30 May 2007

Individuals make mistakes, but governments' are worse

Jonathan Rowe hits the nail on the head:

The supposed “rationality” of homo economicus is necessary for the computer models. But in terms of reality it’s out to lunch. ... Th[e] ultimate metric is the Gross Domestic Product or GDP, which is more commonly known simply as “growth.” But growth is just the sum total of all our buying, much of which is questionable even by the people who do it. Spend a fortune on cigarettes, develop lung cancer, spend another fortune on medical treatments – and voila, growth up the kazoo. ... That there is waste in government is obvious; but the question is compared to what? We individuals are wasteful too. Corporations are paragons of waste, as a glance at executive compensation packages would suggest, Without waste, this thing we call an “economy” would grind to a halt.
One difference, though is that, as I think Milton Friedman pointed out, individuals learn, governments don't. But the point about flawed nature of the GDP metric is well made. It's not only a metric, it's a de facto target of governments the world over. Individuals have more of an excuse for their waste: it's their own money after all, and the consequences mainly fall on themselves. Government, with its teams of officials, advisors, committees and access to academic experts has less of an excuse, and its mistakes have impacts on all of us.

29 May 2007

We are all hikikomori now

Jonathan Freedland, reviewing Nemesis by Chalmers Johnson, in the 'New York Review of Books', dated 14 June 2007:

Johnson provides an anatomy of one particularly egregious example, the expansion into space weaponry represented by the so-called National Missile Defense program (NMD). Patiently he demonstrates why a system aimed at intercepting nuclear bombs before they can land on America does not and could not work. For one thing, no one has yet worked out how to identify a hostile launch and no interceptor has yet been designed that can tell the difference between an incoming warhead and a decoy. The result is that NMD is nothing more than a boondoggle in the sky, at last count pulling in $130 billion of American taxpayers' money, a figure which on current plans would reach $1.2 trillion by 2015.

But the NMD pork-in-space project is far from exceptional. Seeking fat contracts, the big defense companies give donations to those politicians who will pay them back by commissioning expensive defense projects; the contractors then reward the politicians by locating their firms in their districts; finally the voters, glad of the jobs, reward the politicians by reelecting them. Johnson offers dozens of examples, including Florida's Democratic senator Bill Nelson, a member of the Armed Services Committee, who in the 2006 federal budget "obtained $916 million for defense projects, about two-thirds of which went to the Florida-based plants of Boeing, Honeywell, General Dynamics, Armor Holdings, and other munitions makers." Since 2003, Nelson has received $108,750 in campaign contributions from thirteen companies for which he arranged contracts. It's a cycle perpetuated by everyone involved: contractors, politicians, voters. Everyone benefits from this untamed form of military Keynesianism—except the next generations of Americans who can be expected to drown in a debt that now measures $9 trillion and grows daily. (My emphasis.)
This is classic policy as if outcomes are irrelevant. It's as if a broad body of taxpayers' money were meandering slowly across a dry plain, forming runnels and rivulets and making a pattern that was almost random to begin with, but over the years has deepened into channels and rivers within steep banks, ever more distinct from the surrounding parched landscape. The flow of spending creates its own interest groups who lobby to keep it going in the established grooves. What about the barren land in between the channels? As far as policymakers and the beneficiaries of their largesse are concerned it doesn't matter. The problem for the rest of us is that this way of allocating resources has gone beyond enriching a few at the expense of the many; gone beyond even entrenching an underclass and reducing the quality of vital public services such as policing, housing and education. Worse is that the favoured sectors are big and powerful enough to set the conditions for much of the rest of our economy and society as well. Look at agriculture where the history of government intervention and subsidy is one of the longest: what has been the result of decades of 'support for the family farm' in the US and Europe? A social and environmental catastrophe: intense specialization, an empty, barren, overcapitalized countryside, and a dangerous level of industry concentration. My previous post mentioned the dependence of industrial agriculture on oil. Another disastrous side-effect is that the very large companies that produce much food in most rich countries have also become potential vectors for mass infection. A single lot of hamburger meat at one US processing plant was once found to contain parts from 443 different cows (Cheap chow, the 'Economist', 8 March 2003, pages 77-8).

