21 July 2017

Social Policy Bonds and free riders

Let’s say that the bonds have been floated, and that a high proportion of them have been sold to people or bodies have no intention of doing anything to achieve our targeted goal. These are would-be free riders, hoping to benefit from other bondholders’ efforts to achieve the goal, or a drift toward the goal that happens regardless of anybody’s efforts. (An example of this would be a holder of Climate Stability Bonds benefiting from new scientific evidence showing that the climate isn’t changing as quickly as the market thought it was when the bonds were issued.)

If too many Social Policy Bonds were held by would-be free riders who had no intention of doing anything to help achieve the targeted social objective, then the value of all the bonds would fall. At that point it becomes worthwhile for active bondholders to buy those bonds that are traded, do something to achieve the goal, and see the value of their bonds rise. This would benefit any remaining free riders of course, but not as much as the new bondholders, because these new bondholders would have paid less for their bonds. Most likely, we'd see aggregation of bond holdings as it becomes worthwhile for passive bondholders to sell their bonds. The resulting small group of large bondholders would then have incentives to cooperate with each other. This would mean, amongst other things, that they would all benefit by agreeing on how the specified social problem could best be targeted. One element of the optimal strategy will be to decide who will be responsible for what activities, and how they shall be compensated. Major bondholders will certainly have incentives to share information with each other. Many of the bonds would be traded between bondholders.

If the proportion of bonds held by free riders is small, then their passivity would have little effect on the market value of the bonds, and they might benefit by hanging on to their holdings if active bondholders are successful in their efforts to move towards the goal’s achievement. Such behaviour would, to a limited degree, undermine the Social Policy Bond concept, but keep in mind that:
  • The true standard of comparison is not perfection: just something significantly better than any alternative, and

  • Our goal is to achieve social goals as efficiently and quickly as possible; not to ensure that everyone is rewarded strictly in accordance with their efforts.
There is more about Social Policy Bonds and free riding in my book, chapter 4.

20 July 2017

Targeting long-term goals

James Hansen talks about climate change:
You’re talking about a system that responds on the timescale of decades to centuries — that’s a different time constant than the political constant.” James Hansen talking to David Wallace-Wells in The Uninhabitable Earth: Annotated Edition (reference 12)
It's not only climate change for which our current politics is inadequate. Any crisis building now, but whose effects will be felt only by future generations or, even more scarily, future administrations, is going to to be neglected within our current system. Our politicians face few incentives to consider future generations, and plenty of incentives to ignore them completely. We see this in the amassing of grotesquely inflated debt levels, badly thought-out immigration policies, under-investment in critical infrastructure, and environmental behaviours including, but by no means limited to, those that affect the climate. The narrow, short-term interests of powerful interests, public- and private-sector, win out every time. As for future generations: our politicians are expert at kicking the can down the road.

Social Policy Bonds could remedy this neglect of long-term consequences. They would create a coalition of interests in favour of achieving social and environmental goals that are currently too remote to receive much attention - though plenty by dystopian fiction writers. The way the bonds work would be to reward the achievement of our long-term goals at every stage of the process.

Social Policy Bonds (unlike Social Impact Bonds) are radeable, which means that bondholders don't have to hold them until redemption to see their value rise and realise a profit.. This allows the bonds to target effectively such remote goals as climate stability, universal literacy and world peace. The bonds would begin their work as soon as they were issued: those who buy the bonds would be motivated to begin the explore measures that would immediately raise the chances that the targeted goal will be achieved quickly. For most long-term goals, a large array of diverse measures will need to be proposed, implemented on a small scale, then either terminated or implemented more widely. No government can effectively oversee such a range of projects, nor can any single, conventional organisation. In particular, terminating failed approaches in favour of more efficient ideas does not come easily to government. But under a Social Policy Bond regime there would be every incentive to focus only on those approaches that will achieve our targeted goal most efficiently. And, crucially, the optimum mix of approaches will change over time - especially over the long time period that remote goals will require for their achievement. The bonds would give rise to a new type of organisation; ones whose composition and structure would change, perhaps radically, over the lifetime of the bonds, in response to changing circumstances and improving knowledge. Again, such adaptiveness is not a characteristic of government action, but it is an essential element of any attempts to solve our long-term problems.

