21 January 2017

What are economists for?

Markets are means, not ends

Though much of my working life was intended to promote free trade, I question most economists' adherence to it. On the grounds of freedom, I fully agree that governments have no business interfering with willing buyers' importing goods and services from willing sellers. With some caveats, concerning risks to plant, animal and human health, and labour and environmental standards, I do think people should be free to trade with one another. The other argument in favour of free trade is slightly more subtle, but no less persuasive: it's underpinned by the principle of comparative advantage. Essentially, it shows that international specialisation of labour can benefit all trading countries. There are, again, caveats, but generally the theory holds. My concerns are that, yes, a country, say, the US, will benefit from trade with China, but who within the US captures most of the benefits? Consumers, including many poorer consumers, do benefit from cheaper imported goods. But do those gains from cheaper goods outweigh the income lost from jobs now done overseas? Are most of the gains from free trade going to the owners of capital, rather than low-income labour? Comparative advantage says that even after compensating the losers countries benefit from free trade. The problem is that most of the losers are not being fully compensated.

There's what appears to be a similarly misplaced ideological commitment to something called 'markets' in such policy areas as health and education where these are mostly run by government. Much intellectual effort has gone into trying to implant in the public sector those disciplines that characterise the creative destruction of the private sector. This is the sort of work in which my profession seems to revel. (Along, incidentally, with making false predictions: here's how successful they were in predicting the Great Recession:  "As you can see, even in the third quarter of 2008, the best models we have missed the big recession entirely.")
Source: Economists' biggest failure, Noah Smith, 'Bloomberg', 5 March 2015

I don't know whether such efforts have been successful; I'm not sure anybody does. They have certainly been divisive and morale sapping, and have expanded bureaucracy, and led to such wasteful distractions as Mickey Mouse micro-objectives and 'teaching to the test'.

This is where Social Policy Bonds could enter the picture. Instead of seeing 'free trade' and 'markets' as ends in themselves, why not see them as means to an end, and so why not target those ends directly? All the empirical evidence backs up economic theory that markets are the best means we have of allocating society's scarce resources. The definition of economics I was taught is the allocation of scarce resources in order to meet prescribed ends. Most countries don't bother with broad social or environmental goals. By default, therefore, the implicit goal becomes something like Gross Domestic Product per head, or its growth rate. Occasionally a social or environmental problem becomes so acute - and visual - that it becomes impossible to ignore, so resources are devoted to solving it. But we can do better than that. Instead of seeing free trade or markets as ends in themselves, we can yoke them to a higher purpose, as defined by society and its government. That would probably mean helping those severely disadvantaged, including those who suffer from the freeing up of international trade.

So I think society should define certain ends and use markets to achieve them. This has to be at a broad level, because resources can readily move between sectors. Under a Social Policy Bond regime, government would do what it is best at: articulating society's goals, whether they concern health, education, or extreme poverty; and raising the funds  necessary to achieve them. And markets would do what they are best at: allocating our scarce resources in order to achieve our social goals with optimum efficiency.

18 January 2017

Land use and mental well-being

Society's long-term goals often conflict with the short-term, narrow, outlook of our political systems. As well, many of the most valuable things in life are often ignored by our economic and political systems, because they cannot readily be converted into monetary terms. Some contributors to air pollution, for instance, are still disregarded in most countries. The consequences to plant and animal life of loss of habitat are usually ignored too.

But I'll look today at mental health, and specifically the negative impact on it of certain forms of planning and land use. Society's mental health goals are difficult to quantify, but I think we can be reasonably sure that our recent patterns of development of the built environment and land use increase alienation, loneliness, anxiety and depression. A brief extract from a recent article on land use in the US:
[W]alkable communities and co-housing — sound exotic to American ears. Thanks to shifting baselines, most Americans only know single-family dwellings and auto-dependent [ie car-dependent] land use. They cannot even articulate what they are missing and often misidentify the solution as more or different private consumption. But I do not think we should just accept that when we marry and start families, we atomize, and our friendships, like our taste in music, freeze where they were when we were young and single. We shouldn't just accept a way of living that makes interactions with neighbors and friends a burden that requires special planning. How our housing choices make adult friendships more difficult, David Roberts, 'Vox', 16 January
My own belief is that the evidence that US-style suburban patterns of settlement are injurious to mental health is compelling, though perhaps not proven nor provable. But my opinion isn't important. What is important are these points: 
  • Few of us have any incentive to find out whether in fact our land use patterns do create or exacerbate psychological problems for large numbers of people, and 

  • Even were we to find that suburban living does destroy communities, lead to alienation and atomisation, and so aggravate psychological problems, policymakers have no incentive or capacity to do anything about it.
Acute mental health problems - the sort whose consequences are tragically newsworthy - do get some passing attention. But long-term mental well-being counts for very little in our economic and political systems. Just as policymakers failed to consider most aspects of our physical environment for decades until the consequences of doing so became too difficult to ignore, so too are mental problems and their causes neglected today. And, as the excerpt above implies, if we don't even know what we're missing, there's very little chance of either the market or benign central planners doing anything to help.

