Social Policy Bonds blog

Should evidence determine policy?

2012-02-19T18:44:00.004+13:00

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.

Emissions trading not working - who would have thought it?

2012-02-18T18:48:00.002+13:00

No surprises here:

Emissions trading, the European Union hoped, would limit the release of harmful greenhouse gases. But it isn't working. The price for emissions certificates has plunged, a development that is actually making coal more attractive than renewable energy Source

Here's another idea: instead of using fossilised science, and then allowing corporate interests and their friends in government to dictate policy, why not target the outcome that we want to achieve? A more stable climate, defined in terms of some combination of human, animal or plant health indicators. And why not reward people for achieving this outcome, rather than for performing some activities that might, but actually don't, achieve it. See here for more.

Bad Policymaking

2012-02-11T01:47:00.002+13:00

Ben Goldacre writes:

[F]or ... assessing causal relationships, intuitions are often completely wrong, because they rely on shortcuts which have arisen as handy ways to solve complex cognitive problems rapidly, but at a cost of inaccuracies, misfires and oversensitivity. Bad Science, Ben Goldacre (page 238)

This becomes a problem for policymaking under the current system, where government is often charged with identifying causal relationships and, if it gets them wrong, the consequences can be calamitous. For murky, complex social, economic and ecological relationships, we need a mechanism other than the one-size-fits-all, top-down approach that is a feature of the current policymaking system (and which can work well, when causal relationships are obvious). Central planning, a catastrophic failure when applied to economies, fails too in policy areas where there is a compelling need for diverse, adaptive approaches.

But central planning is precisely the approach we are taking in tackling extremely complex social and environmental problems: climate change, or warfare, for instance. They seem to be failing in much the same way as in the economy. There's little response to expanding knowledge or to changing circumstances. There's little diversity. Most important, failed approaches aren't terminated. The incentives are to maintain existing institutions, rather than to achieve the stated outcome.

That's where Social Policy Bonds could be a better alternative. They would reward people only if a specified outcome is actually achieved and sustained. A body that issues the bonds doesn't have to have an opinion about what causes a social problem. It just has to reward the people who solve it. Incentives are built into the system: only efficient solutions will be rewarded.

For more about Social Policy Bonds, please download my book (see right-hand column).

The triumph of process

2012-01-31T01:10:00.005+13:00

It's a familiar story: in so many policy areas - health, education, the environment, for instance - adherence to process is more highly rewarded than socially desirable outcomes. So we have a blizzard of micro-targets combined with a disintegrating physical and social environment and a disengaged electorate. Policymaking itself is an arcane process, comprehensible only to those who are paid to participate in it or who are lobbyists for powerful interests.

And it's the same in the justice system, at least in the US, where "Six million people are under correctional supervision in the U.S.— more than were in Stalin’s gulags." Adam Gopnik explains:

accused criminals get laboriously articulated protection against procedural errors and no protection at all against outrageous and obvious violations of simple justice. You can get off if the cops looked in the wrong car with the wrong warrant when they found your joint, but you have no recourse if owning the joint gets you locked up for life. You may be spared the death penalty if you can show a problem with your appointed defender, but it is much harder if there is merely enormous accumulated evidence that you weren’t guilty in the first place and the jury got it wrong. The caging of America, Adam Gopnik, 'New Yorker', 30 January

Mr Gopnik's article goes on to point out that the large falls in US crime rates over the past three decades, especially in New York, have many explanations, few of which could be known in advance.

I think this well-written piece helps make the case for targeting outcomes, as I have advocated, whether or not by using Social Policy Bonds. Society is so complex that a single group of policymakers cannot know in advance with any certainty the underlying relationships between, say, prison sentences and crime rates. Or between spending on schools and literacy. Or between greenhouse gas emissions and the numbers of people killed or made homeless by adverse climatic events. Where cause and effect are clear - as say, between inoculation rates and disease - there is a strong case for government working to achieve a social target. Where there is not, there is still a strong case for government setting the target and raising the revenue for its achievement. But, instead of trying to achieve it directly, I think it would do better to contract out the achievement to a motivated, diverse and adaptive private sector. Social Policy Bonds are one way in which this division of labour could be carried out efficiently.

Japan is different. Oh really?

2012-01-28T03:51:00.005+13:00

But the LDP [of Japan] shows the same intransigence that has been its stock-in-trade since it lost power in 2009. It vows to block the tax bill, even though raising the consumption tax has long been a plank in its own policies. Generational Warfare, 'The Economist', 28 January

Once more, we see the unimportance of outcomes to today's politicians. The right policy rejected because it's proposed by the people on the other side. We - that is, the entire democratic world - desperately need a new political system. One that targets outcomes that are meaningful to ordinary people, not politicians, corporates or government agencies. The old system is just not fit for purpose.

New Zealand opts for Mickey Mouse micro-targets

2012-01-19T17:11:00.003+13:00

Cancer patients who need chemotherapy should receive it within four weeks of being assessed, under new [New Zealand] government health targets. The cancer target at present requires hospitals to provide radiation therapy within four weeks of assessment. From July 1, hospitals would also have to ensure that patients needing chemotherapy received treatment within four weeks. Source

It's a shame that the New Zealand Government has learned nothing from other countries' mistakes. Targets like this have nothing to do with the broader health of the population. They will be so manipulated as to become meaningless or, worse, divert resources into (apparent) compliance and away from health care. In the UK, for instance, we have seen ambulances delaying their arrival at hospitals, so that targets for seeing patients within four hours of arrival can be met. It's not difficult to imagine ways in which New Zealand's new chemotherapy target will be similarly gamed, at the expense of people's health. This is the sort of micro-management that did so much to cripple the Soviet Union. Private corporations with a narrow focus on a few accountancy ratios are prone to similar errors. In theory at least competitive pressure would ensure that the mismatch between targets and reality cannot continue to worsen indefinitely. (In practice, if the corporations are big enough, they subvert government and change the rules.) But when government applies these micro-targets, there's little to bring them back into line. High-sounding, well-meaning experiments like this are rarely terminated.

We need to bring government back to its core focus: if its goal is to improve the health of its citizens, that's what it should target. Let a competitive private sector work out how best to achieve that goal. Government can still set broad health targets, and it can, and should, raise the revenue to achieve those goals. But it cannot possibly keep up to date with science, nor respond adequately to changing events or diverse circumstances. Only something like a Social Policy Bond regime, where people are rewarded for being efficient achievers of meaningful targets, can do that.

Mickey Mouse micro-targets

2012-01-12T15:53:00.005+13:00

Numerical targets, though they can never accurately measure everything of importance, are going to have to play a role in determining the efficiency and effectiveness of policy instruments. Many of our social and environmental problems can be attributed to (1) the private sector's use of accountancy measures, to the exclusion of anything else, in evaluating its own performance, and (2) the failure of the public sector to use any meaningful numerical targets.

Governments do use plenty of meaningless targets. Here's Theodore Dalrymple:

The Times Educational Supplement is Britain’s most important journal for the teaching profession. In the January 6 edition, it described the methods school principals use to deceive the official inspectorate of schools. The inspectorate’s reports, in the words of the TES, “are vital checks on the performance of schools, relied on and trusted by parents and those running and working in the system.” The precise extent of the principals’ cheating is, in the nature of things, difficult to measure. But once the principals know that an inspection is coming, many employ techniques such as paying disruptive pupils to stay home, sending bad pupils on day trips to amusement parks, pretending to take disciplinary action against bad teachers, drafting well-regarded teachers temporarily from other schools, borrowing displays of student work done in other schools, and so forth. It’s Gogol’s Government Inspector translated to the educational sphere. The Less Deceived, 'City Journal', 10 January

What government should be doing is targeting broad measures that are meaningful to real people. Real people, as opposed to government agencies or corporate accountants. In education government should be targeting, at the very least, functional literacy and numeracy.

The system is rigged

2012-01-12T01:22:00.004+13:00

David Brooks asks Where are the liberals?:

Americans...don't trust the federal government. A few decades ago they did, but now they don't. Why don't Americans trust their government? It's not because they dislike individual programs like Medicare. It's more likely because they think the whole system is rigged. .... [R]ent seeking groups are dispersed across the political spectrum. The tax code has been tweaked 4428 times in the past 10 years, to the benefit of interests of left, right and center. 'International Herald Tribune', Asia Edition, 11 January

This malaise is common to all the western democracies. Interestingly, Mr Brooks mentions sugar subsidies, which benefit just a few wealthy individuals, while "imposing costs on millions of consumers". It's the persistence of such subsidies, in the face of decades of evidence pointing out their disastrous economic, distributional and environmental impacts, that makes one despair about whether our governments can ever reform themselves. And, if they can't, then where is the initiative going to come from?

Perhaps the most benign impetus for reform would come from a shift toward rewarding outcomes, rather than, as now, the specific interest groups - public or private sector - that currently seem to run government. Social Policy Bonds would subordinate all government funding to meaningful results. Under a bond regime only the most efficient achievers of social and environmental goals would receive taxpayer funding.

Clearly the current system is losing the consent of the majority of the people it's supposed to serve. Perhaps it's time to try Social Policy Bonds. My book suggests how a transition to a bond regime need not be too drastic, but could be gradually managed.

Selective memory

2012-01-09T11:57:00.005+13:00

From The Great Derangement, by Matt Taibbi:

[US] national politics was doomed because voters were no longer debating one another using a commonly accepted set of facts.

Life and society are so rich and complex that we can easily extract evidence that supports (or appears to support) virtually any outlandish claim we want to make - or its complete opposite. There are plenty of funds and incentives to make the effort worthwhile. Sometimes these exercises are cynical. But often not. We can see this very clearly when looking at the current financial crisis: respectable commentators put forward coherent arguments for much more, or much less, stimulus spending.

Social Policy Bonds would bypass such arguments and all their attendant cynicism by targeting desired outcomes, rather than what people think, or are paid to say they think, are the means of achieving them. It would be up to holders of the bonds to identify and exploit the relationships between cause and effect, which is so difficult to do in our complex society. By focusing on outcomes, policymakers could concentrate on working out exactly what we want to achieve, rather than get bogged down by the interest groups, vested or not, who have their own agenda.

If this sounds far-fetched, we need look only at climate change to see how the debate has been effectively side-tracked into an expensive and ineffectual irrelevance by doing things the conventional way: trying to prove something to the satisfaction of people who oppose doing anything before taking action. A bond regime would instead be rewarding people for achieving certain specified goals, or a combination of them, which could be expressed as a wide array of physical, financial and social variables. It would be up to the investors in the bonds to work out the relationships, and they would be rewarded for doing so and for continuing to do so, until our goals have been achieved. In this case, as in others, there need be no general (and often impossible to achieve) agreement on the facts before taking meaningful action.

Half full

2011-12-21T07:42:00.005+13:00

It's nearly the end of the year, so time to sum up my view of where policymaking in general and Social Policy Bonds in particular are headed. The latter is easy to summarise: I have had a few expressions of intellectual interest in Social Policy Bonds, but the bond concept remains untested. More generally though, I think the concept of payment for results is gradually gaining ground in government circles. This is generally a positive trend, though I have reservations. Chief amongst these is that the 'results' targeted are rarely outcomes that are meaningful to ordinary people. More often they are outputs of existing organisations, as measured by criteria intrinsic to that organisation. So results targeted include things like 'savings made' or (increasingly) number of employees sacked. In recent history it has usually been the case that well-meaning intentions to improve social and environmental outcomes founder on the solid, immovable rocks of existing institutions and their ways of doing things.

But I remain optimistic that something like Social Policy Bonds will eventually be issued. One reason is that society and the environment are becoming increasingly complex, so that existing methods are becoming useless. We only need to look at climate change for a spectacular and costly example of failure to manage human affairs. The other reason is that the existing system's failings are becoming obvious to all. Our economic system has been gamed to benefit the one percent - or 0.1 percent - and our political systems throw up uninspiring candidates for whom the concerns of most of us and the environment appear well down the list of things to worry about. It's clear that the current system cannot continue. I remain hopeful that someone, somewhere, in the public or private sector, will issue Social Policy Bonds for a worthwhile goal, and enable the concept to be tested, discussed, refined and eventually deployed to solve some of the world's urgent social and environmental problems.

Madness

2011-12-01T03:59:00.002+13:00

Who benefits from the Common Agricultural Policy, which consumes 43 percent of the European Union's budget and costs households $296 per annum? Well:

The Duke of Devonshire gets £390,000, the Duke of Buccleuch £405,000, the Earl of Plymouth £560,000, the Earl of Moray £770,000, the Duke of Westminster £820,000. The Vestey family takes £1.2m. You'll be pleased to hear that the previous owner of their Thurlow estate – Edmund Vestey, who died in 2008 – managed his tax affairs so efficiently that in one year his businesses paid just £10. We're all paying for Europe's gift to our aristocrats and utility companies, George Monbiot, 28 November

This insanity has been documented, qualified and widely promulgated continuously for thirty years. It is not the transfers from the poor to the rich that are inexcusable; it is their persistence over three decades and many administrations. Their persistence underlines the inadequacy of the current policymaking approach: there is no self-correcting mechanism for policies that are self-evidently absurd. Current policymaking is so arcane, so inaccessible to ordinary human beings, that only the powerful - individuals, corporations, government agencies or trade unions - have the resources to negotiate it and make it serve their purposes. And their purposes not only differ from those of most people; they conflict with them.

Complex societies don't need to have a complex policymaking process. Government could, as under a Social Policy Bond regime, target a few broad, widely agreed goals, such as better health, universal literacy, lower crime rates and a cleaner environment. Rather than try to achieve these goals itself and distract itself with easily gamed legislation and regulation, government could concentrate on articulating society's goals and raising the revenue for their achievement. Things that government, in fact, can do very well, and which, indeed, only government can do. The actual achievement of our social and environmental goals would best be contracted out to a motivated private sector, where incentives, diverse approaches and adaptiveness could all serve social purposes.

The Common Agricultural Policy, and the persistence of its lunatic subsidies to the rich at the expense of the poor, is the logical endpoint of the contrary approach, which only the powerful have the time and resources to subvert.

Targeting outcomes: there's no alternative

2011-11-17T23:07:00.003+13:00

When it comes to climate change, the uselessness of the current policy approach is plain. The way we do things now is: get the government or some bureaucracy to identify some activity that has an effect, then try to encourage or discourage that activity. In our complex society, that way of doing things is increasingly futile. Take climate change. Current reasoning has it that (1) climate change is caused by man's greenhouse gas emissions and that (2) cutting back those emissions will stabilise the climate. There are huge scientific uncertainties here, but let's move on to step (3) we need to cut back those emissions. So we end up with the Kyoto process, whereby some, but not all, countries say they will cut their emissions. And in the unlikely event that those countries do actually cut their emissions what do we find?

[A] significant and growing share of global emissions are from the production of internationally traded goods and services. Although this finding may follow directly from increases in international trade itself, it could have unintended consequences for climate policy, as it leads to a spatial disconnect between the point of consumption and the emissions in production. Source

or, as Naomi Klein puts it:

the rise in emissions from goods produced in developing countries but consumed in industrialized ones was six times greater than the emissions savings of industrialized countries. Capitalism vs the climate, 'The Nation', 28 November

We're going nowhere on climate change, because we refuse to accept that, if we want to stop the climate changing, we have to target climate change. We have to reward the achievement of climate stability. What we shouldn't do is exactly what we are doing: using fossilised science to prejudge how we shall achieve climate stability, and building all our hopes and a huge bureaucracy on top of that science only to find that: the science is faulty or outdated and the bureaucracy is failing anyway. In short, cutting back emissions may or may not be helpful but, either way, we're not even doing that.

I really don't think there's a better way of tackling climate change and its consequences than Climate Stability Bonds. Nothing, in the years since my paper was published, has changed my view.

Consult on ends, rather than means

2011-11-13T08:45:00.003+13:00

From a letter to the editor of the London Times:

Sir, Your endorsement of the Greek referendum so that the Greek people can determine their own future surprised me. Personally, I will endorse referendums on economic policy once we also put the question of what medicine doctors should use to cure certain illnesses to a public vote. Jacob Williamson, 'The Times', 4 November

Mr Williamson has a point: economic policymaking is now so complex and specialised that consultation with the public might well be a bad idea. On the other hand, harsh austerity measures need quite a lot of buy-in if they are to be successful; the sort of buy-in that might only be possible with public approval.

The answer could be to consult the public on meaningful outcomes, rather than on policies that may or may not achieve them. We understand the ends more readily than the means. When we buy a plane ticket, we are concerned more with the destination than the identity of the pilot or the detailed operation of the plane. Social Policy Bonds are a means by which the public can articulate the goals and priorities of policy. Under a bond regime, social and environmental outcomes would not only be identified and targeted, but also continually costed via the market for the bonds. Referendums about policy goals then would be a meaningful exercise, one that encourage broad engagement with the policymaking process, and the buy-in that's necessary for difficult decisions.

Matt Taibbi gets it

2011-10-30T07:53:00.004+13:00

Matt Taibbi writes:

Our world isn't about ideology anymore. It's about complexity. We live in a complex bureaucratic state with complex laws and complex business practices, and the few organizations with the corporate willpower to master these complexities will inevitably own the political power. Griftopia

This is something I have been saying for years (here, here, here and here, for examples). Complexity has had the effect of excluding ordinary people from the policymaking process. My suggestion is to reformulate policy in terms of outcomes that are meaningful to ordinary people - as distinct from corporations, government bodies or billionaires. Social Policy Bonds would do that, and they would channel market forces into the achievement of these outcomes.

The logical end-point of the alternative - policy made by the rich for the rich - is being played out before us. But even if the political process weren't being subverted by the powerful, our society is so complex that the effects of even well-intentioned policy measures can rarely be identified. Typically, if such identification is attempted at all (which it hardly ever is) there are too many variables, linkages, unquantifiables and time lags to get a handle on cause and effect. As well, there are very few incentives to get policy right. A policy's impact horizon usually extends beyond politicians' time in office, and few bureaucrats work within a system that rewards achievement rather than activity.

A Social Policy Bond regime could change all that. It would create a coalition of people and organizations whose interests were exactly congruent with those of ordinary people, and who would be motivated to monitor continuously how efficient and effective were their initiatives.

Social Policy Bonds: absurd (at first sight)

2011-10-18T05:16:00.002+13:00

Mark Schmitt, reviewing The Submerged State: How Invisible Government Policies Undermine American Democracy by Suzanne Mettler, writes:

We often hope that citizens will be able to deliberate thoughtfully about policy choices, but that is impossible if the policies are shrouded in complexity and in blurred responsibility. ... It is time for a new era of reinventing government, in which the goal is to establish certain clear, unambiguous public functions, and put energy and resources behind them — to row, and not merely to steer. Row! Row!, Mark Schmitt, 'The New Republic', 4 October

Exactly. This has been my theme for two decades now. Even if you do not think Social Policy Bonds are worth trying, you must surely agree with Mr Schmitt and myself that we, the public, cannot engage with current policymaking because of its complexity, and that it is time for reinventing government in such a way as to "establish certain clear, unambiguous" outcomes. Ok, I have substituted 'outcomes' for Mr Schmitt's "functions" because to me it is outcomes rather than processes that are important, and I think Mr Schmitt would agree with me.

So what about Social Policy Bonds? At first sight, I will admit that they do seem radical. They are likely to mean that the private sector tries to perform broad functions currently undertaken by government: the achievement of health, law and order, or environmental goals, for example. There are dangers in that, some of which I address in my book, others of which might not be anticipated. So I actually don't advocate that Social Policy Bonds be deployed widely. Not immediately, anyway. I do advocate that they be discussed, tried, refined, tried again, and then, perhaps, issued to solve our most urgent national and global problems.

The current system is failing us. Social Policy Bonds would represent a discontinuity in the way we approach policy. They are untried and untested. They use right-wing methods to achieve goals usually articulated by the so-called left. Yes, at first sight, they do seem absurd. But in defence of the Social Policy Bond concept, I call Albert Einstein, who said: “If at first, an idea isn't absurd, then there is no hope for it”.

Government by distraction

2011-10-08T09:36:00.003+13:00

Brendan O'Neill writes:

The otherworldly nature of [UK] party conferences is a consequence of some huge political shifts in recent years. It is the hollowing-out of the mainstream parties, their speedy and profound jettisoning of members and grassroots supporters and their subsequent disconnection from the public, which creates today’s strange and alien political culture. Meet the PC oligarchy that now rules Britain, 'Spiked', 6 October

Exactly so. At a time when we need maximum public participation and buy-in to policymaking, we have a system that is guaranteed to alienate ordinary people. Much can be explained by our politicians' relentless focus on things that are irrelevant to normal citizens: gestures, sound-bites, institutional structures, prestige projects, quirks of personality, Mickey-Mouse micro-targets, and many other distractions. We lose sight of the big issues: facts like unsustainable levels of government borrowing or the proliferation of nuclear weapons. Who benefits from government by smoke-and-mirrors? Those who can afford to pay think-tanks, lawyers and lobbyists to follow and influence the policymaking process. That means billionaires, big corporations, trade unions and other interest groups - including government agencies. It doesn't mean ordinary people.