The externalities resulting from the way in which government not only picks losers but backs them with gigantic quantities of taxpayer funds are catching up with us all. Subsidized agriculture, subsidized oil consumption and extraction, subsidized construction and maintenance of an infrastructure that consistently favours the large over the small, the global over the local: the externalities go beyond the environmental quagmire in which we find ourselves and beyond even the lunatic weapons programmes. They extend beyond even the social collapse that makes the centre of the pretty historical town in England, where I am shortly headed, a no-go area after 7pm even in the long summer evenings. Perhaps the most insidious externality of all is the widening gap between ordinary people and the political system that determines so much of our lives. Policymaking is remote and unresponsive to the needs of natural persons. We become justifiably skeptical about our ability to change the system. Why bother? What chance have we got? Policymaking is shaped mainly by the interests of big business and its friends in government. It has little to do with the individual and nothing to do with the individual that stands out against the system. We respond by withdrawing from it, into a world of blogs and distraction, emerging briefly, maybe, once every few years to put a cross on a piece of paper. When it comes to influencing policy, unless we are chief executives of large corporations or at the very top of the government machine, we are all hikikomori now.

27 May 2007

The ways forward are not obvious

All is not as it seems with systems as complex as the environment. You'd think that encouraging people to walk rather than drive would reduce fossil fuel use or CO2 emissions? Think again.

The grinding, milling, wetting, drying, and baking of a breakfast cereal requires about four calories of energy for every calorie of food energy it produces. A two-pound bag of breakfast cereal burns the energy of a half-gallon of gasoline in its making. All together the food-processing industry in the United States uses about ten calories of fossil-fuel energy for every calorie of food energy it produces. That number does not include the fuel used in transporting the food from the factory to a store near you, or the fuel used by millions of people driving to thousands of super discount stores on the edge of town.... Richard Manning, The oil we eat.
What about US agriculture as a whole?

In 1994, David Pimentel and Mario Giampietro estimated [that for every] 0.7 Kilogram-Calories (kcal) of fossil energy consumed, U.S. agriculture produced 1 kcal of food. Source
Similarly, you might assume that travelling by train is kinder to the environment than flying or going by car. But in June 2004, ‘Modern Railways’ published an article, Rail loses the environmental advantage, which pointed out that high-speed rail can consume more fuel per passenger than cars or even short-haul aircraft.

This happens when electricity for the rail network is generated by oil- (and presumably coal-) fired power stations, which convert fossil fuel into oil-equivalent at only 40 percent efficiency. As well, for supposed health and safety reasons in the UK, rail passengers cannot travel in the front third of the two vehicles that drive the fastest trains, and there have to be 'seat-free crumple zones' as well as toilets for the disabled (each occupying the space of eight seats. The result is that you end up with trains of 186 seats that weigh 227 tonnes, or a massive 1220kg per seat.

All this is to say only that it's not always obvious how to proceed when confronting environmental problems, and that our first instincts are likely to be wrong. Unfortunately, such are the disconnects in our complex societies and economies that our first instincts are likely to be expressed as government reaction, and that can entrench or aggravate problems rather than solve them.

With very complex systems, I suggest an outcomes-based approach: don't try to think of the best way of solving a problem, but define the desired outcome, and reward people for achieving it, however they do so. That's where Social Policy Bonds come in: they would be redeemable for a fixed, high, sum, once the specified social goal had been achieved, however it is achieved, and whoever achieves it. Under the current political system government bodies are set up, or regulations enacted that attempt to guess the most efficient way of achieving goals - if these goals are made explicit, which doesn't always happen. Or some funding is diverted from taxpayers to various interest groups that have stated objectives that sometimes sound as if they are congruent with those of society. But the reality is that there are no strong financial incentives for government or private agencies actually to achieve social social goals. In many instances the incentives are perverse. What happens to the police force in an area where the crime rate plummets? The organizational objective above all others is self-perpetuation, and that often conflicts with its stated objective.

