Meaningless Mickey Mouse Micro-targets

Meaningful social and environmental targets must be broad; otherwise we risk a proliferation of Mickey Mouse micro-targets, that may seem unarguably valuable at first sight, but whose achievement comes at the expense of other valid goals. Take this example, where the always-interesting UK-based National Health Service Blog Doctor is writing about a patient, Robert, showing unexplained weight loss:

I have written about this before. The days of the hospitals taking on patients and sorting them out has long gone. NHS hospitals no longer see patients. They process problems. This is a direct result of government targets. To hit the targets, each hospital contact or “event” has to be concluded as quickly as possible. And so it is. Robert’s contact with the hospital is deemed a successful outcome, and points will have been scored. Meanwhile, his weight loss continues.

Costing policy targets

The primary source isn’t entirely clear, but according to an article in the current ‘Economist’ (subscription) around 6 per cent of UK children leave primary school each year unable to read properly. Clearly more government resources could reduce that figure. But, as with all social and environmental problems, the question is: where to draw the line?

I have my own preconceptions. For instance, I strongly believe that an excellent use of government funds would be to buy some low-cost law enforcement that could reduce the number of people killed on New Zealand’s roads from its current rate of 400 per annum - along with tens of thousands of serious injuries. We all have our own priorities about where scarce resources should be allocated. But unfortunately we, and policymakers, are very much in the dark as to the costs of our predilections. It’s in few people’s interests to calculate disinterestedly how much return, in terms of welfare, would be saved by more funding on, say, traffic policing as against (for example) funding of women’s refuges or literacy for schoolchildren.

A Social Policy Bond regime would be an improvement over the current system of allocating social funds, but also because it market prices of the bonds would constantly generate information of great value to policymakers about the total costs of their policies.

Take, for example, the objective of lowering some index of water pollution from 50 to 40 units. Assume that a national government issued one million bonds targeting water pollution, each redeemable for $10 once this lower level has been attained. The maximum cost to the government of achieving this objective would then be $10 million. But if the bonds, when issued, fetched $5 each, then the market would be saying that it thought it could achieve this objective for just $5 million. It wouldn’t say when it thought it could achieve that objective, but that could be inferred from market behaviour and the market value of the bonds compared with other financial indicators. But what if the bonds sold for virtually nothing, and the market value of the bonds failed to move from that floor? That would mean that the government had miscalculated: in the market’s view there would be no realistic chance of the objective being achieved for an outlay of $10 million in the foreseeable future. The government could respond in different ways:

• It could wait for new technology to arrive, or for circumstances to change in other ways, such that the market would see the objective as becoming more easily achievable, and the value of the bonds would consequently rise. Or,

• It could issue more bonds, with the same specification, also redeemable for $10. It might do this in stages, gauging the market reaction to each new tranche of bonds, which would tell the government the maximum cost of achieving the objective.

Either way, the government could be reasonably sure that it would be getting the best possible deal, expressed as ‘reduction in water pollution per unit outlay’. Valuing the benefit of achieving a targeted social or environmental outcome is bound to be an uncertain, and to some extent, subjective task, whichever policy instrument is used. But minimising the cost of whatever outcome is targeted is a different matter. A government issuing Social Policy Bonds could determine the maximum cost of achieving the objective because that would simply be the total number of bonds issued multiplied by the redemption value plus administration costs minus any revenues gained on floating the bonds. And, under a Social Policy Bond regime, it would be the collective wisdom of those in the market for bonds that determines how much the government (that is, taxpayers) would actually pay to achieve the targeted outcome: they will have every incentive to minimise that cost.

The prices of Social Policy Bonds are even more beneficial in that they would not merely minimise the total cost of achieving a specified objective. They would also indicate the marginal cost of achieving further improvements. But that discussion is more technical, and I will not go into it here.

Instead: two snippets from Harper’s Index (taken from ‘Harper’s’, October 2006):

• Minimum amount of USDA [US Department of Agriculture] farm subsidies since 2000 that have been paid out to people who do not farm: $1.3 billion.

• Minimum value of “small business” contracts given out by the US last year that went to Fortune 500 firms: $1.2 billion.

EU kills off small businesses - what's new?

Who could argue against this?

A race is on to inform more than a million small businesses that they become responsible for disposing of electrical waste — from dishwashers to calculators – from July next year. EU rules come into force making businesses responsible for taking back the two million tons of waste electrical and electronic equipment…that normally goes to landfill each year. Source

Well I will argue against it. Like much EU regulation it contrives to be both well-meaning – and to miss the point. If the objective is to reduce waste going into landfill, then why not set explicit, verifiable landfill goals and let people other than bureaucrats work out how best to achieve them? Why set up a new bureaucracy – because that is what these rules will do – to play around with activities that may or may not achieve reduce the rate of expansion of landfill?

It’s a typical, top-down, one-size-fits-all, government-mandated, pseudo-solution to what is probably a genuine problem. It’s also gesture politics, because it’s unlikely to achieve much, apart from employment for bureaucrats. Oh, it will probably achieve something: this sort of nonsense imposes proportionately bigger costs on small businesses. As the newspaper report continues:

But business leaders fear that only large retailers have any idea about the new obligation.

Precisely so: the main effect of these rules will be to increase still more the concentration in the retail industry that has already made clones out of every main shopping street in the UK.

Government will not save humanity

As the New Year approaches, there are two particularly urgent challenges facing humanity: nuclear proliferation and climate change. Our current approaches, in my view, are going nowhere, slowly. Iran is rejecting nuclear sanctions, while Kyoto, even if it were to be a success in its own terms, is going to be divisive, expensive and ineffectual. Unfortunately, we are so accustomed to handing over responsibility for social and environmental problems to some level of government or other, that we assume either that solutions to humanity’s problems are at hand, or that there’s nothing we can do about them anyway.

A third approach is that of Social Policy Bonds. Charge the private sector with tackling these problems. Admit that we don’t yet know how to solve them, but encourage people to research, investigate and implement diverse, adaptive solutions. Inject the market’s incentives and efficiencies into the whole process; so expanding the pool of human ingenuity devoted to solving these real problems. We don’t even have to wait for government to do it. We could issue our own (pdf) Nuclear Peace Bonds (here’s a similar idea) or Climate Stability Bonds. All it would take would be for some interested philanthropist to put up the funds, and let the market for the bonds do the rest. Of course, once the ball got rolling, contribution from members of the public could be solicited, which would swell the total redemption rewards.

The first hurdle is the one that looms largest, to me anyway. I have tried and tried to contact philanthropists and publications for philanthropists. With not a single exception my emails have not even been auto-acknowledged. No doubt these organisations have devised effective filters to screen out unsolicited messages. Are any readers of this blog philanthropists? Do you know any philanthropists? Do you know how to get in touch with philanthropists? I fear the current alternative, waiting for government to do something helpful, is just not going to be good enough.

Biases of big government

The problem with big government is that it is generally remote government. Remoteness means that government is unresponsive to the real needs of real people and has wildly different priorities from real people. Big government has more in common with other big organisations (corporations, trade unions, other governments) than with the people it's supposed to represent. All these institutions have two main things in common:

• Their over-arching objective is self-perpetuation; and
• When monitoring their performance, they rely heavily on easily quantifiable data.

Self-perpetuation for most of us, most of the time, is a goal with which we can identify as individuals. Some organisations, brought into being to address genuine grievances can, knowlingly or not, perpetuate or entrench the causes of their grievances: they see the entire world through the prism of the cause that validates their raison d'etre; and that can be problematic.

But the reliance on quantifiable data is, I think, equally dispiriting. A benevolent welfare state cannot discriminate between the deserving poor, and those who would benefit more from being refused (say) unemployment assistance and so more motivated to find work. The criteria for receiving such assistance will be numerical data, mainly wealth and income.

Given that we have big government, one way of solving the sort of mismatch between numerical aggregate measures of wellbeing, and actual wellbeing, would be to have sensible numerical targets. Take the unemployment example: instead of detailed, legalistic criteria for the process of applying for unemployment benefit, a truly benign government could set a broad target for total unemployment, and contract out the achievement of that lower target to the private sector. (Click here for one suggestion.) The private sector would be motivated to encourage those unemployed at the margin - those least unwilling or unable to go to work - to find jobs. This is in contrast to a bureaucracy, which has no such clear motivation. The proliferation if meaningless micro-targets, and the bureaucratic need for self-perpetuation, combine in this and many other instances, to form a vicious circle, or a downward spiral, which cannot respond sensibly to cases of individual human need.

