30 June 2006

Portentous prose about nothing

Here in England following the World Cup is a lot of fun. What I like best is the eloquent, well-informed moaning about England's inevitably lame performances. The calibre of the commentary on football, from professional journalists and the people who ring talkback radio, is very high. (Motoring is another field where the quality ofjournalism is far greater than you'd expect.) Ultimately of course (whatever Bill Shankly said) it’s only an entertainment and the commentators realize that.

The mismatch between the tone of equally high-calibre political journalism and its content is more jarring. Much attention is lavished in this country on the precise timing of the end of Mr Blair’s Prime Ministership, the qualities of his likely successor and other trivia. Serious, competent journalists and politicians spend a great deal of energy giving us their views in well-crafted portentous prose. (See here for a recent example.) Good luck to them, and it can be as entertaining as football journalism. Unfortunately it can also distract us from what politics should be about. It’s another branch of the celebrity-driven news and entertainment industry that threatens to crowd out politics and policymaking as far as ordinary members of the public are involved.

Is this emphasis on image and personality a symptom or a cause of public disengagement from politics? Politics and economics are about vision and strategy, priorities and trade-offs; but you will rarely hear them discussed or even read about except in the more serious journals. Their presence in the mass media are almost totally eclipsed by fatuous speculation or frivolity. As the gap between normal people and politicians widens, so it’s being filled with frothy stuff that signifies nothing. Politicians are becoming a priesthood, as remote from the people that pay their salaries as the elite multimillionaire footballers in their private jets.

Part of the reason is that they express their intentions in terms of money spent, institutional structures or vague promises about almost anything – except verifiable outcomes that are meaningful to natural persons, as distinct from corporations. We expect no better nowadays; the opinion formers are largely acolytes to the political caste, beneficiaries of the same mystique they bestow on our masters.

28 June 2006

Tragic consequences of management without objectives

What happens when you make bold decisions without knowing why:
... it appears that the German leaders first declared war and then determined what they were fighting for. David Stevenson, 1914-1918: The History of The First World War (page 134).

26 June 2006

Airbus: the flying Common Agricultural Policy

"I have the choice between being considered someone dishonest or someone incompetent who doesn't know what is going on in his factories,” said Arnaud Lagardère [co-chair of EADS, the Airbus builders]. “I prefer the second version.”
What is it about the French elite and their corrupt hauteur that so intimidates the rest of us? As with the land-based Common Agricultural Policy, so with Airbus they are doing their best to ensure that efficiency and common sense are subordinated to backwards-looking visions of French glory.
Compared with Mr Lagardère, who has no operational role at EADS, the man who actually runs the group was not at all contrite. Noël Forgeard [the other co-chair] claimed in numerous interviews that Airbus, the subsidiary of EADS making the A380, was not late in admitting its production problems. (In fact, it took Airbus two months to make them public.) The relationship between Airbus and EADS is completely transparent. (In fact, Airbus is run as a semi-autonomous fief.) The war between German and French shareholders and managers is over. (In fact, they are at each other's throats.) And he categorically denied using inside information when he pocketed €2.5m for himself and his family after exercising share options in March. He was, he said, “shocked by presumptions of his guilt”. Source
The sadness is that a European Union without the French elite and its hang-ups could actually work very well. For a start, the Common Agricultural Policy could be dismantled, allowing the food-rich developing countries to export to Europe, greatly enhancing the survival prospects of, especially, Africans. Then the EU members could conduct all their business in one official language - English - instead of the 20 or so currently used. Rather than being an unpopular and failing way of projecting French power and its centralised, remote system of government onto Europe populations, it could then become more responsive to the genuine concerns of its people.

25 June 2006

Targeting mental health

Definitional and measurement difficulties aside, it's clear that mental health is a serious social problem. According to the UK's Mental Health Policy Group in the UK 'one in six of all people suffer from depression or chronic anxiety, which affects one in three of all families'.