Perhaps Social Policy Bonds targeting for improvement the mental well-being of all citizens could be a solution. They could function as a way of representing the interests of people as human beings, as distinct from economic units. Such bonds, in targeting mental health indicators, could act as a countervailing force to the weight given to financial indicators in the property sector. Quantifying mental health might appear difficult, but there is important work being done in this area: examples are here and here.

Mental health is a hugely important issue, but there are others equally important that are similarly ignored by policymakers. There are measures being taken to help avoid nuclear war, for instance, but they are laughably small in relation to the enormity of the problem. The few people charged with conflict reduction - hard working and well meaning though they undoubtedly are - are not paid for their success in doing so, nor do the aggregate funds on offer reflect the urgency and magnitude of the challenge. Which is why I believe we should back Social Policy Bonds that reward the achievement of sustained nuclear peace - an indispensable requirement for humanity and one that is routinely ignored by policymakers. Just like long-term mental health.

16 January 2017

Outcomes versus Justice

Sometimes we have to put aside notions of justice and fairness in order to achieve our goals:
Richmond to me is a story of pragmatism ... This idea that we’re going to step away from a purely ideological, moralistic approach to try new things and see what works. Barry Krisberg, criminologist at the University of California in Berkeley, quoted in A radical approach to gun crime: paying people not to kill each other, by Jason Motlagh, 'The Guardian', 9 June 2016

This (long) article discusses a programme in Richmond, California that entails paying people not to kill each other. Such payments amount to "a pittance compared with what Richmond police department must pay for overtime, or what the city pays for the cost of a criminal trial, or medevac helicopter rides to take shooting victims to hospitals." There are moral or ethical principles that might be being violated here, but that shouldn't be a bar to pragmatic solutions. It's not difficult to think of problems whose solution might mean that, for instance, killers aren't brought before a court of law, but instead are, essentially, bribed to give up (or decommission) their weapons. Real-world examples include the recent peace deal in Colombia, and deals made with men of violence in Northern Ireland and South Africa. In such cases, despite their crystallising injustice, the benefits to society as a whole far outweigh the costs.

They are not pure expressions of the Social Policy Bond ideal, but they do embody payment-for-outcomes, which is an essential element of that ideal. How would Social Policy Bonds differ? They would allow us to take a longer-term, broader, approach. A bond issue targeting gun deaths in Richmond, California, for instance, could target the reduction of gun deaths by 50 percent over a sustained period; say twenty years. Payments to potential killers might be one way of achieving that goal, but holders of those bonds would make such payments only when they are convinced that they are the most efficient way of achieving their goal - a goal which is exactly congruent with that of society. Still: it's a start.

08 January 2017

Target health, not surrogate indicators

Surrogate indicators in medicine are measures that might be correlated with physical health. An example would be cholesterol levels, which can be correlated with heart disease. There are general problems with such indicators: correlation does not imply causation; the correlation anyway may be weak; or the measure might indicate a specific medical concern but not the overall health of an individual. In recent years (here and here, for instance) I've inveighed against the medical establishment's use of surrogate indicators for policy purposes, claiming that most medical professionals have neither the incentive nor capacity to look at the broad health of a nation and to target that for improvement.

It's been a lonely road, so I was much cheered to hear this British Medical Journal podcast, with Professor Emeritus of Surgery, Michael Baum, arguing on exactly the same lines as I do in my work on applying the Social Policy Bond concept to health. There is a link to the BMJ article on which the podcast is based here. My paper on Health Bonds, and links to some of my other blog posts on the subject can be found here.

05 January 2017

How to become a nuclear optimist

Bruce Schneier discusses Steven Pinker's optimism that trends that have brought about a less violent world will continue. Schneier doesn't share this optimism, thinking that 'the damage attackers can cause becomes greater as technology becomes more powerful', and that this trend will overtake Pinker's. it's an interesting discussion.

