial. Hutto, who worked in a state prison, saw how much money the state was wasting and could find many ways to save money.
For example, through special building architecture with long, highly visible corridors, CoreCivic reduced the number of guards. The more inmates in a prison, the cheaper it cost the state each of them: for example, in the late 1980s, the state paid CoreCivic $33.01 a day for the first 310 inmates and $7.88 for inmates starting with the 330th.
But reliance on government contracts is a weakness of private prison companies. The success of their business (and thus the stock price and dividend amount) is directly dependent on political decisions. This is noted, for example, by Fitch Ratings, which gave CoreCivic stock a BB- rating in December 2020.
In the late ’90s, the private prison industry was booming, CoreCivic was building new facilities, and its stock was worth $146 apiece. But when the company failed to get expected orders and its new prisons stood empty, the stock dropped to 18 cents.
In the early 2000s, George W. Bush launched an anti-illegal immigration campaign, empty private prisons were used as immigrant retention centers – and the stock started rising again, to $15 in 2007 and $26 in 2015. However, it was no longer possible to return to the levels of the late 1990s.
In 2016, the Obama administration’s Justice Department compared private and public prisons. Overall incarceration rates had begun to decline, so the department recommended that existing contracts with private prisons not be renewed – or at least kept to a minimum.
This recommendation had no force of law and applied only to federal prisons (and most private prisons cooperate with state authorities), but it still hit CoreCivic stock. However, they rose again after Trump was elected, and then again after Trump announced the details of a new policy to detain undocumented immigrants.
Most prison stocks (over 90%) are held by funds – for example, Vanguard, the largest index company, owns 15% of CoreCivic. The funds either buy whole indexes or use prison stocks in the same capacity as utility company stocks. Their revenues and profits depend more on long-term contracts with the government and less on market volatility, so such stocks can be used for balance. They also pay a steady dividend.
The efficiency of private prisons
Authorities and independent scholars have repeatedly conducted studies and compared private prisons to public prisons. One of the first such studies, a study by the Bureau of Justice Assistance (2001), found that private prisons in the U.S. have partially delivered on their promises and generally perform as well as public prisons.
The savings were not very large. The researchers don’t think private prisons are inefficient – just that the economic benefits of them have not been as obvious. First, the state has adopted some optimization measures from them, and state prisons have also become more efficient, and second, private prisons have been too few (less than 5 percent as of 2001) to affect the overall state budget.
The number of incidents per thousand inmates in private prisons was lower than in state prisons. At the same time, as the authors of the study note, “private companies have shown that they can be just as incompetent as the state.
The researchers, who studied private prisons in England and Wales from 1998-2012, found pros and cons. They found that private prisons perform better on indicators that are easy to measure: prison conditions and inmate activity. And guest prisons fare better on indicators such as order and prisoner safety, which are more difficult to measure.
According to the University of New Mexico at Albuquerque, private prisons save money in the short term. But in the long run, they are slightly more expensive than public prisons (by 1.5-3%), and they also do a worse job of fighting recidivism.
According to an article by University of Louisiana at New Orleans professor David Hay (2015), private companies achieve maximum efficiency during the construction phase – for example, in Scotland, one maximum security prison saved more than 50% in construction. Another way to save money is to optimize the number of employees and their salaries, which costs about two-thirds of the cost of running a prison.
Such optimization has disadvantages. Because of lower salaries, private prisons have to hire less experienced staff, and turnover increases. But unlike state prisons, private prisons can hire non-union employees to save on staffing without sacrificing quality. In addition, private prisons allow the state to be more flexible: it is easier to sign a new contract with the prison than to issue new laws.
But the private prison system has disadvantages, especially in the United States. For example, in the United Kingdom and Australia, a government inspector is constantly present in private prisons, while in the U.S. he comes only occasionally to make reports.
Private prisons have been successful in lobbying for favorable legislation: according to 1996-1997 data cited in Hay’s article, the more private prisons a state had, the higher the share of incarceration among all sentences. The U.S. also enforces contracts less strictly and is less likely to fine corporations for non-compliance.
Finally, unlike other countries with private prisons, the U.S. allows the construction of so-called “spec prisons. Companies do not build them for a specific government order, but in advance, so that when the authorities have a need for a private prison, to negotiate from a position of strength and to obtain more favorable terms.
Campaigns against private prisons
Private prisons are criticized for their conflict of interest: their goal is not to reduce crime in society, but to make as much money as possible. Sometimes to do this, prisons commit direct crimes, such as in the “kids for cash” scandal, where two judges accepted bribes from prison companies and imposed the harshest possible sentences on teenagers.
In addition, activists describe the mistreatment and abuse of inmates in private prisons. Gang members inside the prison were allowed to beat other inmates, those who needed medical care were ignored – they set fires in their cells to get attention. Some former inmates of private prisons who had experienced it firsthand became activists themselves.
Activism against private prisons intensified under Donald Trump. He introduced stricter anti-immigration policies and began sending illegal immigrants to special centers, where, according to some reports, children were separated from their parents. Private companies own up to 75% of immigrant detention centers (and about 10% of prisons).