Mental health is of course difficult to quantify - to put it mildly. So how can government aim for improvement? It can readily measure and increase spending on treatments like psychological therapy, as the Group advocates. But how are we to know whether such spending is cost-effective, or even effective? Quantifying well being, or as economists put it 'social welfare' is a broader question than mental health and I have no easy answers. The World Bank and United Nations publish tables of social indicators of development, encompassing such variables as literacy, water supply and sanitation, and natural resources. These are obvious priorities for developing countries, and they do happen to be easy to quantify. But even in these countries mental health is a hugely important issue: should it be ignored just because it's difficult to measure?

One approach could be to take small randomised samples of a population, and measure their behaviour and responses to specific questions or psychological tests. This is the approach taken by crime surveys, which are thought to be more reliable indicators of criminal activity than numbers of crimes reported to the police. These surveys simply poll a sample of people and ask whether and how they have been affected by crime.

A Social Policy Bond regime should probably target mental health explicitly, but so too should our current political system. Like the physical and social environment, with both of which it's inextricably bound up, psychological wellbeing is in danger of being allowed to deteriorate by default, because nobody got round to quantifying it until the effects of its degradation were too catastrophic to ignore.

23 June 2006

Leave it to the government

Having travelled a bit recently around northern England and Wales it seems to me that we are living in a physical and social environment that is becoming more and more a creation of government and the intellect, rather than nature and our own social instincts. There doesn’t appear to be much investment in the provinces at least, that isn’t initiated or heavily subsidised by government. (In Wales, for instance, government accounts for 66 per cent of economic activity.)

Perhaps it all began when government started subsidising an infrastructure that intrinsically favours the large and global at the expense of the small and local. Fifty years ago this month that US President Eisenhower signed the Federal-Aid Highway Act of 1956, which committed his government to invest heavily in a national network of interstate highways. In the rich and the developing countries we see that big business has the ear of government; that it can steer policies in its favour, at the expense of small- and medium- sized enterprises and ordinary taxpayers and consumers, and the environment. Our current politics favours top-down, once-size-fits-all policies, rather than bottom-up, local decision making. It means more and more that ordinary folk look upwards to government, to a specialised caste of policymakers, either as a source of income or for guidelines on how to live our daily lives.

So, in this excellent piece about climate change from the current New York Review of Books, we find:

As with the extinction of species, the disintegration of ice sheets is irreversible for practical purposes. Our children, grandchildren, and many more generations will bear the consequences of choices that we make in the next few years.
I’d just make one small but significant change: it’s not really our choice; it’s that of our governments, who are not only indifferent or unresponsive to climate change but are actively helping it along by subsidising fossil fuel extraction and use.

On a more day-to-day level, the desolation and danger of some of the UK’s provincial towns also owes something to the top-down, inorganic nature of town planning. Zoning and government’s subsidies for road transport have divided shops from dwellings and commercial premises. A centralised and ideologically driven education system, in which the worst schools are not allowed to fail, compounds the problem, and even on the long summer evenings in the very pleasant small English city centre where I’m a visitor, the streets are mostly deserted, apart from a few bewildered tourists looking for somewhere that’s open.

More contentiously, the social fabric of our countries is changing rapidly and inorganically, in the sense that it’s driven by policymakers rather than people:

In Norway, a tiny Scandinavian nation that was until recently 99% white and Lutheran Christian, native Norwegians will soon be a minority in their own capital city, later in the whole country. And still, Norwegian politicians, journalists and University professors insist that there is nothing to worryabout over this. Multiculturalism is nothing new, neither is immigration. In fact, our king a century ago was born in Denmark, so having a capital city dominated by Pakistanis, Kurds, Arabs and Somalis is just business as usual. The most massive transformation of the country in a thousand years, probably in recorded history, is thus treated as if it were the most natural thing in the world. To even hint that there might be something wrong about this has been immediately shouted down as "racism." Source
Now I am not saying this migration should not occur. My point is that it’s happening without ordinary people’s involvement in the decision-making. On such a sensitive issue, more public participation is an end in itself, as well as a means toward wider acceptance of new citizens. I would also argue that much immigration to the west is driven in fact by the rich countries' corrupt trade policies, which do so much to impede imports of goods from the third world. It’s crony capitalism, carried out at the expense of consumers. Norway’s barriers to agricultural imports, for instance, are some of the highest in the world. Western governments have contributed to the collective impoverishment of poor countries, so stimulating reluctant immigration to their own countries.