Social Policy Bonds would represent a radical change from today's politics. But, as long-term problems threaten to overwhelm humanity (click on the source excerpted at the top of this post, for one example) it's clear that business as usual is not working. Targeting long-term goals and injecting market incentives into their achievement would seem to be our best hope. Social Policy Bonds, uniquely amongst policy instruments, would do both.

I've written about why I believe tradeability is important here, and why I am ambivalent about Social Impact Bonds here.

14 July 2017

Climate change: means and ends

A leader in the current 'Economist,' referring to public- and private-sector commitments to run their operations on 100 percent renewable energy is titled: Better to target zero emissions than 100% renewable energy:
Most important, a 100% renewables target confuses means with ends. The priority for the planet is to stop net emissions of greenhouse gases, especially carbon dioxide. Putting too much emphasis on wind, solar and other renewables may block off better carbon-reduction paths. 'The Economist', dated 15 July
No. The real ends of policy have to do with the problems caused by climate change. Whether, and by how much, greenhouse gas (ghg) emissions contribute to those problems is still an open question. And, whatever the answer to that question, still more important to policymakers is whether reducing ghg emissions is the best way of dealing with climate change. For that, we need to go beyond the cant about renewables and beyond the Economist's - and almost everyone else's - focus on greenhouse gases to ask whether we are more concerned about climate change, or about the impacts of climate change on human, animal and plant life?

A Social Policy Bond regime would not assume that reducing ghgs is the best way of achieving our goals. Instead it would specify very clearly what our goal actually is. Most likely, we would express our policy goal as a combination of physical, social, biological and financial measures that must fall within specified ranges for a sustained period. We'd then issue Climate Stability Bonds that would be redeemed only when that had occurred.

Unfortunately an entire bureaucracy has grown around ghg emissions. It seems to me that the existence and activities of this bureaucracy embody the assumption that our trying (and most probably failing, though we'd never know either way) to influence the climate is the most efficient way of dealing with problems caused by unfavourable changes in the climate. I think that assumption needs to be challenged. Clarity about what actually we want to achieve, of the sort that a Social Policy Bond approach would necessitate, is the only feasible starting point.

11 July 2017

Immigration: the need for buy-in

Tim Black writes about the immigration crisis facing Italy, where last year 181 000 migrants arrived via Libya, and 'already this year, a further 84 000 have arrived, which is 20 per cent more than arrived in the first half of 2016.'
Now, if those Italians whose towns have been turned into migrant holding stations had been allowed to debate the migration issue; if those living in Lampedusa and the other migrant destinations in Italy had been part of a process of democratic deliberation; and if they had been allowed to voice their concerns, and influence the decisions which have led to the influx of migrants, then perhaps the seething resentment, the sense of being imposed upon, of having their lives turned upside down with the stroke of pen in Brussels, might have been absent. Perhaps a more workable solution could even have been found. And perhaps the migrants themselves wouldn’t be treated as a problem, but as people just like us, sometimes fleeing wretched lives, always seeking better ones. The EU: pitting migrants against citizens, Tim Black, 'Spiked', 12 July
Sadly for everybody involved, our so-called representatives at the national and EU levels have got into the habit of not consulting us about almost everything. The results are as dismal as they are predictable: the gap between citizens and politicians grows ever wider. Ordinary people feel - and are - powerless. Politics are hyper-polarised. Anger and violence are now a normal feature of political discourse.

Our politicians just know they're right. So do those NGOs and philanthropists who support 'open borders', for example, though, unlike the rest of us, they don't have to live with the consequences of their momentous decisions.

It's time to change the way policymaking works. Social Policy Bonds have two main elements: identifying society's social goals, and injecting market incentives into their achievement. If we could strive for the first of these elements alone, that would be preferable to our current system. As it is, few ordinary people are consulted on issues, such as immigration, and our political class is now so removed from everyday life that they no longer have any feeling for what's important to us.

Social Policy Bonds could narrow the gap between politicians and the people they are supposed to represent. Political debate under a bond regime would focus on outcomes that are meaningful to ordinary people; things like physical and mental health, crime and housing. Because such concerns are meaningful to all of us, we could all contribute to discussion about which goals we should target, and their relative priority. Of course, none of us will be fully satisfied by our collective decision. But, crucially, we shall know that we have been consulted and that, if we wanted to, we could have contributed to the debate.

