Social Policy Bonds: an alternative to fatalism

Discussing climate change Malcolm Bull writes:

Perhaps we should just acknowledge the problem, try not to exacerbate it too much and hope for the best. That, after all, is what most people have decided to do about the nightmare of the previous generation, nuclear weapons, and there is no reliable means of quantifying whether nuclear war is more or less likely than severe climate change, or whether its effects would be more or less destructive.The real question is whether such fatalism is ethically defensible. What is the rational response? Malcolm Bull, 'London Review of Books', dated 24 May

I disagree. I think we can and should do more than be fatalistic about climate change and indeed nuclear conflict. Yes, there are huge uncertainties about what is going on; and yes the political difficulties of particular causes of action appear insurmountable: Al Gore, quoted in the same article, says ‘the minimum that is scientifically necessary’ to combat global warming ‘far exceeds the maximum that is politically feasible’. But just to sit back and watch what happens? We can do better than that. We could, for example, issue Climate Stability Bonds, which would reward the achievement of a stable climate, however we define it and however our goal is achieved. We don't need to know in advance how people will go about preventing climate change or dealing with its effects. We can't know, because our scientific knowledge of what's happening and of potential solutions is expanding rapidly. But we can give people incentives to explore these possibilities and to put resources into the most promising ones, and that is what a Climate Stability Bond regime would do. 

Climate change is a huge and urgent challenge, whose scale, uncertainties and implications, as Mr Bull indicates, overwhelm our existing policy mechanisms. But rather than simply wait passively for whatever will be, we could be raising funds to back Climate Stability Bonds and so give incentives for people actively to address the problem. And, in fact, the same applies to nuclear conflict.

Self-entrenching corruption

Our current political systems are quite simple to understand. Corporations, government agencies and, indeed, any organisation, have as their over-riding goal that of self-perpetuation. With government at all levels looming so large, the bigger organisations find that trying to influence government in their favour is one of the most effective ways of achieving their prime goal. Most often this happens at the expense of society or, via borrowing, the next generation, or the environment. Everybody's doing it, it seems, so it would actually be a dereliction of duty for any leaders of these organisations not to do it. Unfortunately, this system is self-entrenching. Only a really big shake-out can do anything about it - and such shake-outs bring their own problems.

A Social Policy Bond regime would be different. New organisations would come into being that would be entirely subordinated to society's explicit social and environmental goals. They would survive and thrive only by being efficient at achieving these goals. Their structure, composition and activities would all be secondary issues: subordinate to their goal-achieving initiatives. In short, we shall have a new type of organisation. And that's exactly what we need. Here is one tiny but typical of the current system subverts has corruption built into it:

The claim that it would be cheaper for Greece to send every rail passenger to their destination by taxi was ... first made by Stefanos Manos, the former Greek finance minister, in 1992. Manos used the railway system to illustrate what he saw as gross public sector waste. ... He says it was an off-the-cuff remark but about right. "I knew the number of passengers and I made a brief estimate of what it would cost to send them from Athens to the north of Greece and I decided it was quite obvious it would be cheaper to send them there by taxi rather than train."

The conclusion?

... Mr Manos is correct if there are more than two passengers in each taxi. Source

What happens when targets aren't transparent?

Social Policy Bonds rely on the targeting of the use of robust, quantifiable, broad indicators of social and environmental well-being. But there is another criterion: transparency. Our targets must be made explicit and broadly acceptable. If not agreed on by everybody, they must at least be meaningful enough for the public to understand what they mean, and participate in their formulation. The alternative, as with any other policy instrument, is that they will be corrupted, which means they will benefit one interest group at the expense of society as a whole. A particularly pernicious example of what happens when targets aren't made explicit is given in the the China section of the current Economist:

[U]nder the Communist Party’s system of cadre evaluations, local officials are graded on the basis of a series of internal targets that have little to do with the rule of law. The targets are meant for internal use, but local governments have sometimes published them on websites, and foreign scholars have also seen copies. The most important measures are maintaining social stability, achieving economic growth and, in many areas, enforcing population controls. Cadres sign contracts that spell out their responsibilities. Failure to meet targets can end a cadre’s career. Fulfilling them, even if it means trampling laws to do so, can mean career advancement and financial bonuses. Suppressing dissent, 'the Economist', 11 May

There's probably little alternative to the growing use of numerical targets in today's society's with all their complexities and time lags. While I'd prefer to channel market forces into the achievement of our social goals we can, failing that, at least strive to make sure that these targets are consistent with the rule of law and visible to all of us.