Bureaucrats and lobbyists versus the people

New Zealand has released a draft forestry strategy to take into account climate change. Or rather, the fossilized science underpinning Kyoto – and that’s the problem. There’s a lot of internal consistency: to tax nitrogen fertilizer so as to reduce emissions of nitrous oxide; to spend NZ$100 million over five years to encourage new forest plantings. There’s also a lot of elegant economics: tradeable permits for agricultural emissions and offset schemes from tree planting.

All very worthy and, as I say, entirely consistent with the premises underlying Kyoto.

Unfortunately these premises are flawed. Kyoto is not, ultimately, concerned with climate change. Its sole focus is to reduce net anthropogenic greenhouse gas emissions. They are not at all the same thing:

1. Reducing anthropogenic greenhouse gases might not be the best way of reducing the concentration of greenhouse gases in the atmosphere;

1. Reducing the concentration of greenhouse gases in the atmosphere might not be the best way of preventing or mitigating climate change; and

1. Preventing climate change might not be the best way of preventing the worst effects of climate-induced catastrophe.

Even if our ultimate goal were solely to reduce net greenhouse gas emissions, Kyoto would be inefficient. Kyoto, and the New Zealand Government, are telling us not only that greenhouse gas emissions must be cut, but how to cut them. They are putting in place their own fixed assumptions about the relative contributions that greenhouse gases make to the climate change problem, and similar assumptions as to the contributions that planting trees rather than crops make to solving it. Such assumptions are based on old science: it is in the nature of top-down, micro-managed, bureaucratically administered regimes that they cannot readily adapt; and our scientific knowledge is expanding very rapidly indeed. Even accepting the premises of Kyoto, then, the current responses are inherently inflexible and inefficient – which matters a lot, given the colossal costs involved.

How would Climate Stability Bonds be better? First, they wouldn’t assume that cutting greenhouse gas emissions is the best way of tackling climate change. But even if it were found that doing so is the best way, holders of Climate Reduction Bonds would have strong incentives to do be more efficient. They would want and would have wider scope for action. For example, they wouldn't be bound by political correctness or realpolitik of the sort that exempts some countries that emit huge quantities of greenhouse gases from any disciplines at all. They would simply buy these regimes off or otherwise undermine opposition to the necessary disciplines.

There is an important presentational aspect too. Kyoto doesn't focus on a desirable outcome: it's focused on processes and activities. So it is now so politicized, and its money flows so unpalatable, that it is seen as an imposition; in the rich countries it's seen as an imposition by the greenies on everyone else, and in the poor countries it's seen as an imposition by the rich countries on them. And to industries, such as the forestry industry, it’s seen as a government-imposed threat to their wealth, or an opportunity to seek subsidies from that same government. Either way, it diverts the attention of some clever people away from managing their business efficiently, and into lobbying the government for special treatment.

In the proverbial battle between elephants, it’s the grass that gets crushed. With governments and the other Kyoto lobbyists, success is defined bureaucratically. As the New Scientist in its editorial of 25 November put it: “Some at the heart of the [UN climate] negotiations claim that the [recent meeting] in Nairobi has been a success. That’s baloney. The conference persuaded itself that a review of the [Kyoto] protocol in 2008 is a major outcome, but to an objective outsider it looks more like an excuse for inaction.” And for corporate interests, success is measured in terms of how much they will gain or lose as a result of whatever schemes, allegedly to mitigate climate change, are put in place by governments. While these games are being played, the losers, as so often, are we, the people.

Who cares about quality of life?

A couple of posts ago I castigated the New Zealand Prime Minister for her making GDP per capita as the Government's target par excellence - even at the expense of the welfare of infants and children. Perhaps this isn't the worst possible default target. The current 'Economist', describing UK Finance Minister Gordon Brown's Pre-budget Report says:

Mr Brown has little to say about the quality of people's lives; tellingly, he seeks to boost growth in GDP rather than GDP per person. Stripped of the verbiage, much of his speech could be seen as opening the way to more development in the crowded south-east, whose residents would be less able to object under the proposed planning reforms.

While you can increase GDP per capita by substituting paid childcare for unpaid, you can increase GDP merely by letting more people into your country. Et voila! A visionless politician's problems solved! A high GDP means influence, power; a seat at G8 summits. Quality of life? Who cares?

Smoke and mirrors

In Why I've lost my faith in Gordon Brown in the UK ‘Times’ yesterday,  Anatole Kaletsky says:

                                Perhaps the most worrying revelation about Mr
                                Brown’s approach to politics has been his
                                obsession with institutions and processes,
                                rather than results. Everyone knows that Mr
                                Brown’s proudest achievement has been the
                                restructuring of the Bank of England, but is it
                                possible that restructuring other government
                                departments is Mr Brown’s “big idea” for the
                                next decade? Following the merger of the Inland
                                Revenue with the Customs and Excise, Brown
                                allies hint at reorganising the Department of
                                Trade and Industry, revamping the Cabinet Office
                                and maybe even abolishing the Treasury itself.
                                Even more depressing is Mr Brown’s apparent
                                addiction to commissions and quangos run by
                                former businessmen, financiers, civil servants
                                and newspaper editors. It is as if the mere
                                appointment of these commissions is enough to
                                satisfy Mr Brown’s insatiable desire for
                                information and the appearance of governmental
                                activity.

Unfortunately, on this record Mr Brown is exactly in tune with current policymaking priorities. For political purposes, results hardly count. It’s cheaper and less effort to get Public Relations people to spin the facts, rather than to change them.* The parties tacitly conspire in this shell game, stressing in their election campaigns rhetoric and image, under an electoral system that allows voters a choice between Tweedledum and Tweedledee once every four or five years. Voters are seen as taxpayers or beneficiaries with Attention Deficit Disorder – a self-fulfilling belief system given that (as Kaletsky continues) educational policy itself is subordinated to meaningless spending targets:

                               On the substance of policy, meanwhile, Mr Brown
                                seems to have nothing of interest to say — or
                                do. Education, for example, is supposedly Mr
                                Brown’s top priority for the “next Labour
                                decade”. Yet his only positive idea in this
                                sphere is to keep spending more money on school
                                buildings and renovations, without any apparent
                                regard to what these schools teach or how, until
                                he achieves his newly proclaimed target — that
                                the average cost of educating state school
                                pupils should reach the amount now spent in
                                private schools.

This is gesture politics at its worst. Spending is not a legitimate policy goal. It is a means to ends, not an end in itself….unless, of course, Mr Brown’s real educational objective has more to do with placating the teaching unions than with actually educating the electorate of the future. The solution of course is to express policy goals in terms of results that are meaningful to real people. Meaningful goals for education, oddly enough, are educational goals: things like numeracy, literacy and the physical and intellectual well being of young people. Trickier to measure, to be sure, but far more relevant to real people than the lazy (or corrupt) pseudo-goal of ‘higher spending per pupil’.

* And if you think I am being overly cynical about the role of image-making in politics, check out this Mail on Sunday report that the British Government has agreed on a multi-million pound PR campaign to make British citizens feel better about the European Union. The plans, entitled Reframing the Debate, suggest promoting the ‘EU brand’ by linking it to popular or ‘warm’ European themes, like the Eurovision song contest, or the Cannes Film Festival - even though these have nothing to do with the EU.  It also suggests banning Ministers and officials from referring to unpopular EU institutions like the European Commission, places such as Brussels and Strasbourg, the euro, terms like 'Eurocrat' and 'EU directive' and controversial policies such as the Common Agricultural Policy and the EU Constitution.

GDP: the default target for government policy

It’s about two years since I started this blog. In that time I haven’t detected much movement toward outcome-based policy. Instead, we are seeing the ascendancy of a political caste; people who are politicians first and foremost and always have been. Their concerns are not those of ordinary people, and their definitions of success or failure are entirely removed from those of the populations they are supposed to represent.

Take this example, from a 2005 statement by the New Zealand Prime Minister, Helen Clark:

Treasury estimates that our GDP per capita would rise by 5.1 per cent if we lifted our participation rates overall to the average of the top five OECD nations. That’s a worthwhile objective and at this time of labour shortage, it’s a good time to be pursuing it. In last year’s Statement I highlighted the need to increase women’s participation in the workforce, and a number of steps have been taken to do that.

