A European Union without France

A European Union without the French and their emotional insecurities and hangups could be a powerful force for good. For a start, there would be one official language, English, instead of twenty. Then the new EU could set about dismantling the Common Agricultural Policy and other corrupt protectionist scams. Then they could start thrashing out genuine common policies, instead of relexively opposing the US and UK. As it is, the French in the EU are behaving exactly as they do in Canada: blackmailing everyone else until they get what they think is in their interest. Perhaps it's time to call their bluff; encourage them to leave, and get on with the job of creating a genuine European Union, responsive to its people, rather than to the French elite's manipulative skills.

Tax breaks for the rich

Death by a thousand cuts by Michael Graetz and Ian Shapiro tells the story of the successful campaign to repeal inheritance (estate) tax in the US. It is a fascinating story, reviewed here by David Runciman.

The mystery is this: how did the repeal of a tax that applies only to the richest 2 per cent of American families become a cause so popular and so powerful that it steamrollered all the opposition placed in its way?

Part of the answer was the rechristening of the tax as the 'death tax', which implies that the tax was on the hard-working deceased, rather than those wanting to inherit wealth. The tax was also depicted as a form of discrimination,

By the time a few opponents of repeal started to make the case on more principled grounds, arguing that the estate tax was a crucial part of the American conception of giving everyone a fair chance in life, it was already too late. Graetz and Shapiro draw a blunt lesson from all this, designed to send a chill through the hearts of progressive politicians everywhere: ‘In politics, when you’re explaining, you’re losing.’

Social Policy Bonds are more about spending tax revenue than raising it, but this book does illustrate how the complexities of social policy can be readily abused by interest groups acting out of pure self-interest. Exactly the same goes on when lobbyists argue in favour of 'protection' for farmers (for example) that end up as subsidies to wealthy landowners and large agribusiness corporates while everybody else, and the environment, suffer. The true beneficiaries and victims are obscured by the formulation of policy in terms of funding of various projects or vague, mutually conflicting pseudo-objectives. A Social Policy Bond regime, in contrast, makes absolutely clear from the outset who shall benefit from particular policies.

Technorati tag: economics

Entrenching dependence

The European Union has decided to double the amount of taxpayers' money it will give in aid by 2015. The EU mandarins are obviously more comfortable giving other people's money as charity than allowing poor countries to prosper through trade. According to Oxfam:

The financial losses associated with import restrictions in rich countries outweigh the benefits of aid. Import tariffs, the least significant weapon in the protectionist arsenals of rich countries, cost developing countries around $43bn a year. The total costs of all forms of trade barriers – including tariffs, non-tariff barriers, antidumping measures, and product standards – are more than double this amount, rising to over $100bn, or more than double the total sum of development assistance.

The extra aid will amount to $40 billion. If the EU chiefs were genuinely concerned about third world poverty, they would dismantle their corrupt, insane, barriers to agriculture, textiles and clothing. Especially since, as Oxfam continues:

Such figures understate the real impact on the poor. They do not capture the costs of protectionism in terms of reduced opportunities for employment, reduced income for essential goods such as food and health care, or the long-term economic losses associated with restricted opportunities for investment. Nor do they capture the disproportionate impact on very poor households. Because Northern governments impose the most punitive import restrictions on goods produced by the poor, they systematically diminish the potential for trade to act as a catalyst for poverty reduction.

It looks very much as though EU governments are trying to replicate on an international scale the disastrous, enfeebling welfare dependency they have created at home. Perhaps they are more interested in control than prosperity.

Technorati tag Economics

Nappies and environmental policy

The UK Environment Agency's life cycle analysis of nappies concludes that neither type - disposable or cloth - is better or worse for the environment. The Women's Environmental Network disagrees, saying the report is analysis is seriously flawed.

As always there are bound to be valid arguments on both sides, as well as value judgements, boundary issues etc. The lesson for policymakers though is this: instead of trying to legislate for or against activities whose effect on the environment are not obvious, they should target environmental outcomes. Under a Social Policy Bond regime, people would have incentives to work out the best ways of achieving these outcomes. If you live close to a landfill site, for example, it might be better for the environment if you used disposable nappies rather than cloth. Only an outcome-based regime would reward people for taking a such a diverse, responsive approach.

With nappies, we are not talking about disaster scenarios. But the same mistake has been made with climate change. The politicians have decided that the way to prevent it is to cut back on anthropogenic greenhouse gas emissions. They have staked everything on this. Instead of targeting alleged causes, they should be rewarding people for achieving climate stability as cost-effectively as possible, however they do so. To see how, please read this published article about Climate Stability Bonds.

