30 March 2006

Gesture politics or meaningful outcomes?

The Kyoto treaty is ... the quintessential expression of the higher multilateralism: the point of Kyoto is not to do anything about "climate change" but to give the impression of doing something about it, at great expense. If climate change is a pressing issue and if the global economy is responsible - two pretty big "ifs" - then Kyoto expends enormous (diplomatic) energy and (fiscal) resources doing nothing about it: even if those who signed on to it actually complied with it instead of just pretending to, all that would happen is that by 2050 the treaty would have reduced global warming by 0.07 degrees - an amount that's statistically undetectable within annual climate variation. Source
Thank you Mark Steyn, for stating the obvious. Sometimes I think I'm the only one inveighing against the gesture politics that manages to waste resources, polarise issues and achieve nothing. I think climate change is more pressing than does Mr Steyn, but Climate Stability Bonds would be the least-cost way of dealing with it regardless: the market would decide how much should be spent on stabilising the climate, and where to direct resources. Under Kyoto, it's a handful of bureaucrats who would make those decisions based entirely on today's fossilised scientific knowledge.

As Mr Steyn says, it's not just climate change. When it comes to many other policy decisions, outcomes that are meaningful to real people seem to be the last thing that's considered. Decisions are made by politicians or bureaucrats, and they embody political or bureaucratic goals: retention of power and institutional survival, first and foremost. There's a disconnect, in our complex, highly specialised societies between the government and the governed. In New Zealand and possibly other countries, the proliferation of ministerial policy advisors and tacticians, and the effective downgrading of the civil service, mean that strategic policy formation insofar as it happens at all, is more and more done by the politically committed; that is, by people whose incentive is to serve narrow party political interests, rather than the national interest. Politicians are becoming a caste, a priesthood, from which ordinary mortals feel excluded. Symptomatic are electoral apathy and cynicism.

A Social Policy Bond regime is one way in which ordinary people might reclaim interest in policy formation. Such a regime would take as its starting point broad meaningful social and outcomes.

28 March 2006

Policy priorities

Much wailing and gnashing of teeth here in New Zealand in reaction to our team's apparently less than stellar performance at the Melbourne Commonwealth Games. Like everything else these days it becomes a matter of government policy. Or rather, like all the other stories that the media decide to run with - which are not at all the same as those things that matter to the public. Now I'm not saying here that the media are engaged in some vast conspiracy to manipulate the public. I am saying that when it comes to making public policy it would be better to ignore the short-term priorities of the media.

Many of the crises facing New Zealand and the world are too slow-moving for tv or the newspapers. Climate change, social collapse, and the piling up of armaments, for instance. When these three challenges alone are so enormous and potentially catastrophic, there seems (to me) something wrong with a government - any government - that spends its time and our resources reacting to frivolous media stories. Don't get me wrong: frivolity and sports are fun; but I do question whether the attention they get from policymakers truly reflects public concern. Perhaps if the public had a chance to participate actively in government policymaking, we'd see some sensible policies for dealing with urgent problems. Instead, the media's obsession with sport and government's pandering to this obsession are symptomatic of the remoteness of governments who have no real objective aside from continuing in power.

Under a Social Policy Bond regime, only broad social and environmental goals that are meaningful to natural persons (as distinct from government agencies and corporate bodies) would be targeted. Ordinary people would be drawn into the policy formation process, because we understand outcomes. (The media realises this and brings up issues - like medal tallies at international games - that are vivid and visual, but very often trivial.) What we don't and don't want to understand are arcane decisions about funding for myriad government agencies, the restructurings that seem de rigeur for every government deparment every couple of years or so, and the Mickey Mouse micro-targets devised by bureaucrats that do nothing for real people. With such ploys, government has widened the gap between itself and the people it's supposed to represent.
Two hundred years ago, when the United States was a modest commercial republic, the president could take a walk down Pennsylvania Avenue—by himself—and talk to anyone who approached him. If he wasn’t on a walk outdoors, he was most likely at home, and you could speak to him by knocking on the door of the White House and presenting yourself. ...

Today? The president moves about like Caesar Augustus, with a vast, graded court of civil and military aides, doctors, secretaries, valets, hairdressers, makeup artists, bodyguards, drivers, baggage handlers, cooks, food tasters, Praetorian guards, snipers, centurions, bulletproof limos, a portable hospital, and an armored rostrum. And that’s when he travels in the U.S. Source

25 March 2006

Ideology blights medicine, not just policymaking

If you think that medicine and publications such as The Lancet rise above ideology, read this post by Dr Mike Eades, and think again. Without going into detail, it appears that some doctors believe in low-fat diets and others believe in low-carb diets, and that these doctors' beliefs impede impartial scientific investigation. In medicine then, as in policymaking, ideology gets in the way of rational decision-making. Ideology should not drive medicine and it should not drive policymaking. Ideologues cannot help but distort facts and respond inadequately to events. Outcomes, not ideology, should drive policy.