In other words, an increase in GDP per capita has become an objective in itself. Anybody who has always lived and breathed politics is going to think like that: the things that matter to such a person are aggregated quantifiable data. The flaw is that such data do not accurately measure the well being of society. Devised primarily to measure the output of manufacturing economies, GDP does not take into account changes in the quality of the physical environment, nor the distribution of income, nor social problems such as crime and homelessness. It ignores human capital (the education and skills that are embodied in the work force) and it fails to account for leisure time or the unpaid work of parents or family members. It cannot account for these things because they do not generate a flow of money. When GDP becomes a target these failings become more important than a measurement error. They underlie policymakers’ favouring of the big and measurable.

Statistics like GDP should never have assumed the authority they have nowadays, but they have done so by default, because we have failed explicitly to target outcomes that are actually meaningful, whose quantifiable measures are correlated with societal well being, at least at the lower ends of their ranges. We should, for instance, be targeting such measures as infant mortality, basic numeracy and literacy, basic levels of education and housing, employment levels. At a global level meaningful targets would be the spread of nuclear weapons, violent political conflict, and critical environmental indicators, such as climate stability.

But politicians, especially career politicians, find it hard to think in this way. They are not ordinary people. Their identification of success with GDP per capita is exactly analogous to a corporation’s appetite for profits: an end in itself. Nothing else matters. So Ms Clark for all her ambition may well see a small tick upwards in the New Zealand GDP. It’s the children whose mothers join the workforce who will bear the consequences.

The rich world's farm policy is corrupt

I’ll leave it at that for today:

“A maverick dairyman named Hein Hettinga started bottling his own milk and selling it for as much as 20 cents a gallon less than the competition, exercising his right to work outside the rigid system that has controlled U.S. milk production for almost 70 years. Soon the effects were rippling through the state, helping to hold down retail prices at supermarkets and warehouse stores.

For three years, starting in 2003, a coalition of milk companies and dairies lobbied to crush an initiative by a maverick Arizona dairyman. Hein Hettinga chose to work outside the rigid system that has controlled U.S. milk production for almost 70 years. The milk lobby said he presented unfair competition because he chose to operate without federal price control. Hettinga fought back but was outgunned on the Hill. In March, Congress passed a bill that effectively ended his experiment….” Source:  Washingtonpost.com:

World targets in megadeaths

Two snippets from a newsletter sent out by Carbusters:

• The city of Guangzhou has banned battery-powered bicycles to make more room for the 870,000 cars on the streets. This will negatively affect the almost 100,000 residents who drive these bicycles, but will make space for automobiles, which are appearing on Guangzhou's streets at a rate of 150,000 per year [Reuters].

• On average, 3450 people die on the world's roads every day [RoadPeace].

I write about cars and the depredations they inflict on us all not because I think cars are evil, but because they show very clearly what happens when government and its policies become remote from ordinary people. As with so many government activities, the promotion at public expense of transport was a good idea – at first. Roads used to be as essential as decent sewerage. Now, largely because of the enormous growth in road traffic, any other way of getting about has become expensive or dangerous. We are so hooked on our cars, and the road lobby is so hooked on corporate welfare, that government can do little to stop the juggernaut, even when it kills people at the rate of one 9-11 a day – as well as maiming and mutilating tens of thousands. Oh, and poisons our atmosphere, devastates our cities and countryside, and goes a long way toward shredding our social fabric.

Some years ago when the Chinese Government was bundling Falun Gong meditators into trucks for torture and worse, the British people mounted a remarkably successful demonstration…against a small rise in petrol prices.

Environmental policy must be diverse and adaptive

It’s not at all clear whether oft-proposed shifts in the way we do things would actually benefit the environment. I’ve blogged already about the uncertainties over whether cloth nappies (diapers) are better for the environment than disposables, as is commonly assumed. In June 2004, ‘Modern Railways’ published an article (Rail loses the environmental advantage) pointing out that high-speed rail can consume more fuel per passenger than cars or even planes.

The current issue of the ‘Economist’ has published a letter questioning the environmental advantages of solar panels over fossil fuels:

Silicon fabrication factories are energy and water intensive and the manufacture of silicon wafers uses energy from traditional fossil-fuel power generators, with the same old pollution. Add the potential problems of disposal towards the end of a panel's life—they are frequently doped with toxic materials like arsenic—and solar power hardly seems like the environmentally benign solution it is often touted to be. Peijing The, ‘The Economist’, 9 December.

The sort of life-cycle analysis required to establish the environmental benefits or otherwise of shifts in our behaviour are bedevilled by boundary issues, measurement difficulties and the difficulty of weighting one type of environmental impact against another. They are better than blandly assuming that rail is ‘better’ than air travel, that solar power is better than coal-fired power stations, but for the making of robust policy they would need to be continually reassessed in the light of our ever-expanding knowledge of the environment and our ever-changing environmental priorities. Government policy cannot be so responsive: if government did use life-cycle analysis with the aim of altering our behaviour, it would probably do so on the basis of a one-time, necessarily limited, and possibly quite subjective assessment of environmental costs and benefits. It’s not good enough, but even worse would be what we largely have now: government environmental policy based on corporate interests, media stories and the launching of visually appealing initiatives that attract air time but otherwise achieve nothing.

Social Policy Bonds would take a different approach. They would subordinate environmental policy to targeted environmental outcomes. It might be, for instance, that society wishes to reduce its use of fossil fuels. A Social Policy Bond issue that rewarded achievement of such a reduction would generate incentives for bondholders to bring it about at least cost. They might well carry out life-cycle analyses in their attempt to do so. But there is an important difference between the way do they would conduct their research and the way government would do so: bondholders have incentives to achieve their goal efficiently. This is likely to mean responding to and stimulating: increased knowledge of scientific relationships, and technical advances.

A single environmental goal, such as reduction in fossil fuel use, entails diverse, adaptive responses. These are precisely the sort of responses that government does very badly. Government can and should articulate society’s environmental goals, and can help pay for their achievement: in the democratic countries it performs these functions quite well. But actually achieving these goals requires continuous, well-informed and impartial decisions to be made about the allocation of scarce resources. For that purpose, Social Policy Bonds, with their incentives to achieve targeted outcomes efficiently would, I believe, be far better than the current ways in which environmental policy is formulated.

Read this and weep...

...or Subsidising Planetary Destruction, part 94.

Last month the United Nations General Assembly discussed banning high-seas bottom trawling, which scrapes the sea-floor bare, devastating habitat and coral. But strip mining of the high seas for fish in this way is not only continuing: it is being subsidised.

The villains – or lunatics – in this particular policy area include Japan, Russia, South Korea, and Spain. And how are their destructive fishing operations subsidised? Mainly by the provision of low-cost fossil fuel! The Fisheries Economics Research Unit at the University of British Columbia’s Fisheries Centre estimates (pdf) that bottom trawl fleets operating in the high seas receive an average of US$152 million per year, which constitutes around 15 per cent of the total landed value of the fleet.  

Never mind the outcome, feel the sanctimony

An article in the UK Sunday Telegraph says that Chancellor Gordon Brown ‘has been launching transport reviews at the rate of nearly one a year since 1998’. According to the same article, in 2000 Brown proposed scrapping older lorries with a £100 million investment fund. ‘Asked about this recently, ministers said they did not fund any such schemes.’ In 2003, Mr Brown claimed that everyone on Jobseekers' Allowance would be assessed with a mandatory skills test. But ‘Ministers recently told the House: "There are no mandatory skills courses linked to Jobseeker's Allowance".’

This sort of thing is typical. Image is more important than reality; and who’s going to keep the politicians honest? Between policymaking and policy delivery there are manifold labyrinthine paths, obscured by the fog of committees, agencies, and the glossy outpourings of PR professionals. The goal is not to deliver outcomes, but to remain in power, and for that, in the ADD era, grandiose but vapid promises suffice. Unveil new well-intentioned initiatives, and you will look good on the tv news. And under the current regime there’s no need to bother about outcomes. All the good news can be ascribed to your policies; all the bad news to the confounding effects of unexpected events or the long-term fallout from the previous ruling party’s activities.

This randomized or – frankly – deceptive approach is just not good enough. It never was, but given the challenges face as a planet and a species, it could bring us to extinction. Kyoto, for instance, is typical: high-sounding principles; top-level agreements; elegant trading mechanisms…and the outcome? A possible negligible reduction in anthropogenic greenhouse gas emissions. Pitiful: the triumph of process over substance.