Recasting policy in terms of outcomes could close the ever-widening gap between politicians and the people they are supposed to represent. Social Policy Bonds would refocus policy onto outcomes that are meaningful to ordinary people, who would be better able to understand and participate in policymaking. A bond regime would reward only those who help achieve our social and environmental goals. All government-financed initiatives would be undertaken with the aim of achieving these goals as efficiently as possible. And, in stark contrast to the current system, 'creative destruction' would operate: failed projects would be terminated.

Five jumbo jet disasters a year in the UK

2011-10-07T09:14:00.004+13:00

Despite clear improvements in road safety, the annual cost to the UK economy of all [road] deaths and injuries remains significant at around £13 billion (i.e. around 1% of GDP), with damage-only accidents estimated to cost a further £5 billion. Source (pdf), quoted on Man's Greatest Mistake

A shark attack anywhere in the world means instant headlines, as does a plane crash or a terrorist atrocity that kills a few dozen civilians. Rightly so, perhaps, but then we - or rather, policymakers - should make a lot more of the everyday killing that occurs on our roads. By some measures, the UK has the safest roads in Europe but even so, 1850 people were killed in 2010. Road accidents are so routine, or so difficult to film for televistion, they don't merit much in the way of media attention. Policymakers should do better. The most cost-effective way of saving lives would be to allocate funds across all life-threatening causes, however mundane and unspectacular.

Social Policy Bonds have amongst their advantages that of being able to target such broad goals as longevity. They reward outcomes, not activities. Under the current system, funding for activities that are supposed to improve longevity is allocated according to a range of often spurious criteria, such as media attention, past levels of funding, or the identity of likely victims. A Social Policy Bond regime would allow policymakers to target all threats to longevity (however defined) impartially. This cannot be done under the current system, as funding is allocated to bodies that have little interest and incentive to consider the overall health of the nation. Funding goes to bodies according to criteria that may have little to do with outcomes. It's funding as if outcomes - real outcomes that are meaningful to ordinary people - don't matter.

Policy as if outcomes are irrelevant

2011-09-28T04:54:00.003+13:00

The economy's ok; shame about well-being

2011-09-27T23:44:00.003+13:00

From the Economist:

The alarm [in the developed countries] over the threat to jobs from India and China echoes the anxiety about Japan’s rise in the 1970s and 1980s. America’s economy has survived the shake-up of its steel, electronics and car industries, as have other rich countries. Exporting Jobs, survey of the world economy, 'the Economist', 24 September

If we accept that the "economy" has indeed been able to "survive" then, whatever the "economy" is, it can't have much to do with employment, confidence, social cohesion or indeed anything that correlates with the well-being of the human population. Sadly our leaders are hypnotised by "the economy" and its well-being. They implicitly target things like average GDP per capita, regardless of how it's distributed and the consequences for the physical and social environment. I think we'd all benefit if, instead of fixating on "the economy", we targeted instead outcomes that are meaningful to ordinary people.

Policy: for specialists only

2011-09-22T03:07:00.002+13:00

One of the advantages of Social Policy Bonds is that they express policy in terms of meaningful outcomes. This means, as I said in my previous post, that the public can participate in the policymaking process. The benefits of this, in terms of greater public buy-in, are incalculable. Sadly, the current system is moving yet further in the opposite direction. In After America Mark Steyn discusses the US health care debate:

Through all the interminable health-care “debates” of Obama’s first year, did you read any of the proposed plans? Of course not. They’re huge and turgid and indigestible. Unless you’re a health-care lobbyist, a health-care think-tanker, a health-care correspondent, or some other fellow who’s paid directly or indirectly to plough through this stuff, why bother? None of the senators whose names are on the bills ever read ’em; why should you? (page 52)

Exactly so. Any relationship between what you would read and an outcome meaningful to you would be purely coincidental. Policy debate nowadays focusses almost exclusively on institutional structures, funding arrangements, legalisms, with some gestures and symbolic language thrown in.

All over the place

2011-09-20T08:52:00.003+13:00

With economics as with society and the environment, policymakers are confused. Their only consistent objective seems to be to hang on to power. On issue after issue, whether it's climate change, unemployment, crime or any social or environmental problem, policymakers will choose appearance over reality; the continuation of current policies beyond the point when they become destructive; the placating of powerful interest groups, especially donors to their political party; and the substitution of Mickey Mouse micro-objectives (agreements signed, funding allocated, pamphlets produced) for meaningful outcomes for ordinary people. There need be no conspiracy. Policymakers are simply too busy or too pre-occupied with the short term to consider long-term goals. Kicking the can down the road has become the default mode of operation. Not rocking the boat has become the default, over-arching political objective.

We need to reconnect policymakers with the people they are supposed to represent. The current policymaking mechanism, focused as it is on legislation, arcane discussions about institutional structures and funding, sound-bites and personality, serves only to widen the gap between the government and the people.

One way of bridging that gap might be for all of us to think in terms of the outcomes we want to see from policy, rather than supposed means of achieving them. At the very highest level objectives such as "economic growth" have now become irrelevant to, or even in conflict with, the aspirations of ordinary people. On a crowded planet, with ever more complex social arrangements, something as vague as GDP per capita correlates very little with human well-being. Why not, then target more directly things that really matter: physical and mental health, low crime rates, universal literacy, a cleaner environment? That is what a Social Policy Regime would look like. A few broad - negotiated - social and environmental goals, to which all government-financed activities would be subordinated. People can understand objectives, even if we (those of us who aren't paid lobbyists) are turned off by legal and political processes. Under a bond regime we could engage with policymaking and, crucially, feel that our voices have been heard. Such a policymaking system would, I think, be not only more efficient than the current, failing, mechanism, but also would generate buy-in from the public; something that is essential if we are goiing to solve the urgent, critical social and environmental problems that we face.

Propping up interest groups: everyone loses

2011-09-07T01:13:00.003+13:00

John Kay, explaining the current financial crisis, writes:

The subtle but important distinction between policies that support a market economy and those that support the interests of established large firms was not widely appreciated by policy makers on either right or left. A good crisis gone to waste, 30 August

Governments make this mistake often: they identify the success of the economy with that of large corporations - which often just happen to be big contributors to their party funds. Failing corporations, just like failed policies, are not allowed to expire, but are instead propped up with taxpayer funds. The 'creative destruction' on which our economic system depends, doesn't operate: instead government policy takes over from market discipline. Diversity goes and, with it, the ability of our political and economic system to adapt. What we are seeing now: social, political, evironmental and economic crisis, is largely a result of government propping up special interest groups. The short-term beneficiaries are the bosses of big corporations and the visionless politicians who buy them off. The losers are...well...everybody else.

We urgently need to move toward a system that rewards favourable outcomes. Not, as under the current system, those who say they're going to deliver them or who may have delivered those outcomes in the past, but cannot efficiently do so now. That's where a Social Policy Bond regime could help. Only those who actually and efficiently achieve targeted social and environmental outcomes would be rewarded. In stark contrast with the current system their identity would be entirely subordinated to their efficiency and effectiveness.

Subsidising the rich

2011-09-02T06:17:00.002+13:00

Or rather, transferring resources from the poor (and the environment) to the wealthier members of society.

The richest 10 per cent of the population receive four times as much public spending on transport as the poorest 10 per cent. Source

It's the usual fare: policy as if meaningful outcomes for ordinary people don't matter.

Reason and prejudice

2011-08-29T05:19:00.004+13:00

According to Hugo Mercier, we've been reasoning about reason all wrong. Reasoning is very good at what it probably evolved to let us do—argue in favor of what we believe and try to convince others that we're right. Did reason evolve for arguing?, 'Point of Inquiry', 15 August

According to this theory (elaborated in the POI podcast), the function of reasoning is argumentative. If I have understood it correctly it says that we use reasoning to convince others of our beliefs and prejudices. So "reasoning works well as an argumentative device, but quite poorly otherwise." If we accept this theory, what would it mean for policymaking and policymakers? In an age of extreme specialisation, making policy, or choosing amongst alternative policies, will often be done only by perhaps a single person, who will decide not according to reason and logic, but according to his or her unchallenged beliefs. In this respect, the theory is similar to the that of natural selection. The implication of both theories is that policymakers, even experts, should have some humility.

Both theories support my contention that policy approaches should be subordinated to outcomes. Politicians in democratic countries are good at articulating social goals, and good at raising the revenue necessary for their achievement. But they are not so good at working out how to achieve these goals. Even with a public administration degree, they still won’t be perfect. They subvert natural selection, by favouring top-down, one-size-fits-all approaches, which are not always appropriate, and by failing to terminate failed approaches. And, if we accept Dr Mercier's theory, they are also likely to favour approaches that accord with their own ideology and a priori beliefs, rather than those that can be supported by evidence.

This is where Social Policy Bonds could help. Many goals are not amenable to the top-down approach. But a bond regime would reward successful outcomes however they are achieved. Governments could set social and environmental goals, without having to think of how to achieve them. That would require some humility, of course, as well as politicians' relinquishing some of their power. For that reason and others it's probably more likely that non-governmental actors - NGOs or philanthropists, for instance - will be the first to issue Social Policy Bonds.

Solitudinem faciunt...

2011-08-17T09:59:00.002+13:00

Jean Bricmont and Diana Johnstone discuss the NATO intervention in Libya:

Despite the efforts of a few isolated individuals, there is no popular movement in Europe capable of stopping or even slowing the NATO onslaught. The only hope may be the collapse of the rebels, or opposition in the United States, or a decision by ruling oligarchies to cut the expenses. But meanwhile, the European left has missed its opportunity to come back to life by opposing one of the most blatantly inexcusable wars in history. Europe itself will suffer from this moral bankruptcy. Who Will Save Libya From Its Western Saviours?, 'Counterpunch', 16 August

There are no guarantees against this sort of madness, but western governments that are focused on bringing about the achievement of a few broad, well-defined, explicit social and environmental objectives would find it awkward to explain how taking sides in Libya could help their society's well-being...let alone that of any other society. It's clear that there's no internal mechanism to limit the scope of government, whether at home or overseas. Desperately needed is some discipline that would re-orientate government so that it concentrates on outcomes that are meaningful to ordinary people. The accumulation of sovereign debt in the developed countries is the most obvious and ominous symptom; but the pointless, destructive and barely opposed intervention in Libya is a particularly poignant example.

It's obvious really

2011-08-14T05:44:00.002+13:00

It's obvious that governments should spend within their means, shouldn't debase the currency, and shouldn't destroy the environment and social cohesion. But today's policymakers operate in a fog of obscurity and micromanagement. They are preoccupied with ideology, activities, institutional structures, spending plans, image and news management. In such an environment, it's too easy to lose sight of principles. Attention spans shorten; the focus shifts from the long term and crucial to the short term and flippant. Problems that can't manifest themselves as dramatic tv footage are neglected.

Expressing policy in terms of broad, desirable goals, as Social Policy Bonds do, could get us out of this predicament. We could issue bonds that become redeemable at the end of a sustained period of, for instance, world peace, fiscal continence, contained inflation and unemployment, and low levels of environmental destruction.

It's unlikely to happen. Governments just don't think like that. It's unfortunate that, at a time when governments are big, democratic and influential enough to articulate society's goals accurately and to raise the revenue to achieve these goals, they cannot relinquish their control over how these goals shall be achieved. Instead, they centralise more and more, as if power is an end in itself. Big government doesn't have to be remote, one-size-fits-all, rigid, error-prone and a threat to the well-being of mankind and every other species. But, because it fails to measure success in terms of explicit, meaningful outcomes, that's precisely what it has become.

Who cares about policy?

2011-08-04T05:45:00.002+13:00

Mick Hume writes that political life in the UK:

...becomes less about what you believe in or achieve, and more about how you appear, where you are seen and who you consort with. Personal image and style become all-important. That is why we find ourselves in a bizarre situation where a Tory prime minister can, on a given day, get more stick in the media for refusing to tip an Italian who did not deliver cappuccino to his table than for failing to deliver anything much in the way of a government programme. How British politics became trivial pursuits, Mick Hume, 3 August

Mr Hume talks about our celebrity political culture, which is partly a result of the lack of any ideological underpinnings to political parties. For me, though, ideology is at least as removed from society's well-being as celebrity. In either case, the interests of ordinary people are removed from the political agenda. Politicians are driven by ideology or by their wish to associate themselves with celebrities, either as an end in itself, or as a means of staying in power, or to distract the masses from matters of substance.

Ideology, celebrity, or the interests of the rich and powerful: in every case the drivers of our politics are not delivering meaningful outcomes to ordinary people. Social Policy Bonds, aside from their efficiency, could re-orientate politics entirely towards the achievement of social and environmental outcomes. Under a bond regime, politics would focus on the targeting of such outcomes, their relative priority and their cost. All actions set in train by such policymaking would be subordinated to the achievement of these outcomes. Ideology, celebrity and other nonsenses - currently absurdly important - would be seen, accurately, for what they are: self-indulgences.

Complexity used to favour the rich

2011-07-24T09:43:00.002+13:00

Government and big business have interests that often conflict with ordinary people and smaller businesses. They habitually use complexity to benefit themselves, at the expense of small, local enterprises and natural persons.

...leading members of the [US] Senate are seriously considering giving the most profitable companies in the world a total tax holiday as a reward for their last seven years of systematic tax avoidance. Hundreds of billions of potential tax dollars would disappear from the Treasury. And there isn’t a peep from anyone, anywhere, on this issue. We’re seriously talking about defaulting on our debt, and cutting Medicare and Social Security, so that Google can keep paying its current 2.4 percent effective tax rate and GE, a company that received a $140 billion bailout en route to worldwide 2010 profits of $14 billion, can not only keep paying no taxes at all, but receive a $3.2 billion tax credit from the federal government. And nobody appears to give a ****. What the hell is wrong with people? Have we all lost our minds? Corporate tax holiday in debt ceiling deal: where's the uproar? Matt Taibbi, 22 July

Complexity, obscurity, and just the plain boredom of the policymaking process are being exploited by powerful interests. They can get away with this, because policy is expressed in terms that are so incomprehensible or vague that they deter outsiders - that's those of us who should be in uproar - from getting involved.

Social Policy Bonds would be different. They would target explicit goals that are meaningful to ordinary people: cutting the crime rate, reducing unemployment, reducing pollution, for instance. The public would take an interest because it can understand outcomes. The bonds could close the gap between the public and the policymakers, which is now not only wide, but widening. Perhaps disastrously so.

The EU: a top-down, one-size-fits-all institution

2011-07-21T10:33:00.005+13:00

Frank Furedi writes:

From its inception, the EU was an elitist managerial project that was able to construct and promote its agenda without having to respond directly to popular pressure. Decisions are never arrived at through public debate, and the majority of EU laws are formulated by the hundreds of secret working groups set up by the Council of the EU. Most of the sessions of the Council of Ministers are held in private, and the EU’s unelected European Commission has the sole right to put forward legislation. Why the EU is so clueless about the Euro crisis, 20 July

It's arguable that global crises require global solutions, and EU-wide crises require EU-wide solutions. But I would argue that solutions need to arise from below, rather than imposed from above. They need to be diverse and adaptive. Big government, while necessary to articulate our goals and to raise the revenue for achievement, is rarely best placed to achieve them. The decision-making bodies of big government, such as those that Mr Furedi writes about, might be well meaning and hard-working, and they might even perform adequately when a crisis requires a big, one-size-fits-all, top-down solution. But they tend to be remote, and unresponsive to local circumstances and changing events. The entire EU exercise and, in particular, the Euro, are the apotheosis of big, remote government. They might well be neither responsive nor diverse enough to go on for much longer.

It's too late for the EU, but a Social Policy Bond regime would distinguish between the (1) the articulation and revenue-raising part of government, and (2) the achievement of social and environmental goals.

Targeting GNP: the logical conclusion

2011-07-18T10:57:00.002+13:00

Gross National Product, in the absence of any other explicit indicator, is often targeted implicitly; as if GNP, or GNP per head, indicate anything meaningful to ordinary people. This is one example of what happens when governments insist on targeting GNP.

Taking command of the long term

2011-07-06T07:43:00.002+13:00

Greece has 800,000 civil servants, of whom 150,000 are on course to lose their jobs. The very existence of those jobs may well be a symptom of the three c’s, ‘corruption, cronyism, clientelism’, but that’s not how it feels to the person in the job, who was supposed to do what? Turn down the job offer, in the absence of alternative employment, because it was somehow bad for Greece to have so many public sector workers earning an OK living? Where is the agency in that person’s life, the meaningful space for political-economic action? She is made the scapegoat, the victim, of decisions made at altitudes far above her daily life – and the same goes for all the people undergoing ‘austerity’, not just in Greece. Once Greece Goes..., John Lanchester, 'London Review of Books' online, 30 June

We live and work within a policy framework decided by people at high altitude. Or perhaps 'decided' is too purposeful. Policymakers are only a little less victims of the system within which they operate than ordinary workers. They have few definite, long-term objectives to work for. Perhaps the maximisation of economic growth (or growth per head) which, if it considered at all is assumed to generate enough resources to solve every sort of problem - even those it creates. Other guidelines are even more vague or rarely articulated. The avoidance of social upheaval; the avoidance of 'too much' pollution, or unemployment, or crime, or whatever. Because these guidelines are vague, or seldom made explicit, they have the status of declarations of intent. All this means that society's actual long-term guidelines are either decided by default, or subject to the manipulation of the powerful; including large corporations, government agencies, and the largest trade unions.

So we find, and not only in Greece, explosions in public sector employment, and public debt. We'd all be better off society's longer-term goals, including debt levels, were openly debated and made explicit. They need not be absolute, but there would be incentives for people to achieve them.

Social Policy Bonds, because they are tradeable, could be used to target long-term goals, including guidelines within which, say, debt, or crime, or pollutions must lie. Societal goals, such as limited debt levels, are more stable over time than the supposed ways of achieving them, and we could all benefit if they were targeted explicitly. Outcomes targeted under a bond regime could include those whose origins are uncertain or contested. Just because policymakers don't know all the causes of crime, or climate change, say, does not mean that they cannot explicitly target them and, in effect, contract out the work of identifying cause and effect to a motivated private sector.

Subsidising planetary destruction

2011-06-27T04:42:00.002+13:00

The International Energy Agency does valuable work in quantifying the subsidies to fossil fuel production and consumption.

We estimated that consumer subsidies [for fossil fuels] were worth US$ 312 billion in 2009. In the current economic climate, this is a significant amount of money which could be used to more directly tackle priorities such as poverty alleviation, health or education. Our modelling also showed that if subsidies are reformed by 2020, global energy demand could be reduced by 5%. This has significant implications for energy markets and efforts to combat climate change. International Energy Agency’s Senior Energy Analyst Amos Bromhead in conversation with 'Subsidy Watch', April 2011

It's scandalous that these subsidies continue. They transfer funds from the poor to the rich. They do nothing to help the poor that could not be better done by more-targeted assistance. And they subsidise environmental depredation. In this, energy subsidies have much in common with agricultural subsidies, still continuing decades after their lunacy was exposed and quantified. One example from last year:

What could be more outrageous than the hefty subsidies the U.S. government lavishes on rich American cotton farmers? How about the hefty subsidies the U.S. government is about to start lavishing on rich Brazilian cotton farmers? If that sounds implausible or insane, well, welcome to U.S. agricultural policy, where the implausible and the insane are the routine. Our perplexing $147.3 million–a-year handout to Brazilian agribusiness, part of a last-minute deal to head off an arcane trade dispute, barely even qualified as news .... If you're perplexed, here's the short explanation: We're shoveling our taxpayer dollars to Brazilian farmers to make sure we can keep shoveling our taxpayer dollars to American farmers — which is, after all, the overriding purpose of U.S. agricultural policy. Why the US Is Also Giving Brazilians Farm Subsidies, by Michael Grunwald 9 April 2010

The gap between the governments we have and the people they are supposed to represent hardly looks like closing. Ordinary people, along with planet Earth, are left behind in the policymaking process. We have to put up with whatever comes out of the bargaining between interest groups, be they large corporations, government agencies, trade unions or (so-called) religious bodies. For reasons social, financial and environmental, such a policymaking process cannot last much longer. If we are lucky, there might be time to turn towards making policy as if outcomes mattered.

Government by the rich, for the rich

2011-06-18T08:08:00.003+13:00

House keeps farm subsidies, cuts food aid as it passes food and farm spending bill 'Washington Post', 16 June

This should be no surprise. We have known for decades that farm subsidies are insane; that they transfer income from the poor to the rich and that they do much to destroy the natural environment and animal welfare. But our corrupt political systems are incapable of stopping them. Much easier to cut food aid to those who count for nothing under the current regime: the poor at home and overseas. This is government for the rich by the rich. It makes a mockery of democracy.

If we made policy as if outcomes mattered, such lunacy would not survive. The tiny number of people who benefit from it can do so only because policymaking is an arcane process focused on procedure, funding, structural and institutional arrangements and other concerns entirely removed from those of ordinary people.

