16 January 2018

The costs of bad policy

The costs of bad policy are ... spread across the public at large, making it harder for them to organise. Getting it back: how America's economy is rigged by special interests. 'The Economist', 30 November 2017, in a review of The Captured Economy: How the Powerful Enrich Themselves, Slow Down Growth, and Increase Inequality, by Brink Lindsey and Steven Teles, December 2017
The book looks at areas of the US economy where barriers to competition, mandated by government, have led to excess income. In the words of the reviewer:
Implicit and explicit government subsidies to the financial industry enrich bankers and sow the seeds of crisis, for example, but have done little to boost growth. Increasingly strong intellectual-property protections have not unleashed a torrent of new ideas, but have instead swelled the earnings of top firms, which wield their patents and copyrights menacingly at would-be innovators. ... Analyses of occupational licensing and land-use rules turn up similarly skewed policies: they benefit those already on top at the expense of society as a whole.
The book suggests 'a more deliberative politics' to loosen the grip of the powerful. It also proposes philanthropy and more government researchers. The reviewer, though, thinks that 'America’s institutional rot' might be 'too far advanced for mere deliberation to help'.

I agree; I think the same diagnosis applies to most countries, and I have another suggestion, which might have a better chance of succeeding: focus on policy goals, rather than the means of supposed means of achieving them. Government, and perhaps only government, can do two things well: articulating our social goals, and raising the revenue for their achievement. Where it fails is in areas where policy is too complex for it to actually achieve these goals. It sets up agencies that pay their employees according to activity, rather than outcomes, and are inherently inefficient in complex, changing environments. And policymaking itself, with its focus on organisations, their structures and funding, and on regulation, has been captured by exactly the interests outlined in the the Captured Economy: the already rich and powerful. Our policymaking processes are too arcane and long-winded for ordinary people to follow. Yet the results of these processes, and their failures, affect us all.

A government that issued Social Policy Bonds would concentrate on what it can do well: raising revenue and using it to reward the achievement of society's social and environmental goals. Incentives would cascade down from bondholders to all those working to solve these problems. The bonds, being tradable, would stimulate long-term initiatives to achieve goals currently thought to be too remote or idealistic: the ending of war, for instance, or universal literacy. A bond regime would encourage the exploration of diverse, adaptive, approaches and - crucially - the termination of failing approaches. Powerful interests could, as they do now, take an interest in achieving our social goals but the difference between a bond regime and the current system is critical and stark: they would be rewarded only to the extent they achieve society's goals, not their own.

07 January 2018

Experimenting with Social Policy Bonds

As far as I know, there's not been a single trial of the original Social Policy Bonds. Social Impact Bonds, on the other hand, are being issued in about nineteen countries. The main difference is that SIBs aren't tradable and, as I argue here and here, this drastically diminishes the range and timescale of the social problems that they can set out to solve. It also, again in my view, opens them up to exactly the sort of gaming and manipulation that feature so prominently in our current policymaking environment, and from which we are trying to escape.

That said, there are genuine difficulties in getting people interested in the Social Policy Bond concept. Principal amongst these is that it's never been tried. The difficulty is that Social Policy Bonds are at their best, in that they show their most marked advantage over current policies, when the problems they target are likely to require trialling and adapting many diverse approaches to their solution.

If we already know the best approach, there's no need real need for Social Policy Bonds, and if we know the people best placed to solve the problem, then SIBs, essentially functioning as a performance-based incentive, are adequate. My contention is that, for many of our biggest and most urgent challenges, neither of these conditions apply. We don't know how, for instance, to end war, nor which combination of people and organisations are best placed to do so.

All this implies large-scale goals with a relatively long time frame. So I've found it easy to write about applying the Social Policy Bond principle to goals like world peace, universal literacy, and climate change. It's more difficult to think of less grandiose goals, immune from the possibility of gaming, that could serve as experimental examples to prove the validity of the concept. Perhaps SIBs, despite my concerns, could serve as a stepping stone toward the issuing of a Social Policy Bond, and the subsequent refinement, development and implementation of the concept, so that it can meet our large-scale challenges.

29 December 2017

What do we actually want?

