Politician speaks the truth!

Barrack Obama, in Wednesday's Financial Times, about the implosion of the US subprime lending industry:

Over the past several years, while predatory lenders were driving low-income families into financial ruin, 10 of the [United States'] largest lenders were spending more than $185 million lobbying Washington to let them get away with it. So if we really want to make sure this never happens again, we need to end the lobbyist-driven politics that made it possible.

(I think he means "make it possible".) On the strength of this, Mr Obama would get my vote.

Climate change and land management

Freeman Dyson writes:

To stop the carbon in the atmosphere from increasing, we only need to grow the biomass in the soil by a hundredth of an inch per year. Good topsoil contains about ten percent biomass ... so a hundredth of an inch of biomass growth means about a tenth of an inch of topsoil. Changes in farming practices such as no-till farming, avoiding the use of the plow, cause biomass to grow at least as fast as this. If we plant crops without plowing the soil, more of the biomass goes into roots which stay in the soil, and less returns to the atmosphere. If we use genetic engineering to put more biomass into roots, we can probably achieve much more rapid growth of topsoil. I conclude from this calculation that the problem of carbon dioxide in the atmosphere is a problem of land management, not a problem of meteorology.

It sounds plausible to me. The point, though, is that we need to supply incentives to people who prevent climate change without prejudging how they do so. Unfortunately Kyoto fails in this regards. It is entirely focused on reducing net anthropogenic greenhouse gas emissions. Climate Stability Bonds would be different: if Professor Dyson is right in that climate stability could be achieved by more widespread application of no-till farming methods, then a bond regime would reward research and diffusion of those methods - but Kyoto would not.

Fisheries

Of the fish caught by English and Welsh commercial fishing vessels in the English Channel, Western Approaches, Celtic and Irish Seas between 2002 and 2005:

63 per cent ...weighing 24,500 tons, were thrown back over the side. Few if any of these fish would survive because trawling ruptures their swim bladders. Fishermen 'discard two-thirds of catch' Daily Telegraph

It would be exhausting as well as upsetting to explain the tragedy of the world's fisheries. The root causes are probably similar to the parallel fiasco of industrial agriculture: highly visible, noisy and utterly self-interested lobbyists; a focus on yields per dollar to the exclusion of anything else; lack of political courage.... Policy instruments to address the environmental calamity have been useless, focusing mainly on ineffective and inefficient input controls. Farmers in the west seem to accept a downgrading of their role as food producers in favour of glorified landscape gardeners, working for the government and subject to monitoring and surveillance - in return for handsome subsidies from taxpayers and consumers. But it's difficult to see the world's fisheries people, whose identity is bound up with pursuit of a wild resource, in that role.

Perhaps then the state of the world's oceans would be suitable for application of the Social Policy Bond principle? The goal - biological health, expressed as some index of the world's marine plant an animal species - would be shared by almost everyone; it's the means of achieving it that are proving elusive. And, in contrast to perhaps to agriculture, there seems to be no amount of government-backed monitoring that will stop people degrading the environment for their own short-term purposes.

Where the goal can be reliably quantifed and agreed by all; where existing policies are failing; and where there seem to be no other solutions on the horizon: those are criteria that, to me, cry out for a Social Policy Bond approach: in other words, one where people are rewarded for achieving a specified outcome.

Orangutans v biofuels

An interesting discussion at Grist where Peter Madden asks whether those concerned about the environment are too obsessed with climate change?

There certainly are trade-offs between tackling different environmental issues. And with a limited pot of money, other important areas can suffer. Policies can be in conflict, too. Remember the catalytic converter in the 1980s: good for tackling pollution, but bad for fuel efficiency. And bad for biofuels today, which may be good news for tackling climate change; but if poorly sourced, is very bad news for orangutans.

How should we go about sorting our environmental priorities? The problem is one of weighting entirely different environmental impacts. We'd all like to see climate change reduced and pollution fall and more orangutans, and, for that matter, better healthcare, lower crime rates and all the rest.