That's where Social Policy Bonds would differ: under a bond regime, projects, funding, and activities would all be orientated towards achieving specified social goals. The connection between policy and targeted outcomes would be explicit and inextricable. The public could engage with policymaking, so goals would have greater buy-in. The current farm subsidy regime is a symptom of a much bigger problem: that of the disconnect between policymakers and the people they represent. Social Policy Bonds, with their focus on meaningful outcomes, could re-connect policy with the public.

Government: picking winners, picking losers; who cares?

2011-06-12T08:27:00.005+13:00

But progressive government -- as demonstrated by the Obama administration -- flunks any real test of fairness. It clearly favors unionized workers over non-unionized workers, just as it routinely favors the biggest and most politically connected corporations over smaller and more entrepreneurial enterprises. Crony capitalism and the practice of kowtowing to the biggest and most politically assertive unions are joined at the hip in this administration. Gambling Man, Andrew B Wilson, 'The American Spectator', 6 June

True, but if we simply change "unions" in the last sentence to "organizations" this would apply not only to the current US administration, but to virtually every other administration in every country in the world. It's convenient, at every level, for government to act as though the success of big organizations, including its own departments, implies the success of an economy, a society and the government itself. Not so. All organizations, whether they be government agencies, business of any size, religious and education bodies, and - yes - unions, have as their over-arching goal that of self-perpetuation. Even when that goal diverges from or conflicts with the wishes and well-being of society.

There's little to keep bigger organizations honest, especially when they are so big that they can work on other organizations, including government agencies, to manipulate trade, legislation, the market, and the regulatory environment with the goal of preserving their privileges. Government itself is folded into this process, such that unravelling the mess is going to be extremely difficult. A widespread sense of crisis might help, but there are no guarantees that that would lead to anything better, at least in the medium term.

Setting some broad, long-term goals might help. Government, with all its powers and influence, would, I think, be better advised to consult with the public about what's really wanted. Under a Social Policy Bond regime it could target, not only global goals such as dealing with the threat of man-made or natural catastrophe, or minimising the risk of nuclear conflict, but national goals such as improved health and education outcomes.

Instead, for its own petty reasons, it wastes time and scarce resources by, for example and as Mr Wilson points out, acting as an investment managers with taxpayers' money. Investment managers, or gamblers, moreover, who are paid however badly they perform.

We need to target long-term goals

2011-06-08T05:45:00.004+13:00

Democratic governments these days devote much of their energy to kicking problems down the road, for solving at some time in the future that's uncertain, but beyond the lifetime of their administration. It's a pattern. Nuclear weapons pile up; budget deficits rise; environmental challenges are evaded.

On reflection, it's not so surprising. The very idea of a stable society, one that can identify with its future members, has been undermined by the pace of technological change and porous borders. We vote for short-term fixes. Young people can't vote, and nor can threatened non-human species.

But we do have moments of clarity and rationality. We know that certain broad outcomes are desirable. Number one, most likely, is the survival of the human race in the face of natural or man-made catastrophe. Others would include the maintenance of a decent financial and physical environment for future generations. Sadly, our political campaigns are focused almost exclusively on who shall govern us for the next few years. We can choose one person over another (or one party over another), on the basis of what they claim to believe and the activities they promise to carry out over their few years in power. The link between politicians' promises and their activities is tenuous. That between their promises and short- or medium-term outcomes even more so. And long-term outcomes - the sort that will profoundly affect the lives of future generations - are rarely anything other than a by-product of the accumulated decisions. Distracted by the short term, we fatalistically surrender discussion of the long term to the religious, the chiliasts and the cultists; few of whom care dispassionately about the well-being of the entire planet, or the whole of humanity.

That's where Social Policy Bonds could enter the picture. Existing political activities could be subsumed within a set commitments to achieve society's broad, long-term goals. Under a bond regime, we could explicitly target such objectives as the survival of human beings and the avoidance of catastrophe. The bonds, because they allow the explicit targeting of such very long-term goals, would shift the focus of politics towards the well-being of future generations. We all know that such a shift is essential, but it's also clear that current politics is rigidly, almost obsessively, concerned with the short term.

Wish I'd said that

2011-05-29T09:13:00.002+13:00

The [UK] government has now promised to cut greenhouse gases by 50% by 2027, which means that, with a following wind, the UK could meet its legally-binding target of 80% by 2050. For this we should be grateful. But the coalition has resolved the tension between green and growth in a less than convincing fashion: by dumping responsibility for the environmental impacts on someone else. The carbon cut we have made so far, and the carbon cut we are likely to make by 2027, have been achieved by means of a simple device: allowing other countries, principally China, to run polluting industries on our behalf. George Monbiot, 'the Guardian', 23rd May

I have been saying this for years. In climate change, as in other social and environmental challenges, narrow targets are useless. They are far too easily evaded or gamed, so that any supposed social problem is shifted away from the scope of explicit targeting. We should be targeting not British greenhouse gas emissions, nor even global greenhouse gas emissions, but climate instability. If we did that by issuing Climate Stability Bonds, we'd be addressing this global, urgent concern with maximum efficiency. Other targets, as is the UK Government's, are likely to be inefficient and ineffective.

Giving greed a chance

2011-05-23T08:42:00.003+13:00

People sometimes challenge the Social Policy Bond principle because of its reliance on financial incentives - also known as 'greed'. I think they are right to do so. Who wants a society in which the lust for more money dictates every aspect of our behaviour? In which people won't do the right thing for society unless there's a financial incentive involved?

My response is that we have such a society already, in which millions of people perform functions that have little direct social content for the purpose of earning a salary. Within 25 metres of where I am typing this, there is a body piercing salon and a tattoo studio. Within several hundred metres there are old people who could do with a bit more help and company. And within a radius few thousand metres crime blights the lives of hundreds.

People do respond to financial incentives. Our problem is that many of the incentives are in place for people to do things that don't actually help society. And this applies to funds ostensibly in place for social or environmental purposes, not just the world of breakfast cereals and bodily mutilation. Government funding, typically, goes to activities or institutions that, are often only nominally linked to achieving social outcomes. In cases, like fossil fuel subsidies or agricultural subsidies, the net effects of these funds is almost entirely in conflict with rationality itself, as well as society and the environment. The only beneficiaries are a tiny minority of powerful, well-organized, vested interests. So financial incentives, ostensibly for public purposes, already exist in the form of government funding. At best they are unsystematic and inefficient. At worst, they undermine our social and environmental goals. In all cases, they are uncorrelated to outcomes that are meaningful to ordinary people. Social Policy Bonds would rejig existing incentives in favour of such outcomes. People would, as they do today, respond to the incentives on offer, but under a bond regime they would be rewarded for efficiently achieving social and environmental outcomes. What they do with their rewards is up to them, but there's no reason to believe that they would spend them ignobly.

The fact is that monetary payments needn't corrupt. Many people under the current system do all sorts of socially valuable work in return for salaries that aren't very high. They might do more for higher salaries, or more people might do the same sort of work if there were more cash on offer to achieve, a la Social Policy Bonds, a stipulated social or environmental outcome. Salaries, needless to say, can be used for more than frivolous consumption. They can mitigate poverty, increase leisure time, and raise children. Adding to the numbers working for social goals, or paying more to those who do so efficiently, is not negative or evil.

Philanthropy and outcomes

2011-05-22T08:45:00.002+13:00

The Economist writes, in a review of three recent books about philanthropy:

For Mr Buffett, the main reason why giving is harder to do than making money is that in business “you go after the low-hanging fruit”, whereas in philanthropy you are trying to tackle problems that are inherently difficult, such as how to educate demotivated urban kids or end rural poverty. Giving for results, 'The Economist', 14 May (subscription)

Another of the books argues that:

philanthropists should create systems that force them to hear what may at times be unpleasant truths about the ineffectiveness of their work, and to be constantly challenged to improve.

I think philanthropy could do a lot more if it subordinated all its activity to meaningful outcomes. It's very clear why government has a built-in resistance to doing so: the jobs of public servants at all levels would be at stake. But philanthropists have their own, less pecuniary, incentives to avoid addressing the 'unpleasant truths'. We could speculate about the reasons, but they are less important than the result: philanthropists underachieve, and in doing so they deter philanthropy.

So there's a lot at stake. I think if philanthropists, instead of trying to prejudge the best ways of achieving noble outcomes, were to issue Social Policy Bonds, the efficiency gains would be large enough to make a difference in their own right, and to encourage more outcome-oriented funding, whether by the public or private sector. As another of the books reviewed says:

one of the key lessons is for philanthropists and non-profits to be clear about the outcomes they are trying to achieve— and to measure properly the progress they are making towards those goals.

It sounds an obvious discipline. But neither government nor philanthropists follow it. Social Policy Bonds would change that.

How long have we got?

2011-05-12T18:51:00.001+13:00

Only 0.01 percent of all species that have ever existed continue to do so. We happen to be one of them, for now. When [UK Astronomer Royal Sir Martin] Rees looked at the myriad ways in which the present is more perilous than the past in his 2003 book Our Final Hour, he set the odds of human extinction in the next century at 50 percent. [Nick] Bostrom, [an] Oxford philosopher, puts the odds at about 25 percent, and says that many of the greatest risks for human survival are ones that could play themselves out within the scope of current human lifetimes. “The next hundred years or so might be critical for humanity,” Bostrom says, listing as possible threats the usual apocalyptic litany of nuclear annihilation, man-made or natural viruses and bacteria, or other technological threats, such as microscopic machines, or nanobots, that run amok and kill us all. What will happen to us?, Graeme Wood, 1 May

You might think that we'd be well advised, as a species, to look at these survival probability estimates, and see if we can find ways of increasing them. And it's true that many people are working, sometimes heroically, at ways of doing so. There are quite a few organizations, for instance, that seek to raise awareness of the possibility of nuclear conflagration, and many more that seek to mitigate or prevent natural and man-made calamity. The difficulty I have is that their work is unsystematic, unco-ordinated, and is rewarded in ways that bear no relationship to their success or efficiency. As well, and perhaps more dangerously, there are policies in play that can only accelerate disaster, such as: subsidies to fossil fuel extraction and consumption, the accumulation of weapons of all kinds; and the failure seriously to pursue one of the main goals of the Cairo Population Summit, where 179 signatory countries agreed to provide access to family planning services to all the women who want them. And last, there are ways in which our survival is threatened that are beyond our current knowledge and imagination. Nobody is being encouraged to anticipate them.

In short, we need to re-orient the incentives, and to do so in a coherent manner that rewards the survival of our species against calamities of all kinds. This is where the Social Policy Bond principle can help. The issuers of Disaster Prevention Bonds need have no knowledge of the relative likelihoods of known or unforseeable catastrophic events. Neither would they have to pre-judge, with our current limited scientific knowledge, the most efficient ways of ensuring our survival. Instead, the bond mechanism could target the sustained avoidance of any - unspecified - catastrophe. It would do so in a way that encourages the exploration and investigation of all threats, known and new, impartially. Policymakers would not (and anyway could not) have to decide on how dangerous each threat is. That would be left to bondholders, who would have powerful incentives to do so continuously. Investors in the bonds would be rewarded only if they can adapt to rapidly changing events and to our ever-expanding scientific knowledge.

This is a stark contrast to the current approach; the one that has led to highly intelligent men giving our survival such a baleful prognosis. The people who are currently working in favour of humanity do so in ways that, while worthy of great respect, are doing so within a system that is heavily weighted to favour the short-term goals of large organizations, including governments, that have little incentive or capacity to care about the long-term future of the whole of humanity. It's very regrettable, and Disaster Prevention Bonds, issued with sufficient backing, could change all that.

Why are we not surprised?

2011-05-05T18:47:00.002+13:00

Tom Philpott writes:

During the Bush II administration, I used to groan that the closest thing we had to a concerted policy response to climate change was the federal government's slew of goodies for corn-based ethanol. It was a monumentally depressing situation, because propping up corn-derived fuel is expensive and (despite industry hype) doesn't actually do much, if anything at all, to mitigate climate change -- but contributes actively to ecological disasters like the Gulf of Mexico "dead zone." Now, two years into the Obama administration, we still have no concerted policy response to climate change, and the corn ethanol program abides, sucking up resources that could be going to actual green technologies.

What actually determines policy in democracies these days? It's not the long-term good of a nation, a society, or the environment. It's not the needs or wishes of ordinary people. No, nowadays it's essentially the medium-term accoutancy goals of large corporations, as interpreted by the politicians they pay for. Society's growing complexity and, in this instance, genuine scientific uncertainties, are smokescreens behind which powerful interest groups operate, manipulating markets, funding decisions, and the regulatory environment for their selfish purposes. Sometimes these coincide with broader long-term social and environmental goals. Very often they don't. And, increasingly, as the scale on which government and corporations operate grows bigger, the stakes are higher, and the goals of large organizations - corporations or government agencies - actually conflict with those of society. The distance between policies and their effect is too large, the relationships too complex, the time lags too intricate, for anyone except specialists employed by the largest corporations to understand and exploit. The result is often as Mr Philpott indicates: a trashed environment; and a trashed society.

Social Policy Bonds might be the answer. The democratic process needs to be re-orientated to respond to the needs and wishes of ordinary people, not large organizations. Expressing policy goals in terms of meaningful outcomes, as the bonds would do, would encourage more public participation in policymaking. The bonds would also subordinate all activity to society's goals, rather than to those of the organizations supposedly achieving them. Under a Social Policy Bond regime, organizations might grow and prosper, but only if they are efficient at achieving society's goals - a stark contrast with the current setup.

Where we're at

2011-04-28T17:48:00.003+13:00

The world seems beset by systemic crises: financial, economic, environmental and social. We appear to be approaching limits on all fronts. The overwhelming reaction has been to do what we've been doing before, except more so. In the economic sphere, this means going for growth, as if that will solve all our problems. It won't. The mis-identification of growth with human well-being is clear to most these days: growth takes no account of distribution, leisure time or its externalities; in particular the environmental and social impacts of growth that is geared entirely to the narrow, short-term indicators of accountants on behalf of senior executives and major shareholders of large corporations. Government, supposedly the major corrective to these negative impacts, has become complicit with the large corporations. The world more and more looks like a contest between government and big business on the one side, and ordinary people and small businesses on the other, with the odds overwhelmingly in favour of the big and global at the expense of the small and local.

If government is going to use its clout, and is serious about doing so for the benefit of ordinary citizens, it would do better to go above the heads of the large corporations. Even if, at one point in history, it made sense to identify the success of big business with that of economy and society as a whole, it no longer does so. That doesn't mean government should actively campaign against big business. It does mean that it should focus directly on the outcomes that it wants for ordinary people, rather than assume that the health of 'the economy' (by which it usually means large corporations) means a better-off population.

I still have some hope that governments will move towards something like Social Policy Bonds, at least in the long run. Society is so complex and intertwined that any relationship between conventional policy and its outcomes is just too difficult to identify. We see governments doing all sorts of bizarre things that do little except benefit its favoured interest groups while alienating the rest of the population: bombing Libya, doling out massive sums of taxpayer revenues to wealthy landowners and agri-business corporates, subsidising the banks, the fossil fuel industry, piling up nuclear weapons and the rest. It cannot be sustained. My hope is that government, rather than carry on diverging from the wishes of the people it's supposed to represent while ramping up the repression, will instead begin to express its goals in terms of outcomes that are meaningful to ordinary people, and target them directly.

It's broken

2011-04-18T23:15:00.003+13:00

Fareed Zakaria writes about the US political system:

We have a political system geared toward ceaseless fundraising and pandering to the interests of the present with no ability to plan, invest or build for the future. And if one mentions any of this, why, one is being unpatriotic, because we have the perfect system of government, handed down to us by demigods who walked the earth in the late 18th century and who serve as models for us today and forever. Are America's Best Days Behind Us?, 'Time', 3 March

(To 'pandering to the interests of the present...' I would add '...and the wealthy...') How has this come about? I think it's largely because policymaking is opaque to most ordinary people. It's focused on arcane discussion about laws, organisational structures and institutional funding. All these things are necessary of course, but they should be the by-product of policy geared to the interests of society: what I call outcomes. Opacity and complexity are being exploited - perhaps cynically, perhaps not - in the interests of government and big business, at the expense of small enterprises, the public and the physical environment and, as is becoming ever more apparent, our future.

How to re-orient policymaking so that it focuses on things that are important to people? The essential step is to make it comprehensible, which will encourage greater public participation, and hence buy-in. One way of doing that would be to focus discussion entirely in terms of outcomes. Transparency would generate realistic expectations about what government can and cannot achieve. The notion of trade-offs, absolutely central to politics, would be clear to everyone, not hidden from public discussion.

Social Policy Bonds are one way in which our politics could be re-jigged so as to focus on meaningful outcomes for society as a whole. A bond regime would express its goals in terms of broad social and environmental outcomes, while the market would not only provide best estimates, on a dynamic basis, of their costs, but also reward only the most efficient ways of achieving them. It would represent a radical departure from the existing set-up but, as I explain in my book, a gradual transition could occur, with spending to existing bodies gradually reducing in line with increases in funding allocated to redeeming the bonds.

'World targets in megadeaths'

2011-04-15T22:44:00.003+13:00

The Economist sums up the conflict in Libya:

Significantly, the earlier chorus of criticism from rebels doubting NATO’s stomach for the fight has subsided. Mustapha Abdulrahman, a rebel spokesman, declared that there had been a “positive change” in the intensity of NATO attacks over the weekend. In short, all sides now seem ready to dig in for the long haul. Libya versus Libya: the Colonel's fake diplomacy, 'the Economist', 14 April

This is the logical outcome of policy driven solely by institutional goals. Does anyone in Nato really think that if they topple Gaddafi the Libyans - or anyone else - will be better off? What exactly is the purpose of this intervention? Is there any objective other than the short-term needs of unpopular politicians and the military? It's a game of "formulate the objective as we go along", conducted at huge expense with funds borrowed from the next generation.

It's also a particularly tragic and visible manifestation of Policy as if Outcomes Don't Matter in the Least; the same idiocy that has led to the poor being taxed to subsidise agribusiness and wealthy landowners, our absolute dependence on fossil fuels, and the desperate fragility of the world financial system - to give just a few examples. It's no longer good enough to assume that the aggregation of government and corporate goals advances human well-being. The planet is no longer big enough to absorb for us to learn from our mistakes, nor do we have that much time. We urgently need to take over from the politicians and corporations that run our lives, and target goals that are meaningful to ordinary people. We need to subordinate all the actions of the powerful to those goals. And the over-riding goal, the one that we need to target most of all, is survival of the human species. Faced with urgent social and environmental challenges our politicians solemnly decide to inflame obscure, inconsequential tribal squabbles, at huge cost. Madness.

The masonic option for inefficient organizations?

2011-04-05T21:22:00.005+13:00

Francis Fukuyama writes of the US:

Trade unions, agribusinesses, drug companies, banks, and a host of other organized lobbies often exercise an effective veto on legislation that hurts their pocketbooks. It is perfectly legitimate and indeed expected that citizens should defend their interests in a democracy. But at a certain point this defense crosses over into the claiming of privileges, or a situation of gridlock where no one's interests may be challenged. This explains the rising levels of populist anger on both the Right and Left that contribute to polarization and reflect a social reality at odds with the country's own legitimating principles. Francis Fukuyama, The origins of political order

Exactly, and it applies the world over. Every institution - and I would explicitly include corporations, religious bodies, universities and government agencies in Mr Fukuyama's list - has one over-arching aim: that of self-perpetuation. Given the power of these lobbies, it's no surprise that human beings, that is, even those of us who are members of these bodies, are seeing our quality of life eroded. We might be 'organization men', but our humanity is increasingly denied by the organizations that run the planet. If this sounds far-fetched you need only look at the way our cities are almost entirely subordinated to the needs of the car and its attendant interest groups: car manufacturers, fossil fuel suppliers, the construction industry and all the rest. The interests of society and those of large corporations are not merely different, they are divergent and they conflict.

One way of re-orienting society is to re-jig the incentives. Instead of supporting lobby groups that (usually) start out with benign intentions, we could support those benign intentions themselves. We could learn to express our wishes in terms of desirable social outcomes, rather than allocate resources to groups of people who are paid to achieve them, but who inevitably end up serving the institution they work for rather than its ostensible ends. Social Policy Bonds are a financial instrument that can focus our attention on our social goals and reward the achievement of these goals rather than activities or institutions that might have, in the past, been helpful in bringing them about. My book describes the advantages of a Social Policy Bond regime and how we could gradually introduce them, in ways that divert resources away from current institutions only if they are inefficient.

If inefficient organizations want to survive under a bond regime, they have two clear alternatives: they can become more efficient, in which case holders of Social Policy Bonds will fund them. Or, like the stonemasons who used to build cathedrals, they can change the nature of their organization, become self-funding, and devote their energies to activities other than subverting markets and resisting change at the expense of society.