One reason I don't watch tv programmes about wildlife is given by George Monbiot:
To be aware of the wonder and enchantment of the world, its astonishing creatures and complex interactions, and to be aware simultaneously of the remarkably rapid destruction of almost every living system, is to take on a burden of grief that is almost unbearable. The unseen world, George Monbiot, 28 December
Neither have I read all of Tipping point for planet Earth, which ends:
The world really is poised to roll in one of two different directions. One direction leads us right over an environmental tipping point....The other direction leads to the bright future that our children want, and that we all want. Ending up at that future requires building communication bridges, and enhancing our global awareness, to the point that a critical mass of the global society and world leaders recognises our current environmental problems as real, and begins fixing them before it’s too late. If we can get to that kind of tipping point we’re in good shape, because we’ve already got much of the technology we need, and people are incredibly clever when they’re motivated. Tipping point for planet Earth, Anthony Barnovsky, July 2016
We are all the beneficiaries of a degraded environment. I don't just mean those of us who fly or drive or buy supermarket food. I mean everyone on the planet. By destroying the environment we have allowed a massive increase in the quantity of life, and we ourselves, our lives, are the result. Without past environmental destruction the earth would be supporting far fewer people. Many of us are also beneficiaries in that we enjoy a life of abundant food, good health and material wealth. My point is that any campaign or reframing, must start with recognising that It's not us versus them. We are all 'us'. If we do actually want future generations to face brighter prospects we, the 'critical mass of global society' need to encourage our 'world leaders' to express that goal in some form that will motivate people to do something about it. Statements of intent aren't enough.

To be more pragmatic, I suggest reframing the discussion in terms of explicit, agreed, meaningful, environmental goals. Not, as at present, about rights, processes, activities, or funding of institutions. Broad goals that are meaningful to all of us, such as reductions in the levels of pollution of our air and water, or so that instead of trying to monitor and pin down polluters of our air and water, we'd agree on and target the quality of our air and water. Instead of trying to target the average planetary temperature, we'd target for reduction the harm done (to humans, animals and plants) by adverse climatic events. These are goals that mean something to everyone and there is more consensus over what we need than about how to get there. Talking about outcomes makes trade-offs clearer, and brings more participation and buy-in into environmental policy. My piece on Environmental Policy Bonds goes into more detail and discusses how we can use the market's incentives and efficiencies to achieve environmental goals. (I've also written about climate change.) Efficiency is part of it, but the first step, which we have not taken, is to articulate and reward the achievement of agreed, explicit and meaningful goals.

18 December 2017

Planet to government: humility required

Helena Bottemiller Evich writes about research done by Irakli Loladze on the effects of a changing atmosphere on the nutritional content of plants: 
“Every leaf and every grass blade on earth makes more and more sugars as CO2 levels keep rising,” Loladze said. “We are witnessing the greatest injection of carbohydrates into the biosphere in human history―[an] injection that dilutes other nutrients in our food supply.” ... Within the category of plants known as “C3”―which includes approximately 95 percent of plant species on earth, including ones we eat like wheat, rice, barley and potatoes―elevated CO2 has been shown to drive down important minerals like calcium, potassium, zinc and iron. The great nutrient collapse, Helena Bottemiller Evich, 'Politico' 13 September
The loss seems to be of the order of 8 percent or less, but the implications for humans and for the species that eat and pollinate these plants are uncertain. (See here for a spirited debate.) Policymakers prefer to focus on variables that they can influence or control. In agriculture, the focus has been on yields: that is, the mass of crops per unit of land area. Many governments have funded agricultural extension and research institutes with the main aim of maximising yields. Reasons for this are understandable; memories of wartime shortages, for instance. For yields, cause and effect are relatively easy to identify, as are the effects of time lags. There are costs, though, which take the form of depleted soil, polluted water (pdf), loss of wildlife habitat and, as we see, nutrient depletion.