Designing institutions?

Again and again, we prefer to design systems, laws, regulations and institutions that will, we hope (or pretend to hope) bring about certain outcomes. So:

The root problem of decarbonizing energy supplies, climate change, and many other aspects of environmental sustainability is the lack of institutions to reconcile the conflicting incentives of people involved in national democracies and other governments, globalization, and environmental sustainability. What will it take to save the Earth?, Joel E Cohen, 'New York Review of Books', dated 26 April (subscription)

and again:

The difficult challenges of our energy future include, first, designing and creating institutions that adjust the incentives of globalization and national governments .... (ibid)

I disagree. I think the composition, structure and activities of an organization should be not a precursor to, but a consequence of the way it achieves its goals. Designing institutions smacks of self-indulgence when facing urgent, potentially catastrophic challenges. Far better to reward the solution of our problems, whoever carries them out and however they do so, as would happen under a Social Policy Bond regime. Many of our problems are unprecedented in scale, and our knowledge of them and potential solutions is rapidly expanding. Designing institutions is in such circumstances will most likely be a waste of time; a laborious, contentious and divisive process that can easily be derailed, corrupted or endlessly delayed by vested interests opposed to any real change. (See also this earlier post.)

Why have Social Policy Bonds gone nowhere?

A correspondent asks about Social Policy Bonds:

Given how interesting [the] idea is and how much high-level attention it's received (e.g., from the likes of [Professor Robert] Shiller), what would you say are top 2-3 reasons that it has not been implemented?

I answered along the following lines:

1. The concept works best on a larger scale: that is where efficiency gains are maximised as there is more scope to shift resources between different projects and different approaches. This makes it difficult to test on a small scale in a way that would encourage uptake of the concept. For instance, Social Policy Bonds issued by one local authority would be very unpopular if one effect would be that polluters or criminals simply transfer their activities from one city to another. Bonds targeting cancer mortality rates might end up raising total mortality rates. For similar reasons, the advantages of the concept would probably be most marked over over long time periods, which again makes testing tedious.

2. Its chief proponent, until now at any rate, has been me. I have little status in the academic, business or bureaucratic world. Most people of influence would (understandably, I guess) be disinclined to take seriously any ideas originating in such a source; especially ideas that have never been tested, or at least advocated by people with more status and credibility. One instance: I have not once received a single reply, not even an acknowledgement, to my numerous emails to philanthropists, or organizations for philanthropists, or journals for philanthropists. No doubt they are swamped by emails from all sorts of people, and they have powerful filtering algorithms.

3. ...which is really (2) restated: tried, tested and failed is a better tactic for anybody in a large organization to follow. The incentives these days are to follow due process and tick boxes rather than to achieve results. The costs of trying something very new that might fail are higher than those of replicating existing approaches, even if they are doomed to fail. I think this applies within NGOs as well as government agencies.

I find that the idea generates enthusiastic support from individuals (including Prof Shiller who first wrote to me back in 1997 and senior members of governments of New Zealand and other OECD countries), but also that such support does not influence the larger systems within which the individuals operate, which rarely reward performance.

Finance as a source of good in society

It's been a fallow time for Social Policy Bonds, but today Professor Robert Shiller of Yale University mentions the concept in the Huffington Post. It's the eighth of his Ten Ways Finance Can Be a Force for Good in Society. Professor Shiller also mentions Social Policy Bonds in his recent book Finance and the Good Society.

Policy as if process is the only thing that mattered

Mark Steyn writes about the US healthcare bill:

A 2,700-page law is not a "law" by any civilized understanding of the term. Law rests on the principle of equality before it. When a bill is 2,700 pages, there's no equality: Instead, there's a hierarchy of privilege microregulated by an unelected, unaccountable, unconstrained, unknown and unnumbered bureaucracy. It's not just that the legislators who legislate it don't know what's in it, nor that the citizens on the receiving end can ever hope to understand it, but that even the nation's most eminent judges acknowledge that it is beyond individual human comprehension. Just reading Obamacare cruel and unusual punishment, 1 April