What can we do about all this? An essential first step, I believe, is to formulate policy in terms of outcomes that are meaningful to real people, which would make it harder for governments to justify dodgy expenditures. After all, if mad schemes like the Common Agricultural Policy had to say from the outset that their prime aim is to transfer resources from the poor to the rich, to denude the environment and to impoverish the third world; if, in other words, they did not rely on deception for their existence, then it’s unlikely they’d ever be implemented.

16 June 2006

Ideology and education in Britain

Ideology is bad enough when adults inflict it on each other. It's even worse when innocent children are the victims. Since state funding for grammar schools in the UK began to be phased out in the 1960s for narrowly ideological reasons, what has happened to social mobility in that country?

The latest research, published today, reveals that the percentage of top positions in the British media going to former private school pupils has risen by more than 10 per cent since 1986. The report on the media follows reports on the legal profession and on MPs which reached similar conclusions. The research, published by the Sutton Trust education charity, shows that of the leading 100 media opinion-formers, 54 per cent came from private schools, compared with 49 per cent 20 years ago. Thirty-three per cent of the remainder came from selective grammar schools and only 14 per cent were from comprehensive schools, which cater for 90 per cent of all pupils.

The report on the legal profession shows that almost 70 per cent of barristers from leading chambers were educated at private schools. And in the House of Commons, 42 per cent of those holding government office or shadowing ministers are former pupils of private schools. Just 7 per cent of all pupils are educated in the private sector. Source
Meanwhile, we can see from another newspaper article an indicator of the value some Britons put on their kids' education:

World Cup haircut pupils get the boot from school.

Two pupils have been suspended from a Blacon school because they had St George's flags cut into the back of their hair. ... The two 14 year-olds have been told they cannot go back to lessons unless they shave the motif out or wait for it to grow out. [The father of one of the boys] said his son would not back down. "It is just stupid. The boys are not having it shaved out." Source: Chester Standard 18 June
Here's another idea: instead of running our schools as social engineering experiments or suppliers of mass babysitting services, how about we subordinate their structures and activities to educational outcomes, instead of ideology? Issue Social Policy Bonds that target basic verifiable achievements, such as numeracy or literacy. Let motivated educators decide how these shall be achieved, and let parents decide on their other priorities.

15 June 2006

Financial incentives

Reading the excellent book Critical mass: how one thing leads to another, you realize quite graphically in just how many ways quite small causes can have very large effects in physics and in society. You get the same impression when looking into the causes of social calamaties such as war or violence of any sort. I find this encouraging. There are many people working for the social good but there is also a very large pool of extraordinary talent, creativity and diligence that is, to put it mildly, not fully aligned with public goals. Much of this skill and ingenuity is deployed in the pursuit of private goals, many of which have negative social and environmental externalities - as well, of course, as benefits, both private and public. For instance, there are prodigious talents, very evident here in the UK, devoted to marketing of just about anything. Humanity could gain a lot if a fraction of them were encouraged to move into fields paying a greater social dividend.

There is no need for compulsion though. A Social Policy Bond regime could do the job quite simply, by increasing the financial incentives on offer. Collectively we are squeamish about paying people large sums of money to achieve social and environmental goals, and I share this feeling too, to a degree. But people do respond positively to incentives, and it's not always greed. People crave respect and in the west nowadays that comes largely through being wealthy.

As an aside consider Japanese society:
The Japanese have understood that what people are largely pursuing in the workplace is not so much money as the respect of the people around them, and therefore maintain a sophisticated - indeed, bizarrely over-elaborate to the Western eye - economy of respect in addition to the economy of money. They have understood that a large part of what money-seeking individuals really want is just to spend that money on purchasing social respect, through status display or whatever, so it is far more efficient to allocate respect directly. Japan, a refutation of neo-liberalism, Robert Locke.
But this aspect of Japanese society is exceptional in the world context and we cannot rely on it, or on altruism, to meet the serious social and environmental challenges we face. Under a Social Policy Bond regime people or institutions would become richer and many of them would be rich to start with. But such wealth would be concentrated only if the public good were also served. A bond regime would create a means by which wealth would be inextricably linked to our social goals.