Subsidising the rich

The [New Zealand] Government is increasing its commitment to developing a knowledge society with an extra [NZ]$60 million for its Digital Strategy, including [NZ]$44.7 million of contestable funding. The strategy, released yesterday in advance of the Budget, says creating a knowledge society will require connections to the internet to be instantaneous, affordable and available everywhere. ... [T]he Government [will] spend up to [NZ]$400 million on digital strategy initiatives in the next five years. Government digs deep to create a wired society, 'New Zealand Herald', 17 May

If the Government wants to create a 'knowledge society' it should first decide what a knowledge society is. A functional literacy level of 100 per cent would be a good start. A sensible government would set up some such meaningful targets, raise the funds to deliver them, then let the market decide how to achieve them. See here (pdf), for how Social Policy Bonds could be issued to raise literacy of girls and women in Pakistan. I suspect this well-intentioned government initiative will end up subsidising the stay-at-home movie watching habits of well-off New Zealanders.

Information markets and Social Policy Bonds

Robert W Hahn is co-founder and executive director of the American Enterprise Institute-Brookings Joint Center for Regulatory Studies. His paper, Using Information Markets to Improve Policy, briefly refers to my work on Social Policy Bonds. I respond to his comments.

Horesh's proposal differs from ours in two other ways. First, it does not pay for incremental progress toward a specific goal. That is, the bond would only pay the fixed amount if a specific objective were achieved.

I have three main answers:

First, let's say our targeted objective is to reduce unemployment from 10 per cent to 3 per cent. We issue Social Policy Bonds that become redeemable for a fixed sum when unemployment is sustained at 3 per cent or below for, say, two years. This is a remote objective, but would that put people off buying the bonds even if they did not particularly want to make a long-term investment that might take many years until redemption? Not necessarily, because if they undertake unemployment-reduction projects now, the market value of their bonds will rise, even if the effect of their activities is only to reduce unemployment to, say, 8 per cent. The market will most likely interpret such a reduction as a reduction in the cost of getting the percentage down to the required 3 per cent target. The market value of the bonds will therefore rise, and the original purchasers can sell and realise a profit, once they have carried out their unemployment reduction projects.

Governments routinely issue bonds redeemable 10, 20 or more years into the future, but very few people who buy them at issue intend to hold them all the time until redemption. They can profit from shorter-term variations in bond prices.

Second, the redemption terms of the bonds could be formulated to explicitly reward incremental progress. In the interests of simplicity I have not gone into detail about this, but time-based provisos could easily be added to the redemption terms of any Social Policy Bond issue. For example, bonds could be issued that targeted a reduction of unemployment of 10 to 3 per cent. They might be redeemable for $1000 each, but if, say, the 3 per cent target were achieved within five years (and sustained for a further two years) the issuers could make them redeemable for $1500. If the target is not achieved for 30 years, the redemption value could collapse to zero. Of course, bond issuers could post more sophisticated time-based redemption conditions.

Third, and more trivially, bond issues could target intermediate targets themselves. So bonds could be issued that targeted a sustained drop in unemployment to 6 per cent rather than 3 per cent. Or two or more unemployment rates could be targeted by two or more bond issues.

Second, in the absence of costless bargaining and coordination among firms holding Social Policy Bonds, individual firms will not have adequate incentives to help meet the performance objective under his proposal because of problems with free riding.

I think this would be more accurate if instead of 'will not have adequate incentives…' it read 'would have reduced incentives…'. Even if bargaining and coordination were costly firms would, under certain conditions, help meet targeted objectives. Certainly, the direct benefits of bondholding would not always be apportioned strictly corresponding to bond holdings. But:
Firms would be looking at how worthwhile it is to themselves to undertake activities that would raise the value of their bonds. They might not be deterred from carrying out these activities just because other firms might benefit disproportionately more. Company executives and workers respond to all sorts of incentives, and are not deterred from maximum performance just because large shareholders will receive much greater financial rewards.

Firms could leverage their actual bondholding by buying call options or futures for the bonds, thereby maximising the returns from their target-achieving activities.

However, perhaps more important is that bargaining and coordination in the age of the internet are, in fact, very close to costless.

[Horesh] does not address how to obtain information on the costs and benefits of a policy prior to implementation.

This is true for new policies. But issuers of Social Policy Bonds will easily limit the maximum cost of their policy because they determine the redemption value of each bond, and the total number of bonds in circulation. And once a bond has been issued that, say, targets the reduction of unemployment from 10 to 8 per cent, then the market value of the bonds will generate and reveal masses of information about the costs of this policy, costs and benefits of particular unemployment-reduction projects and, importantly, costs of reducing unemployment still further. (I go into this in detail in my books.)

