29 April 2016

DAOs and Social Policy Bonds

Decentralized Autonomous Organizations might be the sort of organization that I envisage here; organizations whose structure, composition and activities are all subordinated to the market's constantly changing view as to who is best placed to achieved targeted goals efficiently. A discussion on DAOs and Social Policy Bonds has started in this ethereum forum.

28 April 2016

GDP and distribution

The current Economist (dated 30 April) features Gross Domestic Product and its inadequacies, here and here. It doesn't seem to mention distribution of income, which is important as many governments use GDP as a de facto target. I argue though that rises in GDP don't do much for welfare if they are increasingly concentrated in the hands of the top one percent or so. If we are trying to do something to improve welfare, we need to target an array of measures.

Raising GDP (or GDP per capita) has become the default goal for governments because they are unwilling or unable to target for improvement an array of broad outcomes that are meaningful to ordinary people: such as better health, universal literacy, full employment etc. The vague, slippery, and ever-revisable GDP metric is a handy smokescreen that allows government not to commit itself to improving the welfare of ordinary citizens. A Social Policy Bond regime would be a stark contrast: it would target for improvement explicit, meaningful and verifiable metrics that are inextricably linked to the welfare of ordinary people.

24 April 2016

The business of America is lobbying

Broken at the top is a recent Oxfam report which, amongst other findings, reports that:
  • From 2008-2014 the 50 largest US companies collectively received $27 in federal loans, loan guarantees and bailouts for every $1 they paid in federal taxes.

  • From 2008-2014 these 50 companies spent approximately $2.6 billion on lobbying while receiving nearly $11.2 trillion in federal loans, loan guarantees and bailouts.  

  • For every $1 spent on lobbying, these 50 companies collectively received $130 in tax breaks and more than $4,000 in federal loans, loan guarantees and bailouts. Broken at the top, Oxfam, 14 April  
When I talk about Social Policy Bonds I usually emphasise their efficiency. But they have another great advantage: transparency. Expressing policy in terms of targeted outcomes does mean that ordinary people can follow what’s going on - in contrast to the current system. So if society as a whole wanted to subsidise the largest, wealthiest corporations in the land, then we could do so, and we’d be doing so with our eyes open. But if, as seems likely, people would rather see society's scarce resources channelled into helping the most disadvantaged amongst us, then we could issue Social Policy Bonds targeting for improvement broad indicators of our citizens' basic well-being. Health, for instance, or literacy and other basic educational goals.

These are outcomes that are meaningful to ordinary people. Which means we could all participate in the policymaking process. This would be a huge improvement over the current system, which is - deliberately or not - made so obscure that the only people who can follow it closely are those whose ultimate sources of funding are the already wealthy.

17 April 2016

Health is not an accountancy issue

Reading about psychiatry and obesity, and health generally, you can easily get the impresion that the incentives in play conflict with the stated goals of the professionals.

Psychiatry first: Dr Peter Breggin writes copiously and broadcasts about the over-prescription of psychiatric drugs to adults and children, in the US. Often these drugs have little in the way of robust scientific research to justify their use. Research can be shoddy or misrepresented. The organizations that encourage misdiagnosis and overtreatment are captured by powerful interests in, for example, the pharmaceutical industry.

Or obesity: there is an entire weight loss industry dedicated to selling diet books, supplements or food substitutes. There are television shows and exercise programmes, all supposedly aimed at reducing obesity. Yet the long-term results of almost all these interventions are almost invariably small and often negative.

Even in the less cash-driven, more socialized health services of, for instance, the UK, doctors come under pressure to over-prescribe, and defensive medicine - medical care performed primarily to reduce the risk of litigation - is significant.

Let's say that there are arguments on both sides: that some overdiagnosis and overtreatment is going on, but we're not sure how much, or how deleterious are their effects on health. I have no idea how close we are to optimal levels of treatment. Perhaps Dr Breggin and the other sites to which I link above are mistaken, but the important point is that nobody has incentives to find out. Instead, largely by default or historical accident, the major determinants of what interventions get prescribed to whom and how often, are the short-term interests of companies that have goods or other interventions to sell. Their incentives are to overprescribe. It is the narrow, short-term goals of corporations or professional organizations, or government bodies, that largely dictate how we shall tackle our health goals.

So if, say, the best interventions, from the point of view of the unwell person, won't benefit, in cash terms, powerful interest group, it seems likely that they will be under prescribed. (A similar argument applies too to 'negative defensive medicine', where the fear of a cash loss motivates practitioners not to treat patients.) Dr Jason Fung, for instance, recommends fasting as a cure for Type 2 diabetes and obesity.

Again, the point is that there are too few incentives in place that encourage people to look for low- or no-cost ways of treating people that are better, from the patient's point of view, than high-cost ways.

This is where the Social Policy Bond principle can play a part. Health Bonds would target the broad, long-term, general health of an entire population. Bondholders would be rewarded if health outcomes improve, however that occurs. Bondholders would have incentives to research, investigate and exploit only the most efficient ways of improving people's health outcomes. If non-treatment or low-cost treatment is the best way of improving a person's health, then that is what bondholders will be motivated to supply. The important point is that, under a Health Bond regime, it is the ordinary citizen's long-term general health that is the priority for bondholders and not, as in the current system, the accountancy goals of existing organizations, be they public- or private-sector.