13 June 2006

Rejigging incentives

As individuals, our activities don’t seem up to meeting the serious environmental and social challenges we face as a society. Our work lives, even if we are in the public sector, don’t appear to contribute much to solving such global problems as climate change and nuclear proliferation. And while we might do a lot, even if we don’t realise it, to help individuals either directly or through tax payments, there does appear to be a disconnect between our work and achievement and the scale of the social and environmental problems we face.

Yet there’s no shortage of skill, talent an ingenuity. To take just my recent experience here in England: you can’t fail to be impressed by the quality of the voluminous journalism about the English team’s World Cup team and its performance. In the bookshops there is a huge number of well-written books about science, history and almost any other subject as well as fiction. Advertisements in all media are slick, humorous, probably very effective, and have unquestionably benefited from some extraordinary brain power.

It all comes down to incentives. We react rationally to the incentives on offer. And there are few direct incentives for us to seek solutions to global problems. There are scientists, politicians and officials part of whose remit includes addressing these problems, but their financial rewards are in no way linked to their success in solving them. Rather than hope for a mass conversion to altruism, or despair at the improbability of a bright human future, we can do something to rejig the incentives. That’s when (in my view) Social Policy Bonds come in. Social Policy Bonds inextricably link rewards to outcomes – not inputs, outputs or activities. Under a bond regime, people would not get paid merely for turning up to work at a bureaucracy that includes the words ‘Environment’ or ‘Climate Change’ in its title. They would, in essence, be on performance-based contracts of the most flexible sort: if they fail to deliver, then the rewards will go to those who can deliver.

We need to agree on what we want as a society. For starters we’d probably opt for some climate stability target, and the absence of a nuclear conflict. Then rather than employ swarms of bureaucrats with the stated objective of achieving , these goals, we should issue Social Policy Bonds targeting them. Rewards would then be inextricably linked to achievement of a stable climate and nuclear peace, and we’d find a significant fraction of our species’ awesome collective skill, talent and energy channelled that way.

12 June 2006

Letter from America

Somtimes the government machine just seems to be way of obscuring flows of funds. Vested interests, adept at pleading their cause, talk about government funding in the abstract, as if it's inexhaustible. The notions of trade-offs and opportunity costs seldom enter political debate, and it takes an outsider to remind us that they are basic.

This letter from Mr Paul DeRosa in New York appeared in the Financial Times on 12 June:

Europe sacrificing the young to their elders

Sir, Richard Lambert's
prescription for the failures of European universities is to have them charge tuition fees .... But from where will the money come? In nations that take fifty cents of every dollar earned in taxes, money that might otherwise be available to pay fees is taken away and used for pensions, healthcare, and subsidies for loss-making rail systems. The future of European youth is, in effect, being sacrificed so that their elders can retire young with free healthcare.

09 June 2006

Whose infrastructure?

Having recently spent time in Bangkok, where quality of life has been almost wholly sacrificed to the car, I was interested to read about Fred Harrison's publication Wheels of Fortune: Self-funding Infrastructure and the Free Market Case for a Land Tax in the Financial Times (9 June). It makes a strong case for taxing the beneficiaries of infastructure development, who are invariably landowners. Increases in land values give a good indicaton of the benefits of infrastructure investments, but they also supply a just way of financing their costs. Needless to say, this doesn't happen. In most countries, including Thailand, infrastructure development generates windfall gains for existing landowners. Some financial gains probably do percolate down to everyone else, but randomly and at huge non-financial cost in the form of the destruction of communities, accidents, noise pollution and air pollution.

08 June 2006

The need for broad, meaningful targets

Broad targets, rather than proliferating Mickey Mouse micro-targets, are essential if government is going to maximise societal well being. The British Government has opted for narrow, micro-targets in its attempts to run education and the National Health Service, but another perhaps even more crucial area is that of monetary policy. Mr Han de Jong of the ABN Ambro Bank in a letter to the editor of the Financial Times (published today) reckons that controlling banks don't know how to deal with asset price inflation. They have targets for 'normal' inflation - typically the costs of consumer or producer goods and services - but these generally exclude (except indirectly) asset price inflation.

