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

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 (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.

Comments

[icandoitdon]

hell, the seeds of a solution to the housing crisis are here.....

let em all out of jail and give them no money down, subsidized "starter" loans to buy up all those foreclosed homes. we could use he money saved on incarceration to help with the subsidy.

problem solved. let me know if i can help with anything else.

[Trader T]

What a great source of labor to offset some of the incarceration costs. Remember, around 35% of our state and federal prison population are illegal immigrants - tighten up the boarders and the prison population will decline.

[raising4daughters]

It's not PC to say this, of course, but it's grossly unfair to compare Japan and Germany's homogeneous populations with that of the US. Add 10-15% black and 10-15% hispanic minorities, and they'd need to build a lot more prisons, too. Fact.

[Clearlead]

Yep, guess it does pays to designate certain groups for prison (i.e, minorities/under-educa... to serve as below-market labor while enriching the companies that supply the prisons.... of course the same theory applied to warehousing people in poverty and in housing projects located "across the tracks," and that resulted in so much good....NOT!!!!

[mikeyt1984]

truthteller, not only are you bigoted and ignorant, but incredibly naive as well. you're a disgusting piece of racist garbage, and the essence of what is wrong with this country. the fact of the matter in this country is that blacks and hispanics are in prison in higher rates because they are targeted specifically by law enforcement and politicians. 2/3 of crack users are white, but nearly 80% of those imprisoned for crack cocaine are black. crack, which many consider to be a black drug, carries a literally 100 times more heavy penalty than powder coke, a white drug. the problem is not that blacks and hispanics are criminal. that is a pathetically ignorant assumption to make. that is the same kind of thinking that led to the segregationist-era south. you should wake up, craawl out from that rock you've apparently been living under since the middle of the 19th century, and start to focus on the real problem. Ignorant, asinine people who boldly claim "Facts" when they have no idea what they're talking about. Fact.

[LearningCurve]

I am shocked to have discovered that I own CXW in Fidelity's Small Cap Growth fund. I'm selling that fund today and will look for a moral choice (as far as is possible) to include in my portfolio. Of all the disgusting stocks to own, with this one I finally hit the red line. FCPGX, I jettison you today!

[jdlech]

Making prisoners pay for their own incarceration seems vaguely remeniscent of the labor camps of WWII. There's no question that profiling is a self fulfilling prophesy and that incarceration rates shall only continue rising in America. Eventually, our ultra conservative society (compared to the rest of the world) will resort to more harsh treatment of these prisoners to make them 'pay their way'.
That said, the economically rational mind would buy CXW. Morality has nothing to do with making money. As messed up as I think our society is becoming - and I really think this is messed up - the pursuit of profit dictates that CXWs business plan is a good one.