One happy result of that is that there would be widespread buy-in. We might not fully agree with every decision, but we were able to participate in the process, and we now have a fuller understanding of the trade-offs inherent in any political decision.

I've written more about Social Policy Bonds and buy-in on my main website here, and in various blog posts including, recently, here, here and here.


05 July 2017

The environment: what do we want?

John Michael Greer writes: 
A huge fraction of the energy consumed by a modern industrial society is used indirectly to produce, supply, and transport goods and services; an allegedly “green” technological device that’s made from petroleum-based plastics and exotic metals taken from an open-pit mine in a Third World country, then shipped halfway around the planet to the air-conditioned shopping mall where you bought it, can easily have a carbon footprint substantially bigger than some simpler item that does the same thing in a less immediately efficient way. Dark Age America, John Michael Greer, 2016
The sort of life-cycle analysis required to establish the environmental benefits or otherwise of shifts in our behaviour are bedevilled by boundary issues, measurement difficulties and the difficulty of weighting one type of environmental impact against another. They are better than blandly assuming that rail is ‘better’ than air travel, or that solar power is better than coal-fired power stations but, for the making of robust policy, they would need to be continually reassessed in the light of improving technology, our ever-expanding knowledge of the environment, and our ever-changing environmental priorities. Government policy cannot be so responsive: if government did use life-cycle analysis with the aim of altering our behaviour, it would probably do so on the basis of a one-time, one-size-fits-all, and possibly quite subjective assessment of environmental costs and benefits. It’s not good enough, but even worse would be what we largely have now: government environmental policy based on corporate interests, regulatory wrinkles, and 'feels-good' media stories and the launching of visually appealing initiatives that attract air time but otherwise achieve nothing.

Social Policy Bonds would take a different approach. They would subordinate environmental policy to targeted environmental outcomes. It might be, for instance, that society wishes to reduce its use of fossil fuels. A Social Policy Bond issue that rewarded achievement of such a reduction would generate incentives for bondholders to bring it about at least cost. They might well carry out life-cycle analyses in their attempt to do so. But there is an important difference between the way do they would conduct their research and the way government would do so: bondholders have incentives to achieve their goal efficiently. This is likely to mean responding to and stimulating: increased knowledge of scientific relationships, and technical advances.

More important, though, is that a Social Policy Bond regime would compel clarity over society's real goals. In this case, we'd have to answer the question: is reducing fossil fuel use an end in itself, or a means to other ends? And if the latter, what are those ends? Let's say those ends include, inter alia, improving air quality. Now, is improving air quality an end in itself, or is it the effects that air pollution has on human, plant and animal life that we really want to be targeting? And, if the latter, why not target these ends directly? There might be good reasons, involving the costs of monitoring, for targeting indirect means of achieving our goals, but we do need to keep these goals clearly in mind.

A Social Policy Bond regime would necessarily entail asking ourselves what are the real goals of, say, environmental policy. It would then contract out the achievement of these goals to those people or bodies - public- or private-sector - who, at any one time, will form that coalition that can most efficiently take us along the route towards achieving our goals. Even a perfect life-cycle analysis cannot do this: technology and our knowledge are changing constantly. Policy should therefore limit itself to articulating our environmental goals, and raising the revenue for their achievement.

Most of our important environmental goals will require diverse, adaptive responses. These are precisely the sort of responses that government does very badly. Government can and should articulate society’s environmental goals, and can help pay for their achievement: in the democratic countries it performs these functions quite well and, indeed, it is the only body that can do so. But actually achieving these goals requires continuous, well-informed and impartial decisions to be made about the allocation of scarce resources. For that purpose, Social Policy Bonds, with their incentives to achieve targeted outcomes efficiently would, I believe, be far better than the current ways in which environmental policy is formulated. For more about how Social Policy Bonds could target improve the environmental goals, see here.