... Central banks are reluctant to include asset prices in monetary policy decision-making. They argue that they cannot determine the right level of asset prices any better than the market. Funny that, as central banks have no such reservations about their abilities when it comes to the price of money. In addition, they are not sure how to fight asset price inflation. To me it seems relatively simple. A combination of strong growth, modest consumer price index inflation, easy money, strong credit growth and strong asset price increases suggests that monetary conditions are too loose. The economy in the eurozone is recovering and growing at a rate close to its potential. In spite of two European Central Bank rate increases, real official interest rates are barely positive. This is asking for trouble. As far as the eye can see, euribor futures contracts are pricing in money rates below 4 per cent. Assuming a 2 per cent inflation rate, that means rates will peak in this cycle well below their long-run average in real terms. If this happens, asset markets will continue to bubble. From time to time, those bubbles will inevitably pop.
For myself, I think monetary targets should be subordinated to outcomes that more directly measure social and environmental well being. Things that would take in, for example, homelessness and poverty. Under a Social Policy Bond regime targeting poverty an independent central bank would be motivated to reduce asset price inflation ... if doing so were an efficient way of dealing with poverty. Unfortunately what we have now are monetary targets that aim to restrain 'normal' inflation, but leave asset price inflation untargeted. For hard-working families in the UK and New Zealand (the two countries I know most about) this makes owning their own home a dream for ever.

07 June 2006

So it's come to this

Many of us remember the current UK Prime Minister and his Chancellor proclaiming that the Common Agricultural Policy must be dismantled. Several years later and there's talk of at last winding down the subsidies to the richest landowners. And what do we read in today's Financial Times?

[T]he British government said yesterday it would fight to preserve the big payouts for large farms, claiming that its blue-blooded gentry were exponents of modern, large-scale, efficient agriculture.

These are big payouts indeed and they go to some of the wealthiest people in the UK as Oxfam to its great credit, pointed out. Now the British 'Labour' Government is resisting efforts to cap them at Euros 300 000 a year (about US$388 000). These sums, let us remind ourselves, come from the European taxpayer and consumer. They take the form of direct budgetary payments and higher food prices. Apart from transferring money from the poor to the rich, they have also played a large part in destroying the rural environment in Britain and the rest of the European Union.

Of course, there's politics involved: the UK Government knows that British farms, because they are generally larger than those on the continent, benefit disproportionately from open-ended subsidies. The remark about 'efficient agriculture' is bogus: UK farming might yield more per farmer (or possibly per hectare) but that is because it uses more capital per farm worker than other countries - largely because of subsidies and generous tax allowances for machinery. The capital-intensive nature of UK agriculture uses more fossil fuels and contributes to rural unemployment.

The British Government knows all this, but it is putting politics above principle. Or perhaps it's being subtle, and in trying to shore up the CAP's jackpot payments to the wealthy it is doing its bit to undermine not only the corrupt, insane, CAP, but the EU itself. I wish I believed that.

05 June 2006

Perhaps insurers?

When I first started promulgating the Social Policy Bond idea I naively thought that government would be the first to issue them. They have the resources, after all, and solving social and environmental problems is a large part of their remit. Since then, and especially since I addressed a meeting at the OECD in Paris a few years ago, I have become convinced that government is too risk-averse and self interested to experiment with a new financial instrument that hands over the responsibility for achieving social goals to the private sector.

I have urged, so far without success (as far as I'm aware), private individuals to issue their own Social Policy Bonds. I have tried and tried to interest philanthropic organisations but with not a single exception they fail even to acknowledge my messages.

