30 October 2006

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.

28 October 2006

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.

25 October 2006

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.

23 October 2006

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.

21 October 2006

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.

19 October 2006

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.

16 October 2006

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.

13 October 2006

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.

12 October 2006

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.

10 October 2006

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.

09 October 2006

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.

07 October 2006

Policy and rationality

John Kay points out that:

Each year, a million children die from malaria. Those who live in areas where the disease is endemic, and survive, acquire a degree of immunity. They remain vulnerable through their lives to episodes of disease, which sap their energy and productivity. Perhaps a billion or more malarial episodes occur every year. We mostly judge risks by their salience. … Salient risks are those that everyone is talking about or that we have recently encountered.
It’s natural, though still irrational, that in our own lives we respond to events that are ‘salient’, even if they are unlikely to occur or recur. We are fallible human beings, and it’s our nature to respond emotionally to salient events. But policymakers should do better. They fail us when they react irrationally, with taxpayer funds, to events that have assume a media profile out of all proportion to their real impact.

In the five years since 11 September 2001, Patrick Buchanan writes, “85,000 people have been murdered in the USA …not one in a terror attack.” But you’d never know that from the actions of our politicians.

The solution? Social Policy Bonds, which would target, say, premature deaths impartially; that is, without regard for whether they are caused by terrorism, murder or road accidents. Or, if we truly believe that deaths from terrorism count more than those caused by conventional acts of violence, then under a Social Policy Bond regime we’d be forced to be upfront and explicit about it. Transparency in policymaking is an end in itself, as well as a means to greater rationality and efficiency. Under a bond regime we could still over-react to high-profile media events and throw money at fast-moving, highly visual problems, at the expense of slower-moving and less dramatic tragedies – such as malaria. But Social Policy Bonds mean we’d have at least have to be honest about it.

05 October 2006

Politics and accountability

From Fooled by Randomness:

Our attribution of heroism to those who took crazy decisions but were lucky enough to win shows the aberration – we continue to worship those who won battles and despise those who lost, no matter the reason. … The situation is not much better in a bureaucratic economy. … The contributions of civil servants might be even more difficult to judge than those of the executives of a corporation – and the scrutiny is smaller.
In our complex societies politicians and officials can always evade or deflect censure for their terrible decisions. We can rarely prove that one particular decision was a bad one: there are just too many variables and linkages, too many obscurities and time lags between cause and effect. This is one of the reasons I emphasise the rich countries agricultural subsidies. These represent not only a calamitous waste of society’s scarce resources; they transfer wealth from the poor to the rich, and they accelerate the degradation of our physical environment. They are also now threatening to derail the entire world trading system. It is their size and persistence over decades that make quite clear that there are no systemic checks on government policymaking; that much of the bad news may result from government activity and much of the good news may occur despite government activity.

As P J O’Rourke put it a while ago (in Parliament of Whores):

I spent two and a half years examining the American political process. All that time I was looking for a straight forward issue. But everything I investigated – election campaigns, the budget, lawmaking, the court system, bureaucracy, social policy – turned out to be more complicated than I had thought. There were always angles I hadn’t considered, aspects I hadn’t weighed, complexities I’d never dreamed of. Until I got to agriculture. Here at last is a simple problem with a simple solution. Drag the omnibus farm bill behind the barn, and kill it with an ax.
One of the aims of a Social Policy Bond regime is to bring some accountability into the policymaking process. Framing policy decisions in terms of costed outcomes is an essential first step. Currently policymakers can - indeed must - express their decisions as vague declarations of intent, backed up by funding programmes for favoured bodies, be they government agencies or other interest groups. Issuers of Social Policy Bonds would in contrast have to be explicit about their objectives: transparency and accountability are built into a bond regime, as surely as they are excluded from the current policymaking apparatus. Insane, corrupt programmes, such as Europe's Common Agricultural Policy, have platitudinous, vague, mutually conflicting goals,
which sound lofty and high-principled but actually end up shovelling vast sums of taxpayers' and consumers' money into the myriad bank accounts of massive agribusiness corporates. If outcomes were built into policymaking, as they are with Social Policy Bonds, such policies would get nowhere. Instead they have lasted for decades, at great cost to everybody except a few millionaire businessmen, and a burgeoning, parasitical administrative bureaucracy.

03 October 2006

Social Policy Bonds to reduce crime

After the high stakes of UK politics and the military coup in Thailand, public affairs in New Zealand seem both parochial and small minded. But news of the larger issues can still be found in the public arena. Violent crime in New Zealand rose by 10 per cent last year; in the Wellington Police District (where I live) there were 5988 violent incidents in the year ended June 2006.

Current policy approaches seem to be failing and there are no simple solutions. These are key criteria that indicate that Social Policy Bonds might improve things. Bonds targeting reduced crime rates could encourage a mosaic of diverse solutions, adapting to local circumstances and events that cannot be anticipated. Highly motivated investors would be rewarded for their success in tackling crime. Their objectives would be congruent with those of society. This contrasts with the current approach, which is inherently cynical: while composed of heroic men and women, police forces as institutions are more likely to be disbanded than rewarded if they were to succeed in slashing crime rates.