01 July 2017

Blockchain-based investing and the Social Policy Bond principle

Zipper Global Ltd, on 28 June, released a draft paper that marries the Social Policy Bond and blockchain concepts. The aim is to address some of the flaws in current startup protocols. The abstract of their draft:
Blockchain based investing and contributing to early stage token projects
Today’s startup funding protocols have several serious flaws. Startup founders struggle to get early stage funding and spend significant amount of their time fundraising instead of building their company and community. Investors are stuck with their illiquid investments for years, and have to make risky investments without knowing if startups are able to execute their plans. Zipper investment platform fixes these pain points and disrupts startup funding with milestone and token based investments. The platform, based on Ethereum blockchain, provides professional investors an early access and safe way to invest into even the most ambitious startups’ tokens, as funds are released to startups in tranches based on reached, smart contract controlled milestones. Investors can exit anytime by selling the startup’s tokens, and startups can scale more easily by giving tokens to their network such as users and contractors as incentives. Startups spend also significantly less time in fundraising as less funding rounds are needed. ZIP token, the platform’s native usage token, grants investors the right to invest through the platform. Moreover, a smart contract controlled Startup Trust scales the platform by investing into selected startups in the platform with the ZIP tokens the Trust holds. ZIP token holders co-decide which startups the Trust invests into and how to spend the Trust's investment profits, such as purchasing ZIP tokens from the open market which would create demand and liquidity for the tokens.  
The paper - full text here  (pdf) - is a first draft, and Zipper Global invite comments via either zipperglobal.com or https://slackin-qhgawovsyq.now.sh/.

27 June 2017

Social Policy Bonds and price signalling

One of the less obvious benefits of a Social Policy Bond regime arises from the price signalling of the market for the bonds. At flotation, the bonds would be auctioned, and difference between the sums raised at flotation and the total redemption value of the bonds would supply the market's best estimate of the cost of achieving the targeted goal at that time. This estimate would vary over time, depending on many factors including bondholders' performance in undertaking or financing goal-achieving projects. The market for Social Policy Bonds, then, as with all markets, plays a vital role not only in allocating resources but also in signalling; in this instance to policymakers, the approximate costs of achieving social goals.

A competitive market for Social Policy Bonds would minimise the total cost of achieving a specified objective, as well as signalling it. More subtly, and more technically, it would also indicate the marginal cost of achieving further improvements. Say one million crime reduction bonds issued by a local authority were to sell for $5 each. This would tell the issuing body that the present value of the expected maximum cost, including bondholders’ profits, of reducing the crime level from, say 50 to 40 units, would be $5 million. The local authority might then suppose that it could afford to be more ambitious, and aim for a further fall to 30 units. It could issue a million additional bonds redeemable when this new lower rate were reached. These would (probably) have an initial market value of less than $5, reflecting the (probably) diminishing returns involved in preventing crime. The point is that, by letting the market do the pricing of the bonds, the local authority would be getting an informed view of the marginal cost of its objectives. So if the bonds targeting the new level of 30 units were to sell for $4 each, then the maximum cost of achieving that objective would be $11 million, being equal to: $5 million (paid out when the level fell from 50 to 40 units) plus $6 million (paid out when the level fell from 40 to 30 units). The marginal cost of a 10-unit drop in crime would thus have been revealed to have risen from $5 million to $6 million. Should the local authority aim for a further fall to 20 units? Following such crime rate-targeting bond issues it would have robust information about the cost of doing so.

This is, of course, a simplified example and in fact the bond market would continuously update its pricing information. Say that new research, of the sort that might be stimulated by an initial bond issue targeting crime, suggested new ways of reforming or deterring criminals. Bondholders may, for example, have financed successful research into more effective reform programmes, or set up more appealing alternative lifestyles for especially hardened criminals. How would the market react to such developments? Once their effectiveness had been revealed, the value of all the bonds would rise. Instead of being priced at $5 and $4, the two crime reduction issues of the example might sell for $8 and $7. The total cost to the government of redeeming these bonds would not change: it would remain at $11 million (though redemption would most probably occur earlier). But the market would be generating new information as to the likely cost of future reductions in the crime rate. The market would now be expecting reductions of 10 units of crime to cost $2 million (from 50 to 40 units), and $3 million (from 40 to 30 units). The new research would have reduced the costs from $5 million and $6 million (respectively). So the cost of any further crime reductions would also fall, and by following market price movements policymakers could gauge approximately by how much. 

