Corporate goals and perverse subsidies

The corporate sector has very clear objectives, comprising mainly sales, profits, market share and growth. In achieving its objectives the corporate sector generates positive and negative externalities. If corporations were human beings, informal pressures would probably ensure that the positives outweighed the negatives, or at least we could appeal to their humanity when the negatives become outrageous. They aren't, so we try formal regulation instead. But what happens when the regulators - governments - don't have equally clear objectives?

One answer is that they can be easily corrupted by the corporations. So we get perverse subsidies, such as those to the energy or agriculture sectors, that are financially and environmentally disastrous, and subsidise the rich at the expense of the poor.

Perverse subsidies are essentially expensive ways of protecting sectoral investments and employment. They constitute sufficient evidence that governments mis-allocate significant resources. But they are only the most spectacular wastes of government funds, representing entire policies almost all of whose effects on society and the environment are negative. Other government failings are not always so obvious or quantifiable. Sometimes only certain elements of a programme are questionable, or only fractions of public funds may be misdirected or abused. Or government may be carrying out worthwhile activities inefficiently, so that their costs to the taxpayer are higher than necessary.

The result is that in many of the wealthiest societies that have ever existed in human history, there are significant pockets of deprivation, crime rates are high and rising, health services are plagued by too much demand and occasional scares, and public education seems always to be in crisis. Environmental problems are a growing cause for concern at all levels: local, national and global. Indeed the entire human population is now threatened by global environmental catastrophe and by the proliferation of weapons of mass destruction. These problems persist despite high levels of government spending and the less well-funded but laudable efforts of many non-governmental organisations.

Under a Social Policy Bond regime, governments would target social and environmental outcomes as single-mindedly as corporations target their own objectives. A Social Policy Bond regime would combine explicit, meaningful goals with the other essential element that defines corporations: financial incentives. Click here to go to the Social Policy Bonds website and find out more about how the bonds would work.