Policy and political careers should be subordinated to outcomes. Real, meaningful goals should be made explicit, then targeted. People should be rewarded for how efficiently they achieve societal goals. We can no longer afford the smoke and mirrors of the current political process. It’s not a matter of who gets elected any more: it’s a matter of survival.

Event Loss Swaps

In an earlier earlier post I mentioned the similarity of Social Policy Bonds to Catastrophe Bonds. Readers might be interested to hear of an initiative by Deutsche Bank which, according to the Financial Times, “has begun making two-way markets in what it calls event loss swaps (ELS), which work in a similar way to credit default swaps and allow investors to buy or sell protection against insurance industry losses from large natural catastrophes.”

These derivatives, as with catastrophe bonds themselves, do not a seek to modify behaviour, but in principle there is no reason why they need not encourage a movement toward projects aimed at preventing the losses resulting from those ‘large natural catastrophes’. With larger funds at stake, and a broader definition of catastrophe than insurance losses, cat bonds and their derivatives could be equivalent in effect to Social Policy Bonds.

Don't rely on government

One of the disadvantagess of a large public sector is that it crowds out our natural, organic, bottom-up way of doing things. Whether it be care of the elderly or the sick, maintaining our physical environment or defining our cultural identity; the temptation for many of us is to let government do the work. This is not all bad: there are things that only government can do efficiently; but it does tend to reduce our own faith in our problem-solving abilities. It’s also an excuse for laziness in the face of urgent challenges. We think that, since we are giving more than a third of our income to the government, we don’t really owe society very much more.

Unfortunately, government inefficiency is legendary, and the recipients of its largesse (wealthy landlords, multinational corporates, the military etc) are not always those in most urgent need. But if our priorities are significantly different from government, we can actually do something to solve our social and environmental problems – even if we don’t know exactly how.

Philanthropists can issue their own Social Policy Bonds to achieve a specific goal with which they identify closely. They can back the bonds with their own funds, to be placed in an escrow account. Once their objective has been achieved these funds would be used to redeem the bonds. The philanthropists, once having got the ball rolling, could solicit funds from members of the public, who could contribute directly into the escrow account, and so increase the incentive for the targeted objective to be achieved quickly.

For those interested, I have written a small handbook, taking as an example female literacy in Pakistan: click here for a pdf file on how philanthropists could issue Female Literacy Bonds. I have tried and tried to communicate with philanthropic organizations and publications directly but, understandably perhaps, they do not seem to respond to my unsolicited emails.

What politicians think of us

On the rejection of his proposed constitution for the European Union:

It was not France that said ‘no’ to the constitution, it was 55 per cent of French people. Valery Giscard d'Estaing, quoted in the Brussels Journal.

There's a lot that can be read into this that one sentence: the arrogance of a member of the French political elite; that elite's disdain for voters; the concept of a France that is not some representation of a vision shared by the French, but one that is actually in conflict with the French people's wishes. I will just say that the statement represents the logical end point of a policymaking process that has nothing to do with outcomes that are meaningful to real people. The EU constitution on which the French voted was largely incomprehensible. More generally, policymaking is an arcane excercise to the non-specialist, where decisions are about changes to institutional structures or funding arrangements, and are driven by ideological concerns or the need to buy off various interest groups. Matters, in short, that have little relevance to the outsider. Indeed, they help create and widen the distinction between outsider and insider.

Giscard is the consummate insider. The outsiders used to be those who didn't bother to vote at all. But as far as Giscard is concerned, even those who do vote should be considered outsiders if they don't agree with what he and the other members of his priesthood think is best for us.

Killing with kindness, killing with complexity

Not, in this instance, literally:

More than five million Britons now rely on state aid to live and the number of younger people claiming sickness benefit is higher than anywhere else in the industrialised world, a major new study has found. ... Around £64 billion per year — more than 10 per cent of all public spending — is handed out free of obligations. Spending on benefits, not including pensions, amounts to nearly £80 billion a year, more than is spent on education and twice as much as is spent on law and order. ... The central problem has been the way [Finance Minister] Mr Brown has structured the system to keep a strong central grip on welfare. His design for tax credits means that the UK has the highest penalties for increasing income or increasing hours worked – the poverty trap – of any developed country. Five million Britons on state aid 'Daily Telegraph', 27 November

Anybody who's been on a vacation of more than a couple of months will be familiar with the problem. We return and, after switching the power back on, we have to re-learn how to set and use the finer features of the microwave, the telephone answering machine, the VCR or DVD recorder...and so on. All this electronic equipment was designed by specialists for people (apparently) who will be using it every day and who have the time and energy to consult the voluminous instructions if they take a break.

It's similar to the composers of modern serious music, whose audience consists entirely of other musicians, or the highbrow novelists who write exclusively for the novelists on prize committees. And so it is with the welfare industry. The experts who construct welfare policy are several stages removed from their supposed beneficiaries. The econometrics is elegant, the proliferation of new features is technically impressive, but the result of all the complexity - if the policymakers but cared about it - is a fiscal, social and pyschological disaster.

Here's an idea: why not say, explicitly, what welfare policy is designed to achieve? Express your targets in terms that can be easily monitored and that are meaningful to real people. And if you don't know how to achieve your stipulated goals, don't be embarrassed: just contract the whole process out to a motivated and efficient private sector. Perhaps the UK Government is actually coming round to this way of thinking. The 'Telegraph' article continues:

The report proposes the outsourcing of welfare provision to voluntary and private sector organisations which would be paid on results, in particular for getting claimants into sustained employment.

Milton Friedman and the public sector

Since 1989, the year Ronald Reagan, the American president most in tune with Mr Friedman's ideas, left office, and the Berlin Wall came down, America's government has grown just as fast as its economy—an economy which has barrelled along for much of that time. The state's slice of GDP is forecast to be 36.6% in 2006, up from 36.1% 17 years ago. The public sector has also swollen in Europe's three biggest economies—Britain, France and Germany—and in OECD economies as a whole.

This excerpt from an editorial in the current Economist reflecting on the achievements of the late Milton Friedman. The point being made is that there is still a lot of work to be done. I don't quite share the assumption that the rising influence of the state is necessarily bad. Sure it means that people have less to spend on what they themselves want but might it not be that they want more spending on public goods and services of the type that only government can supply? Sadly, the answer is probably 'no'. Governments keep getting bigger largely through deception, obfuscation and inertia. Deception, in that it knows and has known for a long time that its subsidy programmes do nothing to help the people whom they are represented as benefiting. So massive farm subsidy programmes, sold as essential to maintain family farms, actually do no such thing: they overwhelmingly go to the largest landowners and massive agribusiness corporates. Obfuscation, in that government (with very few exceptions) does not target explicit policy outcomes, such as universal literacy, low crime rates, or basic health or employment goals. Instead it allocates public funds according to criteria that have little to do with people's considered wishes: media appeal or political expediency. Its decisions concern spending, rather than publicly accessible outcomes. Existing institutions, especially government agencies, and their ways of doing things are taken as a given.

And inertia, because many government programmes are self-entrenching. Subsidies to corporations, or protection for public sector workers, strengthens the forces of resistance to any meaningful reform. The Economist editorial goes on:

Governments are as convinced as ever that they know best how to spend their citizens' money.

But it's just as true to say that they may not be so convinced; they may see quite clearly that socially unjust, economically wasteful, and environmentally destructive subsidies (for example) are stupid. It's just that they lack the courage to end them.

It doesn't really matter...

...what is causing climate change. By the time we definitively identify the cause it may be too late to do anything about it. From a letter to the [UK] Guardian by Piers Corbyn of Weather Action:

The global warmers' claim that current extra CO2 causes warming which gets dangerously magnified through the greenhouse effect of extra water vapour in the atmosphere, consequent to the temperature rise, also fails. The sea absorbs extra CO2. Furthermore, increased transpiration-cooling by enhanced growth of plants, which is caused by extra CO2, cancels out the extra greenhouse warming of that same CO2. Increased greenhouse heating due to doubling CO2 is 3.7 watts per sq metre. This is negated by about the same amount of enhanced transpiration-cooling of plants, all of which grow faster in extra CO2. Therefore there is no CO2 driven net heat flow and surface temperature rise. Temperature and climate change in our epoch is therefore driven by other factors, especially solar particle and magnetic effects.