Technorati tag: economics

Killing our cities

The Nation (Bangkok), today published my letter:

The Bangkok Metropolitan Administration wants to ban street vendors from operating on Sundays. I am sure the BMA genuinely believes its plan would be good for the city. Like government the world over, it probably identifies economic success with the profits of its friends in big business, in this case the owners of shopping malls, luxury goods stores, and car manufacturers, all of whom would benefit from clearing vendors off the streets. In this the BMA is mistaken. It is small businesses on which the economic and social health of Thailand depends, and the BMA should be encouraging them, not chasing them away.

If the BMA wants to see the results of policies that favour big business at the expense of small businesses it need only visit typical western cities, where well-meaning over-regulation and zoning laws have created sterile, bleak, city centres. Cities that used to be vibrant and thriving, as Bangkok is today, are dying. In fact, at weekends and every evening they are already dead. People are afraid to walk in the streets and drunks and yobboes take over. Bangkok should learn from the mistakes we have made in the west, where government and big business seem determined to stifle diversity and enterprise.

Technorati tag: society

Government for special interests

The problem with special-interest conservatives is not that such agenda items violate their greater principles on any given point, any more than the policies promoted by Democratic interests violate liberal principles. Rather, it's that the entire enterprise of running Washington as a special-interest spoils system breeds a bloated, ineffective government - which does very much go against conservative principle. Ten years ago, conservatives defined themselves in large measure by their belief in less government. Many still view themselves that way, but the self-conception no longer has anything to do with reality. ...[F[or the 101 biggest programs that the Contract With America Republicans proposed to eliminate as unnecessary in 1995, spending has now risen 27 percent under a continuously Republican Congress. Interest-Group Conservatism, Jacob Weisberg, 'Slate'.

What goes for the United States goes for the other western democracies. The identity of the special interests changes, but the consequences don't: government that keeps growing, but fails to achieve society's social and environmental goals. And the consequence of that? A widening gap between government and the people, and a self-perpetuating lack of public participation in the political process. Even with postal voting, the turnout in yesterday's UK general election amounted to about 60 per cent. Only when politicians stop catering to special interests, and start focusing on what real people want, will this change. And that won't happen until they start expressing their policy goals in terms of broad, transparent, explicit, verifiable outcomes.

What about the subsidies to big oil?

If we're going to get through this crisis period without an awful lot of pain, we're going to have to have the equivalent of a Manhattan-like Project. We're going to have to challenge, not just the American people, but the people of the world because the first thing we have to do is to have an enormous conservation effort so that we buy time. US Congressman Roscoe Bartlett (R-Maryland)

Politicians are still subsidising oil extraction and oil consumption, as they have for decades. It is politicians who have subsidised the infrastructure that makes us dependent on oil. And here is one of them advocating another top-down, think-big, government-knows-best 'solution'. Yes, that's sure to work. Memo to Mr Bartlett: why not just stop the subsidies?

Closing the gap

Unlike many economists I have no view on the desirable size of government. I do not believe that 'taxation is theft', or that economic freedom is necessarily the most important consideration. To me it is the distance between government and people that is the matter of concern, especially as this distance seems to be widening in most democracies.

The gap would narrow if more people participated in policymaking. One reason, I believe, why we're not very interested is that policy is formulated in terms that are difficult to relate to outcomes that are meaningful to natural persons, as distinct from corporate bodies. Policymakers appear to concern themselves with decisions about funding for different government agencies, dispensing patronage to big business and other lobbies, presenting themselves in the best light ... almost anything, in fact, except outcomes that mean something to real people.

A government that issued Social Policy Bonds would, from the outset, have to concern itself with social and environmental outcomes. Its main role would be to articulate society's wishes regarding social and environmental outcomes, and to raise the revenue that would fund these outcomes. Unlike most of the current determinants of policy, the language of outcomes and the necessary trade-offs between them is comprehensible to people other than politicians, bureaucrats, lawyers and public relations experts. For that reason, more people would be drawn into policymaking - an end in itself, as well as a means toward getting greater public buy-in to the resulting policies.

Expressing policy in terms of outcomes, and the consequent closing of the gap between public and policymakers would be one valuable benefit arising from a Social Policy Bond regime. The other would be the much greater efficiency in achieving social and environmental goals once the market, rather than a handful of government employees, decides who shall achieve these goals, and how they shall be achieved.