What does this have to do with social policy, or with Social Policy Bonds? Simply this: Social Policy Bonds would change policymakers' focus from things that they can influence, to problems that society wants to solve. So, rather than simply aim to maximise food production, for instance, we'd focus on improving society's health, broadly defined. If nutrient depletion worsens society's health, its effects would be captured by components of our targeted health goal including, probably, Quality Adjusted Life Years, infant mortality and longevity. It would be up to bondholders, motivated to find the most efficient ways of achieving our health goal, to work out whether, and how, to deal with nutrient depletion. No government, no single organisation, the way policy is made now, has the incentive or the capacity to address problems that we do not fully understand, using science that is inescapably out of date. Our social and physical environments are too complicated for any government to understand. Instead, they should be looking at desirable social and environmental outcomes, and setting up a system that motivates people to achieve them. If they use Social Policy Bonds, they'd be doing that, and injecting the market's incentives and efficiencies into all the stages necessary to achieve those outcomes. Focusing on any particular variable, whether it be greenhouse gas emissions, numbers of smokers, or hospital waiting times - or crop yields - just isn't good enough any more.

For more about Social Policy Bonds see here. For more about how the Social Policy Bond concept can be applied to health see here. For my views on agricultural policy see here and here.

16 December 2017

The Collapse of Complex Societies

Clay Shirky writes about Joseph Tainter's 1988 book The Collapse of Complex Societies
One of the interesting questions about Tainter’s thesis is whether markets and democracy, the core mechanisms of the modern world, will let us avoid complexity-driven collapse, by keeping any one group of elites from seizing unbroken control. This is, as Tainter notes in his book, an open question. There is, however, one element of complex society into which neither markets nor democracy reach—bureaucracy.even when moderate adjustments could be made, they tend to be resisted, because any simplification discomfits elites. Clay Shirky, The Collapse of Complex Business Models, April 2010 (?)
In my view, these elites include the bureaucrats themselves. As Mr Shirky writes: "In a bureaucracy, it’s easier to make a process more complex than to make it simpler, and easier to create a new burden than kill an old one." There are too many powerful people with an interest in maintaining the complex way we do things. This includes policymaking. It suits vested interests to keep it complex and arcane, so that only they or, more likely, their paid agents, can follow and influence it.

Social Policy Bonds would simplify policymaking because policy goals would be expressed in terms that ordinary people can understand. Goals would be explicit, transparent and meaningful to ordinary citizens, who could then engage in the policymaking process. If Trainter's thesis is correct, it might well be the complexity of our politics that precipitates societal collapse: too few of us understand it, so we have very little buy-in to the process and its institutions. In the west we are seeing the result of this lack of buy-in: extreme polarisation, whereby different views are barely tolerated. Yet buy-in is going to be essential if we are to face up to urgent, huge challenges facing all of us: climate change for instance, or nuclear proliferation.

Social Policy Bonds could help remove unnecessary complexity further down the track, when it comes to solving our social problems. Under a bond regime, inefficient operators would be penalised - whoever they are - and only efficient approaches would receive funds. It would be the self-interest of bondholders that would ensure this: their goal would be exactly congruent with those of society: to achieve our social goals as efficiently as possible. There might still be complexity in achieving these goals, but only if it boosted efficiency. The contrast with today's system, in which complexity is almost a deliberate ploy to deter scrutiny, would be total.