So if our goal is to reduce greenhouse gas emissions, target that. If it's to reduce traffic congestion target that. Let the market work out whether doing these things means putting people into cars or trains, or replacing highly processed cereals with locally grown vegetables. In short: start off with the targeted objective, subordinate everything else to its achievement, and contract out that achievement to the market.

25 May 2007

Any change would be an improvement

Not too many surprises in the UK House of Commons report, released on 16 May, on the UK Government's Vision for the Common Agricultural Policy, (which was launched in December 2005). It was, says the report, a 'disappointing lost opportunity'. The report concludes:

The only long-term justification for future expenditure of taxpayers’ money in the agricultural sector is the provision of public benefits. Payments should represent the most efficient means by which society can purchase the public ‘goods’—environmental, rural, social—it wishes to enjoy. For these payments to remain publicly acceptable, it is essential that they relate directly to the public goods provided and that, in turn, these public goods are measurable and capable of evaluation.
That would certainly be an improvement on the current nonsense, but how far would even that vision take us? It would probably take us into the realms of 'multifunctionality', whereby farmers and their lobbyists identify such nebulous by-products of agriculture as employment in rural areas, or the failure of farmers totally to destroy wildlife everywhere in Europe, and demand payment for supplying them. If this sounds cynical, it's not: agriculture's 'multifunctionality' is a means by which large quantities of taxpayers' and consumers' funds are already siphoned off to farmers and agribusiness in the European Union. As if agriculture alone is multifunctional! You might also cite the mutlifunctionality of violent crime or arson - they generate employment for health care personnel, construction workers, ambulance drivers and the rest. There's a case for looking at net positive multifucntional benefits, but it's a difficult and inescapably subjective one, especially if other sectors were to start demanding equal treatment.

There is another way: immediately announce the phasing out of all subsidies to farming to be completed in ten years. Use the taxpayer funds saved to alleviate genuine poverty, and allow consumers to benefit from lower food prices. One result would be a drop in the value of farmland. This would relieve stress on the environment and allow more people to take up farming. You would see a substitution of capital by labour, and quite possibly an increase in total production, though that would not be an explicit policy goal. Then would come the time to take on baod some of the UK House of Commons report: identify any further goals, social or environmental, that the public is willing to pay for, and reward people, perhaps by issuing Social Policy Bonds, for achieving them.

24 May 2007

Site feed change

For reasons that are obscure now, but seemed compelling when I made them earlier today, I've changed the site feeder to Feedburner. There's a logo in the right-hand column. I'm not sure of the implications, but it's possible you may have to modify the settings of your RSS reader accordingly.

23 May 2007

Subsidising fisheries destruction

From today's Bangkok Post, and also appearing in the Daily Telegraph:

Pierre Gagnaire, whose Michelin three-star restaurant in Paris regularly wins plaudits as one of the world's best, said that there were now too many restaurants like his own, ploughing their way through large quantities of certain raw materials considered as delicacies. ... "in the next five to 10 years there will be no wild fish, only farmed fish. That will have a huge impact on not only cooking techniques, but also flavours and the dishes we cook."

Mr Gagnaire's fatalism is unfortunate, but probably justifiable. As a species, we still haven't got round to stopping subsidies to fishing, which are variously estimated at $6.7 billion annually (by OECD), $15 billion (by the WWF) or $14-20 billion (by the World Bank, in 1998). Disciplines on subsidies are supposed to be considered in the stalled Doha Round of trade talks, but as the Global Subsidies Initiative puts it "the probability that new, tighter international disciplines on fish subsidies will enter into force any time soon is low." Note that any such disciplines would be imposed for reasons of economic competition, rather than conservation; no bad thing, but still.... Meanwhile, and from the same source, "According to the FAO, around 75 % of the world's commercial fisheries are fully exploited, over-exploited or significantly depleted."

20 May 2007

Two welfare systems

"In reality we have not one but two welfare systems.", writes Paul Hawken in the Ecology of Commerce, "The first is meager, consisting of aid to the unemployed, dependent children, the poor and helpless. It is seen as charity, a hand-out, a grudging acceptance of social responsibility, but it is almost always accompanied by judgment, adminishments of failure, and a high moral tone. The second welfare system is large, expansive, and expensive. It comes in the form of large government grants and programs for building highways, subsidies to the rich in the form of interest payment deductions on their houses, giveaways of timber and mining rights on government lands, government-financed research in universities, revolving-door policies between the dense industry and government resulting in expensive, poorly planned procurement policies and so on. The list of recipients of these handouts from the government is long, but they are not seen as recipients of welfare. However, the fact is that three times as much housing subsidy goes to the top fifth of the population as to the bottom 20 percent who need it most."