Postponing and off-loading catastrophe

2011-04-03T20:24:00.004+13:00

It's unlikely governments are going to be the first to implement a Social Policy Bond regime. Some private bodies and government agencies are making tentative first steps along the road to paying for the achievement of favorable outcomes (search for, and see my posts on, 'Social Impact Bonds' and 'Payment for Success Bonds). But typical efforts to bring about social and environmental goals focus on the tried, tested and (largely) failed approaches. So while there has been a downward trend in violent political conflict, for example, and increases in the aggregate level of human well-being, it's quite likely that present-day successes are being bought at the cost of more extreme calamities in the future. That is certainly how the current and still unresolved world financial and environmental crises seem to be shaping up.

The underlying reasons can probably be found in the too close relationship between government and large corporations, but identifying them is less important than fending off catastrophic risks to human well-being, which could take the form of an unravelling of our complex financial and economic systems, or large-scale warfare, or calamitous environmental disasters.

I've written a short paper about using Social Policy Bonds to reward people who help avoid such catastrophes. Perhaps the people with the strongest financial incentive to issue such bonds are the combination of private insurance companies, national export credit agencies and multilateral bodies such as the World Bank's Multilateral Investment Guarantee Agency which, according to the current Economist (subscription), offer businesses cover against political shocks such as the 'sudden imposition of currency controls, expropriations, conflicts and terrorism, and for governments failing to keep their part of an investment deal, such a supplying a new factory with electricity.'

It's difficult to get the attention of such bodies. But perhaps even if they did know of Social Policy Bonds they wouldn't be particularly interested. There is huge, tragic, and maybe a growing, mismatch between human suffering and the market. The people who are least able to escape from or adapt to catastrophe of any sort are the ones who cannot afford to buy insurance but who need it most. We could well be seeing not only escalation of problems that aren't dealt with early enough, but the off-loading of these problems onto those least able to bear them. The victims of these escapes from responsibility and are future generations and the poor.

It's unlikely that any coalition of insurance companies or government and multilateral bodies will spontaneously form to mitigate or avoid potential disasters as climate change or, say, large-scale warfare involving poor countries. They have little incentive to do so since the main victims have little market power. My hope is that some combination of philanthropists, non-governmental organizations, and the public will get the ball rolling and together issue Social Policy Bonds that will address the concerns of those who cannot enter the marketplace for conventional insurance.

A single quality of life target?

2011-03-23T23:14:00.002+13:00

Narrow social policy targets don't work. Take a goal like "halving the number of deaths from road accidents in the city centre". One response could be for city authorities to make driving attractive in all parts of the city other than the centre, with the same number of deaths occurring outside the target area. Another response (and one which would appeal to drivers in my neighbourhood) would be to encourage driving on the sidewalk, and exclude deaths occurring there from 'road' death statistics.

Even broad goals, such as improved health or educational outcomes, could conceivably be subject to the same manipulation or gaming, under a Social Policy Bond regime. Without very careful targeting, investors in the bonds could make unforeseen, negative trade-offs between societal goals.

Why not then target a single ‘quality of life’ indicator for the whole of society, taking into account all quantifiable social and environmental objectives: quality of life, physical and mental health, education level, environmental pollution, crime, homelessness unemployment, leisure time and any others? Surely targeting one single aggregated ‘social welfare’ indicator would be the optimal approach?

The more obvious objection to doing this is the daunting practical problem of defining a meaningful and measurable indicator of social welfare. The second is even more fundamental. Aiming for an increase in a single social welfare indicator carries with it an assumption that society’s needs can be traded off against each other. But for many of the needs for which government usually assumes responsibility such trade-offs cannot be made. For the neediest beneficiaries of government’s welfare programmes, a massive increase in priority for, say, health care would be unlikely to compensate for a total withdrawal of government funds from, say, basic education. ‘Safety net’ programmes in particular are scarcely amenable to trade-offs. In the same way a lowering of the crime rate, say, however welcome it might be, could hardly compensate for the total collapse of a country’s physical environment.

So experimentation and continuous refinement of the Social Policy Bond principle are going to be necessary. Issuers, public or private sector, will have to be vigilant to ensure that any particular bond issue does not break the spirit of society's stated and unstated goals, as well as the letter of the redemption terms. Of course, this sort of monitoring is necessary in today's policy environment as well - and it's not often practised.

Providing incentives to prevent humanitarian catastrophe

2011-03-16T20:56:00.004+13:00

We have fairly well-developed markets to insure against financial disaster. Catastrophe bonds, for instance, as well as conventional insurance policies. But financial resources rarely correlate with human life and well-being. So incentives to prevent or alleviate humanitarian disasters are left to the caprice of well-intentioned (usually) governments, or superb charitable organisations, which respond quickly and efficiently to crises. Unfortunately, these efforts are unsystematic. There is probably less emphasis on prevention than there should be and there are no systematic efforts to maximise the humanitarian benefit per dollar spent.

Disaster Prevention Bonds could be one way of bringing the prevention of human suffering into the market, and so injecting efficiency into that goal. Markets these days are associated, rightly, with grotesque income and wealth inequalities, and the pursuit of private goals at the expense of social and environmental amenity. But markets can be made to serve the public good, and the Social Policy Bond principle would be one way of harnessing the market's incentives and efficiencies in the service of society's needs. The contrast between the insurance available for financial disasters as against human disasters is stark and quite tragic. But it is not inevitable.

Special interests benefit from obscurity and complexity

2011-03-07T13:38:00.003+13:00

John Lanchester writes of the former chief economist of the International Monetary Fund:

[Simon Johnson's] day job involved going into crisis-struck countries and banging heads together to get them to accept reforms as a price of IMF aid. He acquired an extensive experience of countries which had effectively been captured by a ruling elite who governed entirely in their own interests. His startling conclusion about the current crisis is that the US has become of those countries. As the banking sector got richer, its power and influence over US government policy increased - power and influence which the bankers weren't at all afraid to use. John Lanchester, in Whoops!

Or rather 'abuse'. It's becoming a familiar pattern: special interests deploy complexity and obscurity as devices by which they can attract taxpayer funds away from a disengaged public. More regulation seems to be the obvious solution; but that adds to the complexity and obscurity. My suggestion, is, instead, to target outcomes, in such a way that ordinary people engage in policymaking and ensure that rewards are inextricably linked to the public interest rather than, as now, the private interests of those wealthy enough to pay lobbyists and lawyers to manipulate policy for their own purposes.

Social Policy Bonds would do that. One target, for instance, could be the 'sustained avoidance of financial and economic collapse'. Such a collapse could be targeted as an array of financial, economic and social indicators, which would all have to fall within a defined range for a sustained period before the bonds would be redeemed.

More generally, bonds could be issued that targeted any sort of disaster, defined in terms of a combination of, amongst other things, numbers of deaths and serious injuries caused, financial costs, numbers of homeless, and an array of other social, physical and financial indicators. See my paper on Disaster Prevention Bonds. The Social Policy Bond principle though, is a broad one. Essentially, society would decide on what it wants to see, and target the achievement of these goals. It's 'policy as if outcomes mattered', where the outcomes are those that favour society as whole not, as now, a cartel of interest groups and their lobbyists.

Black swans

2011-02-28T21:06:00.002+13:00

In the Introduction to his book Whoops!, about the 2008 crash, John Lanchester says:

Many bright, literate people have no idea about all sorts of economic basics, of a type that financial insiders take as elementary facts about how the world works.

Nor can many of us follow the technical debate about climate change or the dangers of strangelets or supervolcanoes.... Along with the esoterica of the financial markets, the complexities and obscurities of the relevant scientific relationships just cannot be unambiguously fathomed by policymakers - or even teams of experts.

That's why I advocate that, instead of attempting the impossible task of trying to identify such relationships and their consequences, policymakers target outcomes instead. We don't have fully to understand the climate change debate to know that it would be to our advantage to avoid climate catastrophe. Nor should we have had to anticipate the myriad derivatives that the finance industry constructed to avoid the derailing of the entire global economic system. It's the outcomes that matter, not how we reach them.

Under a Social Policy Bond regime, we could define the circumstances we want to avoid, and issue bonds that become redeemable only when these circumstances have not arisen for a sustained period. Defining such circumstances would not necessarily be a simple matter. It could involve constructing an index that combines measures of human, animal and plant health, or physical and financial indicators. No, it would not be simple - but it would be preferable to the current policy, which is basically that of reacting to crises only after they have occurred and caused immense, and possibly fatal, damage. For more on using the Social Policy Bond principle to avoid catastrophe, however caused, see my paper on Disaster Prevention Bonds.

On another note, the Economist of 19 February has an article on Pay for Success Bonds (subscription), a US version of Social Impact Bonds. At first glance they suffer from the same (as I see it) weakness as SIBs: they would not be tradable, and so would be limited to fairly narrow, short-term goals whose would-be achievers are known in advance. (See my previous post, on Social Impact Bonds.) These bonds are definitely a step in the right direction, in that they reward successful achievement of social outcomes, rather than merely pay people to undertake ostensibly beneficial activities. But I think that, because they are non-tradable their scope is necessarily limited, and also that, as a result monitoring their success or otherwise might be too costly in relation to their benefits.

The book

2011-02-18T22:01:00.002+13:00

My book Market Solutions for Social and Environmental Problems: Social Policy Bonds, is now also available from CreateSpace (part of Amazon) with ISBN number 978-1456512095. It costs US$19.95. It's a slightly updated version of the book available from Lulu (see right-hand column) and will eventually supersede it.

Social Impact Bonds - progress report

2011-02-15T21:35:00.002+13:00

Social Impact Bonds (not to be confused with Social Policy Bonds) were launched in the UK in September 2010. SIBs are similar to Social Policy Bonds in the sense that investors receive higher returns if their social intervention is successful. They are being tried over four years with 3000 UK prisoners at Peterborough prison. The more their reoffending rate falls, the more the backers of the bonds will receive.

Toby Eccles, development director of Social Finance, says it hopes to launch half a dozen such bonds across the country and for a variety of social projects over the next 18 months. Other groups ... are looking to foster similar bond schemes in areas such as cutting the number of children going into care or handling people with long-term health conditions better. “Making these work is complex,” says David Hutchison, Social Finance’s chief executive. “You have to be able to measure success accurately and work out how much to pay for it and when. Peterborough is relatively easy – people either reoffend within a year or not. Bonds set to help prisoners break with past, by James Boxell and Nicholas Timmins, 'Financial Times', 10 February

I met Toby Eccles in London last June, and we discussed both Social Impact Bonds and Social Policy Bonds. SIBs are definitely a step in the right direction. The idea of rewarding desirable social outcomes (rather than paying people for simply turning up to work), while obvious in theory, is (sadly) revolutionary in practice. Social Impact Bonds have the great virtue of being easier to trial than Social Policy Bonds. But in other ways Social Policy Bonds have the advantage.

The biggest difference is that, compared with SIBs are less tradeable than Social Policy Bonds. There would be no transparent market for them. The composition and structure of the organizations trying to achieve outcomes under a SIB regime are therefore fixed and pre-determined. Under a Social Policy Bond regime, on the other hand, the type, structure and composition of organizations working to achieve the target would be subordinate to the most efficient way of reaching it. This means, amongst other things, that broad, longer-term goals could be targeted. Such goals can be more closely aligned with society's wants and needs. Rather than target a relatively narrow indicator (like the re-offending rate of a certain set of people), over a period of a few years, they could target regional or national crime rates over a period of decades.

Nevertheless, I am pleased to see Social Impact Bonds being tried and I hope that their major departure from current policy - rewards that are inextricably linked to relevant performance - is taken up more widely.

Say no more

2011-02-12T21:54:00.002+13:00

In his dissenting opinion for Citizens United v. Federal Election Commission, a case that gave the notion that money equals speech and corporations equal individuals the imprimatur of the Supreme Court, Justice John Paul Stevens went so far as to make a sort of bitter joke out of the whole thing: "While American democracy is imperfect, few outside the majority of this Court would have thought its flaws included a dearth of corporate money in politics." Murdoch Triumphant (subscription), by Marvin Kitman, Harper's Magazine, November 2010

Foreign Aid for Scoundels

2011-02-04T23:24:00.005+13:00

Wiliam Easterly writes:

[T]he nations and organizations that donate and distribute aid do not care much about democracy and they still actively support dictatorships. ... [T]he French government continued to aid the Hutu government [of Rwanda] even after the genocide had become public knowledge. Foreign Aid for Scoundrels, William Easterly, 'New York Review of Books', 25 November 2010

How does this happen? One reason is institutional inertia:

Aid agencies exist to give aid, so they must keep the money flowing. The department of an aid agency assigned to help a country may not get a budget next year if its officials don't disburse to the country's ruler this year; so they hand out funds no matter how autocratic he is.

And it's a fact that institutions have objectives that can have little to do with their lofty mission statements. Indeed, their over-arching goal, the one that over-rides all others is that of self-perpetuation. How could it be otherwise? As in biological evolution, considerations such as well-being are important only insofar as they they influence survivability. Since funding determines survivability of institutions, and since nobody bothers to check (pdf) the performance of institutions, let alone reward them according to their success, the current, corrupt, destructive aid regime is an inevitable result.

This is where Social Policy Bonds could make a difference. Under a bond regime, organizational existence would not be taken as a given. In a neat reversal of the current system, the efficient achievement of a targeted outcome (the welfare of a poor country, say) would determine the structure and nature of the organizations that pursue that goal. If any agency trying to improve the welfare of a poor country's people were inefficient, it would lose funding by investors in the bonds. The structure, composition, and all activities of all agencies would be totally subordinated to the bonds' targeted goal.

Of course the Social Policy Bond principle can be applied to the welfare of people in the rich countries too, where there is plenty of inefficiency and the system of poor people subsidising the rich is a long-established tradition (see my posts aid for big business, fisheries, and energy and New Zealand's policy of subsidising movie tycoons). It can also be applied to global challenges, such as climate change or, indeed, any catastrophic event.

It won't be though. The Social Policy Bond idea has been in the public arena for more than 20 years now. The level of interest from individuals, the academic world and think-tanks is heartening; but from policymaking institutions - well, the word 'nil' perhaps overstates their enthusiasm for this (or any other) idea that threatens their funding.

Different or divergent?

2011-02-01T11:16:00.003+13:00

The protests in Tunisia and Egypt are not difficult to explain. Rising aspirations are colliding with the inability and unwillingness of governments to meet them. The interests of the politicians and the other pillars of the establishment (the police, the military) are not different from those of their people but, increasingly, in conflict with them. And there's no mechanism, other than by revolution, by which the widening gap can be closed. So it's not just that people's expectations aren't being met under the current regime; it's that the regime is systemically incapable of aligning itself with those expectations.

It's not that different in the rich countries. Our policymaking is in thrall to special interests; mainly big corporations, trade unions, wealthy individuals, and their lobbyists. Policies that turn out to be counterproductive (to put it mildly) are not just implemented, which would be excusable, but they persist. So we see agribusiness corporations and wealthy landowners in Europe and the US subsidised by taxes on the poor to the tune of billions of dollars annually: not just for a short time during which there is a transition to saner policies, but for decades. Our collective response to the unsustainability of ludicrous policies has been to borrow more money to keep them going; to prop up a corrupt system, at all costs to everyone and everything except the special interests. The special interests are the only winners. The losers are ordinary people, our social environment, and our physical environment.

It doesn't have to be like this. Instead of the special interests dictating policy we could find a way of orienting our politics to society's interests rather than those of the powerful. This is where outcome-based policy in general should play a role. Social Policy Bonds are one way by which all government activity and funding would be subordinated to the greater good. Under a Social Policy Bond regime, government would do what it's good at: articulating society's goals, and raising the revenue for their achievement. These goals would be expressed not, as today, in terms of vague, high-sounding but unverifiable ideals, but in terms of quantifiable outcomes, whose achievement would be inextricably bound to improvements in social and environmental well-being. So, rather than target 'economic growth', say, or GDP per capita, we'd be targeting things like universal literacy, or reduced crime rates, or a cleaner environment. We'd target ends, rather than the supposed means of achieving these ends.

No longer would policy, despite the best intentions of the hard-working people in our government agencies, drift away from the the concerns of ordinary people and align itself with those of large corporations and other special interest groups. Policymaking under a Social Policy Bond regime would be entirely subordinated to society's wishes. Rewards would benefit only those who help make such wishes a reality. Only when the interests of government and people are aligned can we be sure of avoiding north-Africa-style turmoil and social collapse.

Accountants shape society

2011-01-24T21:30:00.003+13:00

Who, any more, sees social well-being as anything other than a set of numerical variables to be optimised, subject to financial constraints?

Patients are to be told to examine themselves at home and email their GP with the results rather than meeting face to face. They would send in a short message describing symptoms which would be answered by a doctor between appointments or at the end of the working day. Now you must email your GP, Sophie Borland, ' [UK] Mail Online', 24 January

Perhaps because easily quantified units of manufacturing output used to be strongly correlated with well-being, we tend to think that something like Gross Domestic Product per capita is a reliable indicator of social welfare. An extrapolation from the corporate sector seems to be going on. Corporations measure their success almost entirely in terms of financial variables; with considerations such as market share or employee welfare only really entering the picture insofar as they affect the long-term financial figures. Any negative impacts of their activities that can be successfully offloaded onto society or the environment will be - and have been, spectacularly so in recent years by the financial sector. All that matters is the numbers. Extrapolating from this, we tend to think that corporate success equals a society's success. It isn't true though. Apart from the non-market social and environmental costs of corporate activity there is, increasingly relevant, the concentration of the financial rewards into ever fewer hands.

It's up to politicians to articulate society's concerns, to regulate the corporations, and to redistribute according to society's wishes. And it's failing. Even when it tries, as with the UK's National Health Service, it apes the corporations in choosing a narrow range of micro-indicators as a way of measuring success. Increasing a doctor's throughput, measured in terms of numbers of patients dealt with per day is, like targeting hospital waiting lists, a waste of time. These indicators are too narrow and too easily manipulated to do much good. We should be targeting broad health outcomes: things like longevity, infant mortality and Quality Adjusted Life Years. Unfortunately, government takes the current institutional structures as given, and applies a set of accountancy-type objectives to them. The incentives, as with doctors reading emails, are to satisfy pre-determined criteria - to tick boxes and apply algorithms - rather than to consider the overall health of the patient.

A Social Policy Bond regime would be different. Under a bond regime, broad outcomes that are meaningful to real people (as distinct from corporations) would be explicitly targeted. Any institutions that arise as a result would be well advised to subordinate all its activities to achieving these social goals, or it will find its bonds bought up by a more efficient investor.

Shambles

2011-01-21T13:40:00.002+13:00

There are two simple facts about climate change that are worth emphasising. First, climate change could devastate animal, plant and human life across the planet. Second, we're doing nothing to prevent it. Actually, 'nothing' might be an overstatement: we're still encouraging greenhouse gas emissions through subsidies on fossil fuel extraction and consumption. And for all the endless, divisive, bureaucratic wrangling, we're not actually cutting back global emissions. Elegant so-called solutions, apart from diverting intellectual resources away from the actual problem, attract fraud of the sort that is technically illegal, or are designed to be gamed by the major players.

My role here is not to criticise, but to offer a better solution than those currently on offer. Let's state another simple fact: if we want to reduce climate change, then we ought to reward people who reduce climate change. Definitions are crucial, but there's no need to go into detail here. 'Climate change' can be defined to include physical, biological and financial variables (and rates of change of variables), and 'reduce' can be defined in terms of those costs. What is important is to to set up systems that will see climate change, however defined, reduced. But how are we to convince people that the inevitable costs of preventing climate change are worth paying? The many vested interests who are willing to take refuge in the scientific uncertainties have largely blocked any meaningful international agreement. Well, one huge advantage of a Climate Stability Bond regime is that it wouldn't need to persuade the vast majority of people that climate change is actually happening. Instead, it transfer the risk of doing too much or too little to those willing to bear it, in return for big rewards if they call it correctly. Another is that whereas scientific uncertainty (and there are some huge ones, over the role of clouds for instance, or methane clathrates) could dramatically undermine the success of the current approach, a bond regime would simply absorb such uncertainty through the market for the bonds. The current approach requires scientists to take a position now on physical and biological relationships that just cannot be identified and quantified. Climate Stability Bonds would adapt to our rapidly expanding knowledge.

It's clear that no better solution is on offer. Resources are going instead into gaming the current approach or defending against climate change - which is something that only rich countries can afford to do (and then, only partially). Kyoto, Cancun and all the rest are a distraction. They are "policy as if outcomes don't matter in the least". They represent payment for activity rather than results. They are doomed to fail, and the outcome will be disastrous for many millions of human beings.

Large organizations are not human beings

2011-01-11T22:27:00.002+13:00

Large organizations aren't human beings. More pointedly, their success does not inevitably mean improvements in human well-being. I am glad that former US labour secretary, Robert Reich, realizes that fact.