These figures are hypothetical, but they do indicate the role that markets for Social Policy Bonds could play in helping the government, and taxpayers, decide on their spending priorities. The market for the bonds is elegantly efficient in conveying information about the cost of achieving objectives and, crucially for policymakers, how this cost varies with time and circumstances. I discuss this in chapter 5 of my book.

17 June 2017

Creeping corruption afflicts charities too

I've blogged before about my two opinions about organisations, which I deem axiomatic:
  • Every organisation, be it a church, trade union, university, government or whatever, will always seek to overplay its hand.

  • Every organisation will, sooner or later, forget its founding ideals and its stated objectives, and devote its energies to self-perpetuation.
Sadly, but not unexpectedly, the list in the first axiom can be taken to include charities, which appear to be just as subject to creeping corruption as all the others. There's little point in trying to find why this happens, but there is a great deal to be gained, in my opinion, by remedying the problem.

Social Policy Bonds would lead to the creation of a new sort of organisation: ones whose composition and structure will adapt to changing circumstances. The bonds would encourage the achievement of social goals that will take longer to achieve than the current, relatively short, time horizons of people or bodies in the current system. Under a Social Policy Bond regime, the members of the coalition of bondholders targeting, say, better health, would gain by buying bonds, doing what they can to improve the nation's health, then selling their bonds at an increased value. They need not stay invested in the bonds for the lifetime of that bond. At every point in time between the flotation of the bond and its redemption, the bondholders would form the body that can advance goal-achievement most efficiently. Bondholders need not be directly involved in achieving the goal; they might be investment companies, whose role will be to allocate funds according to what they think will be the most efficient people or projects that will help bring about the next step toward achievement of the targeted goal, simultaneously raising the value of their bonds. The identity of any and all bondholders would change over time, if that turns out to be the best way of achieving our objective quickly. Blockchain technology could facilitate any shifts in the membership of the coalition of bondholders.

The important point is that every activity of every bondholder would be devoted to achieving our goal. Their self-interest would be exactly congruent with those of society - in stark contrast to what happens now under even the best of our current systems of government.

13 June 2017

Listening to the 99.9 percent

Jeffrey Lewis writes about Our Nuclear Future
President Trump, for example, would have between two and four minutes to decide that computerized reports of [a nuclear] attack are not a false alarm and to give the order to retaliate. Our Nuclear Future, Jeffrey Lewis, 'The American Scholar', Summer 2017
The possibility of nuclear catastrophe is not confined to the Russia - US theatre:
If the 30 minutes that it would take for an intercontinental ballistic missile to fly from Russia to the United States imposes crushing time pressures, consider that flight times in South Asia will be five to 10 minutes, depending on the missile and the target. India and Pakistan are re-creating a Cold War deterrence framework under much more demanding conditions.
That's scary enough, and then there's North Korea.... What can be done to reduce the chance of catastrophic nuclear conflict? Mr Lewis writes about the Global Zero initiative, but that appears to be a failing attempt to eliminate all nuclear weapons. So, despite its fading somewhat from public consciousness, the nuclear nightmare hasn't gone away. In many ways it's getting worse. As Mr Lewis writes, the very narrow window available for decision-making 'requires an enormously complex computerized system to detect missile launches, convey that information to the president, and then transmit and execute his order. Every minute that is lost to these processes reduces the time in which the president must decide. As a result,
the pressure to automate much of the system is strong.' And with automation comes the possibility of malware or defective hardware or software.

The problem is magnified, in my view, by the mismatch between the enormous costs of nuclear catastrophe and the relatively minuscule rewards on offer to those working to prevent it. I am certain those involved in initiatives such as Global Zero, and in disarmament, whether they be UN or non-governmental agencies or other public- and private-sector bodies are hard working and well meaning. They probably couldn't work harder even if their salaries were tripled. But the point about lack of incentives is that they are needed to attract more, and more-talented people into striving for nuclear peace. Our current political systems have no way of funnelling sufficient funds into a goal, such as nuclear peace, that is inherently long term, and that has no powerful interest group to lobby in its favour, despite the enormous potential benefit to the 99.9 percent of humanity that would like to see it happen.