Fine: there appears to be reasonable doubt about whether greenhouse gas emissions cause climate change. Should we therefore wait several decades before mitigating the effects of climate change or taking steps to stabilise the climate? In general, do we have to find root causes of a problem before we try to solve it? We can do both, but allocating resources between the two courses of action needn't be done at the initial stages. We strongly suspect, for instance, that smoking causes cancer. But we don't give up all research into prevention and cure of cancer until that particular causal relationship has been proven. Similarly with climate change: let's focus on mitigating its worst effects, however caused. And let the market decide, via Climate Stability Bonds, how to allocate scarce resources between prevention and mitigation: something that the market, with its built-in incentives, can do far more adaptively and less divisively than the absurdly expensive, ineffectual bureaucratic testimony to 1990s science that is Kyoto.

Subsidising environmental destruction (continued)

A reminder: we're not just destroying the planet, but we're subsidising its destruction:

House Democrats also are shying away from tampering with more than [US]$1 billion worth of oil- and gas-related tax breaks, enacted last year. Source: Washingpost.com

Compliance costs discriminate against small business

A revealing graph from the current Economist:




I don't know about the 'tax burden' element, represented by the height of the bars. I can't imagine that Italian companies pay nearly 80 per cent of their actual profits to the government. Eighty per cent of declared profits maybe. But the figures in the rectangles, which is the number of hours per annum that businesses have to spend preparing and filing tax payments are interesting. They give some idea of how complex tax (and regulatory) regimes tend to favour large businesses over small. They range from about 80 minutes per week for businesses in New Zealand and Switzerland, to more than 11 hours per week in Spain. Time costs of compliance with other regulations, such as health and safety concerns, employment documentation etc, are likely to be equally high. Such costs obviously fall disproportionately heavily on smaller businesses. In fact most government interventions, however well meaning and high sounding in principle, tend to favour the large and global at the expense of the small and global.

Dirty energy is subsidised too

This week's 'Economist' says (Green Dreams, 16 November) that '[a]lmost all clean energy ...relies on government subsidies to make it competitive with fossil fuels.' Recent figures are hard to find, but in 1997, the World Bank estimated annual fossil-fuel subsidies at US$ 48 billion in twenty of the largest developing countries and US$10 billion in the rich countries. (Source) Add in taxpayer-financed road construction and non-pricing of the negative environmental impacts of fossil fuel consumption, and it's clear that dirty energy too is heavily subsidised.

The same article also says that 'government subsidy is a wobbly foundation on which to build a business'. I wish that were so. But subsidies on such a large scale are self-entrenching: they fund the very interest groups that are so successful in lobbying against their withdrawal.

I don't know

Every year, 35,000 children in England - 6% of all 11-year-olds - leave primary school without basic literacy skills. This casts a shadow over their own future and has huge costs for society as a whole. Rapid Response, 'The Guardian', UK, 7 November

[Christopher Monckton] has a degree in classics and a diploma in journalism and, as far as I can tell, no further qualifications. This is a dazzling debunking of climate change science. It is also wildly wrong, George Monbiot, 'The Guardian', 14 November

I know even less about education than I do about climate change. But I know that when policy is being made in both areas outcomes are almost irrelevant to the debate. Allegiances are bought and sold, insults are traded, activists use their support as a quid pro quo for more power and deep down, at the very heart, is either personal ambition or - which is very much the same thing - the drive to validate an ideological position. The losers are those of us with no input into policymaking; that is, ordinary members of the public and our children. While the politicians and think-tanks debate local control of schools, literacy standards suffer. While they debate greenhouse gas emissions, the global climate may or may not be changing catastrophically and irreversibly.

Policies and ideologies; ambitions and systems; all should be subordinated to targeted outcomes. It doesn't matter who controls schools, as long as basic educational outcomes are achieved. And it doesn't matter what happens to greenhouse gas emissions, as long as the climate is stabilised. Some sort of humility is called for: the ability of policymakers to say 'I know what I want, but I don't know how to get there. Let the private sector decide: that's what it does best.'

Why bother to think?

The New Zealand Government will make all your decisions for you.

One snippet from this week's issue of Brian Harmer's admirable WYSIWIG News:

Simon Collin of the Christchurch City Council says depending on which scientist you speak to, disposables can take between two and 500 years to decompose and the human waste in them contributes to greenhouse gasses. He says in a bid to reduce the amount going to the rubbish dump, they have decided to subsidise washable nappies, as the cost of them is thought to be prohibitive to many families. Mr Collin says they have put aside ten thousand dollars to subsidise 500 starter packs.

In fact, it's not at all certain that cloth nappies are kinder to the environment:

If in a drought, it's best to use disposable diapers. If the area has landfill problems, it's best to use commercially laundered cloth diapers. If there are air pollution problems, resort to disposable diapers. The best diaper ultimately depends on the community's situation. Source: Institute for Lifescycle Environmental Assessment

...which is why I always stress that it is environmental outcomes that are important, not the alleged ways of achieving them, however trendy or superficially attractive those might be. Besides, the best ways of achieving outcomes are prone to change with time as scientific relationships change, and as knowledge expands.

A second excerpt from WYSIWIG News:

The [New Zealand G]overnment is injecting close to $2 million into a regional initiative to strengthen Wairarapa's international food and wine reputation.

And a third:

A showcase of New Zealand-made products at Parliament later today, is expected to be tinged with sadness as it coincides with the first anniversary of the death of Rod Donald. The invitation-only event is the first of six regional showcases and kicks off the Government's Buy Kiwi Made programme.

As Brian Harmer rightly comments:

These kinds of jingoistic programmes are understandable at one level, but are not logically sustainable in a country whose economic lifeblood is exporting products to other countries. How would we react to our products being shunned as a result of similar programmes in those countries. Protectionism like this will bite us in the posterior sooner or later.

Yet another item discusses Auckland's proposed waterfront sports stadium, which could cost up to NZ$1 billion. Much of this will come from central and local government funds.

Things will change

Of course the mid-term election results will change American politics. The Democrats are beholden to a slightly different set of interest groups than the Republicans.

David Lange

An excerpt from David Lange’s engaging autobiography:

“It was often remarked that I had no education in economics. This is somewhat ironic. In the early 1980s, nobody was better qualified than a lawyer to understand the New Zealand economy. It was a legal construct. Only the law could allow farmers to earn an income by killing sheep and burying them…. There was a ramshackle wall of legal protection around the economy…. [Prime Minister] Muldoon’s regulatory excesses were increasingly absurd. You did not need to be an economist to understand that; the question was what to replace them with.” My life (page141), David Lange

Unleash the private sector - a little!

As seemingly in all the industrialized countries, in the UK health care is in crisis. For reasons of ideology it does not charge at point of use. Inevitably, demand is unsatisfied. One response – see this post by NHS Blog Doctor – is to ration by bureaucracy. Integrate inefficiency into the system so inextricably that patients either die, or pay for private sector treatment. Another approach is to ration according to the more-or-less random factor of media appeal: the British national health care system’s terminal-care budget seems to be allocated on that basis: 95 per cent of it is allocated to the 25 per cent of the UK’s population who die from cancer, and just 5 per cent to the 75 per cent who die from all other causes. (See Alternative endings, [UK] Radio Times, 13 July 2002. This was the subject of a [UK tv] Channel 4 documentary Death: you’re better off with cancer broadcast on 16 July 2002.)

These are not necessarily consciously inhumane processes, but they do raise the genuine question as to the role that government should play in health care.

I have long argued in favour of government targeting broad, basic, health outcomes. Instead of micro-managing particular bureaucratic processes, or rationing on the basis of mind-space or celebrity affliction, government could set up well-thought out, meaningful indicators of health, such as quality-adjusted life expectancies at different ages, infant mortality, and ideally some reliable measures of mental health. At basic levels there will be a strong correlation between the numerical value of well-chosen indicators and social welfare. Included in such indicators could be the universal availability of insurance against catastrophic health costs.

Once chosen, government could contract out improvements in these indicators to the private sector, via a Social Policy Bond regime. Bonds could target any or all of the chosen health indicators. A fruitful division of labour would be the result: government would define its chosen health care outcomes. And precisely because it targets such outcomes, rather than bureaucratic processes or meaningless micro-targets, it will attract greater public buy in – extremely helpful for a universal scheme. Government would also be the ultimate source of finance for achieving these outcomes. It could perform both these functions – defining targets and raising funds to achieve them – very efficiently and with maximum public support. But under a bond regime the actual achievement of these outcomes will be done by the private sector, which will maximise its profits only by maximising the efficiency with which it achieves society’s health goals, as defined by government.