“Corporate America is in a V-shaped recovery.... That’s great news for investors whose savings are mainly in stocks and bonds, and for executives and Wall Street traders. But most American workers are trapped in an L-shaped recovery.” Robert Reich, quoted in Deepening crisis traps America's have-nots, by Ambrose Evans-Pritchard, 'Daily Telegraph', 11 January

In former decades it was perhaps reasonable to identify corporate health with social well-being. But that doesn't apply now. Government, with its power and responsibility, would do better to target directly social outcomes that are more strongly correlated with well-being than the financial status of large corporations (or what passes for their financial status under a debased accountancy system).

Social Policy Bonds are one way in which governments could target essential elements of social welfare directly. Elements such as: a cleaner environment, universal literacy, better health and housing outcomes. Under a bond regime, governments would define and target such goals, and raise the funding necessary for their achievement. But it would be up to investors in the bonds to work out the best ways of achieving them. Corporations, some of them large and wealthy, might well become larger and wealthier under a bond regime (though new types of organization can be expected to arise), but if they did they would be doing so only because they are efficient at achieving society's aims, rather than, as under the current system, their own.

The unimportance of being right...

2011-01-11T00:48:00.005+13:00

...if your organisation is a monopoly. Discussing a book by Richard Aldrich about about the UK's intelligence agency, Government Communications Headquarters, Bernard Porter write:

The list Aldrich gives of GCHQ's...failures of prediction doesn't make for comfortable reading: the Korean War; the Russian atomic bomb; the Soviet invasion of Czechoslovakia; the Yom Kippur war; the rise of Middle Eastern terrorism...; the overthrow of the shah of Iran; the Falklands invasion; the end of the Cold War; the attack on the Twin Towers; and the non-existence of WMDS [in Iraq]. Thank God for Traitors (gated), Bernard Porter, 'London Review of Books', 18 November 2010

Another example of policy as if outcomes didn't matter: these agencies secure funding merely because they secured it in the past. Like agribusiness and wealthy landowners, or large corporations in general, the subsidies these organizations receive go to support their own self-perpetuation. It's the Special Interest State, and ordinary people aren't special interests. We urgently need to re-align policy priorities so that the undoubtedly hard-working and well-intentioned people employed by GCHQ and the others, have incentives to do more useful work instead.

Social Policy Bonds are one possible way of bring about that realignment. Under a bond regime organizations wouldn't receive funding just because they received it the previous year. Funding decisions would be made by investors who would be rewarded for choosing only the most efficient agencies. The current system allows large corporations to subvert the market and government agencies to monopolise the supply of many public goods and services. Efficiency, effectiveness and the public interest come very low on the list of priorities. A bond regime would be entirely different. It would inextricably tie rewards to outcomes. And those outcomes - in contrast to the current system - would be meaningful to ordinary people, rather than special interests.

The gap widens

2011-01-03T22:04:00.002+13:00

Another year, and the gap between policies and meaningful outcomes continues to widen, as does the gap between policymakers and the people they are supposed to represent. Much of the problem lies in an almost total refusal by policymakers to be open about the costs of their policies. The environment and future generations look like being the most grievous victims. Policies that benefit the rich, large corporations and the present generation of voters at the expense of everyone and everything else are always likely to be made under the current regime, where policymaking is so complex there need be no transparency about who are to be the real winners and losers. Policy goals are unstated, vague, uncosted or mutually conflicting and there is no follow up as to the success or failure of particular initiatives.

Social Policy Bonds offer a transparent alternative. Being entirely focused on outcomes that are meaningful to ordinary people, they are far less likely to be hijacked by corporations and their lobbyists, because outcomes are accessible to all - unlike the arcana of current policymaking.

So where are Social Policy Bonds going? They have been in the public arena now for more than twenty years, and I know of nobody who's actually issued any. I see my present role as one of maintaining my websites and making my work available to all, while standing by in case anybody does want advice. Right now I'm working on updating my book (a little) so that it can be marketed a bit more effectively.

Lies, damned lies, and policymaking

2010-12-30T22:05:00.003+13:00

An ethical doctor decides to examine, discreetly, a patient who is being looked at by other doctors:

[S]he’s concerned that, like many patients, he’ll end up with prescriptions for multiple drugs that will do little to help him, and may well harm him. “Usually what happens is that the doctor will ask for a suite of biochemical tests—liver fat, pancreas function, and so on,” she tells me. “The tests could turn up something, but they’re probably irrelevant. Just having a good talk with the patient and getting a close history is much more likely to tell me what’s wrong.” Of course, the doctors have all been trained to order these tests, she notes, and doing so is a lot quicker than a long bedside chat. They’re also trained to ply the patient with whatever drugs might help whack any errant test numbers back into line. What they’re not trained to do is to go back and look at the research papers that helped make these drugs the standard of care. “When you look the papers up, you often find the drugs didn’t even work better than a placebo. And no one tested how they worked in combination with the other drugs,” she says. “Just taking the patient off everything can improve their health right away.” David H Freedman, quoting Dr Athina Tatsioni in Lies, Damned Lies, and Medical Science, 'The Atlantic', November 2010

A potential difficulty with Social Policy Bonds is that they rely, almost entirely, on meaningful correlations between measured variables and that which society wants to target: most likely, some component of well-being. It's a difficulty, because people can game the system, complying with the letter, but not the spirit, of any defined target-setting.

What's not so obvious is that it's an even bigger problem under current policymaking regimes. In our industrial societies, with their large, complex economies, government bodies and non-governmental organizations have extremely complicated tasks. Increasingly, and of necessity, government already relies on numerical indicators to manage its resource allocation. and largely supplanted families, extended families, and communities in supplying a range of welfare services to a large proportion of their populations. .

But this use of indicators is relatively recent, unsystematic, unsophisticated and incoherent. Indicators such as the number of medical tests performed, or the size of hospital waiting lists don’t measure what matters to people or are prone to manipulation. Even when numerical goals are clear and meaningful they are rarely costed, they are almost always too narrow, and they are largely chosen to mesh in with the goals and capabilities of existing institutional structures. Those broad targets that are targeted with some degree of consistency tend to be economic aggregates, such as the inflation rate, or the rate of growth of Gross Domestic Product — which has come to be the de facto indicator par excellence of rich and poor countries alike. But GDP’s shortcomings as a single indicator of the health of an economy are serious, and widely known. Government would do better to target ends rather than means: social and environmental outcomes that are meaningful to natural persons, as against government agencies and corporate bodies, rather than growth rates or other abstract economic indicators.

It would appear that the choice will increasingly be between (a) the current de facto targeting of per capita GDP along with an almost random array of narrow, easily manipulated indicators that have no necessary relationship to societal goals, and (b) the targeting of consistent, transparent, mutually supportive indicators that represent meaningful social outcomes, under something like a bond regime.

Social Policy Bonds are not perfect, but they still, I believe, would be better than the current system.

Government doesn't do diversity

2010-12-18T18:44:00.004+13:00

Discussing some of the perils of the internet, Nicholas Carr mentions Frederick Taylor's system of scientific management. It brings great efficiency advantages to manufacturing, but took away the employee's need to:

'make his own decisions about how he did his work. ... After Taylor, the laborer began following a script written by someone else. ... The messiness that comes with individual autonomy was cleaned up, and the factory as a whole became more efficient, its output more predictable. Industry prospered. What was lot along with the messiness was personal initiative, creativity, and whim. Conscious craft turned into unconscious routine. Nicholas Carr, The Shallows (page 218)

The trade-off probably works in society's favour when the productivity gains are sufficiently great, and when employees have other outlets for their creativity. Where society stands to lose, though, is when ostensibly scientific scripts are applied inappropriately, and when there is no possibility of their being superseded either by better scripts, or adaptive behaviour. I think this applies to much of current policymaking, where we commonly see approaches that have been tried, tested and found to be inefficient or useless being applied again and again to social and environmental problems.

This need not be a total disaster, so long as there remains in the policy arena some approximation of the 'creative destruction' that characterises perfectly competitive markets. But, sadly, that condition applies less and less to our more serious global or national problems. Government wants to apply its monopolistic approach not only to those areas, such as provision of public services, where that can work well, but also to challenges, like climate change, that urgently demand diverse, adaptive approaches. Government at all levels increasingly takes away our autonomy and writes the script on our behalf. This tendency is partly a fear of litigation where, so long as you can prove that you've ticked all the boxes, you are covered. But it's also simple inertia, whereby government agencies react rationally to the incentives to enlarge their powers.

One remedy might be Social Policy Bonds, whereby government can still set targets and raise the revenue necessary to achieve them. But it can disengage from actually achieving them and from stipulating how they shall be achieved. For complex problems, where our current knowledge is scanty, and where a mosaic of different approaches is going to be necessary, we need to encourage 'creative destruction': that is, experimentation, with the termination of failed trials. We need, in short, diverse, adaptive approaches, of the sort that government (or any single, large organisation) cannot take. A bond regime, where highly motivated investors would always be on the lookout for better ways of doing things, could be the way forward.

Going where government cannot go

2010-12-14T00:30:00.003+13:00

In many policy areas, government does about a good a job as we could expect any single agency to do. Government does well when it's clear what sort of action is required, and when it alone has the organising capacity and authority to get things done. These are generally areas where the problems are obvious, have obvious causes, and where the ways of solving them have been tried, tested and (by and large) successful. Much of the low-hanging fruit has been picked. In most developed countries sanitation is universal or at least widespread, as are literacy and basic health, education and housing. But there are still serious problems, which our current political system seems incapable of addressing.

Perhaps most important are the potentially catastrophic events, often man-made, which our political system is adept at postponing into a fast-approaching future. But, as well, and equally as significant to many, are those policy areas where government has done a lot, but is trying to do more - and failing. And, because it's still trying, it has crowded out initiatives from others, so that the problems remain unsolved.

Take crime, for instance. Most of the heavy lifting has been done. By the standards of even 100 years ago rates of almost all crime are low. But crime still blights many lives and we could perhaps open up crime prevention to diverse, adaptive approaches, of the sort that government cannot follow. Similarly with infant mortality, domestic violence, basic education, health and, more broadly, poverty. Government probably can't do much more than it's already doing so long as it monopolises the actual attempts to alleviate these problems. The single agency, top-down approach tends to be inflexible, incapable of adapting to differing or rapidly changing circumstances.

Government can't solve these problems, but it can tax its population under the pretext of trying to do so. And that's where Social Policy Bonds could enter the picture. Rather than try to reduce crime still further (or raise literacy to 100 percent, or whatever), which it is not doing efficiently, it could contract out the achievement of these goals to the private sector. Under a bond regime it would still be aiming for the same goals, and it would still be the ultimate source of revenue for funding their achievement, but it would be investors in the bonds who would actually achieve them. They would be motivated by the consequent rise in the value of their bonds, as they help achieve the targeted goal.

The same reasoning applies at all levels, and to problems, such as the ending of war or the avoidance of catastrophe, where government hasn't even picked the low-hanging fruit.

For more about Social Policy Bonds, click here. For the application of the Social Policy Bond principle to catastrophe, click here.

What drives policy?

2010-12-09T21:43:00.002+13:00

What does drive policy? Ideology, soundbites, emotion, personality, and institutional inertia are all prime motivators. Another is the desire to be associated with glamour. As the UK Government looks at spending £30 billion of taxpayer funds, which it can ill afford, on high-speed rail, it's all too easy to see the appeal of the grandiose, at the expense of the public, the environment...well, everything really.

The macho culture of local and national politics means that councillors, county surveyors and politicians want to be associated with grand projects: building a bypass, or a bridge, or a tram or fast train line. Car Sick: solutions for our car-addicted culture, Lynn Sloman, 2006

Transport is typical policy-as-if-outcomes-are-irrelevant territory. You might think that poverty, housing, health and education are more obvious policy areas: in which government intervention can bring about meaningful improvements in wellbeing for society's most disadvantaged people. You might also think, with me, that if it's worth spending billions of pounds to upgrade rail links that will shave a few minutes off journey times, then the private sector should be bear all the risk. But no, politicians feel they must get in on the act.

A Social Policy Bond regime wouldn't put up with such wasteful nonsense. Transport is a means to various ends, not an end in itself. Government should target those ends, and let motivated investors in Social Policy Bonds work out the best ways of achieving them. Clarity, in particular about the distinction between means and ends, is missing from today's policymaking environment. The result is we get lumbered with expensive, futile projects, while those things that government should be doing - and that only government can do well - are too often neglected.

Safe prediction: Cancun will fail

2010-12-06T11:55:00.005+13:00

It's too early to say whether the Cancun climate change summit will be deemed a success or not. By keeping expectations low, the myriad bureaucracies involved will be able to term any agreed string of words a victory. One thing though is certain: in any meaningful sense, Cancun will fail. How can I be so sure? For one thing, it is not concerned with climate change: it is entirely preoccupied with (1) political jockeying and finger-pointing, and (2) greenhouse gas emissions. For another, any agreement or commitment (or, more accurately, declared commitment) will be based on current science; it will not have the capacity to adapt to our rapidly expanding scientific knowledge. Bureaucracies understand top-down, one-size fits all, centralised decision-making. They don't understand diverse, adaptive approaches, and they certainly don't like relinquishing control to people who might be better at actually getting things done than government agencies or their pals who run gigantic corporations. Their real expertise at the international level is in making declarations of intent and organising the transfer of large sums of cash from taxpayers in the rich world to such corporations and third-world elites.

So is there anything positive I can suggest? I've talked and written about Climate Stability Bonds for many years now. As far as I know, nobody's thinking about issuing them. Yet they are the only instrument that I've heard of that can address the doubts (genuine or otherwise) about whether climate change is happening, the huge uncertainties over its likely effects and the best ways of dealing with it, and our rapidly expanding scientific and technological knowledge. Even more important, they are the only suggestion I've seen that will subordinate all policies and all activities and intervention to what we actually want to achieve, rather than to the supposed means of reaching it: a stable climate. That's a versatile and adaptive goal, which can encompass plant, animal and human health, and physical, social and financial targets and ranges.

Current policy, including Cancun, will focus on net emissions of those gases thought to be greenhouse gasses. That's not the same as climate stability. So, in the unlikely event of an agreement in Cancun with which the signatories will actually comply, you can be sure that in any meaningful terms the summit will fail.

Innovation is a threat to the public sector

2010-11-25T22:26:00.002+13:00

But the benefit of competition is not just that it serves customers’ needs today, but that it is a mechanism for adapting to what they will need tomorrow. The dynamism of a market economy comes from innovation in products and processes, and radical innovation in products and processes often – in fact usually – comes from outside the existing market structure. Apple is changing the nature of the phone industry, Amazon the book business. But anyone who had approached these industries from the marketing or the legal standpoint would have concluded that there was enough competition already. Radical innovation rarely comes from within, John Kay, 'Financial Times', 24 November

There are bodies, whose weaknesses Mr Kay discusses, that are charged with improving competition in the private sector. And it's true that they are often needed. It's unfortunate, though, that there's no such mechanism for public sector monopolies, because it's these bodies, typically government agencies, that are supposed to bring about social outcomes that, from a broad perspective, are far more important than reasonably priced books or phone calls. We rely on various levels of government to, for example, relieve poverty, reduce crime rates or insure against environmental - or financial - catastrophe. The absence of innovation in achieving these outcomes is an embarrassment. Yes, there have been some minor changes in the identity of the service-deliverers, some contractings-out and quite a few privatisations. But on the whole, the contrast between the private and sectors is stark. Our political system, like any other institution, has as its over-arching goal that of self-perpetuation, and its interests are not only different from those of ordinary people; they are often in conflict with them.

Perhaps Social Policy Bonds could re-align the goals of our policymakers with those of the citizens they are supposed to represent. Under a bond regime how outcomes are delivered, and who delivers them, would be less important that the fact of their delivery. There would be less discussion about structures and spending; instead there'd be a constituency of highly-motivated investors whose goals would be entirely congruent with those of society. By maximising their own rewards, bondholders would be necessarily achieving social goals, whether they be local, national or even global, as efficiently as possible. Innovation, to investors in Social Policy Bonds, would be an opportunity not, as under the current system, a threat.

Catastrophe avoidance: we're not doing it

2010-11-15T11:46:00.004+13:00

Stepping back from the society's turmoil for a moment, it's pretty clear that we aren't developing ways of dealing with our social and environmental problems. The negative impacts of a person or firm's profit-making used to be either small, or uncertain, or simply ignored because society as a whole counted for too little against the power of wealth. There was much distress, then, as costs of economic activity were socialised, while most of the gains accrued to the few. In response, we have laws, rules, and regulations. But the disparity between the wealth of the corporate sector and the ever more constricted and degraded lives of most individuals has rarely been so striking as today. On the whole, the aggregation of corporate incentives is not, these days, seen as improving the quality of life of most of the population. The planet is too small for the corporate sector's bye-products, social and environmental, to be absorbed or ignored as in the past. And corporate incentives now influence (to put it mildly) much of government: the form of organisation whose legitimacy is entirely based on its role in enhancing the lives of most of its citizens. No wonder, then, that we are facing multiple crises, taking the forms of cynicism and despair about politics, and threats of massive financial, economic and environmental disruption.

In response, I believe we need to make a conscious effort to re-align incentives. Society and the environment are too complex and rapidly changing for market failure to be addressed by laws, regulations and small-scale tax or price adjustments. We urgently need to give priority to things that really matter. I'd target, above all else, the avoidance of catastrophe, however caused.

Social Policy Bonds are one way in which we can give catastrophe avoidance the priority it deserves. It's clear now that it needs explicitly to be targeted, and Disaster Prevention Bonds are one way of rewarding people for maintaining a habitable planet. How would they work? Governments (and non-governmental organisations) would set up a fund that would be used to redeem bonds, issued on the open market, that would become valuable after a sustained period during which no major disaster has occurred. Investors in the bonds would have incentives to anticipate potential catastrophes and seek out those ways of avoiding them that are most cost-effective. The advantages over the current way of doing things are many: The exact nature of the catastrophe need not be known in advance. We'd stimulate a diverse, adaptive range of approaches. Cost-effectiveness is built into the bond mechanism. In effect, we'd be creating a new, protean, type of organisation: one that, in contrast to the current multiplicity of, mostly, ineffective bureaucracies, would be motivated not merely to turn up for work and perform various activities, but actually to achieve an explicit, urgent, and vital goal: the survival of human beings on planet Earth.

Why wait centuries?

2010-11-06T23:14:00.002+13:00

The late Tony Judt, historian, in an interview published in The Nation, 17 May:

Democracy has always been a problem. The truly attractive features of the Western tradition that we accidentally - and it really is accidentally - get the benefit of are the rule of law, liberalism and tolerance, all of which are virtues inherited from predemocratic societies, whether they were based in eighteenth-century Anglo-American aristocratic individualism or nineteenth-century European forms of a type of developed postfeudal legal state.

Indeed, the accidental effects of human actions can be beneficial as well as disastrous. Adam Smith's Invisible Hand generates material benefits, as does government planning. But they also create social and environmental problems, and only partly because of market failure. In my view, the world is too small now for the solution of social and environmental problems to be left to chance. And, once we have achieved, however haphazardly, virtues such as the rule of law, liberalism and tolerance, and once we see recognise their importance, we can consciously set out to maintain them.

This is what Social Policy Bonds could do. One of the great advantages of the bond approach is that we can encourage people to achieve social goals without anyone knowing in advance how they will do so. Issuers of 'Rule of law' Bonds could target the achievement of rule of law, in societies that currently don't have it; and its continuance in societies that do. The accidental achievement of rule of law (and liberalism and tolerance) in the societies that have it took centuries of conflict and bloodshed. We cannot know how best to achieve these virtues in remote, complex societies, nor how to sustain them in more fortunate societies. But we can offer incentives for people to do so. Yes, defining what we mean by 'rule of law' poses difficulties. But the alternative, waiting for societies to achieve it accidentally is unlikely to be any easier.

No way...

2010-11-02T21:42:00.002+13:00

No way to check emissions puts climate deal in danger reads the header of a recent article by Fred Pearce in 'New Scientist'. One example:

China does not record CO2 emissions from its small coal-burning factories and long-standing fires in mines which may result in under-reporting by as much as 20 per cent. The uncertainties for other greenhouse gases are even greater.... 'New Scientist', 9 October (page 12)

Another article, Dead Oceans, in the same issue (page 37) talks about the possible consequences of oxygen-deprived dead zones in the oceans; a result of warmer waters and the smaller quantity of dissolved oxygen they can contain. These regions:

...could come to host bacteria that emit nitrous oxide, a powerful greenhouse gas. Working out the likely extent of such feedback processes...will be a major preoccupation for scientists in the coming years.

We might not have those years. Our policymaking systems are incapable of dealing with a problem like climate change. Focussing as they do on processes and institutions they seek, at their best, to identify the causes of problems before they set up institutions supposed to solve them. Of course, these institutions develop their own agenda, and the people working for them aren't paid in ways that reward successful solutions but, given sufficient funding and sufficiently robust knowledge of the relationships between cause and effect, and plenty of time, this mechanism has been known to work.

Sadly, though, the deficiencies of such an approach become serious flaws with potentially disastrous challenges like climate change. The relationships, as the two snippets quoted above suggest, are just too uncertain and complex. Our knowledge of them, though expanding rapidly, is too sparse to generate the buy-in required to deliver effective solutions. We need diverse solutions that can adapt to changing circumstances and our expanding knowledge. And we need to target the outcome we want to achieve, rather than waste years trying (and, most likely, failing) to identify the important scientific and economic relationships before we take effective action.

