2005

It hasn’t been a great year, either for Social Policy Bonds or for policies that are subordinated to outcomes.

Nobody has issued Social Policy Bonds, as far as I am aware, during 2005, nor has there been much professional interest. I have been updating the text of my book Injecting incentives into the achievement of social goals: Social Policy Bonds, to reflect my view that the private sector is more likely to issue Social Policy Bonds than government agencies. I expect to have the text completed during the first quarter of 2006. I haven’t begun looking for a publisher yet. Anybody who has purchased any of my books can email me for an electronic version of the new book, free of charge, at any time. There has been no media coverage of Social Policy Bonds apart from a couple of articles in New Zealand newspapers, in which I offered Climate Stability Bonds as an improvement over the wildly expensive, moribund, Kyoto process.

As regards policy: there has been some delinking of subsidy from production levels in EU agriculture, but absurd tariffs and other import barriers remain as a serious impediment to would-be food exporting developing countries and a continuing threat to the global trading system. Other perverse subsidies, including those to oil extraction and consumption, continue.

Despite this lack of progress, I continue to work on refining and publicising the Social Policy Bond principle. Any suggestions as to how to advance it would be most welcome. I wish all my readers a happy, healthy 2006.

Climate change: subordinate policy to outcomes not process

Dealing with climate change as if it’s just another problem is going to be disastrous. Governments, especially at the supranational level, subordinate all policy to process. Their only concern is that they comply with the rules – or rather, that they are not seen to have failed to comply with them. To politicians and officials, outcomes are irrelevant. This is especially the case with climate change, where they can easily escape or deflect censure because of all the scientific uncertainties and because their failures will not be directly attributable to them.

What’s prompted this diatribe? Researchers in the UK have found that warmer temperatures have stimulated microbial activity in 6000 soil borings across Britain. This means that much of the carbon that used to be stored in the soil is now being released into the atmosphere. “The quantities were large enough to negate all the work that Britain had done to switch away from coal to reduce carbon in the atmosphere.”

This is one of several scary feedback findings published recently. How will Kyoto absorb them into its mechanisms? How will policymakers respond? Answers: it won’t, and they won’t, respectively. That’s because Kyoto is a typical government conceit: it assumes government knew the scale of the climate change problem, the cause of the problem, and the best way of solving it in the 1990s. Kyoto cannot respond to our rapidly expanding knowledge.

Instead of Kyoto we urgently need an adaptive policy, that rewards people for preventing or mitigating climate change, however they do so. My suggestion is that we ditch Kyoto and governments, along with concerned non-governmental organisations and philanthropists issue Climate Stability Bonds instead. Even if the entire premise for Kyoto eventually turns out to be false – the climate is not changing, in other words – Climate Stability Bonds, because they are priced by the market, would still be the lowest-cost policy.

The middle-class housing crisis

In 1970, about 50 per cent of all families could afford a median-priced home; by 1990 this number had dropped below 25 per cent. The next American metropolis, Peter Calthorpe

This quote, refers to the US, but could equally apply to New Zealand and the UK.

How has it come about? The authors of Suburban Nation, point out that one factor is the way that planners and developers design our cities. In most residential developments it’s now almost impossible for any adult to function without a car. The cheapest cars (in the US) cost around US$6000 a year to run, which at typical mortgage rates equates to US$60 000 in home-purchasing power. For two adults, the impact on housing affordability is obvious.

Another crucial point, which I’m pleased the authors make:

The atomization of our society into suburban clusters was the result of specific government and industry policies rather than of some popular mandate.

It’s not markets, in other words, that have led to urban sprawl, but government subsidies, notably for oil extraction, consumption, and for highway construction, along with disastrous single-use zoning laws.

Government favours industry concentration

A recent report by the ETC Group, Oligopoly, Inc. 2005 points out, inter alia, that in the past two years alone:

• the world's top 10 seed companies have increased their control from one-third to one-half of the global seed trade;
• the top 10 biotech enterprises have raised their share from just over half to nearly three-quarters of world biotech sales; and
• the market share of the top 10 pesticide manufacturers rose modestly, from 80 to 84%, but industry analysts predict that only three companies will survive the next decade.

I think government intervention tends to favour oligopolies, in that it favours big business at the expense of small businesses and natural persons. Government identifies big business with economic success, and most corporate welfare programmes go to the largest companies. Agricultural subsidies, for instance, are claimed to be for 'family farms', but they mainly go to wealthy landowners and large agribusiness corporates. (Import barriers for food, as well as hurting the third world, also transfer cash from poor (western) consumers to wealthy farmers.) Big business can manipulate the regulatory environment, eg regarding health and safety, to make it very difficult for small businesses. The result is increasing concentration in industries like agriculture, where government intervention is dominant and sustained.