What do I think? I can't see any reason to doubt Schneier's belief, which is predicated on what 'the most extreme person with the most extreme technology' will be able to do, if trends continue. But I think that, understanding this, we can do something to influence the speed and direction in which 'technology' takes us. It's not only the compactness and falling cost of massive destructive power that threaten us; it's their proliferation. These need not be taken as a given: all can be influenced by the incentives on offer.

Unfortunately, the incentives currently on offer reward people for finding ever cheaper, more concentrated destructive power, and for selling it. The results, which we see now, fully justify Schneier's pessimism. So I think the time has come to offer countervailing incentives: in other words, to reward the sustained non-use of weapons of mass destruction.

Issuing a sufficiently large number of very high-value Nuclear Peace Bonds would, in my opinion, go a long way toward avoiding nuclear catastrophe. Assume that we issue bonds that become redeemable for, say, $10m each only when a period of thirty years of non-use of a nuclear weapon has been achieved. While that long-term goal seems remote, the bond issue would have an immediate effect on current investment programmes. Incentives would cascade down from the expected redemption value of a large bond holding, to finance an array of approaches aimed at reaching our goal. People or organizations would benefit by doing what they can to reduce the possibility of a fatal nuclear detonation: it would be up to them to decide the most effective ways of doing that. Such ways could entail bribing politicians or 'religious' leaders to tone down their rhetoric, the investigation into technical ways of detecting nuclear materials, giving nuclear scientists now working for belligerent regimes one-way, first class air tickets to the tropical resort of their choice, or any of a vast array of other possible initiatives. The important point is that we don't have to know in advance which will be the most efficient ways of achieving our nuclear peace goal. That will be up to bondholders to decide, continuously, as our political, scientific and psychological environments evolve.

I fully accept that even the most dangerous demagogues in human affairs are unlikely themselves to be amenable to financial incentives. But their capacity to unleash destruction can be realized only by dealing with others - who will be. Social Policy Bonds can re-jig the incentives, giving a more credible voice to the vast majority of humanity who don't want to see nuclear catastrophe.

For a short piece on Nuclear Peace Bonds see here. For a longer article about Conflict Reduction see here. For a 5800-word essay about how we can use the Social Policy Bond principle to bring about World Peace see here.

30 December 2016

Working for a living

It doesn't matter whether the cat is black or white, as long as it catches mice. Deng Xioping
I'm not sure I fully understand the recent article entitled Shared stakes, distributed investment: Socially engaged art and the financialization of social impact by Emily Rosamund, but it did make me think about the apparent disdain that some have for worthwhile activities when they are undertaken mainly for financial gain. Social Policy Bonds have been in the public arena for something like 28 years now and their non-tradeable variant, Social Impact Bonds, are now being issued in about 15 countries. In my experience, it's been the ideologues on the left that are most opposed to the concept.

Often implicit, sometimes explicit, is their feeling, or argument, that Social Policy Bonds are a means by which investors make money out by doing what they should be doing anyway. It is true that some wealthy bondholders could become even more wealthy by first buying Social Policy Bonds, then doing something to achieve the outcome that they target, then selling their bonds for a higher price. This some call "profiting from others' misery" and it offends their sensibilities.

But it can also be called "working for a living while doing something socially useful". In the long run it's quite probably that only a few people or organizations will amass huge fortunes under a bond regime, even if they do successfully achieve society’s goals and profit from their bondholding. The way the market for Social Policy Bonds works would mean that excess profits could be bid away by competitive would-be investors. The market for the bonds would openly transmit a huge amount of information, that will indicate the constantly varying estimated costs of moving towards a targeted goal (see chapter 5 of my book for a full explanation). Barriers to entry into helping with target achievement could be low, especially if most bonds are held by investment companies who would contract out the many diverse approaches necessary to achieve most social and environmental goals.

The absolute sums of money at stake might be huge, particularly for Social Policy Bonds that target apparently remote, national or global goals, but there’s no particular reason to assume that, in the long run, it would be shared out any less equitably than, say, teachers’ salaries. Teachers? Yes, and nurses, doctors and social workers, all of whom perform socially valuable services for which nobody, even on the left, begrudges payment.

