31 March 2005

Reframing environmental issues

Grist has an interesting discussion about reframing environmental issues. I made this contribution:

Reframing in terms of agreed outcomes

One problem is that 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 environmental destruction the earth would be supporting far fewer people. So any campaign, or reframing, must start with some humility. It's not us versus them. We are all 'us'.

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. Goals - so that instead of talking about cutting greenhouse gas emissions, we target climate stability. Instead of trying to monitor and pin down polluters of water, we agree on and target the quality of the water. My website goes into more detail, and discusses how we can use the market's incentives and efficiencies to achieve environmental goals. Efficiency is part of it, but it's also about having clear, agreed, targeted outcomes. 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.

30 March 2005

Policy as if outcomes don't matter

When outcomes don't determine policy, this is how politicians spend your tax money:

[T]he [UK] government finally published details of the £1.7bn in support payments that farmers and agricultural companies in England receive from the taxpayer.The most glaring subsidy was more than £120m received by Tate and Lyle in a single year.

Aristocrats who received CAP subsidies included the Dukes of Westminster (£448,000 in 2003-04), Marlborough (£511,000) and Bedford (£366,000), plus the Earl of Plymouth (£459,000) and the Marquess of Cholmondely (£306,000).

Ali Abbas, the Iraqi orphan who lost both arms in the war, has been told he will not receive backdated disability payments in Britain because he cannot prove his injuries existed before last week.
Sources: 1, 2, 3.

29 March 2005

'Solving the world's problems'...

...is the immodest title of my new book on Social Policy Bonds. It's available from online retailers, or as an ebook via this page on the Social Policy Bonds website.

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24 March 2005

Government cannot pick winners

The death of John DeLorean is a good time to remind ourselves that government picking winning products doesn't work. In this case it was a futuristic-looking sportscar, into which the British Labour government poured ₤55 million taxpayers' money. The Thatcher Government later topped that off with a further ₤30 million. Within 21 months, receivers were appointed, the car went out of production and the workers at the DeLorean factory in Northern Ireland lost their jobs. Fewer than 9000 cars were produced.

Governments aren't much better when it comes to picking winning industries, and for exactly the same reasons: it's cannot respond quickly enough to changing circumstances, it doesn't adapt to local conditions, it doesn't understand markets and it has no financial incentives to be efficient.

So why should we assume that a government is any better at picking policy mechanisms? If the government wants to achieve, say, better health outcomes, that's fine. Democratic governments are good at articulating their citizens' wishes. But that's quite different from picking the best ways of actually achieving better health outcomes. (See Mickey Mouse targets, below.) Government is no better at choosing activities and policy programmes than it is at picking winners in other areas. Let the government do what it's best at: representing our wishes and raising revenue to achieve them. But then let the market take over, and work out how best to allocate taxpayer resources. A Social Policy Bond regime would bring about such a division of labour.

22 March 2005

What drives education policy?

According to this report the more school pupils use computers at home and school, the less well they do on tests of literacy and maths.

These findings raise questions over the UK Government's decision, announced by Gordon Brown in the Budget last week, to spend another £1.5 billion on school computers, in addition to the £2.5 billion it has already spent.

It's clear that whatever is the basis for the government's obsession with putting computers in schools, it's got nothing to do with educational outcomes.

21 March 2005

Corrupt Agricultural Policy

What is missing in NAFTA is precisely the element that makes the EU work as a free-trade bloc. The EU's regional policy pays money directly from wealthy industrialized nations such as Germany to less wealthy agricultural nations such as Italy, Greece, Portugal and Spain. The result is that EU farmers stay on their farms. Like the US Farm Bill, EU subsidies violate the principles of free trade and comparative advantage, but do so for a higher cause: social stability. Militarism and the war on drugs, Asia Times, 18 March 2005
There are several things wrong with this. First, is that EU farmers don't stay on their farms. They have been leaving in droves, and for decades. Second is that most of the subsidies don't go to farmers: they are capitalised into land values or go to food processors or input suppliers. Of those subsidies that do find their way to farmers, most go to the very largest, who can then snap up any land parcels that become available. Subsidies have fuelled the replacement of farm labour by expensive machinery. Nevertheless, if we accept that subsidies have caused at least some farm labour to stay on the land, how would that be a force for social stability? The jobs that ex-farmers would have done are being undertaken by unwilling migrants. Unwilling, because any chance they had of becoming prosperous in their home countries has been crippled by the EU's protectionist barriers against imports of, amongst other things, farm products. The EU's Common Agricultural Policy has undermined social stability in Europe and in would-be exporting countries. It is a corrupt, deceitful policy that wastes billions of dollars, denudes the environment and subsidises the rich at the expense of poorer consumers and taxpayers.

19 March 2005

What are the New Zealand Government's goals?

A Unicef study has found that 16.3% of New Zealand children are being raised in poverty — a rate higher than all but three OECD nations (Mexico, the United States and Italy). Child Poverty in Rich Countries 2005, published by the United Nations Children's Fund (Unicef) found that one in six New Zealand children were living in homes that earned less than half of the local national median income. (These figures are based on data collected in 2001.)