Archives available again

The problem with this blog's archives (thank you anonymous commenter) has been fixed.

Markets better than Kyoto at minimising costs

Markets are good at allocating scarce resources. This is not just a conclusion from economic theory, but accords with all the historical evidence. That said, it’s unfortunate that policy decisions that entail the expenditure of colossal resources, are taken without reference to the market.

Take climate change: under the Kyoto Protocol the resources spent on trying to prevent it will be decided largely by national governments. They will be a negotiated outcome based partly on today’s current knowledge of the scientific relationships, but mostly on what politicians think they can get away with. The political process will attenuate any the relationship between the magnitude of the climate change problem and the global response.

Now consider what would happen were Climate Stability Bonds to be issued. The main decisions about the likelihood of climate change, the magnitude of the efforts required to prevent it, and the probabilities of doing so successfully would be taken by the market, when it decides how much the bonds are worth. This, in my view, is vastly superior to the bureaucratic process. As with central planning, bureaucrats make mistakes. Their systems are cumbersome, uniform and cannot adapt – even if the bureaucrats are well meaning. Contrast this with a Climate Stability Bond market: there, the decisions as to how much need be spent on stabilising the climate will be taken by those with powerful incentives to minimise the cost. They will be people (or institutions) who stand to benefit if they get their sums right and particularly, if they are cost-effective in reducing climate change. Contracting out the achievement of climate stability in this way vastly expands the pool of people with an interest in researching and minimising its costs.

Tying it all together

Conversations with friends over the weekend have encouraged me to tie together the strands of my thinking on policy. Social Policy Bonds are an attempt to address certain policy problems: what follows is my explanation of the origin of these problems.

Essentially, corporations have too much power. As James S Coleman, in the Asymmetric Society describes, the major influence on our society has changed from natural persons to corporate actors. The two parties might have nominally equal rights, but they have vastly different resources, which in any actual transaction can be decisive. Corporations have drifted apart from natural persons, partly by default. Their objectives are not necessarily congruent with those of society. Through a vast array of subsidies and trade barriers, through their unpriced negative social and environmental impacts, and through manipulation of the regulatory environment, they can and do entrench their power, and make live worse for natural persons. (To some degree offsetting these impacts, and seldom mentioned in the literature, are their unpriced positive externalities.)

Corporations and governments support each other in creating ideal conditions for corporate growth. They protect, foster and subsidise the large and global at the expense of the small and global. The large scale of social organisation, and the very high degree of specialisation and complexity of our economies, while helpful to corporations, does not therefore arise from undistorted market forces, and do not therefore originate in decisions made by natural persons; though they are certainly maintained by such decisions, as viable alternatives become ever more scarce.

Big corporations and big government go hand-in-hand. A large scale of aggregation tends to go with remoteness: people feel they have nothing to contribute to decision-making and tend to disengage from the political process: another self-reinforcing trend. The big losers from all this are natural persons and the commons.

Social Policy Bonds are an attempt to redress this balance. Their starting point would be explicit, verifiable outcomes that are meaningful to natural persons. At a local or national level their goals could be things like: universal literacy, or high levels of health and housing, low levels of pollution and unemployment. At a global level, targets could include reduced levels of violent political conflict and climate stability. Social Policy Bond regimes would inject market forces into the achievement of such social and environmental goals. Perhaps equally important, their emphasis on meaningful outcomes would draw more public participation into the policymaking process. No longer would policymakers get away with protecting their corporate friends (and paymasters) with policies whose principles sound well-meaning, but whose effects will be obscure and as far as real people are concerned, entirely wasteful. Policymakers’ goals would of necessity be transparent right at the start.

Thank you Anatole Kaletsky

Commenting on the Stern report on climate change in the [London] Times Mr Kaletsky makes a point that deserves emphasis:

Global subsidies for energy research are now running at a pitiful $10 billion annually, compared with the $250 billion spent on subsidising the extraction of fossil fuels (mainly on the most polluting of all energy sources, coal). A new slogan for the environmental pressure groups: Some Gain, No Pain, 2 November.

Does anyone believe that our political system can meet the urgent environmental challenges we face, when our leaders haven't even the courage to stop subsidising their corporate buddies in the energy business? I don't.

Subsidising environmental destruction

My suggested response to climate change, which applies regardless of whether it is actually happening, is Climate Stability Bonds, which would reward who stabilise climate, however they do so. (Something has gone very wrong with blogger.com's html links: for a short article on Climate Stability Bonds please see http://socialgoals.com/ieakyototext.html .)

A bond regime would need no prejudging of what is happening to climate, what is causing it to happen, or how best to stop it happening if it is, indeed, happening. I'd rather a bond regime replaced Kyoto, which would be inadequate even if it weren't failing - which it is. But Climate Stability Bonds could also complement such efforts to cut back on greenhouse gas emissions as are being made.

Actually, the human species could go a long way to cutting such emissions simply by withdrawing subsidies for the extraction and use of fossil fuels. These can take the form of direct subsidies or tax breaks to the oil and road construction industries. Or they arise from the unpriced negative environmental impacts of fossil fuel use.

You'd think that such first steps would be the easiest to take, at least in comparison to the heroic demands of Kyoto. But we are not taking them. Perverse subsidies continue to wreak environmental havoc. Given these facts, is there anyone who genuinely believe that we are capable of making the sacrifices necessary to comply with Kyoto - as divisive and ineffectual as it is? Climate Stability Bonds would need a lot of discussion and refinement before they can be deployed. But to my mind it's essential that they, or some other scheme that directly targets a stable climate in ways that people can support, be considered - urgently.

Government taxation is not government spending

Suppose the federal budget is balanced at $1 trillion. Now suppose Congress reduces taxes by $200 billion without reducing spending. One result is a $200 billion deficit. Another result is that voters pay for only 80 percent of what government actually costs. This of this as a 20 percent discount on government. As everyone knows, when you put something on sale, people buy more of it. Logically, then, tax cuts might increase the demand for government instead of reducing the supply of it. Stoking the beast, Jonathan Rauch, 'Atlantic Monthly', June 2006

Rauch goes on to cite research showing that there is no sign that deficits have ever constrained government spending. To the contrary; the evidence shows that a tax cut of 1 per cent of GDP increases the rate of spending growth by about .15 per cent of GDP per annum. The same research shows that taxation above 19 per cent tends to shrink government and taxation below it makes government grow.

Thanks to the Bush tax cuts, revenues have been well below 19 percent since 2002…. Perhaps not surprisingly, government spending has risen under Bush.

There are several policy implications arising from this. The critical one is that reducing government income does not necessarily reduce government spending. The two are not synonymous. This sounds obvious, but it’s the sort of fact that is rarely made accessible to the electorate. It means that reducing taxation does not mean small government – it can mean quite the opposite. This means that we, the public, should (ideally) vote for meaningful outcomes; not slogans. If a political party is advocating small government as an end in itself, then it should come right out and say so. If, on the other hand, it really wants tax cuts, regardless of whether (as in the US) they increase government spending, then it should admit that that is its objective.

Politicians currently get away with this sort of shell game, because we, the voters, are not used to distinguishing between policy ends and means. Small government, except to ideologues, is not an end itself. It may be a means to various ends, but in my view it would be more efficient to target those ends explicitly, rather than the alleged means of achieving them. We should demand and respond to greater transparency from the politicians as to their true intents. We should, indeed, be voting for explicit outcomes that are meaningful to citizens; rather than vague promises and slippery slogans. Such outcomes would be at the very core of a Social Policy Bond regime. People would know exactly what they were voting for. A revolutionary concept, no doubt, but one that would hold politicians accountable and bring greater public participation into the policymaking process – at the expense of the spin doctors and ideologues.

Insuring against catastrophe

In retrospect most of us probably wish more resources had been devoted to stopping the spread of nuclear weapons. Many of the things we most value are difficult to define precisely, and so require some effort to incorporate into a Social Policy Bond regime. 'Peace' for instance is perhaps the most valued outcome of all. It would probably need to be expressed in terms of an array of outcomes and indicators. Nuclear proliferation, again, would need to be defined quite technically before it could be made the object of Social Policy Bonds aimed at preventing it. Nevertheless I believe such targeting could be done and should be attempted as a complement to existing efforts to solve these problems.