13 December 2016

Target environmental ends, not means

The current Economist looks at the the environmental cost of solar electricity generation and in particular at work done on quantifying the very big efficiency improvements in the production of solar cells since 1975. It appears that, over the lifetime of solar panels made today, there will be very significant cuts in emissions over those that would result from the consumption of fossil fuels in generating the same quantity of electricity. This is interesting but it doesn't actually tell us a great deal about the net environmental impact of substituting solar panels for fossil fuels. As one commenter puts it:
If you're going to measure the "clean" of solar power, why would you neglect the production of all of the minerals that are used in the process? These minerals include arsenic, bauxite, boron, cadmium, coal, copper, gallium, indium, iron ore, molybdenum, lead, phosphate, selenium, silica, tellurium, and titanium dioxide. Some of these minerals are difficult to source and mine, and almost always create a large degree of environmental damage in their wake. Source
There are also the environmental costs of providing backup (for when the sun isn't shining) in the form of batteries, or other storage, and the costs of disposing of the panels after their lifetime. As the Economist article says, "The consequence of all this number-crunching is not as clear-cut as environmentalists might hope."

This underlines what I have said in my previous post when it comes to making policy: rather than try government try to identify all the environmental implications of any policy with inescapably limited knowledge at fixed point in time, we should rather be identifying the outcomes we want to see and rewarding their achievement, however that is done. This would be more practical than attempting to conduct entire life-cycle analyses over all possible policy choices - which, even if it were possible, would be instantly made obsolete by new technology and our expanding scientific knowledge. It would also cohere more closely with goals that can be clearly articulated and that are meaningful to ordinary people: those that specify desirable levels of plant, animal and human health.

For more on applying the Social Policy Bond concept to the environment see here.

07 December 2016

Fossilised science is no basis for policy

How do we weight different environmental impacts? Take diesel, lauded at one stage as a way of cutting back greenhouse gas emissions, but known to have lethal effects through emissions of particulates and other pollutants:
Volkswagen’s rigging of emissions tests for diesel cars comes after nearly 20 years of the technology being incentivised in Europe in the knowledge that its adoption would reduce global warming emissions but lead to thousands of extra deaths from increased levels of toxic gases. increased levels of toxic gases. The rise of diesel in Europe, John Vidal, 'The Guardian', 22 September 2015
Or, take organic food. An organic field will certainly host more wildlife and biodiversity, and decrease or eliminate air and water pollutants. But the same field will most probably yield less than conventional farming. More land would then have to be devoted to supply the same volume of food. And it's likely too that organic food production results in higher greenhouse gas emissions than conventional farming. There are also questions about whether GM crops (foods genetically modified by modern techniques) are better for the environment because they could, for example, require less fertiliser, less land, less water and be more tolerant of salt.

What should policymakers do here? The difficulties of weighing environmental impacts are compounded by our imperfect, but ever-growing knowledge of, say, the effects of pollutants, and more and more research into how to reduce emissions from transport or agriculture. Fossilised science is no basis for sound policy, and getting it wrong, as did those who incentivised European diesel engines, can have disastrous effects.

This is where the Social Policy Bond idea could help. Instead of trying to work out whether, say, less petrol and more diesel is a good idea, or whether organic agriculture is better than conventional, we could instead target social and environmental outcomes, and let a motivated coalition of interested decide how best to achieve them.

How would this work? We first need clarity over what we are trying to achieve. Mostly, we'll be concerned about impacts on plant, animal and human health. Focusing just on human health, we would have broad, national, targets for an array of indicators, such as longevity, infant mortality, quality adjusted life years and others. These would be determined by government, articulating as it does society's goals. But the ways of achieving these goals, and who would achieve them, would be the function of a market in Health Bonds. It would be up to holders of these bonds to decide, on a continuing basis and in response to all new scientific knowledge, what will be the most efficient ways of achieving these goals. The most efficient ways will be those that maximise returns to the bondholders but also to society as a whole. Bondholders' interests will be exactly congruent with those of society, and they will remain so until the bonds are redeemed - which could be decades hence. 

Health Bonds would make it unnecessary for decision makers to try to anticipate new scientific knowledge, or to make decisions on trade-offs that can be, and have been, disastrous. They would stimulate the exploration and implementation of diverse, adaptive ways of improving the nation's health. It's unfortunate that we have very few people or institutions devoted to the healh of an entire country. We have instead organizations like Ministries of Agriculture, Transport, the Environment, and plenty of organizations advocating for solutions to specific health problems: cancer, heart disease, respiratory diseases, and so on. These organizations undoubtedly do good work and are staffed by well meaning, hard working individuals. But they cannot, in good conscience, make the trade-offs between, say carbon dioxide emissions and lung problems in ways that maximise the total health of an entire population. Sadly, that necessary policy perspective falls outside their remit and could even threaten their income and status.

For more about Health Bonds see here. For more about Social Policy Bonds, see here.