07 December 2017

Free market? Don't believe it

There's a lot of lip service paid to the notion of the free market, as if competition, at least over the long run, will lead to economic efficiency. There are many problems with this. The biggest, in my view, is that we now have political systems that not only entrench wealth and income inequalities, they extend them. This seems to be an almost worldwide phenomenon. Our governments and big business now act as a coalition, very often acting against the interests of ordinary people and small businesses. Inequality on a staggering scale is both the result of policies favouring the rich, and the stimulus to more of them.
Take this excerpt from a review of The Captured Economy: How the Powerful Enrich Themselves, Slow Down Growth, and Increase Inequality, by Brink Lindsey and Steven Teles, discussing the US economy:
Of the firms that enjoyed returns on invested capital of 25% or more in 2003, 85% were still earning returns that high a decade later. The authors put forward four case studies to illustrate the choking spread of rent-seeking behaviour. Implicit and explicit government subsidies to the financial industry enrich bankers and sow the seeds of crisis, for example, but have done little to boost growth. Increasingly strong intellectual-property protections have not unleashed a torrent of new ideas, but have instead swelled the earnings of top firms, which wield their patents and copyrights menacingly at would-be innovators. The cost to negotiate reams of licence agreements, and the risk of lawsuits, can stymie the most determined of entrepreneurs. Analyses of occupational licensing and land-use rules turn up similarly skewed policies: they benefit those already on top at the expense of society as a whole. How America’s economy is rigged by special interests, the 'Economist', 2 December
Having been involved in agriculture, I have seen how corrupt, insane policies can persist for decades. More important than their benefiting bureaucrats and fraudsters, is that they enrich people and corporations sufficiently to finance opposition to their being withdrawn. No trick is too low. I think much of the reason for the persistence of profligate policies like agricultural subsidy programmes, and those competition-stifling regulatory barriers described above, is that our policymaking process is too protracted and complex for ordinary people to follow unless, of course, they are paid to do so.

One of the benefits of Social Policy Bonds is that they would define explicit, transparent policy goals that are meaningful to ordinary people. This would make the policymaking process itself more accessible. And when people understand what a policy is all about, we can participate more in its development, refinement, and implementation. We should also better understand the limitations and trade-offs that are intrinsic to public policymaking when resources are limited – as they always are. A hugely important benefit arising from this will be buy-in: having been consulted when our social goals are being formulated, we are more likely to participate in achieving them. The widening gap between politicians and the citizens they are supposed to represent would begin to close. Bondholders and their paid agents would experiment with different approaches to solving our social and environmental problems and, no doubt, they will try some that are useless or worse. But - unlike in today's policymaking world, with its entrenched interests - they will have every incentive to terminate their failures. We'd still need regulation and licensing, but they would be means to ends that are wanted by ordinary people, not corporations and other powerful interests.

28 November 2017

Perverse incentives and health

Dr Jason Fung explains why 'there is so much money being raised for heart disease or cancer or diabetes, and why there is so little real medical progress.' As he says, 'there are many ways that Big Pharma pays doctors':
  • The most common are speaker’s fees and consulting fees. ...
  • The second form of graft is consulting fees. The company will pay the doctor for his/her ‘advice’ as a consultant on how to market a drug. Of course, the company cares not at all about what he/she says. It is an opportunity to give these doctors a 2 hour advertisement disguised as a consultation. For this the doctor is paid $2000-$5000. ...
  • The most insidious form of corruption is ‘research’ money. While it sounds great, it is usually another thinly disguised form of bribery. Some research project is usually set up with little or no academic merit. The universities setting this up are well paid. The doctors who participate are well paid. Best of all, research meetings are held regularly in lovely locations like Vienna and Hawaii. ‘Researchers’, of course, are invited to participate, all expenses paid. The public only sees that the company has donated ‘research’ money and that the doctor is doing ‘research’. These shenanigans happen every day, in every university. If you’ve ever wondered why there is so much money being raised for heart disease or cancer or diabetes, and why there is so little real medical progress – this is the reason.Clinical Practice Guidelines or Legalized Bribery?, Dr Jason Fung, November
He's mostly referring to the United States, but perverse incentives pervade even government-run healthcare systems. By default, health expenditure is influenced by groups of medical specialists with little incentive or capacity to see improvements in the overall health of a large population as an objective. As well as the substantial money flows described by Dr Fung, funding decisions are also heavily influenced by the public profile of a disease or its victims, rather than on what would best meet the needs of society. Health is about a lot more than what Big Pharma does, or how governments allocate healthcare funds. It’s also a question of diet, exercise, transport, and culture. Recent research shows, for instance, the beneficial effects on health of green spaces in our cities (see here (pdf) for instance). The way government is structured, with its discrete funding bodies, makes it unlikely that such benefits will influence funding decisions.

We cannot expect a government nor any single organisation, even if they were ethical and altruistic, to identify the huge numbers of variables, with all their time lags and interactions, that influence the nation’s health. We can, though, devise a system that rewards people who explore and implement the most cost-effective health solutions, even when circumstances and knowledge are changing continuously. I have tried to do this with my essay on Health Bonds, which would aim to distribute scarce government funds to where they would do most good, as measured by such indicators as Disability Adjusted Life Years.