The other crucial difference between the two welfare systems is transparency. The first is quite open, with assistance rates (rightly) widely published and accessible to all. The other is largely hidden from public view. That's why the work done, for instance, by farmsubsidy.org is especially valuable: it uses freedom of information law to force European governments to release detailed data on who gets what from Europe's €55 billion Common Agricultural Policy. And it puts this data online. Also interesting is the OECD's work on environmentally harmful subsidies, and research done by Good Jobs First (see this about subsidies to Wal-Mart, the world's largest corporation).

Transparency is one of the big advantages of a Social Policy Bond regime: it is built in right from the start. Under a bond regime, you might get public support for large corporations, wealthy landowners, corrupt construction companies or the organized criminals who benefit so much from complex regulations enacted by big government. You might even get generous public support, though I think it unlikely. But if that were the case, the people giving their tax dollars to the wealthy and corrupt would be doing so knowingly, not, as at present, because the hidden part of our current welfare system is based on deception.

18 May 2007

Free trade and 'free trade'

There's free trade, and then there's 'free trade' as espoused by large corporations and their friends in big government:

Generally, great powers are willing to enter into some limited degree of free trade when they’re convinced that the economic interests under their protection are going to do well. That has been, and remains, a primary feature of the international order.

The ethanol boom fits the pattern. As discussed by agricultural economists C Ford Runge and Benjamin Senauer in the current issue of Foreign Affairs, “the biofuel industry has long been dominated not by market forces but by politics and the interests of a few large companies,” in large part Archer Daniels Midland, the major ethanol producer. Ethanol production is feasible thanks to substantial state subsidies and very high tariffs to exclude much cheaper and more efficient sugar-based Brazilian ethanol. In March, during President Bush’s trip to Latin America, the one heralded achievement was a deal with Brazil on joint production of ethanol. But Bush, while spouting free-trade rhetoric for others in the conventional manner, emphasized forcefully that the high tariff to protect US producers would remain, of course along with the many forms of government subsidy for the industry.

Despite the huge, taxpayer-supported agricultural subsidies, the prices of corn — and tortillas — have been climbing rapidly. One factor is that industrial users of imported US corn increasingly purchase cheaper Mexican varieties used for tortillas, raising prices. Noam Chomsky, Starving the poor, 16 May
It's the self-entrenching and self-reinforcing nature of such distortions that is most problematic. "It does not matter who has property rights as long as they are clearly defined, says a prominent school of economists, citing an insight that won the Nobel Prize for Ronald Coase." But, as John Kay goes on to say (in the context of present-day Russia and Argentina a century ago), "the wrong choice coloured politics and society for a very long time." Subsidies for agriculture, in all their guises, have gone on for several decades already. They are probably seen by their beneficiaries as a property right. They not only impede any movement toward a rational farm policy; they also empower those opposed to any meaningful reform.

17 May 2007

Try all else

John Bolton 'who still has close links to the Bush administration':

And if all else fails, if the choice is between a nuclear-capable Iran and the use of force, then I think we need to look at the use of force. Source
My suggestion: try 'all else'. Decide and define what we want to achieve - a bomb-free Iran? a reasonable regime in Tehran? - and contract out that achievement to the market. Issue 'Iran Peace Bonds' that would become valuable in the event of nuclear peace in the Middle East. Give people incentives to achieve such a peace. This may sound radical, but the war alternative on offer would inflict much misery without any guarantee of success. Imporantly too, most in the west appear to be opposed to it. Iran Peace Bonds, depending on who backed them and how much finance they put up, would merely countervail the existing incentives for arms manufacturers and certain government bureaucracies to make war.

