REUTERS/Lucas Jackson

Shrinking the social debt of cities

By: Dag Detter and Stefan Fölster

Editor’s note: The following is an excerpt from The Public Wealth of Cities: How to Unlock Hidden Assets to Boost Growth and Prosperity.

CONSIDER THE STORY OF LESTER. He sleeps rough, mostly under a bridgehead. During the days he walks the streets of Chicago, trying to pick up bottles, begging, sometimes stealing when there is an opportunity. When luck is with him, he scrounges enough to buy a bottle of booze or whatever drugs are available at the moment among his fellow homeless. Afterwards he is often picked up by the police and brought to a county hospital, which is good because those are the few times he receives a shower and clean clothes.

Through his various activities Lester, forty-four, cobbles together some $6,000 a year, but his costs to the public purse are about seven times that. According to one North Carolina study, a chronically homeless person in the United States racks up a stunning average annual bill to society of $39,458 in combined medical, legal, and other costs. The figures are similar in other studies around the country and, for that matter, in other rich countries.

In the United States these costs are spread around different municipal and state actors, so no single entity is in a position to invest in promising ways of reducing these costs. But the story of Lester is not just about what can be done now to reduce his cost to society — and improve his own quality of life. Lester’s life history makes it clear that his record of petty crime and homelessness has prevented him from obtaining employment over the past twenty years. How did it all start?

Lester was a high school dropout. He is dyslexic and never really had a chance to keep up with the pace of homework. He grew up in Chicago’s South Side in a neighborhood where young people are drawn into gangs of unemployed youngsters. If Lester lives to the age of sixty, the lifetime costs to the taxpayer for his aimless and some might say botched life will amount to more than a million dollars. That is not counting the tax revenue that he might have generated if his life had developed more productively. An investment in terms of special training for dyslexics early on in Lester’s school career just might have had a significant positive effect on the trajectory of his life.

Suppose such a social investment would have cost $10,000. This would have been worthwhile even if it had raised Lester’s chances of leading a normal life by just a single percentage point, since $10,000 is 1 percent of $1,000,000. A canny city has institutions that allow these choices to be made rationally.

In political debates, social spending is generally viewed as a form of consumption. Transfers to low- income earners, better housing standards, and higher teacher wages are proposed to better the lot of the less well off, but some oppose such expenditures as wasteful.

In our new book, The Public Wealth of Cities (Brookings Institution Press, 2017), we explain that our approach is based on viewing social capital just as we would view a share in a company or an item on the balance sheet, rather than a flow. And we have our own definition of social capital. Unfortunately, the term “social capital” has been used loosely, and measured and compared by means of indices that lump together different kinds of social outcomes. The problem with these approaches is that the definition of social capital is vague and such definitions imply that more spending on social programs generally increases social capital.

Instead we aim for a clearer definition of social capital that naturally promotes the use of evidence- based social investments. In theory, the most meaningful way of viewing social capital would be the present value of the expected stream of future social costs. Since expected future social expenditures are costs, they should more appropriately be called social debt.

But this approach is cumbersome in practice. The goal, after all, is not to predict future events exactly, but rather to value social investments in a way that is roughly on target and is not easily manipulated by advocates of different initiatives. We favor a pragmatic approach that at the same time is simple to use for all decisionmakers in a city administration, and is transparent for those affected by these decisions. This approach would be packaged in a tool that anyone can use after just a few minutes’ acquaintance with the way it works.

One such tool is the Public Health Calculator, launched by Uppsala University in 2011 in cooperation with the insurance company Skandia. The calculator’s purpose is to help public entities use the data they have to tailor their social investments in public health to where the investments are most needed and will do the most good. The tool’s column labels give the option to select, for example, the share of the population in different age groups engaged in various forms of lifestyle risks, such as alcohol abuse. The program can then supply projections as to the change in the incidence of various types of diseases in five years’ time. An extension of this program shows the actual costs to municipalities in terms of health care, social insurances, and employers. It also shows how much each municipality could expect to save in the coming years if public health were to improve along one of the dimensions.

The central idea behind social investments is that sizable future social costs and mishaps can be avoided by larger investments now.

This model is easily extended to other areas of social investment. Essentially this kind of tool creates a baseline calculation into the future in order to assess the benefits of various social improvements, building on the research and other information one would need for a full-scale social cost-benefit analysis.

Such tools can enable a new approach to making social policy. They make it easier to argue for spending on social investments to improve long-run social wealth and outcomes. And they also provide data to support cutting programs that are dear to various interests but that achieve few long-run improvements.

The central idea behind social investments is that sizable future social costs and mishaps can be avoided by larger investments now. For example, a greater investment in training a dyslectic four-year old may reduce the risk of this child becoming unemployed, or even an addict or a criminal or a homeless person who sleeps under a bridgehead.

Learn more and order The Public Wealth of Cities: How to Unlock Hidden Assets to Boost Growth and Prosperity.

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The Brookings Institution

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