Figure 1 The Child Poverty League

The bars show the percentage of children living in ‘relative’ poverty, defined as households with income below 50 per cent of the national median income.

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Child poverty, according to this measure, increased during the 1990s:

Figure 2

Changes in child poverty rates during the 1990s. The bars show the rise or fall in child poverty rates in each country during the 1990s.

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15 March 2005

Mickey Mouse targets

Staff in some hospital accident and emergency departments are threatening the safety of seriously ill or injured patients because of pressure to meet government targets limiting casualty waiting times. BMA targets put very ill at risk, 'The Guardian', 14 March 2005
When government does get round to targeting outcomes (rather than giving taxpayer funds to favoured agencies or activities), it most often chooses Mickey Mouse goals. So in the UK, rather than target broad indicators of health, the Government has promulgated a panoply of micro-targets, such as the percentage of patients seen through hospital Accident and Emergency departments within four hours. Somebody in the Government has decided that this figure should be 98 per cent by the end of this month. One result is that people with serious, urgent conditions have to wait for treatment so that those with relatively minor conditions can be seen and discharged. This is especially so as the end of the 'four-hour envelope' approaches.
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What effect does this have on patients? A quarter of hospital consultants surveyed said the care of the most ill patients was being compromised; 40 per cent said patients were being discharged before their condition was adequately assessed and stabilised, and half believed people were being rushed into inappropriate wards so that they would be wiped off the casualty unit lists. To comply with the government targets some departments simply redesignated beds within their units as separate wards.

This sort of nonsense is typical of governments when they try to outguess the market. Under a Social Policy Bond regime, a government would set meaningful, broad goals, rather than a range of easily measurable but irrelevant micro-targets dreamed up by a handful of middle-level bureaucrats with little capacity or incentive to see the whole. Instead of costly, intrusive and ultimately counter-productive monitoring of useless pseudo-objectives, a bond regime would target broad outcomes, such as infant mortality, or quality-adjusted longevity. The market would then decide how best these can be achieved. Markets are better than bureaucrats at allocating resources; they are far more responsive to particular circumstances and events than government agencies. Government should stick to what it is good at: representing and articulating the wishes of its constitutuents, rather than trying to micro-manage its way to re-election.

12 March 2005

Why Kyoto will fail

Despite a decade of research documenting the carbon emissions from man-made reservoirs, hydroelectric power still has an undeserved reputation for mitigating global warming. Hydroelectric power's dirty secret revealed, Duncan Graham-Rowe, 'New Scientist', 25 February 2005.

It’s been known for some time that hydroelectric dams can increase greenhouse gas emissions: they produce significant amounts of carbon dioxide and methane - in some cases more of than power plants running on fossil fuels. But only now is this fact making it onto the political agenda. In the next round of IPCC discussions in 2006, the proposed National Greenhouse Gas Inventory Programme, which calculates each country's carbon budget, will include emissions from artificially flooded regions. But even then "[m]ethane production will go unchecked because climate scientists cannot agree on how significant this is".

Our knowledge of the causes of climate change is limited, but expanding rapidly. We urgently need a way responsive way of dealing with climate change that adapts rapidly to our changing knowledge. Climate Stability Bonds would differ from Kyoto, in that they would not assume that we know the best way of solving the problem. They would reward the achievement of climate stability, however it is achieved. Bondholders would have incentives to respond quickly and appropriately to new knowledge about what is causing climate change and to new ways of dealing with it.

10 March 2005

How Social Policy Bonds minimise costs

Issuers of Social Policy Bonds would have to know the maximum they are prepared to pay to achieve an objective, but they would not have to calculate how much the actual cost would be with any accuracy. That would be done by bidders for the bonds in the open market. For example: say a city government targets a 50 per cent reduction in its crime rate, and it issues one million 'Crime Reduction Bonds' each of redemption value $10.00. If the market decided that the issue value of these bonds were $1.00, the net cost to the issuers of achieving the targeted objective (ignoring administration costs) would be $9 million. In other words, the market at the time of issue believes that the cost, including its profit margin, of achieving the objective would be $9 million.

Now suppose the bond issuers are completely in the dark about how much it will cost to achieve a targeted objective and instead of issuing one million bonds they issue ten million with the same redemption value, $10.00. They would then be liable for a maximum cost of $100 million. However, the market would still reckon that it could achieve the objective for around $9 million. So instead of valuing the bonds at $1.00 competition between potential investors would bid up the issue price of the bonds to around $9.10. (Social Policy Bonds would be an unusual financial instrument, in that the more that were issued, the higher would be their value!) The issuers therefore would not have to estimate with any accuracy how much a targeted objective might cost to achieve, and they would put a cap on their total liability by limiting the number of bonds issued.