15 May 2007

Social Policy Bonds: the third way

Writing about organochlorines, Paul Hawken says:

Because of the slow maturation of human beings, we have not had sufficient time...to understand the multi-generational health consquences of exposure...However, we do know that these compounds play havoc with human physiology, with effects that include cancer, infertility, immune supporesssion, birth defects and stillbirths. The Ecology of Commerce
We didn't know about a lot of such things. We didn't know that emitting greenhouse gases could cause catastrophic climate instability. As I see it, there are three ways of responding to such imponderables. We can adopt a strong version of the precautionary principle, which says that if there is a strong suspicion that a certain activity may have environmentally harmful consequences, it is better to control that activity now rather than to wait for incontrovertible scientific evidence. There's much to be said for this when looking at new processes, but applying it to current technology would, I think, mean a drastic reduction in the quality and quantity of human life that we could support. Another response is the current one: ignore the problems created by technology until they become emergencies that affect photogenic animals, or people with whom we identify. Then try to bribe or coerce the vested interests into scaling down their operations.

But there is a third way, which acknowledges that we cannot know in advance the likely results of new scientific or industrial processes. That would be something like Social Policy Bonds, which would specify targeted outcomes for human, plant and animal health; probably in the form of indices, but with minima for each identified species or environmental indicator. The profit motive would both enlarge and motivate the pool of people interested in exploring the likely effects of new technology on the environment and in working towards reducing their impact. A handful of politicians or government-appointed experts cannot anticipate every such impact in advance of the application of new technology. But participants in a market for Social Policy Bonds that target environmental health would have continuous incentives to look for and deal with planetary depredations before they become intractable.

14 May 2007

What chance have we got?

Is there anything positive to say about agricultural subsidies? OK, they are largely capitalized into the value of farmland, making farmers work the land much harder, so exerting more environmental stress on land and water systems; to be sure, they are wasteful and regressive, because poor people spend a larger proportion of their incomes on food than the rich and it is the rich - agribusiness corporates, as well as wealthy landowners - who are their largest beneficiaries. Oh, and they help destroy the living of would-be exporters in the food-rich developing countries, so reducing the chances of those countries ever getting prosperous. But surely, a devil's advocate might say, they subsidise production and so make food cheaper? Not so, because much of the subsidies take the form of import barriers that raise the price of food.

Now Michael Pollan, writing in the New York Time Magazine, describes and explains the disastrous effects that farm subsidies in the US are having on that country's health. His entire article is well worth reading, but here are some excerpts:

[H]ow is it that today the people with the least amount of money to spend on food are the ones most likely to be overweight? ... [T]he rules of the food game in America are organized in such a way that if you are eating on a budget, the most rational economic strategy is to eat badly — and get fat. ... This perverse state of affairs is not, as you might think, the inevitable result of the free market. Compared with a bunch of carrots, a package of Twinkies, to take one iconic processed foodlike substance as an example, is a highly complicated, high-tech piece of manufacture, involving no fewer than 39 ingredients, many themselves elaborately manufactured, as well as the packaging and a hefty marketing budget. So how can the supermarket possibly sell a pair of these synthetic cream-filled pseudocakes for less than a bunch of roots?

For the answer, you need look no farther than the farm bill. This resolutely unglamorous and head-hurtingly complicated piece of legislation, which comes around roughly every five years and is about to do so again, sets the rules for the American food system — indeed, to a considerable extent, for the world's food system. Among other things, it determines which crops will be subsidized and which will not, and in the case of the carrot and the Twinkie, the farm bill as currently written offers a lot more support to the cake than to the root. ...

The result? A food system awash in added sugars (derived from corn) and added fats (derived mainly from soy), as well as dirt-cheap meat and milk (derived from both). By comparison, the farm bill does almost nothing to support farmers growing fresh produce. A result of these policy choices is on stark display in your supermarket, where the real price of fruits and vegetables between 1985 and 2000 increased by nearly 40 percent while the real price of soft drinks (aka liquid corn) declined by 23 percent. The reason the least healthful calories in the supermarket are the cheapest is that those are the ones the farm bill encourages farmers to grow.