That's where Climate Stability Bonds could help. They'd be issued by some global organisation, and be backed by contributions from national governments. They would define some climate target, probably in terms of a combination of physical, biological and financial indicators. The bonds would reward the maintenance of a climate whose index fell within defined boundaries. It would be up to investors in the bonds to decide how best to deploy resources to achieve our goal. They would have incentives to do so as cost-effectively as possible. It would be up to them to keep abreast of all the important science. They would adapt their approaches as our knowledge expands. Every aspect of this behaviour would be far, far better than the current approach, which, to put it mildly, is not working.

Insanity

2010-10-30T23:09:00.004+13:00

Even little New Zealand feels it has to subsidise the rich:

The extra [NZ]$20 million subsidy for The Hobbit will be paid as a tax break on a pool of profits to be shared by actors and other workers on the films, including director Sir Peter Jackson, it is understood. The Government has kept under wraps details of the extra cash incentive to Warner Bros, which comes on top of the 15 per cent subsidy worth about $65m on the budget for the two movies of about $670m. Prime Minister John Key said yesterday that commercial confidentiality meant he could not say what the money would go on. Source

This is rancid politics. It's government pandering to the rich and glamorous with taxes paid by ordinary people. It's quite outrageous.

The problems are systemic

2010-10-27T22:24:00.002+13:00

Johann Hari sums it all up in an article about US politics, but which could apply to all the democratic countries:

If you want to run for national office in the US, you have to raise huge sums of money from corporations and very rich people to pay for the adverts and the mailings that get you on the ballot and into office. These corporations will only give you money if you persuade them that you will serve their interests once you are in power. If you say instead that you want to prevent anything destructive they are doing to ordinary people, or tax and regulate them, you will get no money, and can't run. As the Wisconsin politician Ed Garvey puts it: "Even candidates who get into politics with the best of intentions start thinking they can't get re-elected without money. Senators get so reliant on the money that they reflect it; they stop thinking for themselves, stop thinking like the people who elected them. They just worry about getting the money." ...[W]e have to be honest: the continuities with [President George W] Bush are far more pronounced than the differences. The real reason Obama has let us down - and endangered us, 25 October

Against this systemic flaw, what can Social Policy Bonds offer? The clue is in my tag line: Policy as if Outcomes Mattered. The current system is too indirect. Apart from representing our views and raising revenue, government and officials are employed by organisations that are supposed to achieve these goals: government agencies, or contractors working for them. This obscures the relationship between intention and achievement. It's particularly corrosive when there's no correlation between social outcomes and the rewards to the people who are supposed to be achieving them. The system is inherently cynical: if a government agency, at any level, is too successful in, say, reducing crime, or raising literacy, it's likely to shrink in size, with its funding reduced accordingly.

It's no surprise then that, with such a loose connection between government and outcomes, ordinary people are turned off by the whole exercise. Those who do take an interest are those who are paid to: lobbyists, usually employed by large organisations: corporations, trade unions, religious bodies, or government agencies themselves. These organisations have as their overarching goal, not the interests of society, but their own self-perpetuation. Who loses? Ordinary people. Who wins? The wealthy organisations, as Mr Hari elouqently points out.

Social Policy Bonds could help. Under a bond regime, society's goals would have to be declared at the outset. We'd focus on outcomes. Not the structures or funding of government agencies; not the personalities, peccadilloes or ideology of prominent politicians; and not the high-sounding, emotional, appeals to patriotism or other sound-bites, crafted solely to garner votes under an inherently corrupt system. Government's role would be to articulate our goals, and to raise the revenue required to achieve them. But, because our politics would be expressed in terms of outcomes and their costs, ordinary human beings could participate in the policymaking process. And end in itself, but also a way of engendering buy-in - something that we need if we are, as a society, to meet our urgent social and environmental challenges.

Outrageous

2010-10-19T00:41:00.003+13:00

[President Obama's] political difficulties began with the revelation that AIG, which had received $170 billion from the government, had paid out $165 billion in bonuses to the division that had brought the company down. [Treasury secretary Timothy] Geithner had known about the bonuses but insisted there were no legal grounds to block them. (It then came out that Geithner had pressured Senate Banking Committee Chairman Chris Dodd to insert a provision into the stimulus bill that protected the bonuses.) The Unnecessary Fall, John B Judis, The New Republic, 2 September

This is what happens when politics becomes a specialised craft; something so arcane that outsiders take no interest, out of apathy or cynicism. But it's the outsiders - that is, ordinary people - who suffer as a result.

One answer to the alienation caused by this extreme specialisation is perhaps more specialisation in the form of Social Policy Bonds. Under a bond regime, politicians would be limited to what they do best: articulating society's wishes and raising the revenue for their achievement. But the actual choice of objectives and their relative priority, would be in the hands of the public. And the public would be far more likely to take an interest: we'd be choosing outcomes. Outcomes that are meaningful to ordinary people. Targets like lower crime rates, more employment, a cleaner environment. Expressing politics in terms of outcomes is far more likely to engage the public than the (deliberately, one might think) opaque discussions about process, institutional structures and legalisms that feature most prominently in current politics. Once targets have been set, a bond regime would contract out their achievement to investors, whether they be public or private sector. They would have incentives to be efficient: the bonds would always be in the hands of those who believe they can achieve society's targeted goals most cost-effectively. A stark contrast with the current system, where most of the people working for organisations charged with achieving social goals are paid simply to turn up at the office. I refer, of course, to government agencies.

Social Policy Bonds, in short, would see politicians and the market each do what they are best at. Respectively: expressing our wishes as realizable, costed goals and raising revenue; and allocating resources to achieve these goals most effectively.

The caste of politicians

2010-10-13T23:05:00.004+13:00

Brendan O'Neill articulates our disenchantment with today's politics, commenting on the recent leadership contest for the UK opposition Labour Party:

[T]his was a decadent, neo-aristocratic affair, with various party grouplets shifting their allegiances around for no clear or rational reason, while media insiders sought to provide a political personality and narrative for Ed [Miliband, the eventual winner]. Spiked, 27 September

More than ever, politics resembles a caste system. Any causal relationship between the public's goals and actual outcomes seems more and more to be coincidental: a random occurrence, independent of the wishes or actions of the politicians.

Social Policy Bonds offer a way to reconnect the public with policymaking. Under a bond regime, instead of choosing professional politicians, people would choose the social and environmental outcomes they wish to see. Instead of government-funded ministries and departments choosing how to bring about undeclared, vague, or mutually conflicting objectives, as under the current system, a bond regime would see the spontaneous creation of a new type of organisation, whose structure and activities were entirely subordinated to society's goals.

Of course, any adjustment to such a rational system of policymaking would take time. In my book I describe a migration pathway; essentially entailing the gradual reduction in funds allocated to traditional organisations along with a corresponding expansion of funds allocated to redeeming Social Policy Bonds. It would mean a radical re-thinking of the way in which society is organised. But the alternative - the entrenchment of a political caste almost totally removed from ordinary people, and consequent alienation of even more of us from politics - would be far less edifying.

Means and ends

2010-10-10T23:41:00.002+13:00

Michael Mascarenhas asks "how do we actually measure this complex activity known as water access in subsistence communities?" and, as his article shows, it is a genuine problem. In rural Africa it's difficult to imagine any centralised system of programme funding allocation and assessment working well. The well-being of an individual or community, while it is likely to be accurately perceived by insiders, would be difficult to quantify in a way that's useful to national or NGO decision makers.

But the Social Policy Bond approach could help. Rather than try to measure such abstract concepts as 'availability', it would instead focus on, and target, the benefits that such availability will have on verifiable outcomes: infant mortality, morbidity, longevity, birth weights, to give a few possibilities. It would be a shame, I think, if the failed paradigms of the west - the implicit or explicit targeting of such close-to-meaningless accountancy-type abstractions as 'the economy', GDP etc - were to be adopted by the developing countries. They have led us astray, quite dramatically; with the full ramifications yet to be felt.

Numbers have limits

2010-10-06T20:32:00.004+13:00

The dietary guidelines for Americans should focus on whole foods and eating patterns rather than individual nutrients, argue Dr Dariush Mozaffarian and Dr David Ludwig in the Journal of the American Medical Association pointing out that this is not a radical approach at all, but a return to more traditional, time-tested ways of eating. ‘The greater the focus on nutrients, the less healthful foods have become,’ they write. Quoted in GI News

As society grows more complex and centralised, we see metrics taking over from intuition, instinct and insight. Much as we might try to define well-being in terms of numerical indicators, they are always going to be imperfect at best and in conflict at worst. We might, for instance, target an indicator like literacy for instance but, in doing so, transfer resources away from infant mortality, say, in such a way as to reduce overall social well-being. It's a difficulty for the Social Policy Bond approach, but it's also a difficulty with the current approach to policymaking.

The bonds do have the merit of forcing a focus on what policy is out to achieve, and to express these goals in terms of objectively verifiable numbers. That, in turn, would focus attention on those metrics that are inextricably linked to well-being. Lofty sounding goals ('punching above our weight', 'making us more secure', 'safeguarding the auto industry', 'saving the family farm') would be seen right from the beginning for what they are: distractions - and often very expensive distractions. A bond regime would probably then see more emphasis on safety-net measures: it is for the most disadvantaged that numerical indicators (of income, nutrition, literacy, for instance) most closely correlate with well-being. It would also show a sharper focus on reducing the probability of catastrophe (via Disaster Prevention Bonds, for instance) because, unlike under the current system, the precise nature of the catastrophe need not be specified in advance for funds to be devoted to its mitigation.

The limitations of metrics could function as a useful discipline. They would tend to concentrate government interventions on those policy areas where they can do most good: helping the disadvantaged and insuring against catastrophe. Government could limit itself to those areas without issuing Social Policy Bonds, of course. But they don't.

Don't watch this space...

2010-09-28T01:04:00.002+13:00

...well, not too avidly anyway.

My 800th post, so time once again to look at where Social Policy Bonds are heading. The answer is a little disheartening: nowhere. At least, not that I'm aware of. More dispiriting still, the distance between ordinary people and the politicians who are supposed (in the democracies) to represent them appears to be growing wider. But what about the Tea Party movement? Isn't that a genuine grass-roots, bottom-up, closing-the-gap, trend to be welcomed? At first sight, perhaps. But its funding sources raise suspicions and, more important (to me) is that it seems less interested in outcomes and more interested in the same distractions that bedevil conventional politics; foremost among them personality and ideology.

Politicians are becoming a class apart, sharing few of the concerns of their constituents. Corporations, and especially the biggest corporations, are ever more influential in determining policy. Natural persons view politicians with disdain; politics with indifference, cynicism or despair. A realignment, along the lines of Social Policy Bonds, whereby government targets outcomes that are meaningful to ordinary people cannot come soon enough.

What did they expect?

2010-09-22T03:31:00.002+13:00

An analysis published a few days ago by the campaigning group Sandbag estimates the amount of carbon that will have been saved by the end of the second phase of the EU's emissions trading system, in 2012; after the hopeless failure of the scheme's first phase we were promised that the real carbon cuts would start to bite between 2008 and 2012. So how much carbon will it save by then? Less than one third of 1%. Source

Climate change might be our most urgent environmental challenge. Or it might not. It might lead to catastrophic changes in weather patterns around the world, threatening millions of those people who are least able to adapt. Or it might not.

Our policymaking system doesn't deal well with such uncertainty. It's in most policymakers' interests to delay significant action until it becomes impossible to ignore the consequences of doing so. In similar policy areas, perhaps in most, that isn't too disastrous a policy. But there are occasions when the scale of the consequent disaster is immense.

In all these years of discussion about climate change, I haven't been persuaded that there's anything more likely to meet the climate challenge effectively than Climate Stability Bonds. Under a bond regime, the private sector would bear the consequences of over- or under-estimating the severity of the problem. And they would do so adaptively. That contrasts with the current approach, whereby policymakers employ a limited number of experts using today's science in an attempt to grapple with tomorrow's events - at a time when our knowledge of the causes and consequences of climate change is small, but expanding at a prodigious rate.

It's no wonder then that, perhaps at the unconscious level, our policymakers have decided to do nothing, other than engage in bureaucratic displacement activity. There's an unknowable, but non-zero, probability that we shall get lucky, and that this approach will prove to have been wise; but we can know that only in retrospect. And even if that were to be the case, Climate Stability Bonds, because of the way they work, would still have functioned as an insurance policy. One that could have a massive positive payoff, and one that in any event would be no more costly than the pointless rituals that signify the current way of pretending to deal with the problem.

Incentives for peace

2010-09-21T01:00:00.003+13:00

...I hear two of the wisest Israelis I know say quietly that, against all odds, these peace talks will succeed, because "we are all so tired, so weary for peace", then the Ararat test is the one to set. Can Jews and Arabs opt to forget en masse? When misery is a legacy, Peter Preston, 19 September

In truth, we don't really know whether tiredness - or forgetting, for that matter - lead to peace. Society is so complex, there are bound to be occasions when either condition could contribute to war. You might just as easily find an Israeli or Arab say "we are all so tired, so weary of being persecuted by the other side...". Which is not a gloomy hypothesis: it suggests that peace can break out at any time, regardless of expectations or the views of commentators or the opinions of political leaders.

But incentives matter, and the dice are still loaded in favour of protracted Middle East conflict. Entire bureaucracies and career pathways for ambitious politicians, arms companies and men (generally) of so-called religion depend depend on this and other conflicts continuing into the indefinite future. These people aren't not necessarily evil. They, for the most part, didn't deliberately or even consciously perpetuate the conflict or the conditions that keep it going. But they do depend on its continuing.

And that's why the Social Policy Bond principle can break the circle. The politicians, the generals, the men with beards and countless others are reacting rationally to the incentives on offer. Those incentives are geared toward perpetuating conflict, and not only in the Middle East. Changing these incentives so that peace is rewarded instead of penalised could change everything. And a bond regime could do that. The backers of Middle East Peace Bonds don't need to work out who or what is responsible for the conflict; they don't need to devise road maps or put their livelihoods (or lives) on the line. All they need to do is to define the sort of peace they want to see, and pump as much of their own and other people's money into redeeming the bonds once their peace target has been achieved and sustained. It would be up to investors in the bonds to work out the most effective and efficient ways of reaching that target. They would probably deploy a diverse range of approaches; they would have incentives to explore, implement and adapt the more promising of these, and to terminate the failures. The bonds' backers would be recasting the incentives to encourage peace making, and if there were sufficient funds behind them, there's no reason why they would not succeed.

People casually talk about conflicts that are 'intractable'. I say, read up about the 300-year conflict between England and Scotland, then take a look at the Anglo-Scottish border. It's pretty quiet these days.

What drives policy?

2010-09-14T17:47:00.002+13:00

Sometimes rationality takes a back seat:

Based on surveys ...the top five worries of parents are, in order:

1. Kidnapping
2. School snipers
3. Terrorists
4. Dangerous strangers
5. Drugs

But how do children really get hurt or killed?

1. Car accidents
2. Homicide (usually committed by a person who knows the child, not a stranger)
3. Abuse
4. Suicide
5. Drowning

Quoted by Bruce Schneier, orignally from NPR

Unfortunately, policy is often made on the basis of public perception, rather than a cool, rational appraisal of the facts. It's a widespread problem:

…policies are often adopted on the basis of less careful analysis than their importance warrants, leaving wide room for mistakes and misperceptions. Forces of knowledge destruction are often stronger than those favoring knowledge creation. Hence states have an inherent tendency toward primitive thought, and the conduct of public affairs is often polluted by myth, misinformation, and flimsy analysis. Source (pdf)

Social Policy Bonds could make a difference here. We react to events impulsively and irrationally but we do so for a reason: generally, to return to the status quo ante. Often, in our irrationality, we overreact. 'Too much, too late', is the common, and destructive, impulse. A bond regime, in contrast, would supply incentives to achieve the same goal, but more rationally. So, for instance, if our goal is to minimize the dangers to children, we could issue Social Policy Bonds that would aim to reduce the numbers of people dying or suffering serious injury, from any cause, before the age of 18. This goal would be stable over time, despite events that in today's environment would sway politicians and lead to irrational policy. But at the same time, investors in the bonds would have incentives to react rationally and efficiently to genuine changes in the number and severity of threats to children.

The American ruling class

2010-09-10T02:56:00.004+13:00

Today, few speak well of the [American] ruling class. Not only has it burgeoned in size and pretense, but it also has undertaken wars it has not won, presided over a declining economy and mushrooming debt, made life more expensive, raised taxes, and talked down to the American people. Americans' conviction that the ruling class is as hostile as it is incompetent has solidified. The polls tell us that only about a fifth of Americans trust the government to do the right thing. The rest expect that it will do more harm than good and are no longer afraid to say so. America's Ruling Class -- And the Perils of Revolution, by Angelo M. Codevilla, 'The American Spectator', July-August

Even years after policies have been implemented, it's often difficult to know whether they were right or wrong. For that reason alone, public buy-in is increasingly necessary, as society becomes still more complex and interdependent. One reason such buy-in is difficult to bring about in today's policymaking environment is the casting of policy in terms of activities, lofty but vague ideals, spending patterns, and arcane legislative decisions. It's difficult for ordinary people to understand and follow the policymaking process.

Social Policy Bonds could help generate more public participation and more buy-in. Their starting point is the targeting of outcomes that are meaningful to natural persons - as distinct from abstractions like corporate profits, or 'the economy'. Discussion would centre on these outcomes, their costs and relative priority.

It's dangerous, I think, when people become feel so alienated from the political class that we become cynical or despairing. Even sound, sensible policies then become objects of suspicion. Buy-in to crucial policy decisions, in times such as these, is not a luxury. It's a necessity and one that the current system is failing to provide.

2010-09-04T18:39:00.002+13:00

I estimated that the subsidy for off-street parking [in the US] in 2002 was between $127 billion and $374 billion, or between 1.2 percent and 3.6 percent of the gross domestic product. In comparison, in 2002 the federal government spent $231 billion for Medicare and $349 billion for national defense. Donald Shoup, Shoup to O’Toole: The Market for Parking Is Anything But Free, 1 September

How do we get ourselves into this sort of mess? Bureaucracy and the big corporations have their own agenda. When it comes to parking, it takes the form of mandated parking spaces for new buildings, residential and commercial. To the vast majority of us who are turned off by the whole policymaking process, minimum parking requirements sound sensible, at first hearing. (So too, did subsidies to 'family' farms, many decades ago.) The end result is the apotheosis of the car; subsidies from the poor (who have no, or minimal access, to cars) to the rich, and an aesthetic and environmental calamity.

One thing that outcome-based policy would do right from the start is bring into question such superficially appealing notions as minimum parking requirements. By focusing on ends, rather than means, Social Policy Bonds would lead to a total reappraisal of transport and town planning policy - and one in which ordinary people could participate. Is easy transport a means to an end, or an end in itself? What exactly are town planners trying to achieve? Are ordinary people consulted? Perhaps we'd all be better off if government at all levels were to target the minimal well-being of all its citizens rather than (inadvertently, perhaps, and surreptitiously, almost always) the agenda of big corporations.

Through failure to success

2010-09-04T03:03:00.002+13:00

If you want to be more successful, increase your failure rate. Attributed to Thomas Watson, founder of IBM

We can probably all attest to the wisdom of that dictum. The problem, as I see it, is that with highly centralised government and huge corporations, we are creating a policy environment that eliminates the diversity that gives rise to success through repeated experimentation and adaptation. Decisions in policy areas such as the environment or finance are taken at such a high level of aggregation that there is no realistic chance of comeback if they fail. Government favours the uniform approach, and big corporations can attribute much of their size to their ruthless elimination of competition - in defiance of their much-lauded 'market forces' - with the full connivance of government. The entities that dictate how our ever-smaller planet shall be run now are so large that we can't afford an increase in the failure rate.

We need to revert to an environment in which failure can not only be tolerated, but can perform its necessary function of generating improved policy. Social Policy Bonds are one possibility. Under a bond regime decisions could still be taken with the aim of improving outcomes at the global level. But, unlike under the current system, the bonds would stimulate the exploration, implementation and refinement of diverse solutions. By contracting out the achievement of broad social and environmental outcomes to the private sector, the bonds would encourage diverse approaches, many of which would fail to be efficient and effective solutions to our social problems. Et voila: an increased failure rate!