So the Social Policy Bond mechanism ensures that the market, which means people other than a handful of government employees, would decide roughly how much it will cost to reach a specified social outcome. They would do this when they bid for the bonds at issue and at all times afterwards. This fact, and the would-be bondholders' incentive to minimise their costs, contrast with the current system in which the costs of achieving particular outcomes, if they are calculated at all, are not widely known, nor subject to competitive bidding. Indeed, under the current system, many of the people charged with achieving social goals (or, more likely, with supplying certain outputs) have every incentive to inflate the projected cost of their doing so. Under a bond regime, however, the awesome information-processing power of the market would be channelled into minimising the costs of achieving social and environmental goals.

09 March 2005

Social Policy Bonds: information as well as incentives

In my work in trade policy I often have to point out that zero risk of threats to our animal, plant or human life through introduced species means no imports. We accept the uncertainties and small risks for most products because we think the benefits of trade outweigh the risk-adjusted costs. Policymakers have decided that the optimal level of biosecurity risk is not zero.

Is there also an optimal level of crime? Or road deaths, or illiteracy? There are certainly levels that we tolerate or accept. These levels have evolved through the political process. They have not been calculated nor made explicit. They might be wildly inconsistent and apparently irrational. Limited resources can be allocated according to criteria that have little to do with where they will most cost-effectively improve outcomes. So we spend large sums on, for example, removing small amounts of arsenic from drinking water, when it is at least possible that we could save far more statistical lives by diverting those resources elsewhere.

What is missing is the notion of trade-offs. Our current decision-making processes neither require nor generate the costs of achieving outcomes. So we are flying blind and contentious decisions are made on the basis of speculation, media profile and the relative power of lobbyists.

A Social Policy Bond regime would be different. A government that wanted to raise longevity would auction non-interest bearing bonds that would be redeemable once the longeivty target had been met. These bonds would inject market incentives into finding the most cost-effective ways of increasing the average lifespan. The bonds would not prejudge how best to achieve that objective. Bondholders would have incentives to find and initiate the most effective projects: these could include preventive medicine, or basic health education - both of which receive derisory funding these days because they lack the public profile and media appeal of larger, more visible efforts.

As important, the market for Social Policy Bonds would continuously generate valuable information about how much the achievement of targeted objective will cost. As soon as the bonds are issued, their market value will give an estimate of the cost to the issuers of achieving the targeted objective. The prices of the bonds would be constantly changing in response to events and the anticipated effects of bondholders' actions. From these price changes it would be possible to infer the marginal cost of tweaking the objective so as to bring about further improvements. If, for instance, bonds were issued to increase the current average lifespan to (say) 80 from (say) 76, then at every moment the bonds are on the market they would generate estimates of the costs of raising the average lifespan still further.

03 March 2005

Subsidies favour big business

Take agriculture subsidies: in the OECD area these amount to US$250 billion per year. Most of it does not end up in additional income for farm households. Some goes to those who administer farm programmes, but most goes to those who supply inputs to farmers and those who process output from farmers.

The OECD estimates that only 25 per cent or less of most of the subsidy from consumers and taxpayers ends up as additional income for farm households.

What happens to the remainder? For every one dollar of taxpayer funded deficiency payments, 40 cents goes as extra profits to suppliers of farm inputs. Another 14 cents goes out as extra rents for non-farming landlords. Resource costs, that is the money needed to offset the combined opportunity costs of diverting resources from other productive uses to the production of the supported commodity, account for 20 cents.

Inputs and processing are mostly supplied by large agribusiness companies. Agricultural support policies tend to raise the prices of fertilisers, pesticides, animal feedstuffs and farm buildings, as well as land. Subsidies mean that farmers buy more purchased inputs and that suppliers, knowing that farmers can afford to pay more, charge higher prices for them. One study showed that identically packaged products and services in unsubsidised New Zealand are typically priced at half the levels charged to their subsidised counterparts in the UK and the Netherlands.

So large agribusiness corporates are major beneficiaries of high food prices. Who else benefits? A British charity, Oxfam, found that wealthy landowners like the Dukes of Westminster, Marlborough and Bedford, Lords Illife and de Ramsey and the Earl of Leicester can each receive subsidies of up to £370 000 a year for growing their cereal crops.

It is a self-perpetuating system of mutual back-scratching. The subsidies discriminate in favour of the largest corporates and biggest landowners, who can use taxpayer funds to buy up small businesses and small farms and to bankroll opposition to reform. Large businesses are also in a much stronger position to manipulate the regulatory environment that makes life so difficult for their smaller competitors.

The pattern is similar in other sectors, and the result is industry concentration. A subsidised transport infrastructure favours large, global businesses, as do compliance costs, which impose a disproportionately heavier burden on small businesses. Small, independent firms go bankrupt or sell out. McDonalds, Burger King and Starbucks take over.

A Social Policy Bond regime would not see a proliferation of small businesses as an objective, but that would be the most likely outcome. Why? Because the current subsidy system is based in large part on deception and it is unlikely that most people would willingly choose to subsidise large trans-nationals at the expense of small, local businesses. A bond regime would be transparent about what taxpayer funds would be used for: its goals would be explicit and meaningful to real people. Most of us, I believe, would rather see our taxes spent on raising basic health and education standards (for example) than on further enriching some of the wealthiest companies and individuals in the world.