The evidence against US farm policy is damning, overwhelming, and has been around for several decades. Yet still it, and the European Union's equivalent, persist. There has been some tinkering with both policies, but essentially they are unchanged. Our politicians cannot summon the will to challenge the entrenched interests they represent. Nor are the sums involved trivial. Estimates put the total support to OECD countries at around US$300 billion every year. It is the persistence of farm policy and other perverse subsidies, despite the weight of the accumulated evidence that they are without a single positive feature, that make it seem unlikely, to me, that our political system can ever convincingly address challenges such as climate change, which demand coherent, urgent and radical action.

11 May 2007

Kyoto was never serious

In an article entitled Kyoto is dead, William Pesek writes:
Yes, public awareness [of Kyoto] is rising and we're talking about the effects of greenhouse gases more than ever. Former U.S. Vice President Al Gore even won an Oscar for his film ``An Inconvenient Truth.'' Massive pro-environment rock concerts also are being planned. The word, as they say, is out. Sadly, that hasn't provoked the torrent of policy changes needed to stabilize the environment. Leaders even point to the controversy over the treaty itself as the reason carbon emissions are still increasing exponentially, diverting blame from their own inaction.
I'm not sure about 'exponentially', but Mr Pesek is otherwise quite right, I believe. Kyoto will never work, and its failure is worse than doing nothing. He is also right to imply that our goal is - or should be - to 'stabilize the environment'. Not, please note, to reduce anthropogenic greenhouse gas emissions, nor even to stabilize or otherwise manage the composition of the atmosphere. We need to stabilize the climate, broadly defined to include indicators of the effects that a too-volatile climate has on human, animal and plant life. For myself, I'm quite pessimistic about the chances that anything meaningful will be done. The government-corporate interests that essentially determine policy are too locked in to existing systems to do much about them, and so big and powerful that they tend to crowd out or subvert any initiatives that could counterbalance their biasses. For proof of this we need only read this prognosis about the chances of reforming US farm subsidies, entitled Insatiable, from the current Economist (subscription):

So will politicians seize the chance? The proposals that Mr Bush's administration has put forward would do little more than tweak the system. .... In all ...the administration's plans would do little to disrupt the existing cosy arrangements for farmers.

There we have it, readers. Decades after it was shown conclusively that farm subsidies are an environmental disater, fiscal nonsense and socially inequitable, nobody has quite found the political courage to end them. But... on the off-chance that anyone with any influence actually wants to do anything meaningful about climate change I will continue to try to promulgate Climate Stability Bonds, which, rather than generate attempts to game the system (a la Kyoto) would generate incentives actually to bring about climate stability. That is, if anybody out there sees that as a worthwhile goal.

10 May 2007

Countless ordinary people

I suspect Thailand has some similarities with Japanese society when it comes to a hierarchy that seems to be rapidly losing its influence. Robert Locke, writing about Japanese society, argues persuasively that 'what people are pursuing in the workplace is not so much money as the respect of the people around them…. [The Japanese] 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.'

Rather than offer financial rewards we could perhaps reward people who help achieve societal goals with higher social status. An honours system could go some way toward rewarding people who forgo financial fortune for the good of society. Indeed, many countries have honours systems that are - or were - intended to do this. People also gain status merely by being admitted to exclusive societies, by working for a reputable organisation, or are pleased simply to be recognised in their role by cognoscenti. And many social reformers are quite happy to toil away without needing their efforts validated by any external body. They might be happier for knowing that they are helping to improve the society in which they live but, for a very large number, their reward lies simply in knowing that they are making a contribution.

But whether for good or ill, the context within which social status is barely correlated with financial status is rapidly disappearing from many rich countries: social status is becoming more and more congruent with high levels of wealth and income. The British honours system, for example, which used to compensate dedicated people for the financial sacrifices they made for the public good, is more and more following the trend, making awards to entertainers and sportspeople who, whatever their other troubles, are not financially impoverished. There are still fields of activity, in the academic and religious worlds, for instance, wherein social status and monetary reward do not always go hand-in-hand, but they are shrinking or indeed reward activities that most of us would see as anti-social. Re-instatement of a popular culture that confers high status on those who achieve social and environmental goals would be a difficult task in our highly mobile world. It would have to be an evolutionary process. But in the meantime, facing severe and urgent social and environmental challenges, what are we to do?