The Social Policy Bond principle could help, in the form of Nuclear Peace Bonds. We don't know how to achieve nuclear peace; we don't know who'll be best at achieving it, but we do know that, if we're going to achieve it, we need to offer higher rewards, so as to encourage a diverse, adaptive range of peace building initiatives. Some of these initiatives will be failures or inefficient; others will need research and refining before they can be implemented effectively. This points to the need for a long-term, guaranteed reward for success, as well as the need to make the bonds tradeable, so as not to discourage people from taking only partial steps toward our goal. It seems ridiculous to me, that the rewards to people who gamble with other people's money, keep their winnings and get taxpayers to pay for their losses, are in the billions of pounds, while the collective rewards for those working in an unglamorous but far more socially beneficial field - like nuclear peace - are much more modest and entirely unrelated to effectiveness. Nuclear Peace Bonds would fix that.

06 June 2017

Self-entrenching atomisation

In a discussion about air travel, Steve Randy Waldman makes an interesting point:
Aggregate outcomes are not in general or even usually interpretable as an aggregation of individual preferences. When we learn about the Prisoners’ Dilemma, we don’t interpret the fact that both players rat as evidence that, really, they both just wanted to go to jail for a long time. After all, that is their revealed preference, right? No. We understand that the arrangement that would obtain if they could cooperatively regulate one another’s behavior is in fact the outcome that they would prefer. As isolated individuals, they simply have no capacity to express this preference. Source See also Prisoner's Dilemma
This explanation of the mismatch between the sum of individual preferences, and aggregate decisions makes a lot of sense, and we can see its implications beyond the air travel industry in the deficiencies of our policymaking system. (I'm not, incidentally, convinced by the rest of Mr Waldman's discussion of the air travel industry.) To my mind, it points to the need for more public engagement with policy; more discussion amongst ordinary people about the costs and benefits of policy alternatives. But policy itself is not really the issue: policy is a means to various ends, and those ends under our current system are rarely articulated, often  deliberately obscured, and often in conflict with each other and with the interests of anybody except those bodies wealthy enough to follow and influence them. We don't  "cooperatively regulate one another's behaviour" in the policymaking process, because that process is just too esoteric and time-consuming for ordinary people to follow.

The result is that our politics is ceded to powerful bodies, public- and private-sector, which benefit by ordinary people's unwillingness or inability to follow the policymaking process. A self-entrenching mechanism seems to be at work: certain policies weaken social and family bonds. I'd include amongst these policies that deal with welfare payments, subsidies to (for instance) road transport and capital-intensive agriculture, zoning laws, regulations that favour big business, and trade agreements. Importantly, the positive effects of these policies might well outweigh the negative, but the negative effects do tend to divide us. And, as atomised individuals or nuclear families, we exhibit exactly the behaviour that Mr Walden talks about: we cannot translate our wishes through a broken policymaking system, into 'an aggregation of individual preferences'. This cycle perpetuates itself.

Social Policy Bonds could help. They would refocus policy discussion onto outcomes that are meaningful to ordinary people. Goals, in short, that we could understand and debate. Under a bond regime anyone could engage with the policymaking process and, crucially, with each other, over policy goals and priorities. Even if our individual wishes were over-ruled, we'd have the satisfaction of knowing we'd been consulted. One result of this would be more buy-in: a crucial feature missing from politics these days. Another would be the solution to the problem to which Mr Waldman alludes: our individual preferences could be aggregated in a meaningful way. For example: few of us would want to see, say, a conflict anywhere in the world that led to the detonation of a nuclear device. Or, at the national level, most of us would like to see universal literacy and reductions in the level of violent crime. Currently, we have no way of articulating and debating these preferences in a systematic way: we can vote for political parties that may or may not offer different perspectives; we can join single-issue groups (which tend to deviate from their initial remit), and there are various other ad hoc activities we can undertake in support of some, but not all, of our individual goals. But they're unsystematic, often incoherent, and rarely exposed to moderating or contrary argument. And a large number of interest groups anyway replicates almost exactly the mismatch discussed above.

In contrast, a Social Policy Bond regime would enable us meaningfully to express goals that our current system finds difficult to target: goals like the avoidance of a nuclear conflict. The bonds could do this effectively because they would not presuppose how our goals shall be achieved, nor who shall achieve them. By focusing entirely on outcomes and costs, Social Policy Bonds would translate and modify our individual preferences into coherent, consensual policy goals. An invaluable by-product of a bond regime would be its reversal of the atomisation process afflicting western democracies.