27 November 2016

Policy for the post-truth era

US President Barack Obama talks about the new media system which:
...means everything is true and nothing is true. ...An explanation of climate change from a Nobel Prize-winning physicist looks exactly the same on your Facebook page as the denial of climate change by somebody on the Koch brothers’ payroll. .... Ideally, in a democracy, everybody would agree that climate change is the consequence of man-made behavior, because that’s what 99 per cent of scientists tell us. And then we would have a debate about how to fix it. That’s how, in the seventies, eighties, and nineties, you had Republicans supporting the Clean Air Act and you had a market-based fix for acid rain rather than a command-and-control approach. So you’d argue about means, but there was a baseline of facts that we could all work off of. And now we just don’t have that. It happened here, David Remnick, 'New Yorker' dated 28 November
Science isn't a consensual process though, so even if the majority of scientists agree 
on one thing, whether it's anthropogenic climate change, or acid rain, or whatever, that should carry no more weight than the collective wisdom of experts in other fields, such as economists or opinion pollsters. There is a genuine problem here: how should we make policy when the relationship between cause and effect in our ever more complex societies is impossible to identify? It's not simply a question of following the opinions of existing bodies often backed by vested interests - nor of reflexively ignoring them: they might after all be right as well as self interested. Nor should we simply identify a problem then mindlessly dole out funds to the organizations whose stated objective is to solve it, but whose over-arching objective - in common, I think, with all organizations - is self-perpetuation.

We should instead recognize that resolving complex social and environmental problems, cannot wait for our receiving perfect information about causal relationships, and nor should we delay making decisions until such information becomes available - it might never happen. Take climate change: it's likely that, by the time we know the effects of man's greenhouse gas emissions on the climate, it will be too late to do anything to avoid or reverse their catastrophic effects on the environment. The current way of addressing the problem seems inadequate: extravagant gestures that might lead to some reductions in emissions that we think contribute to climate change, which might lead to some tiny, almost imperceptible (but unverifiable) effect on the climate some decades hence.

I think we can do better than this. We could use the Social Policy Bond idea, first to identify exactly what we want to achieve; and second to channel the market's incentives and efficiencies into achieving it. With climate change, we need to clarify whether we are more concerned about climate change, or about the impacts of climate change on human, animal and plant life. In other words, we define the outcome that we wish to achieve, then let the market decide how best to go about achieving it. Most social and environmental goals will embody an array of conditions that have to be satisfied for the goal to have been deemed met and the Social Policy Bonds redeemed. Our climate change goal should embody measures of physical, biological, social and financial variables that shall have to fall within a targeted range for a sustained period before the redemption of Climate Stability Bonds.

And as with climate change so with other major challenges.The important point is that the Social Policy Bond principle works even when the facts about what causes climate change, say, or crime, or war, are disputed. As such, Social Policy Bonds are the perfect policy instrument for today's post-truth politics.

Update 5 December: a version of this post for newcomers to the Social Policy Bond idea is available here

17 November 2016

Ideologues and vested interests impede good policymaking

A letter-writer reacts to the suggestion by the Economist that poor American consumers gain more from cheap imports than they would if imports were restricted and America produced the same goods:
Being able to buy a Chinese-made 50-inch TV when you work by flipping hamburgers for the minimum wage may be more efficient than working in a factory on wages where you can only afford the 30-inch American-made model. But Donald Trump’s voters weighed up factors that many economists and your newspaper often downplay: the marginal utility of consumer goods in a rich society, the distribution of wealth and a sense of self-worth. The medium through which they channelled their anxiety may be flawed, but their message is clear. Trump's triumph, Prof Diomidis Spinellis, the 'Economist' dated 19 November
Exactly so; countries as a whole benefit from free trade in that the benefits to the economy more than offset the losses, even if the losers - those whose jobs become obsolete - are fully compensated. The problem is that most of the gains are going to the wealthy, and the losers aren't being compensated.

One of the great advantages of the Social Policy Bond approach is clarity about ends and means. Free trade isn't an end in itself: it's a means to an end: the improved well-being of society. A bond regime targeting poverty or income levels would ensure adequate compensation to the losers from free trade (which could take the form of subsidies to struggling companies or laid-off individuals, or enhanced re-training opportunities). Or it could restrict trade, perhaps temporarily, if that were to better meet society's long-term income goal. Such measures would be heresy to the free trade ideologues, but in a bond regime it is outcomes that matter, not ideology.

We see similarly non-outcome driven approaches in other policy areas, where ideology or vested interests get in the way of rational, welfare-enhancing policies. Healthcare in the US is one example, where the interests of insurance companies and blind resistance to anything that could be called 'socialist' do so much to blight the security of even middle-class Americans.