"Ask yourself," wrote John Fund of the Wall Street Journal a decade ago, "If you had a financial windfall and wanted to help the poor, would you even think about giving time or a check to the government?" My explanation for why the answer should be a resounding, unanimous "no" is that government is inefficient in helping the poor, even if that is its actual goal. And it is inefficient because it has no incentives to be efficient. Charities are far more efficient, but have to run on a shoestring because most of what we would spend on the poor is compulsorily taken away from us to be spent by government.
Government, by default is now taking charge of our physical environment. Given the mess it's made of our social environment, we know what to expect: good intentions, massive funding of government agencies, supplanting of environmental goals by insitutional goals, some corruption, more waste, and the crowding out of our own intrinsic motivation to do the right thing. If only government would issue Social Policy Bonds. Then it would concentrate on articulating society's wishes and raising the funds necessary to achieve them - things it does quite well. It would leave to markets the actual allocation of resources to achieve our goals - which government does very badly indeed.
3 comments:
Thanks for your considered comment Adam, which is much appreciated. Let's say that, apart from government, there are two types of 'people who want to solve problems'. There are wealthy individuals or philanthropists who might have lots of capital, and who can indeed issue their own Social Policy Bonds. I have done a handbook which tries to give some guidance on this. I have also tried to interest philanthropists, but understandably perhaps, they invariably ignore my emails. I do not share your concern that bond issuers would initially raise funds from the bond sales: they can always specify a remote objective so that this amount would be negligible and the problem-solvers would have to shell out very little in relation to their potential gain.
Then there are, as you put it, 'cash strapped entit[ies] with the problem solving idea'. These might be individuals or non-governmental organisations. They would not have to buy Social Policy Bonds themselves to put their ideas into action: they could do that by getting bondholders interested in their ideas. A Social Policy Bond regime would give bondholders strong incentives to seek out these entities or, more accurately, their ideas. The potential for profit from higher bond prices would catalyse the getting together of those with the cash but no ideas, and those with the ideas but no cash.
The idea in your last para is interesting. I will think about it more, but here are my first reactions. I am not sure I like the idea of many people holding bonds that would become worthless if a targeted social objective were achieved. They would have perverse incentives to sabotage any objective-achieving projects. The idea would make the problem-solving the exclusive responsibility of the business. It could work though if government bought the bonds, and for small-scale problems, where the relationship between a problem and its causes are readily identifiable and solvable by a single business. But it lacks the fluidity of ownership (of the problem-solving, not necessarily the bonds) that Social Policy Bonds would bring about, which I think is more suited to complex social and environmental goals. For these, there is a need for a larger (than one business) and more changeable cast of characters who will carry out the problem-solving. with your proposal I also see the need for careful and continuing monitoring of what happens to the proceeds from the bond sale. The market would of course discount the risk that these proceeds would (how shall I put it?) not find their way to solving the specified problem, but in doing so it may not actually reward the business with much starting capital. Lastly, I am a wary of businesses identifying problems and offering to solve them for a price. I'd rather the existence and role of problem-solving businesses were a consequence of social policy, not a cause of it. Under the Social Policy Bond regime as I envisage it, I think this is what would happen.
Still, your system relys on the existence of organizations or individuals with enough cash and time to both buy social policy bonds, and seek out organizations with ideas to do something about a problem, and then work with them and probably fund them with more cash to actually help solve the problem.
I'm just not really convinced that the incentive provided to these cash and time rich organizations or individuals to see the price of their bonds go up would really be enough to make a measureable difference in their behavior.
The organizations and individuals who would be most likely to buy social policy bonds under this scheme are probably already working to solve social problems, and don't need an extra incentive to do so by buying social policy bonds.
The key would be to get organizations and individuals who normally are not interested or focused on a given social problem because it is not already part of their mission, to buy these social policy bonds. But why would they if they are not going to see any return on their investment unless they invest more money and time, beyond what they give to buy the bond itself, in what for them are non-mission related activities?
Thanks for your comment. For remote objectives, an organisation would pay relatively little to buy Social Policy Bonds in the first place. They might stand to see capital gains of 900 per cent, or much more, if they held the bonds to redemption. With that sort of opportunity, I see new organisations coming into being, dedicated solely to achieving targeted objectives. They need not directly carry out objective-achieving activities, but could concentrate on subsidising existing bodies that are trying to solve social problems. The bondholders would have incentives to fund only the most efficient of existing projects, or only the most promising new solutions to social problems. What you rightly call 'non-mission related activities' would become 'mission related' to an organisation holding a large number of bonds. The existence, mission and role of a large bondholding organisation would in fact be defined by objective that is targeted by the bonds it owns.
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