09 April 2016

Subsidising obesity

Jason Fung writes:

The government is subsidizing, with our own tax dollars, the very foods that are making us obese. Obesity is effectively the result of government policy. Federal subsidies encourage the cultivation of large amounts of corn and wheat, which are processed into many foods. These foods, in turn, become far more affordable, which encourages their consumption. Large-scale consumption of highly processed carbohydrates leads to obesity. The Obesity Code: Unlocking the Secrets of Weight Loss (page 130), Jason Fung, 2016

What have this and other perverse subsidies got to do with Social Policy Bonds? Simply that the relationship between a policy and its effect is obscured by a policymaking process that focuses on supposed ways of achieving desirable outcomes, rather than the outcomes themselves. So, the US (and most other rich countries) justifies agricultural subsidies because they are supposed to protect the 'family farm'. But very little of these subsidies actually go to smaller farms: most of them are capitalized into farmland values, benefiting wealthy landowners, or end up as subsidies to large agribusiness corporates. And, as Dr Fung relates, they conflict with health objectives. They persist because our policymaking process allows the - deliberate or not - obscuring of the real goals of the powerful.

Expressing policy goals as broad outcomes that are meaningful to ordinary people would change this. If people truly wanted their tax payments and higher food prices to fund wealthy aristocrats and agribusiness then a government could achieve the same result without deceiving its citizens. But it's unlikely that the public actually wants to subsidise the very wealthy: it happens only because policymaking is effectively manipulated and disguised by the powerful. Social Policy Bonds would make the real goals of policy clearer to everybody, generating more public participation in the policymaking process and so, importantly, more buy-in.

04 April 2016


The Economist writes:
VOTERS’ anger over inequality is one explanation for the rise of politicians as varied as Donald Trump, Bernie Sanders and Marine Le Pen. Tough choices, the 'Economist', 26 March
Very true, and our governments don't seem very highly motivated to do anything about it. Many might not consider reducing inequality to be a goal worth targeting in itself. But, if we did move in the direction of targeting meaningful outcomes, that would be for society as a whole to decide. 
But Social Policy Bonds could reduce inequality in a less obvious, less direct way. A bond regime would be a means whereby private gain would be strongly, visibly and inextricably correlated with public benefit. Some bondholders, whether institutions or individuals, would start out rich and, if their bonds rose in value, would become richer. But working successfully to achieve desired social goals would most probably be seen as a laudable way of acquiring wealth. There are intangible benefits from having people or institutions grow rich in this way. There are many disaffected people who view with suspicion or alarm the very high incomes or profits of corporations engaged in activities of little obvious net social or environmental benefit. They are also unconvinced that ‘trickle-down’ occurs to any meaningful degree. Wealth, in these people’s eyes, must inevitably result from exploitation, either of other people or the commons. Social Policy Bonds could shift this worldview and, by helping people take a more positive view of the act of earning an income and accumulating wealth, could make for a more cohesive society. A socially acceptable way of becoming wealthy would also make it more politically feasible to tax less socially desirable ways more heavily – not necessarily an end in itself, but a means of raising more tax revenue for redistribution or increasing the number and quality of public goods and services.

Meantime the OECD is reporting that:
Income inequality in OECD countries is at its highest level for the past half century. The average income of the richest 10% of the population is about nine times that of the poorest 10% across the OECD, up from seven times 25 years ago.

24 March 2016

Society needs more creative destruction

'Creative destruction' is the term coined by Joseph Schumpeter to denote a "process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one." 

Creative destruction in the private sector essentially means that failing companies go out of business and successful ones survive and prosper. One of the reasons that social problems persist is that creative destruction rarely determines which policies shall be aimed at solving them. Largely for historic reasons, the solution of national and global social problems, including crime, pollution, terrorism and war, has been left to the public sector. That is, to bodies that face no competition and are seldom rewarded in ways that correlate with their success. Indeed, many failing institutions supposedly devoted to solving social problems are likely be penalised for success, by seeing their budgets cut or even their very survival threatened. At some level, for some employees, this perverse incentive is bound to operate, to the detriment of the people they are supposed to serve but to the continued survival of the inefficient institution.

Social Policy Bonds are intended to re-jig these incentives by injecting market incentives into the solution of social problems. A bond regime would direct funding to those approaches that bring about the most benefit, defined in terms of beneficial social impact per taxpayer dollar. Note the word 'approaches': it's the best policy initiatives that are rewarded, not the body that introduces them, which otherwise might well become more interested in self-perpetuation than in achieving targeted social goals.