Markets and 'markets', continued

For all the grandiloquence, however, there is no hiding that last week’s meeting did little to promote free trade. The Economist

You'd almost always be safe, if you've fallen asleep at a meeting and woken up to find yourself being looked at expectantly, to say something like there are arguments on both sides, or it's not black or white, it's a continuum. But when it comes to agricultural subsidies these statements would be wrong. There is only one side, and it is black not grey: agricultural subsidies are economic nonsense, and socially inequitable, and environmentally catastrophic. We knew this 30 years ago, but the subsidies continue. Right now, they are threatening to undermine, yet again, the international trading system. Still their proponents - step forward France - keep them going. They continue to put up high barriers to imports from food-rich developing countries, raising food prices for their own consumers and making it impossible for people in the poorer countries to prosper. The main beneficiaries of these absurd policies are wealthy landowners, large agribusiness corporates, the bureaucrats who administer them, and their political friends.

For those who preach 'markets' but are anti-market in everything except rhetoric, the interests of these wealthy, selfish bodies outweigh the millions of ordinary people, some of them desperately poor, who would benefit from the removal of barriers to agricultural trade.

Social Policy Bonds and developing countries

I’m often asked whether Social Policy Bonds could be applied to developing countries. The answer is yes. They could be issued by interested, wealthy outsiders, concerned, for instance, about female literacy in Pakistan (click here for a pdf file on how philanthropists could issue Female Literacy Bonds).

Of course, developing country governments could issue their own Social Policy Bonds. Their public sector is not so well documented as in the rich countries. This makes discussion of their policymaking more difficult, but it should not inhibit the transition to a Social Policy Bond regime for several reasons:

• Public sectors are growing even faster in developing countries than in the developed world from, of course, a smaller base. There is the opportunity therefore to avoid the mistakes that developed countries made when their public sectors grew.

• While public sectors in the developing countries are growing rapidly, they are still not big enough to cope with their very severe social problems and the enormous social changes that are occurring. Developing countries are urbanising rapidly, with all the social dislocation this entails. Crime rates are high, and there is a great deal of urban poverty and unemployment. Many children are outside the educational system altogether and standards in state systems, while variable, are generally very low. Environmental problems are especially severe in developing countries.

• Public sector employees in developing countries are generally not well paid, and are more susceptible to corruption than in most developed countries. This lowers their motivation to act in the public interest. So, even more than in developed countries, there is often little relationship between government spending and desirable outcomes. One pointer: an International Monetary Fund (IMF) survey of 50 developing countries concluded that ‘there is little empirical evidence to support the claim that public spending improves education and health indicators’. (Source: Anjeev Gupta, Marijn Verhoeven and Erwin Tiongson, Does higher government spending buy better results in education and health care?, IMF Working Paper WP/99/21, February 1999.)

Markets and ‘markets’

Talking about Social Policy Bonds I find that some people are initially put off by the concept’s reliance on markets. They associate markets with big business and its largely successful efforts to manipulate the social and political agenda in its own interests. So let me quote Chomsky:

Only economists talk about markets. Business can’t tolerate markets. They don’t want markets in which informed consumers make rational choices. What they want is deluded consumers who will make irrational choices. That’s what hundreds of billions of dollars in advertising are spent on. You don’t get any information about the product.

There is a huge difference between big business and government on the one hand, and small businesses and natural persons (as distinct from corporate bodies) on the other. Big business and government are suspicious of markets, which depend for their vitality on numerous decisions made by people and firms acting diversely and responsively within ethical and legislative bounds. They don’t fully trust markets because they cannot fully control them. But they do try:

Large companies are less and less about making something for a specific market and increasingly about manipulating the arrangements behind such makings. Harvey Molotch, Where stuff comes from, Routledge, 2003 (page 204)

When they are not corrupted or distorted, markets are the best way of allocating our scarce resources: all the evidence of history as well as economic theory supports this.

Markets do get a bad press, because they are often corrupted and distorted. But Social Policy Bonds offer a way in which market forces can be channelled directly into achieving social and environmental goals.

● An article about Climate Stability Bonds appeared in yesterday's Dominion Post (Wellington).