Surrogate markers, in medicine and policy

2010-08-29T07:24:00.003+13:00

A surrogate marker is an event or a laboratory value that researchers hope can serve as a reliable substitute for an actual disease. A common example of this is blood cholesterol levels. These levels are surrogates, or substitutes, for heart disease. If a medical study demonstrates that a medication can lower cholesterol level 10%, then we assume that this will also lower the risk of cardiovascular disease. Why doesn’t this same study determine if an anti-cholesterol drug decreases heart attack rates directly? After all, most folks would rather be spared a heart attack than have a silent decrease in their blood cholesterol levels. ...Surrogates often take on a life of their own, far removed from the actual disease they represent. Patients shouldn’t care if their ‘surrogates’ are improving; their objective should be to prevent disease, feel better and live longer. Evidence-based medicine in disguise: beware the surrogate, 'MD Whistleblower' (blog by Michael Kirsch), 1 August

Quite so. And as in medicine, so it is in policymaking, and for much the same reasons: 'It's much easier and cheaper ...to measure surrogates than actual disease events.' It's much, much easier to measure a government agency's spending than it is to measure its success or otherwise in delivering meaningful outcomes.

The problem isn't always that of measurement, or of short-term interests trumping long-term benefits. There is also the inescapable subjectivity of an important components of welfare: psychological wellbeing. To take one example that has obvious policymaking implications: in the UK for several years crime appears to have fallen, while fear of crime has risen (see here). The answer, if there is one, might be to re-localise some policymaking. Some of the most important components of wellbeing simply cannot be quantified and aggregated for efficient use by our highly centralised bureaucracies. Withdrawing unemployment benefit, for instance, could actually help someone who's lacking in motivation and would gain by being made to find a job. To another person, though, the loss of a welfare payment could mean calamity. No bureaucracy can make such a distinction, and we might not want one with the intrusive powers that could.

Social Policy Bonds are no different from conventional policy in that respect, except that they have to answer, upfront, the difficult question of whether a specified goal is a surrogate (a supposed means to an end) or an end in itself. Having to do that at the outset of making policy, is probably an advantage over the current system in which, too often, objectives are vague, conflicting, and only tenuously related to policy instruments allegedly supposed to bring them about.

Biodiversity and Social Policy Bonds

2010-08-26T09:13:00.003+13:00

Already the UN has conceded that the targets for safeguarding wild species and wild places in 2010 have been missed: comprehensively and tragically. Talk has not halted biodiversity loss - now it's time for action, Guillaume Chapron and George Monbiot, Guardian.co.uk, 13 August

It's a tough one. Some Guardian readers' ideas, many of them worth considering, are presented here. Could the Social Policy Bonds principle help? Part of the problem is to clarify whether biodiversity is a means to an end or an end in itself; and another is how to quantify what biodiversity is and what we want from it.

One option could be to for experts to list their top, say, 10000 plant and animal species, according to their intrinsic value, or their status as indicator species, representing the broader state of the environment, including biodiversity. It would probably be impractical to legislate effectively against serious depredations of such a large number of species. But a Biodiversity Bond, following the Social Policy Bond principle, could be issued, perhaps by a combinatin of governments, non-governmental organizations, and environmental bodies. What would such Biodiversity Bonds target? Not the health or survival of the full panoply of 10000 species; that would be too complex and expensive. But what about the health and habitats of, say, 100 of these species? That would be a fairly simple matter. The key to such a regime is that the 100 species would not be known in advance by either the bonds' issuers or investors in the bonds.

Instead, the 100 species could be randomly chosen from the 10000 towards the end of bonds' stipulated expiry period. The bonds could target a broad definition of biodiversity, encompassing the 10000 species, 30 years hence. Towards the end of that 30 years, 100 out of those 10000 species or habitats would be randomly chosen. If all 100 were doing well, surviving and thriving, the bonds would be redeemed. If not, they wouldn't.

Bondholders would then have incentives to preserve biodiversity of all the 10000 species (or ecological systems), but there need be no onerous, contentious and expensive monitoring of all 10000 species. Only a fairly small sample, randomly chosen after 29 years, need be examined. That, in my view, would make targeting biodiversity a practical proposition.

Your thoughts or comments on this idea are particularly welcome.

An argument for a governing aristocracy?

2010-08-18T11:21:00.004+13:00

Or perhaps, lottocracy? In a review of Philip Ziegler's biography of the former British Prime Minister, Edward Heath, Ferdinand Mount says:

[Heath] promised a 'quiet revolution', in terms which understandably convinced his right wing that he had come over to their way of thinking. By instinct, though, he preferred to control things rather than let them run free and endure the consequences. Plonking, Ferdinand Mount, London Review of Books, 22 July (subscription)

I wonder whether this is a feature of all non-aristocratic policymakers. Which is to say, those politicians - almost all of them nowadays, and definitely Mr Heath - who had to struggle mightily to get to their position. Effort is all very well but, especially when it has successfully advanced a person's career, it will predispose to a controlling mindset; one that will be predisposed to work on problems, rather than let them solve themselves. One that will be biased toward intervention and top-down, one-size-fits-all planning, rather than creating an environment whereby adaptive, diverse policies can achieve outcomes without government prejudging how they shall do so.

Social Policy Bonds could perhaps be a compromise. Under a bond regime, politicians would still articulate our social goals, and control their funding and priority; they would, though, relinquish their power to dictate how these goals shall be achieved.

The costs of free parking

2010-08-16T07:09:00.002+13:00

In his book, Professor Shoup estimated that the value of the free-parking subsidy to cars [in the US] was at least $127 billion in 2002, and possibly much more. ... “Who pays for free parking? Everyone but the motorist.” Free parking comes at a price, Tyler Cowen, 'New York Times', 14 August

One big advantage of Social Policy Bonds is their transparency. If we wanted to subsidise car drivers, for example, a Social Policy Bond regime would require that we do so with our eyes open. Under the current arcane, opaque policymaking process those interest groups with (essentially) the most muscle can manipulate the legislative and regulatory environment to suit their own ends. So we end up with free car parking for the minority of people who drive cars a lot. The price is high, but it's borne by society in general. The car drivers who benefit, pay very little. It's the same pattern in other sectors. The well resourced use the vagueness of current policymaking to their own advantage. And who are the well resourced? Large corporations or government agencies. More and more, it seems, their goals are not only different from those of ordinary people; they are in conflict with them.

Scary

2010-08-15T08:48:00.002+13:00

An article in the Atlantic, highlights the likelihood of Iran's developing nuclear weapons.

The Iranian leadership’s own view of nuclear dangers is perhaps best exemplified by a comment made in 2001 by the former Iranian president Ali Akbar Hashemi-Rafsanjani, who entertained the idea that Israel’s demise could be brought about in a relatively pain-free manner for the Muslim world. “The use of an atomic bomb against Israel would destroy Israel completely while [a nuclear attack] against the Islamic countries would only cause damages,” Rafsanjani said. It is this line of thinking, which suggests that rational deterrence theory, or the threat of mutual assured destruction, might not apply in the case of Iran, that has the Israeli government on a knife’s edge. The Point of No Return, Jeffrey Goldberg, 'The Atlantic', September

And much of the rest of the world. But if the leaders of Iran aren't rational human beings, that doesn't mean they aren't susceptible to incentives. The usual incentives might not apply to them, themselves. But the people who work for them, who follow their orders, who supply their centrifuges or generate their electricity: some of them will be susceptible. And this is where Social Policy Bonds could help. A Middle East Peace Bond or, more broadly applicable, a Disaster Prevention Bond, could focus people's attention on what needs to be done in a more systematic, incentive-driven manner, than the current array of high-stakes bluster, talks about sanctions, talks about talks and all the rest of it.

Socialism, American style

2010-08-09T06:44:00.002+13:00

That's the title of a post by Denis Weisman, which outlines some of the laws that protect US car dealers from having to beheave competitively.

Some states make it illegal to sell cars at lower prices to high-volume dealers than to low-volume franchisees. Some prohibit car companies from selling directly to the public (say, via the Internet) because it would adversely affect the competitive position of the dealers. Socialism, American Style, Denis Weisman, 26 July

How did this come about? It's the usual tawdry tale of lobbyists filling the vacuum created, in my view, by a complex political system that's opaque to non-specialists; that is, ordinary people, as distinct from corporations.

In the American political system, a highly focused, well-funded lobby with tight connections in every House district is almost unbeatable when it chooses to play rough.

It's policymaking by the rich, for the rich, and there's little sign of it ending any time soon.

You can see where I am heading with this. A Social Policy Bond regime would target outcomes. Outcomes that are meaningful to ordinary people. Corporate success would be a by-product of a prosperous population, not something that grows out of the power of the lobbyist. Government's raison d'etre is to enhance the wellbeing of the population, not corporations. Policymaking should subordinate corporate interests to those of ordinary citizens, and a Social Policy Bond regime would do that.

Give greed a chance

2010-08-04T09:34:00.003+13:00

Tyler Cowen asks:

How many [books on morality and markets] take seriously the notion that our moral intuitions can be badly misguided for judging the operation of an impersonal market economy in the modern world? Not so many, though all seem to think they do. Source

I sometimes am asked how Social Policy Bonds, which envisage self-interest as playing a still bigger role in our economy, can be reconciled with morality and ethics? I have two answers. One, that morality is at least as much a matter of outcomes as about the means of reaching them. Our private sector, whose motivation is profits (or sales, market share, or revenue), generates much of the tax revenue with which we help the disadvantaged and supply public goods and services. It also contributes much in the way of positive non-market impacts: through employment it alleviates poverty and crime, etc. In short, a system based (apparently) on greed, as regulated by government, enables us to raise the wellbeing of all, especially the disadvantaged: greed can be good.

My other answer is that what is labelled as self-interest and is disdained for that reason can be no more than someone going to work for money, to support him/herself and his/her family. Under a Social Policy Bond regime, investors in the bonds would make capital gains if they help achieve society's targeted goals. That doesn't make them profiteers or worthy of condemnation. It makes them entrepreneurs willing to take a risk so that they can pay themselves and people who work for them (at a lower risk) salaries. Competition for the bonds would bid away excess profits anyway. Largely for reasons of history and (I think) too-little-examined moral disdain for self-interest, we've been reluctant to channel self-interest into the solution of social problems. Those who are charged with solving them are rarely rewarded in ways that correlate with their success in doing so. Social Policy Bonds are my suggested way of channeling the incentives and efficiencies of the market into the achievement of social goals, including those, such as world peace and the elimination of poverty, that most would agree are morally uplifting. My header says it all.

Evolutionary fitness

2010-07-31T08:02:00.002+13:00

...5% of movies pay for the other 95%, and success or failure is unpredictable. The best the studios can hope to do is find contractual mechanisms that back success after it happens and thus leverage their profits. This was what they had with distributors and cinemas, and it worked. They just didn’t realise it was these deals and almost nothing else that was paying for their Cohiba cigars. The movie industry was what Arthur [de Vany]] loves best: “a complex, adaptive, decentralised system”. Exactly like the human body. Evolutionary Fitness: the diet that really works, Brian Appleyard [UK] 'Sunday Times', 17 August 2008

And exactly like human society. The problem is that top-down planning cannot deal with such a system: it much prefers to impose the idea of equilibria, steady states, homeostasis and normal distributions about the mean on systems to which they don't apply.

Almost all dietary and fitness regimes are based on a homeostatic view of the body – meaning it is a self-regulating system that maintains itself in a continuous, stable condition. The average is the ideal. So we are told to eat regular meals consisting of a balance of the food groups and to take regular exercise, dominated by steady aerobic activity like cycling or jogging. This is all wrong.

We have seen where this line of thinking takes us in banking and finance too (see my post about Black Swans). And I suspect it fails in other policy areas, such as welfare, health and education. Our tendency is to ignore or discount the possibility and impact of catastrophe.

This is one area where Social Policy Bonds can function as a societal insurance policy against large-scale disasters that policymakers would otherwise neglect. The cause of the the disaster need not be specified: the bonds would function in a similar way to increasingly popular catastrophe bonds, except that they would have the purpose - and the backing- of making it worthwhile for investors to prevent disasters happening. A national government (or a consortium of corporations, non-governmental organizations and concerned philanthropists) could issue Social Policy Bonds that would reward investors if an event killing more than, say 10000 of a country's citizens in any one 48-hour period, does not occur before a specified date.

Such Disaster Prevention Bonds would encourage investors to investigate all sources of potential disaster, impartially. Unlike current attempts at disaster prevention, then, they wouldn't concentrate on those disasters that have a high media profile, for example.

The concept could be scaled up: a collection of governments under the auspices of the United Nations or non-governmental organizations could issue similar bonds, aimed at preventing even larger-scale disasters, such as a nuclear exchange. It's also conceivable that, again, the private sector could issue bonds that could, for example, aim to defuse regional conflicts (preventing war), or lessen the impact of malaria or crop failure in specified parts of the world.

Heading for disaster: Kyoto, Copenhagen and climate change

2010-07-27T09:24:00.004+13:00

This is an updated version of an article that first appeared in Economic Affairs, 22 (3), September 2002, published by the Institute of Economic Affairs, London. If you wish to publish it, please email me.

There is overwhelming, but not quite conclusive, evidence that the global climate is changing. That said, scientists are divided as to (a) how fast climate is changing, (b) what is causing it to change, (c) the likely effects of climate change, (d) how much we can do about it, and (e) how much we should do about it. Despite these uncertainties, climate change has the potential to inflict serious harm on large populations, so there is a strong argument for doing what we can to prevent it or minimise its adverse effects.

The December 1997 Kyoto treaty required developed countries to bind themselves internationally to numerical targets. Despite Kyoto’s flaws, between 1990 and 2007 emissions of greenhouse gases did fall by 4% in these countries. (Carbon dioxide, which is given off by fossil fuel combustion, is thought to be by far the most important of the man-made greenhouse gases that form an insulating blanket around Earth.) But evaluations by leading scientists indicate that Kyoto’s environmental effects, for all the bluster and bureaucracy, may be so small as to be almost unnoticeable.

Yet we are heading for more of the same. If any successor to Kyoto is ever agreed - or, more important, implemented - we can look forward to minimal reductions in emissions; undetectable effects on the climate; ingenious attempts to game the system; and the squandering of billions of dollars on wasteful, corrupt schemes all over the world. The big beneficiaries will be third-world dictators, Swiss bankers, and the burgeoning bureaucracies at national and supra-national level who will be charged with administering and ensuring compliance with whatever absurd regime is agreed. This is not cynicism, it’s realism: Canada has exceeded its Kyoto target by 29%,[1] but does anyone imagine it will be punished? And do we really want to see national democratic governments coerced by yet another supra-national governmental body into doing something to which their electorates object?

The successor to Kyoto will share the same, ludicrous assumption that afflicted its predecessor: that government knows the best way of achieving its goals. But with climate change the biological and physical relationships involved are many and complex. Even specialists in climatology disagree about the degree to which any of the myriad components of the world’s climate contribute or react to climate change. It would therefore appear to be poor policy to impose expensive, divisive, unpopular and upfront controls on certain activities on the basis that they might help bring about a slightly more stable climate some time in the future.

People who were serious about addressing climate change would not embody the assumption that they know exactly how the Earth’s climate is changing, what is causing it to change, and what is the best way of dealing with any change. They would not ignore a potentially catastrophic problem, but would try to be as cost-effective as possible, especially because of the colossal expenditures that will inevitably be incurred. An ideal policy would encourage innovative solutions, stimulating the investigation and adoption of promising new technologies, and be open to new information about the causes and effects of climate change. It would most probably seek to constrain the negative impacts of climate change, while doing little to discourage any positive effects.

An ideal solution would also use markets. Now markets are getting a bad press right now. Many blame them for the current financial crisis and for environmental depredations. And it’s true that unregulated markets are being abused to serve purely private interests at the expense of the wider public. So it is important to remind ourselves that a market economy is consistent with many different outcomes and that market forces can serve public, as well as private, goals. Markets are simply the most efficient means yet discovered of allocating society’s scarce resources. An ideal solution to the climate change problem would use market forces to channel people’s self-interest into the solution of the climate change problem.

If such a solution could be found, it would be bound to attract more support from world leaders, non-governmental organisations, and the public in general than Kyoto. Such buy-in is essential, because any solution is probably going to entail enormous costs and sacrifices.

Targeting outcomes, not activities: Climate Stability Bonds

Climate Stability Bonds would be a new globally backed, financial instrument, designed to achieve climate stability, rather than to regulate emissions, activities or institutions. These bonds would be issued on the open market and would become redeemable for a fixed sum only when the climate had achieved an agreed and sustained level of stability. In this way there is no need for the targeting mechanism to make assumptions as to how to stabilise the world climate - that is left to bondholders.

There are obvious difficulties involved in defining what a stable climate actually is, but the same difficulties apply when attempting to monitor the success or otherwise of Kyoto, neo-Copenhagen or any other regime. A Climate Stability Bond regime could target an array of objectively verifiable indicators such as temperature, change in temperature, rate of change of temperature, precipitation, frequency of extreme climatic events, ice sheet volume and many other variables, at a wide range of locations. It could also target for reduction the effects of a changing climate on human, animal and plant life. All indicators would have to fall into a satisfactory range for a sustained period before the bonds would be redeemed.

Normal bonds are redeemable at a fixed date, for a fixed sum, and so yield a fixed rate of interest. Climate Stability Bonds would not bear interest and their redemption date would be uncertain.

Bondholders would gain most by ensuring that climate stability is achieved quickly.

Internationally backed Climate Stability Bonds would be issued by open tender, as at an auction; those who bid the highest price for the limited number of bonds would be successful in buying them. A fixed number of bonds would be issued, redeemable for, say, $10 million each, only when climate stability, as certified by objective measurements made by independent scientific bodies, has been achieved and sustained. Once issued, the bonds will be freely tradeable on the free market.

What will determine the price of the bonds? Most obviously, the market’s assessment of how close climate stability is to being achieved. Interest rates on alternative investments will also be a factor. The bonds would sell for small fractions of their issue price if people thought there were virtually no chance of climate stability being achieved in their lifetime. People will differ in their valuation of the bonds, and their views will change as events occur that make achievement of a stable climate a more or less remote prospect. They would also change as new information about climate, and about the causes of climate change, is discovered. But the bonds, once issued, would be transferable at any time. Bondholders, having done their bit to achieve climate stability, could sell their bonds, realising the capital gain arising from the higher market price of their bonds. These market prices would be publicly quoted, just like those of ordinary bonds or shares.

Assume that Climate Stability Bonds, redeemable for $10 million each, have been issued, and that they each sell for $1 million. People, or institutions, now hold an asset that can give them a return of 900 percent once a stable climate has been achieved. It is this prospect of capital gain that gives bondholders a strong interest in bringing about a stable climate, as cost-effectively as possible.

Climate Stability Bonds could be issued by a world body, perhaps one supervised by the United Nations or World Bank. This body would undertake to redeem the bonds using funds that could perhaps be obtained from all countries, in proportion to their Gross National Product. It would be up to individual countries to decide how to raise funds, presumably from taxation revenue. Importantly though, no bonds will be redeemed until the objective of a more stable climate has been achieved and sustained.

What would bondholders do?

How might bondholders aim to accelerate the achievement of a stable climate? They could:

· help finance countries’ or companies’ greenhouse gas emission control programmes;

· pay vacationers to stay at home rather than fly;

· supply solar heaters to villages and households in poor countries;

· carry out, or subsidise, research into schemes to remove greenhouse gases from the atmosphere.

Bondholders can also be expected to finance other climate stabilising initiatives, the precise nature of which we cannot, and need not, know in advance. Of course, governments, research institutes and others are already carrying out many of these activities. But there is a crucial difference. Under a Climate Stability Bond regime, the motivation arises from the self-interest of bondholders, who have the incentive to seek out those ways of achieving a stable climate that will give them the best return on their outlay. Their outlay, of course, is the taxpayers’ outlay. But note that it is only when the targeted degree of climate stability is achieved that governments end up paying for it. Until then, it is bondholders who have to finance the initiatives that they think will achieve climate stability. The issuing body will, in effect, be contracting out the achievement of climate stability to the private sector. But it will be stipulating the degree of climate stability that it wants, and undertaking to reward bondholders when that objective has been achieved.

Many will be skeptical that bondholders can actually do anything to combat climate change. It is true that too large a number of small bondholders would probably do little in isolation to bring about climate stability. If there were many such small holders, it is likely that the value of their bonds would fall until there were aggregation of holdings by people or institutions large enough to initiate effective problem-solving projects. As has happened with share privatisation issues, the bonds would mainly end up in the hands of large holders - probably institutions, brokers, governments or corporations.

Even then, each such body would probably not be big enough, on its own, to achieve much without the cooperation of other bondholders. They might also resist initiating projects until they were assured that other holders would not be ‘free riders’. But note that they will have a strong incentive to cooperate with each other, and to do so as cost-effectively as possible. If they did not, the market value of their bonds would fall. Their common interest in seeing climate stability achieved quickly means that they would share information, trade bonds with each other and collaborate on climate-stabilising projects. They would also set up payment systems to ensure that people, bondholders or not, would have an incentive to perform efficiently. Large bondholders, in cooperation with each other, would be able to set up such systems cost-effectively. Governments holding bonds would benefit by enacting legislation aimed at achieving climate stability, while large bondholders could lobby for such legislation, targeting their lobbying energies at those governments who will respond most readily.