More readily definable is the detonation of nuclear device in anger. This would be a catastrophe in itself, and would represent a discontinuity in human history that could precipitate untold further suffering. The policymakers, as with nuclear proliferation, seem to be failing. This is where Social Policy Bonds targeting such an explosion could score heavily over the current approach. Their objective would be simple to define - the sustained avoidance of a nuclear explosion - and easy to verify. It's an objective that almost everyone would support, and one that, in my view, requires more imagination and brainpower than is currently being channelled in that direction. It's also an ideal goal for Social Policy Bonds in that it's not at all clear from where the most obvious threat to its achievement is likely to originate. Helen Caldicott, for instance, points to the fact that Russia and the US together own 96 per cent of the world's 30000 nuclear weapons. With current efforts at keeping the nuclear peace apparently faltering; with an easily expressed, easily verified goal that is highly correlated with human well being, and with a real need for imaginative solutions and rewards beyond those available to bureaucrats, maybe Nuclear Peace Bonds would be the way forward.

Monetising public goods

The case of Wal-Mart makes us realise just how badly we lack a way of talking about the public good that is not framed purely in terms of economics. The huge fortunes made at the end of the 19th and start of the 20th centuries were broken up by anti-monopoly and anti-cartel legislation , because they had been accumulated at the expense of the public good. That is a useful idea, and one that needs to be revived and used as a yardstick. John Lanchester, The Price of Pickles (reviewing books about Wal-Mart).

I agree. Corporate power has grown immensely and politicians are increasingly in its thrall. Our physical and social environments are more and more determined by corporate wishes than by any idea of the public good. The government policies I know best are perverse subsidies. Their effects have been disastrous: they help denude and destroy our countryside and cities; the protect large, global concerns at the expense of small, local businesses, and they represent a massive waste of scarce resources. I say 'have been' but these policies persist - and that's even more shameful. If you look carefully amongst the news stories, (skipping the serious stuff about Princess Margaret's alleged illegitimate son, the skateboarding rhinoceros etc) you will see reports of the WWF's study saying that humanity's use of resources is unsustainable. The evidence does seem to be piling up, but what is disheartening is the widening gap between where we are headed, and what most people presumably want.

Many of those in power, if they think at all about the public good, probably identify it with the financial health of corporations. A Social Policy Bond regime puts off some well-meaning people, because it offers cash rewards to those who would supply public goods. I understand their apprehension: a bond regime would use markets to solve classic problems of market failure. Unfortunately we live in a monetised world. Without financial incentives there's little hope of reining back the corporations and their puppets in government. It's paradoxical and perhaps regrettable but also, in my view, necessary, to pay people to do the right thing. After all, we'd not be rushing headlong into planetary collapse if it were not for the monetary incentives and taxpayer-funded corporate welfare programmes that currently reward the destruction of public goods.

Target outcomes, not alleged means of achieving them

We assume that if we raise pollution prices, pollution will come down. But not even the smartest economist can know how quickly it will come down, or by how much. We can only proceed by trial and error. Much of the tax-setters’ time will be spent debating how much of a price hike will produce how much of a reduction in pollution, when in fact what we should be debating is how quickly we want pollution to drop. Once that debate is settled, we should be able to set a value at the agreed-upon level. We can’t do that with pollution taxes. Pollution taxes, in short, though better than nothing, are far from an ideal way to protect nature.

An excerpt from the excellent Capitalism 3.0: a guide to reclaiming the commons, by Peter Barnes. Economists love pollution taxes, which are beguilingly elegant. Unfortunately, as Mr Barnes points out, their apparent sophistication has over-ridden their value: a common failing of policy that is driven by anything - except outcomes that are meaningful to natural persons. The elegance is often seen as an end in itself. No doubt I shall have more to say about this book when I have finished reading it. Meanwhile, another excerpt, quoting Kevin Phillips, a former (US) Republican party strategist:

“The timber industry spent $8 million in campaign contributions to preserve a logging road subsidyworth $458 million—the return on their investment was 5,725 percent. Glaxo Wellcome invested $1.2 million in campaign contributions to get a 19-month patent extension on Zantac worth $1 billion—their net return: 83,333 percent. The tobacco industry spent$30 million for a tax break worth $50 billion—the return on their investment: 167,000 percent. For a paltry $5 million in campaign contributions, the broadcasting industry was able to secure free digital TV licenses, a giveaway of public property worth $70 billion—that’s an incredible 1,400,000 percent return on their investment.” The reason our political system works this way isn’t that our politicians are particularly venal. Rather, the cause is structural.

What drives immigration policy?

We happily delegate many decisions to government because politicians and officials are specialists; they have deeper understanding of most of the issues, and we trust them to act on our behalf. Sometimes our trust is misplaced. But even more often, I think, government drifts into policies that have major impacts on citizens' lives, without realising what it is doing. Some of these policies can be self-reinforcing, acquiring an intertia of their own, which makes them very difficult to stop. Much of the western world is, in my view, experiencing this with immigration policy. Immigration has undoubted benefits, but my beef today is about its effects on house prices. I am thinking of New Zealand and the UK, and what I see in those countries is that ordinary working couples who cannot rely on family help are struggling to buy houses. I also think that governments in these countries are now in a position where they feel compelled to keep house prices high, or risk (1) offending middle-class property owners and (2)
a house price crash, leading to a slump in consumption, unemployment and electoral unpopularity. It is in these governments' interest, at least in the short run, to keep immigrants coming to buttress the housing market.

The purpose of this post is merely to point out that this immigration has much wider effects on society than this, and that maintaining house prices is hardly a legitimate policy outcome. Certainly it's on nobody's election manifestoes. Yet it does seem to have become an implicit policy goal; one that's been reached by default, and will be very difficult to reverse, even if some far-sighted politicians see and care about the long-term effects it has on the social fabric of New Zealand or the UK - or the societies that migrants leave behind. Like farm subsidies or a drug habit, policies to support the housing market are far more difficult to end than to start.

More transparency at the outset is essential. If governments want to subsidise wealthy landowners and agribusiness (as most rich countries do) then they should come out openly and say that that is their policy. And if they see high house prices as an end itself, then they should openly admit it, and we could vote accordingly.

I am not of course objecting to immigration. I am though objecting to policies that have huge effects on people being made by default and without any sort of consultation. A Social Policy Bond regime would from its very outset specify explicit policy goals. People would vote for the outcomes they favoured, not for the least unappealing party leader or phatic statements of intent. Greater informed public participation in the political process would not only be an end in itself: it would be a way of securing more 'buy in' to crucial policies, like immigration policy. Immigrants would felt and actually been more welcome and more willing to integrate if the host population had first been consulted about whether they were to be admitted.

Measuring government performance

The contribution of government to the economies of the rich world exceeds that of Communist China or the Soviet Union in many regions. (In Wales, for example, the public sector accounts for 66 per cent of the economy.)

One problem arising from this is that governments have to use numerical indicators to measure the success or otherwise of their policies (if they attempt that sort of monitoring at all) and that these indicators, as in the former USSR, may have very little correlation with anything meaningful to people - other than the bureaucrats whose careers rise or fall on how well they can make those figures look.

The problem becomes more serious as government crowds out our non-numerical ways of doing things. In many areas of life, and for most but not all of us, these ways are more efficient, adaptive and responsive than government approaches. They are also more obviously sensible, though more resistant to codification, systemisation and other bureaucratic processes. What areas of life am I talking about? Things like child rearing, personal health, and the arts. Well-meaning government programmes, initially developed to deal with extreme cases, expand to dominate more and more of our routine activity: like the private sector, but without its disciplines, growth is the public sector’s imperative.

Etc. The one thing for which neither you nor anyone under your management will be held responsible are outcomes for young people. It would be the same if the issue were crime, or health care, or education…. Plausible reasons for poor outcomes can always be found outside the performance of your agency, and many of them will be perfectly valid. There are just too many variables for your performance to count for much.

All this should imply a certain humility on the part of government. If it works in areas where it cannot think of measurable outcomes that are inextricably linked to social welfare or environmental benefits it probably should not be involved in that field of activity. In those areas government is very likely to be crowding out less formal, but more efficient ways of doing things. Government should stop its subsidies to its corporate friends, which it currently gets away with because they allegedly benefit 'domestic industry' or 'the family farm' or 'transport links'. Instead it should concentrate on the most extreme cases of social and environmental deprivation, where its help is unquestionably needed and where the numbers do correlate with social and environmental well being.