24 March 2006

Flying blind

SIR – The results reported by the Office of National Statistics on measuring productivity in the National Health Service do indeed demonstrate that a wide variety of estimates are possible depending on the inputs and outputs used and the assumptions made about them (“Take your pick”, March 4th). The reality is that, at present, there is no accepted measure of the value of total NHS output and comprehensive data to calculate one does not exist. ...
This letter from the UK's national statistician appears in the current Economist. It tells us that billions of pounds of taxpayers' money are spent without a clue as to how many billions are being wasted. If there is a debate, it's over the measures of inputs, outputs and assumptions. Nobody dare tackle the fundamentals. The UK's National Health Service has iconic status, rather like the principle of non-selection in state schools. The ideologues and public sector unions in both cases stand like road blocks in the way of anything except the most trivial reforms.

A Social Policy Bond regime would not take as a given any ideology, nor the vested interests. It would instead start with broad social goals, including targeted outcomes for physical and mental health. It would not assume that a National Health Service or even a government-run agency is the best solution. It might decide on a safety-net type insurance scheme for every citizen; it's quite possible it would allocate a lot more funding to preventive medicine. It would have no incentive to obscure measurement of how well it's doing by putting off debates about how well it's doing until 60 years after its founding. On the contrary, bondholders would have every incentive to measure their progress accurately, because in maximising their returns they would also maximise returns to the taxpayers' investment.

20 March 2006

Don't despair

There's a lot of human ingenuity that is currently not being channelled into the solution of our most urgent social and environmental problems. What's it doing instead? Developing a five-blade razor, for example, which apparently cost Gillette about the same as creating the three-blade razor, according to this source. That's about US$680 million, which represents a lot of skill and talent. Unlike some ideologues I don't think it's self-evidently 'wrong' that such sums are spent on products that might seem trivial. People after all are behaving rationally given the incentives on offer. The good news is that all it would take is a re-jigging of incentives for these people's skills and talents to be made to serve public goals instead of private ones. We need to get over our ideological hang-ups that decree that financial self-interest and the chance to get rich must be limited to people working in the private sector. By issuing Social Policy Bonds we could switch a significant proportion of human ingenuity away from developing, say, a six-blade razor, and into achieving more social goals.

19 March 2006

Subordinate organisations to objectives, not vice versa

Take any social or environmental problem that a government, local or national, decides must be solved. In many cases some government agency will have the job of solving the problem. However competent and well-meaning are the individuals who work for this agency, as an organisation the agency will generally have little or no financial incentive to minimise its costs. However, the government could decide to contract out solution of the problem. It could do this by carefully specifying the outcome it wants to achieve, and putting a contract out to tender. This would be much better than, as is more common, specifying tasks that must be undertaken and paying on completion of these tasks. Rewarding outcomes transfers the risk of failure from the government (tax- or rate- payers) to the private sector, but only if the successful bidder cannot simply go out of business and plead bankruptcy if it fails to complete the contract.

Better would be a tradable contract to achieve an outcome, which could be bought from a failing company by people to whom it would be more valuable because they believe they are better placed to achieve the outcome efficiently.

But perhaps best of all would be to issue Social Policy Bonds, which would disaggregate the contract, making it much more fluid. Rather than being limited to a single successful bidder, the contract to achieve the outcome would then be dispersed amongst a coalition of interests, bondholders, whose composition could constantly adapt to changing circumstances. The existence, structure and goals of this organisation would be subordinated entirely to the targeted outcome. In this way government could specify longer-term, more ambitious social and environmental goals than is possible currently, when the scope of its goals is severely limited by the scope and objectives of existing problem-solving agencies, whether they be government or private.

See this holding message from the New Zealand Minister Responsible for Climate Change issues, in response to my suggestion that Climate Stability Bonds be considered.

17 March 2006

Incentives and the developing countries

In my latest book on Social Policy Bonds (first three chapters here) I point to perverse subsidies as the only really compelling evidence that governments in the western world can and do implement policies that damage the finances, social fabric and physical environment of their citizens. It's the persistence of these policies, given the longstanding evidence of their failure, that indicts them and casts a shadow over all government activities.

For countries outside the privileged west, though, we don't have to search hard for evidence of policy failure. Wars, civil wars, environmental depredations, and relentless poverty are commonplace. There's more democracy than there used to be, but it's clear that if governments were genuinely concerned about the fate of their populations they could do a lot better.

