High Incarceration Rate Weighing On U.S. Economy, with Upside for Corrections Corp.

May. 6.08 | About: Corrections Corporation (CXW)

The burgeoning US prison population is having deleterious economic as well as social consequences and is rapidly becoming fiscally unsustainable. As a result, reforms that reduce the incarceration rate are inevitable, according to Oxford Analytica.

  • The US accounts for approximately 25% of the global prison population, despite possessing less than 5% of the world’s population.
  • There are 2.3-2.5 million prisoners in the US — one in every hundred adults is now in jail.
  • The US incarcerates 751 per 100,000 members of the population, compared with 63 in Japan, 88 in Germany and 151 in the UK.
  • Russia comes closer to the US figure, with a count of 627 per 100,000.
  • The current US figure is also a major departure from the country’s historic incarceration rate; between 1925-75 only 110 per 100,000 US citizens faced imprisonment.

OxAn runs through the factors behind these startling figures, including the war on drugs, the “three strikes” rule and welfare policy reforms.

Unsurprisingly, many former felons fail properly to reintegrate into society following release. Prison rarely provides the kind of rehabilitation and job training necessary for labour market success — a weakness of prisons in most societies but a chronic one in the US.

Collapsing housing prices have hit state budgets particularly hard, which will make it difficult — if not impossible — to expand the prison system at the current rate, OxAn says.

The unaddressed problems with the current harsh incarceration policy — particularly its effect on the country’s political economy, deprivation of the franchise from a very large number of ex-prisoners, and lack of preparation it affords parolees for the job market — have begun to attract political attention.

Current US prison policy has many deleterious economic and social effects, and is fiscally unsustainable. Despite the resistance of entrenched interests and political lobby groups, reform — principally in the form of a reduced rate of incarceration for non-violent offenders — is inevitable.

Despite or perhaps because of these trends, analysts see a strong outlook for the leading private prison operator, Corrections Corporation of America (NYSE:CXW).

Avondale Partners in April noted that

with budgets still constrained at the federal, state and local government levels, it is not palatable to cut funding for healthcare, education, etc. to build a prison. With the aggregate domestic jail and prison population of 2.1 million individuals growing in excess of 2% annually, however, incremental beds are needed.

The private prison sector is in an excellent position to step in and meet this need. With only 7.2% of domestic prison beds currently privatized, a small increase (1%-2%) in penetration could drive meaningful growth for the sector. CCA, with a 50% share of this market, should benefit disproportionately given its facility ownership model.

Avondale rates CCA Market Outperform with a price target of $35. Lehman Brothers in February reiterated its Overweight rating with a price target of $34, based on CCA’s expansion plans. CCA is trading at around $27.