The unfortunate trend is that, rather than social problems becoming more subject to creative destruction, the private sector is becoming less and less subject to it. The current Economist focuses on the US manifestation of this:

The excess cash generated domestically by American firms beyond their investment budgets is running at $800 billion a year, or 4% of GDP. The tax system encourages them to park foreign profits abroad. Abnormally high profits can worsen inequality if they are the result of persistently high prices or depressed wages. ... If steep earnings are not luring in new entrants, that may mean that firms are abusing monopoly positions, or using lobbying to stifle competition. The game may indeed be rigged. The problem with profits, 'the Economist, dated 26 March
Exactly, and it's not only the biggest firms that can abuse government for their own purposes. Farmers do it too, and have been for decades, though it is likely that most benefits that are in the public mind accrue to farmers do in fact go to the biggest landowners and agribusiness corporates.

I believe this trend is unsustainable. The capture of government by big business and its lobbyists, which has led so much inequality, is already provoking a reaction. Let's hope that this leads to a policy environment that will allow creative destruction to play a bigger role in both the public and private sectors. I write about the need for a new protean type of organization, whose composition and activities will be exclusively focused on achieving social goals, here. New technology, including the blockchain, might help bring these organizations into being.

20 March 2016

Bypassing democracy

Jeff Madrick, reviews a book by Lee Drutman about lobbying in the US. Drutman  finds that business spends $34 on lobbying for every dollar spent by likely opponents such as labour unions and other interest groups. Drutman also briefly cites academic research showing that:
  • The stocks of the firms that spent the most on lobbying as a percentage of their assets beat market averages substantially.
  • The more firms lobby, the lower their tax rates. 
  • Lobbying has a positive effect on a firm’s return on equity compared to the market as a whole. 
  • Companies that lobby intensively are less likely to be detected for fraud than other companies. 
  • Companies with politically connected board members have higher stock market returns than others. How the lobbyists win in Washington, Jeff Madrick, 'New York Review of Books', dated 7 April
Big business is the major beneficiary then, of a system that rewards lobbying. On one side we have corporations and their friends in government; on the other, small businesses and ordinary citizens. When policymaking is overly influenced by lobbyists, government is failing in its duty to articulate the wishes of society as a whole. Democracy is undermined and the response from ordinary people, who aren't consulted about issues that drastically affect their lives, could be dangerous indeed. We see portents of such danger in the western world today.

Social Policy Bonds could do much to close the ever-widening gap between lobbyist-influenced government and ordinary citizens. Under the current system policymakers can get away with favouring their lobbyist-paymasters because making policy has become an arcane, legalistic, protracted process to which ordinary people have no access. Discussion is centred around points of law, detailed regulation, and the structures and funding of various bodies. Only people paid to follow the process have the resources to do so. This means lobbyists. A Social Policy Bond regime, however, would focus on outcomes: policy would be expressed in terms that ordinary people can understand. Broad social and environmental goals would be targeted, and the people who help achieve these goals will be rewarded.

Under a bond regime, government would do what it is good at - indeed what only government can do: articulating society's goals and raising the revenue for their achievement. It would have more time and energy for these activities because, by contracting out the achievement of these goals to the private sector, it would spend less time trying to achieve them itself or working out ways to word legislation in ways that favour lobbyists and the corporates that employ them. Big business might lose out. But ordinary citizens would gain. So too would democracy.

16 March 2016

Money isn't everything

In chats with friends about deploying Social Policy Bonds to counter religious or ideological extremism, I'm often told that the fanatics just won't respond to financial incentives so, the reasoning goes, a bond issue aimed at reducing conflict would be unlikely to succeed. I think the premise is correct: fanatics are motivated entirely by their beliefs. Money doesn't come into it. But I think the conclusion is false: financial incentives can work to eliminate conflict; fanatics are found in any bar, campus or on any street corner. Without backing, either direct or indirect, from others, they do not ascend into positions of influnce. The further one goes from the fanatical centre, the more one will find supporters of the extremists who are amenable to financial incentives. Social Policy Bonds can motivate these people to withdraw their support from the fanatics and, possibly, to channel their support into goals that are more congruent with those of society. A bond regime wouldn't change the beliefs of the extremists, but it would decouple them from positions of influnence. At its most simple level, a bond regime could act as a counterbalance to all the financial incentives that exist to create and continue conflict: those that motivate, at some level, arms manufacturers and brokers, and the interests of those who think they will gain if the conflict resolves in their favour. Money isn't everything, but Social Policy Bonds targeting conflict for reduction could channel the urge to acquire it into socially beneficial activities.

08 March 2016

Blockchains and Social Policy Bonds

I've started learning about blockchains, a fairly new technology, and specifically the possibility that they can function as a platform for markets for Social Policy Bonds. This suggestion has been made by two of my correspondents in the past few days; it's a new idea, and my first thought is that it's an exciting one. The blockchain principle allows us to bypass government (or whoever issues the bonds) when it comes to monitoring progress toward goal achievement. It facilitates payments made to those who help achieve the objective; a role that I have thought might have to be played by a coalition of holders of large numbers of the bonds making decisions as to which projects are likely to be most efficient. This link is to a short article showing how the blockchain principle is being applied to searching for a cure for HIV. Though it talks about a Social Impact Bond, if I surmise correctly the tradeability of the bonds means that they are in fact Social Policy Bonds - perhaps the first ever to be issued.

Update 12 March: there is a discussion about implementing Social Policy Bonds in Ethereum here.