There are many thousands of dedicated westerners who devote themselves to improving the quality of life of people in the developing world. It's unfortunate though that the financial incentives on offer do not match the contributions they make. Financial incentives are important, not because would-be benefactors of the poor are greedy, but because they are human beings who want to do the best for themselves and their families, and if they can earn more for designing alluring packets of dog food than running an eye clinic in Ethiopia, then they will respond rationally and take the dog food contract. It's not greed, just as it's not greed when we make a decision to save a few cents by using a coupon to get a discount on dog food from the supermarket.

Life in the third world won't improve until the incentives change. Improving the incentives to achieve meaningful outcomes for the poor in the third world would not only motivate people more powerfully (or allow them to recruit agents and motivate them more effectively) but would enlarge that pool of people.

Fortunately we can do something about that. If we're wealthy, or have wealthy friends, we could back and issue our own Social Policy Bonds, perhaps swelling any redemption funds by encouraging contributions from the public. If you're interested, have a look at this document, which is an 18-page pdf file that takes female literacy as an example of how we in the west can bring about better outcomes in the developing countries.

14 March 2006

Social Policy Bonds: the book

I have finished updating a draft of my core text on Social Policy Bonds: Injecting incentives into the achievement of social and environmental outcomes. The first three chapters are available as a pdf file (254 kB) free of charge here. The basics of the Social Policy Bond mechanism are described in chapter 3. Comments are welcome. Having failed to interest mainstream publishers in the past, I will not try too energetically to get this book published, but I will make a final version available soon as an e-book from the Social Policy Bonds website. Anyone who has bought any of my books in the past is welcome to email me for the full text of the current update, free of charge. I will post the remaining chapters on this blog, so devoted readers will be able to pick up the entire text (40 000 words) at no cost. Any prospective publishers are also welcome to contact me directly.

12 March 2006

Government by the rich, for the rich

Today I chatted with a friend who recently spent a couple of days in San Francisco. One impression was the large number of beggars and homeless people on the streets of that city. They'll be comforted, no doubt, when old copies of this week's Economist descend to their level, to be reminded of their mayor's policy priorities:

"We will not stop until every San Franciscan has access to free wireless-internet service.” It was a typically bold statement from Gavin Newsom, the charismatic young mayor of San Francisco, as he announced plans in October 2004 for a Wi-Fi network that would blanket the city with wireless-internet coverage.

10 March 2006

Another Mickey Mouse micro-objective

From today's [UK] Daily Telegraph:

A senior surgeon has made a public apology to patients whose operations are being postponed - because he has been too efficient. Peter Cox, a general consultant surgeon at the West Cornwall Hospital, Penzance, and his colleagues have been told to slow down by the local health authorities. Not only has Mr Cox met the current six-month waiting list target but he has surpassed it. As a result, more than 50 of his patients are being sent letters telling them that their surgery dates will be put back. ... The directive has come from the Primary Care Trust for the next financial year. [Mr Cox said:] "They have informed the Royal Cornwall Hospitals Trust that they will not pay for routine operations unless the patients have waited at least 18 weeks from the time that they were put on the list."

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This is what happens when instead of broad, social and environmental objectives that are meaningful to real people, you target Mickey Mouse micro-objectives devised by bureacrats.

07 March 2006

No, I'm not bitter

Private sector operators have objective measures of their success: profits or sales, survival or expansion of their enterprise. When there’s no objective measure of achievement, as in most government activities, anything will do. Sometimes the gap is filled by a plethora of Mickey Mouse micro-targets, usually thought up in response to media stories: hospital waiting lists, for example, which administrative staff become adept at massaging to look better than they are. In the branch of the New Zealand public service for which I used to work, middle managers ‘succeed’ by implementing a restructuring. Nobody monitors these numberless restructurings to see if they actually enhance performance. That’s partly because performance itself means little more than toeing the line, ticking off ‘to-do’ items dictated by politicians: certainly in New Zealand and possibly in the UK, the status of top civil servants has been eroded, even as their pay has increased rapidly. Typically they now work under short-term contracts. Strategy, if it’s considered at all is up to the politicians, in the very short intervals when they are not fire-fighting, campaigning or asleep.

Adherence to an ideology, and gesture politics are other stand-ins when there are no other criteria by which to judge success or failure. I think that’s one reason market solutions are virulently opposed when applied to the achievement of social and environmental goals. I talk to quite a few well-meaning people who instinctively react against the Social Policy Bond principle, simply because bondholders, be they institutions or people, would make a profit if they help achieve social goals. Ideological soundness trumps effectiveness every time.

I used simplistically to summarise Social Policy Bonds as ‘right-wing’ methods of achieving ‘left-wing’ goals. In my naivety I thought such a description would appeal to the ideologues on both sides. But being an ideologue in the field of public policy seems to be more about bonding with your cohorts and uniting against non-believers than actually achieving public goals. The result? Social Policy Bonds end up appealing neither to the left or the right.