Incentives matter, and current incentives have nothing to do with achieving society's broad, long-term goals. Instead, they accrue to those who maximise the narrow, short-term goals that have more to do with the financial success of big companies than the health of ordinary citizens.

22 November 2017

Short selling

A correspondent asks whether short selling will work against the Social Policy Bond concept. Specifically: if Conflict Reduction Bonds are issued, would short sellers profit from events that would make peace less likely?

Short selling in this context would be the selling of Conflict Reduction Bonds that are not currently owned, in the hope that their market price will fall, and that the seller will buy the bonds at their lower price. Short sellers could then be motivated to foment conflict.

I have these responses:

(1) The short seller doesn't own the bonds, but has to borrow the bonds from the broker or dealer when placing the sell order. The seller is then obliged to buy back the bonds at some point in the future. Just as the seller will want to see the value of the bonds fall, so the broker or dealer will want to see their value rise. In the Conflict Reduction Bond example, any additional incentive to foment conflict on the part of the seller would be balanced by an incentive on the part of the broker to reduce conflict.

(2) The weight of money - that is, the funds for the bonds' redemption - will be in favour of progress toward the goal; just as in the share market, the short selling of a company's shares doesn't change the incentives for the company itself to succeed. It's likely that any profits from short selling will be short term in nature; the long arc of the market for the bonds will bend in our favour.

(3) Public opprobrium. While people or corporations do profit from the failure to achieve social goals, they do so in ways that are indirect. If short sellers were to work to make social goals less achievable, the source of their activity and the reasons for it would be direct and identifiable. Taking the Conflict Reduction Bond example, again, weapons manufacturers and military contractors do already profit from their activities. They could even now be deliberately fomenting conflict with the aim of boosting their revenue. Short selling would be only one more way of profiting from war, but it is one that is both more identifiable and more likely to attract public opprobrium than any other so, even if a corporation were that way inclined, it would be unlikely to follow through.

Social Policy Bonds are not a Utopian solution but (in my view) they are much better than the current system. They would bring about the re-jigging the incentives to reward the outcome we want, rather than the activities, institutions or policies ostensibly trying to achieve it.

16 November 2017

The stability of the septic tank

I often agree with British journalist and military historian Max Hastings. But not with his remarks in this interview with Tobin Harshaw:
MH: One of the things I've learned as a historian is that one should never listen to anybody who uses the word "solution." Most difficult problems in the world are not susceptible to solutions. What they are susceptible to is management. We'd all get along a lot better if we understood there is not the remotest possibility of a "solution" or even multiple solutions to the troubles in the Middle East because they are so fantastically complex. The only way to approach them is to think how we can best manage them. How best can we avoid making things worse?
TH: That goes back to what you said earlier... about peace not being the goal. What did you say - it should be stability?
MH: Yes, stability is the key.
Trump, Brexit and Echoes of World War I, Tobin Harshaw, 'Bloomberg View', 11 November
I think Mr Hastings is too pessimistic. Yes, war and conflict have been a feature of humanity at least since history began, and yes, many conflicts appear intractable. But Mr Hastings is in good company: here is Professor Colin Gray:
War is a part of the human condition, it is not a problem that can be solved. However, it is a condition some of the worst features of which can be alleviated by law, custom, norms and plain self-interest. Another Bloody Century (page 379), Colin S Gray, 2007
I am much more optimistic, and I think we should be aiming for outcomes more edifying than the stability of the septic tank. I think that if war's negative impacts can be satisfactorily defined, then targeted for reduction, then, with sufficient incentives, the suffering imposed by human conflict can be drastically reduced. As Professor Gray explains elsewhere in his book "Warfare is social and cultural, as well as political and strategic, behaviour. As such it must reflect the characteristics of the communities that wage it." (page 385). These characteristics are deep-seated and pervasive, which means that any solution to the problem of human conflict will need to be long term in nature. An array of diverse, adaptive and focused approaches will therefore be required.

Stability: our highest aspiration?