The problem is systemic. The policymaking process is more about the process than about the policy. And the process itself is arcane and obscure; comprehensible only to specialists and those who can afford to employ them to follow and influence it. Yes, society is complex, and the ways of achieving social goals are similarly bound to be complex. But that does not mean that government has to try to anticipate all these ways and legislate for them. A much more accessible approach would be one that specifies targeted outcomes and rewards people for achieving them, however they do so. Government could then concentrate on what it does quite well: articulating society's goals and raising the revenue to achieve them. If it issued Social Policy Bonds, it could then contract out the actual achievement of these goals to the private sector. As well as the efficiency benefits of channeling market forces into the achievement of social and environmental outcomes, there would be the buy-in that would come from a public that understands a relatively simple policymaking process, including necessary limitations and trade-offs involved in targeting a range of social goals. What we have now is policy as if process is the only thing that mattered. What we need - urgently - is policy as if outcomes mattered.

Entrenching corruption

Matt Taibbi writes:

In a pure capitalist system, an institution as moronic and corrupt as Bank of America would be swiftly punished by the market - the executives would get to loot their own firms once, then they'd be looking for jobs again. But with the limitless government support of Too Big to Fail, these failing financial giants get to stay undead forever, continually looting the taxpayer, their depositors, their shareholders and anyone else they can get their hands on. Too crooked to fail, Matt Taibbi, 'Rolling Stone', 29 March

Yes, a pure capitalist system would be an improvement on the current model, in that it would respond to people's wishes, rather than the interests of monopolies or government. What we have in the west, more and more, is government that is reponsive not so much to the citizens whom it's supposed to represent, but to powerful institutions. These include large corporations, trade unions, or government agencies, including the military. They all have one over-riding goal: self-perpetuation, regardless of the interests of society or the environment. Unfortunately, there is little in the way of self-correction, especially when government gets involved. Indeed, the dynamic works in the other direction: corrupt favouritism entrenches itself along the lines that Mr Taibbi describes. Interests groups whose influence is out of all proportion to their contribution to society benefit from direct subsidy or regulatory manipulation to such an extent that they become wealthy enough to resist any change.

If this sounds far-fetched take a look not only at the Bank of America, but also at farmers and agribusiness in virtually every rich country. The insanity of agricultural support policies has been widely understood and quantified for several decades now. Its persistence is a savage indictment of our so-called capitalist model.

Social Impact Bonds and Social Policy Bonds

Social Impact Bonds, about which I have blogged before, are a small step in the right direction. (I have had no input into their creation, though I have spoken to their lead developer.) Their best feature is that they target outcomes, rather than activities, inputs, or outputs. To my mind they suffer from the deficiency that they are not envisaged as being tradeable. This means they have to focus on narrow and short-term goals, for which the purchasers of the bonds can expect to hold them until redemption. This in turn means that the arrangements for each issue are more along the lines of contracts whose reporting requirements (monitoring progress toward the goal etc) seem quite burdensome in relation to the intended outcome.

Social Policy Bonds, being tradeable, can target broad, long-term goals, such as peace in the Middle East, or the avoidance of any sort of catastrophe, man-made or not. This is a huge advantage. Targeting outcomes, which both SIBs and Social Policy Bonds do, works better than the current, command-and-control system when we do not know in advance how best to achieve our social and environmental goals. If we target broad, long-term goals there is both: (1) less chance that targeted goals will achieved at the expense of goals that are not specifically targeted, and (2) more scope for investors to explore different ways of achieving these goals and follow and refine the best approaches. As well, reporting requirements will be a lesser proportion of the sums at stake.

Social Impact Bonds, though, are already being issued, while Social Policy Bonds, despite being in the public arena since 1989, have not. As well, I will readily concede that "Social Impact Bonds" is the better name. I was originally going to give my bonds the name "Social Objective Bonds" until one of my colleagues, more worldly than me, pointed out the meaning and widespread usage of the acronym.

Should evidence determine policy?

There seems little to choose between evidence-based policy-making and policy-based evidence-making. See this discussion: "the idea that we've moved from ideology-based policy-making to evidence-based policy-making...is completely misleading, because the evidence-gathering process is itself value-laden." Life is so rich and complex, and the stakes so high, that so-called experts will always be able to find evidence that justifies whichever policies serve the interests of the highest bidder. So my answer to the question in my header is: no. And my suggestion is just as simple: outcome-based policy.