Rejig the incentives, so that people achieving social goals are rewarded in what is becoming the only way we know (currently) how: financially. That's where a Social Policy Bond regime comes in.

The world is being destroyed - no doubt about it - by the greed of the rich and powerful. It is also being destroyed by popular demand. There are not enough rich and powerful people to consume the whole world; for that, the rich and powerful need the help of countless ordinary people. Wendell Berry, Conservation is good work, The Amicus Journal, Winter 1992

Which is not to blame the countless ordinary people. We are, after all, reacting rationally to the incentives on offer. Change the incentives and we can save the planet.

08 May 2007

Social Policy Bonds and government sub-contracts compared

Discussion with friends makes me want to highlight one of the less obvious features of Social Policy Bonds: they function as a tradeable contract not to deliver a service, but to achieve an outcome. The distinction is an important one: the risk of bondholders' failure to perform is borne by the bondholders, not the government - or taxpayer. This is contrast to the usual sort of government sub-contracting.

The other difference between a tradeable contract to deliver an outcome, and a Social Policy Bond issue, would be that Social Policy Bonds could be bought and held by anybody, not just people already involved in carrying out the target-achieving projects, or well set up to do so. So the range of possible bidders would not be limited to a few likely operators, but would be open to all who are prepared to do, or to finance the doing of, projects that would help achieve the targeted objective. The fact that anybody could be involved in the bidding for bonds at any stage would discourage people from making excessive bids, so ensuring that social objectives would be achieved as cost-effectively as possible. Compared with tradeable contracts, this would make ownership of Social Policy Bonds more fluid, which would mean more market liquidity, more transparency and an enhanced ability for the government to fine tune its priorities after the outcome has been specified and the bonds issued.

If the Social Policy Bond concept were to generate more market activity, it would make more practical the targeting of remote objectives; ones that may take years or decades to achieve. Many businesses would be reluctant to take on these goals without the possibility that they could benefit in the shorter run. Social Policy Bonds would allow them to do what they could to achieve the target, then benefit from selling their bonds at a higher price, letting the new bondholders continue the advance toward the goal.

05 May 2007

Widening the gap...

...between politicians and people, still further. This from today's [UK] Daily Telegraph:

The internal politics of both Scotland and Wales now resemble those of most Continental countries more than they resemble the English. The voters do not directly elect a government. They create circumstances in which the political parties negotiate to decide which of them will form the government.

Lateral Thinking and Dangerous Precedent

Look at Iraq. If the US said they were going to leave on a certain date, then for every week without any killings, the date would move forward, and for every week with a killing, the later and later the date would be delayed. This way those who killed would not be seen as heroes but those keeping the Americans in the country. Source
I don't know whether this would work, but Edward de Bono is surely correct when he says that we "have to be open to possibilities and willing to explore". That would include politicians, or at least those whom they employ to formulate policy. Unfortunately, the incentives work against those trying to think laterally.

Francis Cornford put it this way, a century ago in Microcosmographia Academica:

The Principle of the Dangerous Precedent is that you should not now do an admittedly right action for fear you, or your equally timid successors, should
not have the courage to do right in some future case, which, ex hypothesi, is essentially different, but superficially resembles the present one. Every public
action which is not customary, either is wrong, or, if it is right, is a dangerous precedent. It follows that nothing should ever be done for the first time.

03 May 2007


I arrived late last night from a long flight. My first experience of the new airport, and perhaps even more impressive, the lavish road connections into the city. Impressive in a technical sense. Thailand has severe social and environmental problems, most of which would benefit from well-directed government largesse. But it's prestige projects like airports and multi-lane highways that seem to attract much of the available funding. Perhaps they are seen as necessary to the country's development, and perhaps the Thai Government is making wise, long-term, necessary decisions, that will benefit its people in ways that are less obvious than giving a higher priority to the disadvantaged or the physical environment. I can't prove anything one way or the other. It just doesn't feel right, that the rich - who are the main users of air and private road transport in Thailand - are so obviously well served by public funds.