What we have now, and are increasingly suffering from, is in some ways the worst of both worlds: big, intrusive and growing government working hand-in-with big business the expense of everyone else. Tragically this co-exists with expanding pockets of social deprivation, and in many areas, a deteriorating social and physical environment.

Ignorance all round

At a fringe meeting at the Conservative Party Conference the head of the EU Commission's representation in the UK, Finnish national Reijo Kemppinen, argued that the general rise in 'euroscepticism' polled across the EU recently is "fuelled by ignorance, and a lack of knowledge." He said, "People don't know much about the EU and the benefits it can bring," arguing that the Commission has a job to do in explaining the EU and its policies to people. When questioned about his remarks by members of the audience, Kemppinen later denied having used the word "ignorance". He then went on to concede that he didn't know as much of the detail of many EU policies as some eurosceptics. Open Europe Bulletin, 13 October

Commissioner Kemppinen is probably correct, but there's plenty of ignorance too about the costs the EU imposes on its citizens. Not just the regulatory costs, which the EU's own 'Enterprise Commissioner' reports as being around 600 billion Euros every year (about 5.5% of total EU GDP!); but the costs of subsidies, and protectionism, the latter of which does not appear on the EU budget. It's ignorance about these costs that, in my view, that is the more scandalous.

There is such a thing as society

The right therefore has an affinity for market economies, both because people will always be more motivated to work for themselves and their families than for something called "society," and because no planner has the wisdom, information, and disinterest to run an economy from the top down...And since we are always teetering on the brink of barbarism, social traditions in a functioning society should be respected as time-tested workarounds for the shortcomings of an unchanging human nature, as applicable today as when they developed, even if no one can explain their rationale. ... The idea that people have a right to paid vacations, central heating, and a college education, for example, would have been unthinkable throughout most of human history...my freedom to have my teeth fixed impinges on my dentist's freedom to sit at home and read the paper. Steven Pinker, quoted in EconLog

While I agree with the comment, I cannot dismiss 'society' as readily as Dr Pinker appears to, and as many policymakers definitely do. There is such a thing as society, and its loss or erosion means a lot to people who aren't lucky enough to fufil all their social needs in their daily lives. We are not just adjuncts to an economic system, and perhaps we think we have rights to housing and holidays because we regard these things as a quid pro quo for our society's being systematically dismantled by government policies - of all parties - that favour their large, global buddies (via subsidies to big business, infrastructure; the externalising of social and environmental costs; and a biassed regulatory system) at the expense of the small and local.

Roads are for the rich

Aucklanders should oppose tolling every step of the way. Tell Transit we do not want to spend $14 every time we drive between Manukau and Albany. We don’t want fast roads for the rich and slow roads for the poor. It is the government that should be funding roads, not the people of Auckland – they have already paid their taxes.” Auckland City Councillor, Cathy Casey, saying why she opposes Transit NZ’s tolling solution for the funding of State Highway 20

Does Councillor Casey think that toll-free roads benefit the poor? Ok, maybe in Auckland even very poor families have one vehicle of their own - otherwise they'd be unable even to shop for groceries. But it's a mistake to think, that just because they pay nothing for access to almost all roads like rich people, they benefit as much as the well off from lavish provision of roads. They don't. They have fewer vehicles per household, less money to spend to keep them running, and less leisure time for driving. They also suffer disproportionately from noise and air pollution. The big beneficiaries of roading programmes are construction companies and the wealthy.

The limits of quantification, continued

When numerical indicators are strongly correlated with what we as societies want to achieve, then they are invaluable. In setting up the basic health, education and welfare programmes of large societies, quantification is indispensable. We need the numbers to measure where we are, and where we are going. But my question, raised in the previous post, is whether we are in danger of applying numbers where they don't actually measure anything meaningful. GDP per capita, for instance, was, and for many countries still is, an easily measured and occasionally useful indicator of a country's well being. But at higher levels of wealth, the relationship between it and well being breaks down. Nevertheless, maximizing GDP per capita appears to be one of the main de facto priorities for governments of countries at every level of development.

The limits of quantification become more important as government expands its role. They help make the case against that expansion. on efficiency grounds at least, because once we have the basics, the things that really matter to us cannot be quantified. In some ways we in the rich countries are getting the worst of both worlds. We have under-provision of programmes that eradicate poverty and provide a tightly-woven safety net to the most disadvantaged members of society. Here numbers, such as basic health and literacy indicators are meaningful and strongly correlated with welfare. At the same time, government funds its corporate buddies with massive funding of the construction, agribusiness and other sectors, through perverse subsidies, which, as well as representing a transfer from the poor to the rich, impose deadweight losses on the entire economy and devastate the natural environment.

Perverse subsidies and other forms of corporate welfare invariably rely on vague, qualitative arguments, or they use numbers where there is no correlation between the numbers and societal well being. The case for universal safe water and literacy education for children, for instance, is solid; that for exacting funds from taxpayers for post-graduate programmes, or lining rivers with concrete (as in Japan) needs to be made explicit and subject to challenge. A Social Policy Bond regime would achieve this level of transparency; right at the outset it would specify its targets in objective terms. By subordinating policy to outcomes, instead of to obscure, misleading or mutually conflicting objectives, it would impose some rigour on the function of government.

The limits of quantification

Anything that exists, exists in some quantity, and can therefore be measured. Lord Kelvin

Social Policy Bonds would target quantifiable outcomes. In traditional societies, where people lived closer to each other, people probably knew a lot more about each other’s general state of happiness. They knew when the people that mattered most to them were happy, and they had a fairly good idea of the events and circumstances that would make them happy. They probably would not be able to quantify or even articulate these matters, but neither would they have needed to.

[W]e prefer to take our chance of cholera and the rest than be bullied into health - a leading article from the [London] Times, 1 August 1854, in response to government measures to provide basic sanitation.

The same applied when our own societies were less complicated. Problems themselves were more obvious; the causes of problems could be more readily identified, and so could solutions to some of them. Governments were largely successful in their policy interventions on behalf of the disadvantaged: they instituted basic health and education for their own populations. They provided other public goods, such as law and order, and sanitation. And they did so with great success and sometimes, as the quote above shows, against strident opposition.

In our industrial societies, with their large, complex economies, government bodies have far more complicated tasks, but they still believe that the best way solving problems is to look for causes and try to treat those. And they still believe that they are best placed to perform these tasks. Government has enlarged its role and largely supplanted families, extended families and local people in supplying a range of welfare services to those who need them. Increasingly government is turning to numerical indicators to manage its resource allocation.

But this use of indicators is relatively recent, unsystematic and unsophisticated. Few indicators are targeted explicitly for a sustained period: the targeted range of inflation is a rare (and not especially helpful) exception. Other indicators, such as the size of hospital waiting lists, don’t measure what matters to people, or are prone to manipulation. Even when numerical goals are clear and meaningful they are rarely costed, they are almost always too narrow, and they are largely driven by existing institutional structures. Those broad targets that are targeted with some degree of consistency tend to be economic aggregates, such as the inflation rate, or the rate of growth of Gross Domestic Product — which appears to be de facto indicator par excellence of rich and poor countries alike.

But GDP’s shortcomings as a single indicator of the health of an economy are well known: amongst other failings, GDP does not take into account changes in the quality of the environment, or the distribution of income, it ignores human capital (the education and skills that are embodied in the work force) and leisure time, and it ignores such social problems as crime and homelessness. Under a bond regime statistics like GDP would never assume the authority they appear to have nowadays.The goals of government policy should be social and environmental outcomes that are meaningful to natural persons (as against government agencies and corporate bodies), not growth rates or other abstract economic indicators.

Lord Kelvin's remark is nonsense, of course. Much of what matters most to us - family, relationships, connection with nature, meaningful work etc - is impossible to quantify. But if we take the large-scale organisation of our society as a given, then we can expect that societal goals will increasingly have to be represented by numerical indicators. It would appear that the choice will increasingly be between (a) the current de facto targeting of per capita GDP along with an almost random array of narrow, easily manipulated indicators that have no necessary relationship to societal goals, and (b) the targeting of consistent, transparent, mutually supportive indicators that represent meaningful social outcomes. A Social Policy Bond regime would be a step away from the apotheosis of GDP and toward the systematic use of indicators where they can be of most value.