Advantages of Climate Stability Bonds

There are two critical advantages that Climate Stability Bonds have over Kyoto and its likely successor. One is that the bonds do not rely on the robustness of our existing scientific knowledge. Kyoto aims to reduce emissions of a small range of gases. But there may be other causes of climate change that are far more important, of which we are currently unaware. And these need not be man-made: natural variability of climate has had severe impacts on human life in the past. Kyoto, responding to effects whose causes are uncertain, embodies a limited number of fixed ideas about the nature of the relationships involved. A bond regime, targeting climate change directly, may well lead to cuts in greenhouse gas emissions, but it would not assume that doing so is the best solution. Climate Stability Bonds improve on Kyoto because they encourage behaviour leading to the desired outcome, rather than seeking to control activities whose effects on the climate stability are not fully known.

The other major advantage of a Climate Stability Bond regime is that bondholders will support whichever climate stabilising projects will give them the best return for their outlay. These may involve controlling greenhouse gases, but they could also mean furthering research into such ideas as genetically engineered cyanobacteria that can soak up carbon dioxide from the atmosphere. The more efficient bondholders are in achieving climate stability the more they will gain from appreciation in the value of their Bonds. This efficiency maximises the degree of climate stability that can be achieved per dollar outlay. Because of the colossal sums involved, the benefits that Climate Stability Bonds offer in comparison to activity-based regimes, such as Kyoto, are likely to be huge.

Further advantages of a bond regime are:

· the bonds would have considerable informational advantages over such measures as Kyoto, which target activities rather than outcomes. Greenhouse gases are emitted from many sources. About half of carbon dioxide emissions, for instance, come from dispersed sources, such as cars and home heating systems. Immense quantities of information would be needed to establish and monitor a comprehensive system of control using taxes or tradeable emission permits. Costs of obtaining such information and resentment against the intrusiveness required to ensure compliance are going to be high. By contrast, Climate Stability Bonds would target and monitor a much smaller number of global indicators.

· governments would pay up only when a stable climate has been achieved - any risk of failure or of undershooting the climate stability target is borne by bondholders, rather than taxpayers;

· funds for global climate stability could bypass corrupt or inefficient governments or, by appealing to their financial self-interest (if they were bondholders, or bribed by bondholders) could effectively modify their behaviour in favour of achieving climate stability; and

· formulating the redemption terms for Climate Stability Bonds will entail clarifying of what is actually wanted. Framing the debate in terms of outcomes, rather than institutions or activities, will bring about greater public participation and buy-in to the entire process: essential of the challenge is to be met.

Achieving a stable climate will unquestionably require a wide range of diverse, responsive projects. Reducing greenhouse gas emissions or sequestering carbon may be helpful ways, but they are not necessarily going to be the most cost-effective. Other ways yet to be discovered may be far cheaper. Kyoto is, in my view, deficient, in that it offers no incentives to find out how to achieve a stable climate most cost-effectively. Climate Stability Bonds would encourage the most efficient solutions given the knowledge available at any time, and they would stimulate research into finding ever more cost-effective solutions. This occurs because of the nature of the bond mechanism, and requires no presupposition as to the optimal set of solutions. Scientists and governments would need to decide only on the objective - climate stability - not on the ways of achieving it.

Of course, the Climate Stability Bond concept involves surrendering of policy instruments to the private sector, and this may be difficult for politicians to swallow, even though, under a bond regime, they would continue to set, and be the ultimate source of finance for, the targeted objective. The potential benefits of a bond regime are colossal. In economic theory, and on the evidence of recent history, market forces are the most efficient means yet discovered of allocating society’s limited resources. Under a bond regime, government would do what it's good at doing: articulating society’s wishes and raising the revenue for achieving them. Where government often fails is in actually achieving these goals efficiently and that is where investors in the bonds would do what they are best at; exploring, investigating and implementing an array of approaches, while responding to events and our rapidly expanding scientific knowledge; all in the service of the overall goal of climate stability. Investors’ rewards would be inextricably linked to their success in bringing about society's climate stability goal, as articulated by national governments. Rather than punish countries, upfront, for dubious long-run benefits, the bonds would reward and motivate people for achieving demonstrable gains in climate stability.

Climate Stability Bonds are intended to channel the market’s incentives and efficiencies into the achievement of society’s overriding environmental objective. By appealing to people’s self-interest, Climate Stability Bonds could be far more effective at achieving climate stability than Kyoto or whatever deal is struck in Copenhagen. And, by targeting a desired outcome but leaving it for the market to achieve, the principles underlying the bond concept could show the way to solving other seemingly intractable global problems, including other environmental problems, war, civil war, disease and malnutrition.

Bibliography

Injecting incentives into the solution of social problems: Social Policy Bonds (September 2000), Ronnie Horesh, Economic Affairs, 20 (3), Institute of Economic Affairs, London, UK.

Injecting incentives into the solution of social and environmental problems: Social Policy Bonds (January 2001), Ronnie Horesh, iUniversity Press, USA. ISBN: 0-595-15374-7

‘Investing for the Future’, UK CEED Bulletin No 35 (September-October 1991), Centre for Economic and Environmental Development, Cambridge, UK.

[1] Avoiding a crash at Copenhagen, ‘The Economist’, 24 September 2009

Doing what the corporates want

2010-07-21T09:23:00.002+13:00

One of the virtues of Social Policy Bonds is that people, as distinct from government agencies and corporations, would decide on policy goals. As human beings, we probably would not want to divert funds from taxpayers and consumers to, for example, big agriculture, wealthy landowners, or big energy. The sums involved are staggering:

...more than US$ 550 billion was spent in 2008 on subsidies to oil, natural gas and coal by 37 of the world's developing and emerging economies ...their removal would result in significant energy savings. G-20 Summit sees little mention of pledge to reform fossil-fuel subsidies, by Fernando Cabrera Diaz, Global Subsidies Initiative, June/July

It's only because of the way in which government and big business make policy that they can get away with such a waste of resources. The current way of deciding on policy priorities is too obscure and protracted to engage ordinary people. Big corporations and government bodies fill the vacuum.

Social Policy Bonds would be different. The focus would be on outcomes right from the start. Organizations would be entirely subordinate to chosen social and environmental goals. A new type of organization - one whose rewards would be inextricably tied to its success in achieving society's goals - would come into being. Even under a bond regime, people would disagree with some chosen policy priorities. But, having been able participate actively in the selection process, they would be more inclined to buy in to targeted goals. Of course, even then we might still opt to tax the poor and subsidise big energy and big agriculture. But we'd be doing so with our eyes open, not as a result of being excluded from the decision-making process.

The unimportance of outcomes

2010-07-17T09:28:00.002+13:00

President Gamal Abdel Nasser brought Egypt dictatorship, economic ruin and humiliation in the six-day war with Israel. On his sudden death from a heart attack in 1970 Egyptians erupted in grief; some 5m people mobbed the funeral. His successor, Anwar Sadat, freed political prisoners, revived the economy and won a peace agreement with Israel that got back what Nasser had lost. When he was assassinated in 1981, Egypt fell eerily silent. His funeral was attended by foreign leaders but very few of his own people. After Mubarak (subscription), 'The Economist', 15 July

Charisma, televisual appeal, soundbites or superficiality of any sort are not a sound basis for choosing policy. Currently though, we have little alternative; even those of us who aren't Egyptians. We are allowed to choose policymakers rather than policies; and we choose them on the basis of image at worst, or their stated policy priorities or ideological leanings at best. Rarely are we given the chance to target desirable outcomes.

The reasons for this are mostly historical. People were less educated and had less time to take an interest in policy. But we ought now to be in a position at least to move toward outcome-based policy. That would mean public participation in the choosing and prioritising of social and environmental goals. Social Policy Bonds lend themselves to a gradual transition to this sort of policymaking: by focusing on outcomes to be targeted they would be more transparent than the current policymaking process. They would generate more consensus, or at least - and, just as important - buy-in, for chosen goals. A transition to a Social Policy Bond regime would be quite easy to arrange, with funding to existing activity-based bodies (mostly government agencies) being reduced gradually, at the same time as funds for Social Policy Bond redemption rise. (See my book for further details.)

Nasser is not the only charismatic personality in recent history who led his people to disaster. Choosing policymakers is fraught with problems, even if they happen to be televisually appealing, trustworthy, genuine and honest. It's time to move toward choosing outcomes; there are plenty of alternative careers to politics for people with charisma and ambition.

The unimportance of being right

2010-07-16T07:28:00.002+13:00

In a series of studies in 2005 and 2006, researchers at the University of Michigan found that when misinformed people, particularly political partisans, were exposed to corrected facts in news stories, they rarely changed their minds. In fact, they often became even more strongly set in their beliefs. Facts, they found, were not curing misinformation. Like an underpowered antibiotic, facts could actually make misinformation even stronger. How facts backfire, Joe Keohane, 11 July

It's a scary, but not unexpected, finding. With so much information and misinformation about, we tend to ignore the facts that go against our prejudices. All the more reason then, you might think, for policy debates to concern themselves with social and environmental goals, rather than the different - prejudiced - views about the ways of achieving them. The world is too finely grained for most of our political prejudices. We are fairly sure, for instance, that central planning, as practiced by the Soviet Union and China, was a disaster for human welfare. But central planning isn't always a bad thing. Far better to let unprejudiced actors work out for themselves what works best for any particular social goal, on the basis of evidence and an incentive to get things right.

That's where Social Policy Bonds could enter the picture. Investors in the bonds would have powerful incentives to work out the best approaches to social and environmental problems, and to terminate failures. Careful definition and targeting of society's desired goals would mean that the bondholders' interests would be exactly congruent with those of society. If bondholders held mistaken views about how to achieve these goals, they would lose. They certainly wouldn't profit by pumping more resources into their failed projects. That's in stark contrast to the current system, whereby government agencies face few sanctions even if they make huge mistakes and persist with them for decades.

Non-linear processes

2010-07-12T06:07:00.002+13:00

In the fields of economics, ecology and social affairs, small differences in where you start can have a huge impact on where you end up. This is the path dependency that led to driving on the left hand side of the road (in the UK), or the near-universal use of the (supposedly) inefficient QWERTY keyboard. Since tiny causes can have large effects on complex systems then 'even knowing 99% of what you need to know leaves you vulnerable to large errors. And 100% knowledge is impossible.' (Source).

All this is one reason for considering Social Policy Bonds for, especially, those social and environmental goals that have many possible causes and are characterised by time lags and seeming intractability. The peaceful resolution of conflicts, for instance, or the promotion of biodiversity, or the avoidance of natural or man-made catastrophe.

As society becomes increasingly complex, you would think that policy instruments that reward positive outcomes but do not prejudge how to achieve them, such as Social Policy Bonds, might be considered more widely. I did try to interest the Santa Fe Institute in Social Policy Bonds. It conducts research into complexity. However, I didn't receive a response to my approach (made nearly two years ago).

Government by television

2010-07-11T09:03:00.002+13:00

One of the main policy drivers, clear to all, but rarely acknowledged, is the urge not to look bad on television. Failure is acceptable, provided it doesn't take the form of tv footage.

A Social Policy Bond regime would be different. Objectives would be chosen in a calm, rational manner. Unlike under the current regime, they would be stable over time. Stable objectives would mean that rational allocation of resources would not be undermined by high-profile events. For instance, in the aftermath of a tragic rail disaster in London that resulted in the deaths of 40 people the UK Government came under considerable pressure to order the installation of an automatic braking system for trains that go through red signals. Cold calculations showed that this would cost around $21 million for each life that the system could be expected to save. This is around five times the figure that the UK Treasury used as its benchmark valuation of a human life, which means that if the government had succumbed to pressure to install the automatic braking system it would have diverted funds from more cost-effective life-saving projects, and so caused the loss of more lives than it would have saved.

A Social Policy Bond regime that had as its objective the maximising of the number of lives saved per government dollar would not waver in the face of spectacular one-off events.

How policy is made

2010-07-03T08:31:00.002+13:00

When [Tony] Blair announced that 50 per cent of young people would be able to go to university, the first the civil servant in charge of higher education knew about it was when he heard it on the radio.... Things like that and the scheme to take drunken yobbos to cash points to pay on-the-spot fines were mainly dreamt up in the back of a car when Blair was on his way to a meeting or a TV studio. As quoted by Sue Cameron, 'Notebook', Financial Times, 1 July

What is particularly striking is how, at the highest level of national government, big decisions appear to be made on the basis of reactive, primal emotion. Rationality and the long-term interests of the people politicians are supposed to represent hardly figure at all.

…policies are often adopted on the basis of less careful analysis than their importance warrants, leaving wide room for mistakes and misperceptions. Forces of knowledge destruction are often stronger than those favoring knowledge creation. Hence states have an inherent tendency toward primitive thought, and the conduct of public affairs is often polluted by myth, misinformation, and flimsy analysis. Source (pdf)

This type of thinking is particularly dangerous when military conflict looms. An article about Henry Kissinger's role in US foreign policy quotes him saying to US President George W Bush’s speechwriter, about radical Islamic opponents: ‘We need to humiliate them’. Comments like this abound in high politics. George W Bush himself cried ‘bring ‘em on’ at an early point in the invasion of Iraq. These are not examples of high-level thinking.

One of the benefits of a Social Policy Bond regime would be the clarification of social goals, and the transparency of the process that targets them. Goals would have to be articulated before targeting. It's unlikely that random emotional outbursts would crystallise into policy in such a policymaking environment, however eminent the people who make them.

Transition to a Social Policy Bond regime

2010-06-30T08:53:00.002+13:00

Asked about a migration path to a Social Policy Bond regime, I give the example of health. On introducing such a bond regime a government could decide to reduce its funding of health authorities and research institutes by 1 percent a year, in real terms. (The government could allocate the saved funding to the future redemption of the Health Bonds it has issued.) So after five years, each health authority would be receiving directly from central government only 95 percent of the funding that it formerly received. But bondholders could choose to supplement the income of some of these health bodies. They may judge a particular group of health authorities to be especially effective at converting the funds they receive into measurable health benefits, as defined by their bonds’ redemption terms. Particularly effective health authorities might be working in deprived areas, where small outlays typically bring about larger improvements in health. Or bondholders might judge a particular research body to be worthy of additional funding, because it was conducting excellent research into a condition that would be likely to respond especially effectively, in terms of health outcomes, to additional expenditure. In such cases, bondholders would supplement their selected health authorities’ or research institutes’ funding. It may well be that these favoured bodies end up receiving a large boost in income throughout the lifetime of a bond regime.

It could also happen that investors in bonds targeting health look at completely new ways of achieving health objectives; ways that currently receive no, or very little, funding. To give a plausible example, they may be convinced that one of the best ways of achieving society’s longevity objectives is to deter teenage drinkers from driving. Following this logic, they may find that one of the most efficient ways of doing so would be to lay on subsidised taxis for teenagers attending parties on Friday and Saturday nights – but only in certain parts of the country. It is difficult to imagine how our current centralised government fund allocation mechanisms could go about implementing such a programme. A Social Policy Bond regime would quickly eliminate some of the less rational distortions in other health care matters, amongst them the British National Health Service’s terminal-care budget, 95 percent of which was allocated to the 25 percent of the UK’s population who die from cancer, and just 5 percent to the 75 percent who die from all other causes. It is also likely that holders of bonds targeting health outcomes would greatly expand funding in areas such as health education or preventive medicine that rely on expertise outside those bodies traditionally devoted to health care.

The important point is that a transition to an outcome-based, Social Policy Bond regime need not be disruptive. Nor need it necessarily mean the loss of funding to existing bodies, simply because they have been around for many years. But it would mean the beginning of the end for bodies that are inefficient and, in the eyes of bondholders, incapable of becoming efficient. The winners would be society as a whole, and taxpayers in particular.

Process and image versus outcomes

2010-06-25T11:41:00.003+13:00

Frank Furedi writes:

This is probably the most disturbing revelation to come out of the Washington hearings: that oil companies now devote far greater time and energy to managing how they appear in the eyes of the public than they do developing an effective emergency-response plan. So we learned that ExxonMobil’s emergency-response plan has 40 pages on dealing with the media but only nine on dealing with an oil spill. The plan seems more preoccupied with the science of drafting press releases than with the science of taking practical steps in an emergency. Why BP is not very slick in an emergency, Frank Furedi, 21 June

We do need clarity about means and ends. One of the virtues of a Social Policy Bond regime is that it would inextricably bind policymakers to focus on ends rather than procedure. If the goal, for instance, is to avoid environmental catastrophe, then Social Policy Bonds can be issued that will target the sustained absence of environmental catastrophe. Investors in the bonds would have powerful incentives to ensure that resources went into avoiding catastrophe, rather than ticking boxes or shaping a company's image. Government could spend less time trying (unsuccessfully) to regulate against every conceivable adverse event, and more time focusing on the broad social and environmental outcomes that society wants to see. Incentives, in short, would be channelled into society's goal, rather than that of corporations or government agencies.

Social Policy Bonds: free riding and perverse incentives

2010-06-23T07:42:00.004+13:00

The Social Policy Bond principle really needs to be tried, discussed and refined before large-scale implementation. At a recent discussion with a London think-tank, I was asked a couple of questions about free-riding and perverse incentives.

I have in fact written about the possibility of some purchasers of Social Policy Bonds wanting to free ride on the activities of those bondholders who will work to achieve a targeted goal. In chapter 4 of my book, I examine the issue and come to the conclusion that it probably wouldn't do much to undermine the bond mechanism. other purchasers. But, what about a variant in which people would buy a large proportion of the bonds very cheaply and sit on them with the intention of selling them for a higher price to people who are prepared to achieve the goal. This would be counter-productive to the extent that it would deter the would-be goal-achievers from actually working to achieve the goal. How could the issuers prevent this sort of free-riding? They could ensure that the initial price of bonds is not negligible. The choice of objective, the number of bonds issued, and their redemption value could all be chosen with a view to seeing that a bond redeemable for £100, say, could be expected to sell for anywhere between, say, £30 and £90.

They could give the bonds an expiry date, so that if there were no significant progress toward the objective being achieved, or if the market value of the bonds showed no significant increase, the bonds would become invalid.

The issuers could retain the power to declare a particular bond issue invalid, either at their discretion or, better, if certain objective criteria, such as each bond’s market price, were not fulfilled.

Another question posed was: could people buy the bonds, and do nothing to achieve the targeted goal in the expectation that the issuers are so keen to see the goal achieved that they then will issue more bonds and so boost the value of all the issued bonds, including their passive holding? The possibility of a supplementary bond issue would then have the effect of reducing the motivation of would-be target-achievers to take action. If this were thought to be a significant deterrent to achieving the targeted goal, again, the issuers could:

Build in an expiry date to the bond issue, and issue a completely new set of bonds targeting the same goal, so that holders of the first bond issue would lose their investment.

Retain and, if necessary, exercise the power to declare the first bond issue invalid.

For large-scale issues of Social Policy Bonds then, the conclusion is that issuers should retain the right to declare bond issues invalid if bondholders don't comply with the spirit, as well as the letter, of the bonds' redemption terms.

Expanding the corporatist state

2010-06-18T08:54:00.003+13:00

From a comment (subscription, I think) to the Economist:

All right, Obama is not a socialist: he is a corporatist. Is that better? He would yoke government and big business together, pulling towards objectives defined by the great and good.

I'd disagree to the extent that I think the great and good can sensibly define objectives: it's when the ways of achieving them are centrally planned that things go awry. As the commenter recognises. He goes on:

This ignores the fact that it was this collusion that primarily got us into this mess in the first place. For example: government mandates that poorer people get houses. The mortgage industry, which is backstopped by a government controlled (and now owned) "company," tries to devise ways to do this without losing its shirt. These new techniques seem to work so well that they generate a huge bubble. The bubble bursts. And what happens then? The government intrudes even further into the home mortgage industry.

Again, the problem is government prescribing how things shall be done, rather than prescribing what shall be achieved.

"Too big to fail" is a symptom of the corporatist disease; so are "national champions," propped up by the state, to the detriment of innovation and competition. And instead of unwinding the relationship between big business and government, we're entwining them yet more. This marginalizes small businesses, which is where most of the innovation and job creation takes place. How can a small business make any plans, or hire any workers, when every day seems to bring down a new government mandate that favors large corporations? The law is ignored (as during the Chrysler bankruptcy, when bondholders were slighted in favor of unionized workers) to bring about a politically favored result. Only large companies, with corresponding muscle, can play on this politicized field.

Exactly so. Government and big business on one side, versus ordinary people and small enterprises on the other.

Communism, socialism, fascism, corporatism: all branches of the same tree, and all based on the premise that a chosen elite must guide the average person, who will otherwise screw it up. The perversion of the Enlightenment and the long march back to serfdom continues.

I don't know about serfdom, but I do foresee a crisis. Government - and big organizations generally - are, it seems, instinctively against the 'creative destruction' of capitalism, which has done so much to lift people out of poverty. The largest corporations work more by manipulating government and trying to subvert markets. Government and big business collectively have become too big. Not 'too big to fail', but too big to ensure that, when they do fail, society can recover without crises and extremely painful transitions. Corporatism has created a policy monoculture, with all the fragility and potential for disastrous consequences that that implies.