Stabilisation wedges

The current issue of The Economist has a feature about climate change. In it, there is talk of ‘stabilisation wedges’ invented by Rob Socolow. Essentially, this is a way of decomposing ‘a heroic challenge (eliminating the emissions [above the trend line]) into a limited set of merely monumental tasks.’ Dr Socolow lists six such tasks: greater efficiency, decarbonised fuels, decarbonised electricity, fuel displacement by low-carbon electricity, methane management, and natural carbon sinks. Each of these can be further broken down. For example, decarbonised electricity can imply nuclear power, renewable energy etc.

This way of looking at climate change is encouraging in that it’s about diverse approaches solutions to broad, defined, problem.
My reservations about it are:

• That the defined problem is taken to be anthropogenic greenhouse gas emissions, not climate change nor the negative effects of climate change;
  
• That it is still too prescriptive in that it doesn’t do much to encourage the exploration of as-yet-unknown possible solutions;
  
• That it lacks market incentives, so would not maximise cost-effectiveness as that Climate Stability Bonds would, and would shift the burden of failed or inefficient technologies on those – presumably taxpayers – who would be financing, upfront, the entire enterprise.

Click here to read a published article about Climate Stability Bonds. Details of how to order my book on Climate Stability Bonds can be found here.

Politics without outcomes

If you’re a politician and you don’t target outcomes, anything goes. If you’re not in the government you can attack the government for spending too much on this, or not enough on that. If you are in the government you can blame all the bad news on what the opposition did when it was in power. Relationships between cause and effect are nebulous and accountability can always be fudged. So it’s all a lot of fun for politicians: all they really need a research team who can mine data and bring up a few favourable soundbites: there’s no shortage of data. And if you’ve done so badly that even that is unconvincing, well you can always attack the personal history of your opponent. So Gordon Brown, UK Chancellor (Minister of Finance) yesterday was reduced to pointing out that the chief defect of his new Tory opponent is that he was an Old Etonian.

Politicians should be allowed to have their fun, but not at the expense of the rest of us. We really need to get them to target explicit social and environmental outcomes. We need to join with them in articulating our goals and costing them.

More subsidies for the rich

The British Government, like many others, has become dependent on maintaining high property values. So it’s doing it’s best to prop them up. Yesterday it announced that it (ie the taxpayer) will subsidise the purchases of couples who can afford only 75 per cent of the purchase price of a new house. Anyone with basic economics will know that this will merely bid up the price of all houses. Perhaps that is the Government’s real purpose. If it wanted to do something about poverty or homelessness it would tackle them directly. Instead it shovels taxpayer funds into the property market. Its appears that the Chancellor’s priority is to keep consumer spending high – at least for the duration of his political career – by inflating property values.

A Social Policy Bond regime would do away with this sort of nonsense from the outset. It would first identify the desired outcome and then let bondholders, not government, decide on how best to achieve it. It’s possible that a government issuing bonds would say that its purpose was to boost property values so that consumers would spend more. But it’s hard to imagine such a use of taxpayer funds being admitted, let alone approved. The current policymaking regime depends absolutely on fudge, obfuscation and deception. It allows government to favour its own alleged ways of achieving vague, unspecified or conflicting goals. Very often the actual result, as here, is to subsidise wealthy individuals or corporations at the expense of small businesses or the disadvantaged.

Rewarding outcomes, not effort

“But the public seems to be losing patience with airy-fairy ideological crusades—and growing ever hungrier for down-to-earth pragmatism.” So says Lexington in a column headed ‘The End of Ideology’ in the latest (3 December) issue of The Economist. And it’s true America’s 1993 Government Performance and Results Act ‘seeks to improve the management of federal programs by shifting the focus of decision-making from staffing and activity levels to the results of federal programs’.

What has been the result?

As I argue in my forthcoming book, existing institutional structures constrain a truly outcome-based policy. In the US, there has been an emphasis on rewarding effort whatever the result. But for efficiency it is not the quantity of effort that should be rewarded, but its quality, as measured by its effectiveness in achieving outcomes. It is crucial, in short, that outcomes be rewarded, however they are achieved. The risk and consequences of underachievement should be borne by the institutions themselves, not by ordinary members of the public. Outcome measures for bodies engaged in long-term activities, for example, research and development, should be subsumed into broader strategic goals. It should not be up to the government or a government agency to monitor how efficient agencies are in achieving sub-objectives. More crucially, the resource allocation should not be on an agency basis. Resources, ideally, would shift in and out of different activities depending on how efficient each activity is in contributing to the achievement of the strategic goals.

There is no question that the GPRA does represent a big step forward for outcome-orientated government. But, in my view, progress is being impeded on two fronts: existing government agencies have too much say in both the choice of long-term goals to be targeted, and in how resources aimed at achieving these outcomes are to be allocated.