A Conflict Reduction Bond regime could work to stimulate such approaches of the sort that we cannot necessarily foresee. We should, I believe, contract out much of the work needed to find the best approaches to eliminating war. While robust definitions of 'peace' will need to be thought through, we could immediately issue bonds redeemable only when there had been large numbers of people killed, injured or forced to flee their homes for a sustained period.

Bondholders would then have incentives to prevent conflict with maximum efficiency. They would explore and invent new, more diverse options than are currently being undertaken, and they could divert funding into the most promising of these. They would have more latitude for action than government. For example, bondholders could subsidise intermarriage between members of different religious or territorial communities. They could sponsor school exchange visits, sports matches or the broadcasting of peaceful propaganda. They could arrange for the most virulent warlords and preachers of hate to take one-way, first-class journeys to luxurious holidays in remote resorts with limited access to communication facilities. Whatever holders of bonds targeting war and terrorism do, they will have successes and failures. But they will also have incentives to terminate projects that are failing and to refine and replicate their successes - to be efficient, in other words.

Government has no such direct incentive. It cannot offer direct financial rewards for success, and its talent pool is limited, partly for that reason. It would get into trouble if it advocated things like intermarriage, or sponsored sybaritic retirement for warmongers. As in other areas of social policy, its options are limited. They tend to be one-size-fits-all, slow to adapt and advocated mainly because they have been done before, rather than by their efficiency: government will always prefer tried, tested and failed to promising, innovative - and potentially destabilising.

The field of conflict is one area where the private sector can and should be given the chance to operate more freely. Sadly, it is largely private incentives - to arms manufacturers and brokers - that have contributed to human conflict. We need to redress the balance and reward those who strive for peace.

Under a Conflict Reduction Bond regime, government would still have the responsibility of defining our peace goal, and it would be the ultimate source of finance for achievement of that goal. But the actual achievement of peace would be contracted out to the private sector, who would have powerful incentives to achieve it as cost-effectively as possible. Government and the private sector would each do what it does best: respectively, articulating its citizens' wishes, and finding the most efficient ways of achieving its goals. We can, and should, aim for peace, not managing the stability of the septic tank. Peace, after all, is what almost all of us want for ourselves and for future generations.

12 November 2017

Society as an interest group

Clive James writes:
[W]e tend to believe that there is some natural state of justice to which political life would revert if only the conflicts between interest groups could be resolved. but whatever justice we enjoy arose from the conflicts between interest groups, and no such natural state of justice has ever existed. The only natural state is unjust.... The Meaning of Recognition, 2005, page 4
I'm not so gloomy. When it comes to how things shall be done, and who shall do them then, yes, interest groups - those motivated to follow the policymaking process and so to benefit from it - are the only protaganists that really matter. But it doesn't have to be that way. Or rather, by targeting outcomes rather than the alleged means of achieving them, we can enlarge the interest group such that it includes all citizens.

Targeting broad outcomes, such as better health or reduced adverse environmental impacts, that are meaningful to all of us can bring about greater public engagement in the policymaking process. Yes, there will be disagreements over priorities, but we shall have been able to follow the process and contribute to it - unlike under today's regime, where policymaking is strictly for devotees or their paid employees.

The world is too small now for the solution of social and environmental problems to be left to exclusive interest groups to sort out. Social Policy Bonds could represent a middle way between the happenstance of a free market approach to solving our problems, and the coercive, and (often) ham-fisted, inefficient way of central planning. Government, influenced as it is by interest groups, usually does a terrible job in actually achieving our complex social goals. A Social Policy Bond regime, on the other hand, would play to government's strengths: articulating society's goals and raising the revenue to achieve them. But then it would, in effect, contract out the achievement of those goals, letting market forces do what they are best at: ensuring the optimum allocation of society's scarce resources in order to achieve society's goals - not those of interest groups, be they private- or public-sector.

Social Policy Bonds would, I believe, achieve our social and environmental goals more efficiently and less randomly than the current system. The planet as a whole cannot afford either the time for conflicts between interest groups to be resolved or the collateral damage that such conflicts are inflicting on our ever smaller planet.