And so it goes on: major global challenges: climate change; nuclear proliferation; conflict in Africa and the Middle East; all are now entirely politicised. The last thing anybody cares about are the interests of real people. Policy is subordinated to ideology, appearances, and meaningless bureaucratic processes - just as in national politics. Where self-interest does operate in the public sector it takes the form of venality. Social Policy Bonds were devised as a way of channelling self-interest into the public good. Under the current regime self-interest actually works against our global survival, just as it already cripples the prospects of many countries in the third world and has condemned millions to death in futile conflicts.

03 March 2006

Kyoto will fail because it's central planning

Reviewing The Weather Makers, by Tim Flannery, The Economist writes:

'[Tim Flannery] mercilessly dissects the alternatives [to Kyoto] —particularly the idea of replacing hydrocarbon fuels with hydrogen, which he regards as expensive and probably technically unfeasible. And he dismisses the hydrogen-economists' idea of “sequestering” the carbon dioxide generated underground or in the oceans as both impractical and environmentally catastrophic. The answer, according to Mr Flannery, lies in revamping the way electricity is generated. That means abandoning coal, the most carbon-intensive fuel around, and employing sunlight, wind, geothermal power (which he believes is an under-appreciated resource) and also nuclear power. Having done that, the problem of dealing with petroleum-consuming transport becomes one of storing electrical energy in a sufficiently dense form that vehicles can use it. Here, he thinks, hybrid petrol/electric cars point the way forward.'

That's a good summary of the alternatives currently on offer and for what it's worth I agree with most of it. The problem is that it's one man's view and one man, however well-informed, cannot possibly investigate every alternative to Kyoto, nor anticipate future technology, nor take into account our rapidly expanding knowledge of the causes and consequences of climate change, nor the ever-changing economics of climate change, its prevention and mitigation. As a statement of where we are it's fine. As a prognosis for the future it's as dangerous as Kyoto, and that's as dangerous as the central planning that brought the Soviet Union to its knees.

Policymakers need a certain humility. Climate change is a potential catastrophe, and policymakers can help us deal with it. But they are as poorly placed to tell us how to deal with it as the Soviet or Chinese central planners were when they thought they knew best how to stimulate economic growth. Kyoto assumes that it knows what's causing climate change - anthropogenic greenhouse gas emissions - and on this it may well be right. But it's short-sighted to then assume that the only feasible way of dealing with the problem is to cut these emissions. If Mr Flannery's alternatives were prescriptive they would be similarly misguided. The best cost solution will be an array of diverse, adaptive approaches, which cannot be pre-judged by any single person or institution, however well-funded.

A Climate Stability Bond regime would not prejudge the most likely solutions to the climate change problem; it would not even prejudge the size of the problem. Instead it would allow the market to judge the scale of the problem and to allocate resources to most efficiently achieve whichever climate stability target policymakers agree we should aim for. The anti-market approach led to the environmental disasters of the Soviet Union. And the anti-market approach, in the shape of perverse subsidies to energy, agriculture, water and transport is also responsible for a great deal of today's global environmental degradation. Markets are not perfect, but their inventiveness and efficiencies can be channelled into the public good. Climate Stability Bonds would create incentives to solve what is probably our most urgent environmental problem. Kyoto will fail because it's central planning, which stifles efficiency, imagination and inventiveness.

01 March 2006

We care... about selling dog food

In an uncertain, changing world, most decisions are wrong, and success comes not from the inspired visions of exceptional leaders, or prescience achieved through sophisticated analysis, but through small-scale experimentation that rapidly imitates success and acknowledges failure. This disciplined pluralism is the true genius of the market economy. The Centralised Road to Mediocrity, John Kay, 'Financial Times', 28 February

It's unfortunate that this true genius is mainly channelled into improving the sales and profits of private corporations. There's probably more ingenuity lavished on TV commercials for dog food than on solving global problems, such as how to end nuclear proliferation, bring peace to the Middle East or eradicate world poverty. There's certainly a stronger correlation in the private sector between the achievement of a goal and the financial rewards to those who achieve it.

Where centralisation can help is in articulating society's wishes. It's also a good way of raising revenue from countless individuals who cannot themselves do much to bring about social and environmental goals. But it fails when it comes actually to achieving those goals. That's why I propose a Social Policy Bond regime, which would combine the best features of centralised decision making with the pluralism of markets. Under a bond regime, diverse, adaptive approaches would be encouraged - a contrast to the stultifying and failing centralised ways in which we are currently trying to solve global problems. Self-interest would be channelled into the public good and our limited problem-solving resources would be allocated rationally. In absolute terms, dog food commercials would still be entertaining and effective under a Social Policy Bond regime - maybe even more than nowadays - but their relative effectiveness, when compared with campaigns to achieve society's social and environmental goals, would surely diminish.