Now I am beginning to think insurance companies might be the first to take the Social Policy Bond concept to the point of implementation:
Insurers could use their influence as some of the world's biggest investors to make companies in which they have stakes act more responsibly by encouraging "'climate proof' behaviour from the boards of large corporations", the report says. Source

04 June 2006

Kyoto and common sense

[T]he costs of ambitious front-loaded carbon abatement programs (such as the Kyoto Protocol, fully implemented) would have had (a) only a modest impact on our climate prospects, according to the current models, and (b) enormous economic costs. Yes, something must be done -- but need it be as costly and as ineffective as that? Clive Crook, National Journal

Unfortunately the debate about climate change is so politicized that anybody speaking out against the ludicrous Kyoto Protocol is assumed to be either scientifically illiterate or a corporate shill. Clive Crook is neither (as far as I know) and has some sensible suggestions for the US:

An initially moderate carbon tax, an initially gentle scheme of mandatory caps on greenhouse-gas emissions, and an honest plan to promote long-term energy efficiency could nudge the economy with minimal disruption on to a path of much lower climate-change risk. At the same time - anathema to many environmentalists
- serious thought should be given to policies for adapting to climate change.

Climate Stability Bonds are compatible with all this. Investors in the bonds would implement such measures, but only if they were convinced that they are the most cost-effective ways of dealing with climate change. And they would implement them on a global basis, so that the sources of emissions aren't simply transferred from one country to another. In short, they would take an over-arching, global view of what is, after all, a global challenge. Mr Crook's suggestions are more clearly thought out than Kyoto or the 'do nothing' approach, and are probably much better than either. But they still suffer from their narrow perspective. The goal, remember, is not to reduce anthropogenic greenhouse gas emissions from the US, but to stabilise the global climate. Climate Stability Bonds can divert resources into this objective without prejudging how best to achieve it. They would reward only the most efficient climate-stabilising projects, whatever form they might take.

02 June 2006

Targeting conflict

The graph - taken from the most recent CIDCM-INSCR Peace and Conflict report - illustrates the decline in armed conflict since the early 1990s, which may come as a surprise. As the report says:

"Despite the prevailing sense of global insecurity,the positive trends traced in previous editions of this report have continued into early 2005. The decline in the global magnitude of armed conflict, following a peak in the early1990s, has persisted and few of the many societal wars contained in the last decade have resumed. Major societal wars are down from twelve at the end of 2002 to eight in early 2005."

The report does a great job of listing and as far as possible quantifying the effects of armed conflict. It's worth mentioning in this blog because it shows the extent to which much of the quantitative work that would be needed for targeting such goals as armed conflict is already being done. Put it this way: if there were the political will to issue Social Policy Bonds that aim to eliminate war, civil war and armed political conflict, then measurement issues, difficult as they might seem, will not be an insurmountable obstacle.

Social Policy Bonds and Catastrophe Bonds

An anonymous reader of this blog pointed out that Social Policy Bonds are very similar to Catastrophe Bonds or 'Cat Bonds'. Catastrophe Bonds are mainly used as a form of insurance. They are issued by a body, such as an insurance company or local government, that stands to lose if a specified catastrophic event occurs. The issuers typically pay fixed payments unless the event occurs - which helps the issuer to meet the cost of insurance claims. In return, cat bonds pay more interest and have a lower rating than an issuer's other bonds. Apart from their higher yield they are attractive to investors because their riskiness - the risk of a catastrophe occurring - is uncorrelated with other market risks.

Catastrophe Bonds are therefore primarily an insurance concept. They're not designed to make people avert any specified catastrophic event, which so far I think are exclusively natural disasters such as hurricanes or earthquakes. In that respect they differ from Social Policy Bonds. It's interesting that the Social Policy Bond concept has been in the public arena for about 17 years: I have spoken about it on numerous occasions at think tanks, universities and once at OECD in Paris, but nobody before now has brought Catastrophe Bonds to my attention.

The two concepts diverge when we change the nature of the specified event to something that can be averted quite readily, or when the redemption funds grow to such a size that it's worth investors in the bonds doing something about avoiding or mitigating the results of even a natural event such as an earthquake.

01 June 2006

Judging our leaders

How do we judge our politicians? Not by outcomes, such as how healthy or well off we are. Not by outputs, such as how much they achieve. Not even by inputs, such as how many hours they actually work. No, here in the UK the Depute Prime Minister is judged by his apparent input as captured at one point in the working week.