In the absence of systematic weighting, or explicit consultation, these decisions are made (or fall out of) the political process. Unfortunately, rationality and the society's wishes or even our best interests are poorly served. More potent as policy drivers appear to be lobby groups on behalf of vested corporate and bureaucratic interests, and events for which there is video footage that can be shown on television.

There are genuine difficulties with weighting the diverse, competing demands for society's scarce resources, but a large part of the problem is that we have little idea of how much solutions to our diverse problems will cost.

Social Policy Bonds could be the answer. They have an advantage over most other instruments in that the cost of achieving the targeted outcome is minimised and capped. And it is the market that decides on how much the solution to a targeted problem will cost. Bonds aiming to increase climate stability, for example, would convey extremely valuable information to the public and policymakers about the actual cost not only of achieving the targeted degree of stability, but about how much extra increase in stability will cost. The market for the bonds is elegantly efficient in conveying information about the cost of achieving objectives and, crucially for policymakers, how this cost varies with time and circumstances. This information is immediate, upfront, and available to all. It is determined not by a handful of so-called experts, but by competitive bidders who have incentives to get it right.

Immediately, then, half of the policy conundrum is resolved: we have best estimates of the costs of, say, protecting orangutans and increasing climate stability. We could say that raising climate stability by 1 percent will cost $x, while maintaining current numbers of orangutans will cost
$y. We could say that raising literacy rates by x percent will cost the same as reducing air pollution by y percent. (My post here discusses information markets, which, as far as I can tell, generate the same sort of information as Social Policy Bonds but do not seek to modify behaviour.)

Evolution or incentives?

From an article about Gregory Clark's A Farewell to Alms:

Historians used to accept changes in people's behavior as an explanation for economic events, like Max Weber's thesis linking the rise of capitalism with Protestantism. But most have now swung to the economists' view that all people are alike and will respond in the same way to the same incentives. Hence they seek to explain events like the Industrial Revolution in terms of changes in institutions, not people.

Dr Clark, though, argues that institutions and incentives have been much the same all along and explain very little, which is why there is so little agreement on the causes of the Industrial Revolution. He believes natural selection - genetic transmission of capitalist values - is the answer. To me this sounds far-fetched and unnecessary, though I haven't read the evidence that Dr Clark has compiled. I don't often find myself in the position of agreeing with "the economists' view", but I do think incentives are critical. Looking at the failure of certain countries to develop, I can't point to any lack of resourcefulness on the part of their citizens. More compelling to me is how this simple question would be answered: "if people work hard, what is the chance that they will be allowed to keep most of their earnings?" For most societies in the past, and for many today in the poor world, that probability has been too low to make capitalism worthwhile.

Scary

Not directly related to Social Policy Bonds, but fascinating all the same. A letter from Raimondo Salomonem of New York, pubished in today's International Herald Tribune:

The problem with nuclear weapons is that there is never room for even the slightest error. If any nation, or a non-state actor launches a missile, the consequences would be catastrophic. There has been more than one very close call in the past. In 1988, in the mud-caked woods of West Germany, I was stationed on the front lines of the Cold War. I was a member of a Pershing II nuclear missile-launch team. Our missiles were aimed at Moscow and were capable of zeroing in on a trash pail in Red Square. One rainy night, during a field expedition, a sergeant accidentally allowed the tail end of a 40-foot long launch trailer to slide off the road into a ditch. This forced the missile on the trailer's bed to point its nose up to the sky.

Years later, I read a book written by a Soviet defense official who recounted how they locked on that missile - the reports they received said the missile had been erected in what was considered an extremely hostile offensive maneuver. Until we managed many hours later to tow the trailer out of the ditch, the Soviets had been on a heightened state of alert. It was only until they saw us secure the missile in a hangar that they stood down. A sad fact, among many potentially sad facts in this incident, was that the missile in question was a dummy, used only for training. This was a very close call that brought us perilously close to the type of flash point that would send the world into destruction. Forget treaties. Future leaders should hold summit meetings, not fishing trips. When the subject of global warming comes up in conversation, I silently hope to myself that we will be around long enough to see if it happens.

Supermarkets and farmers

'Farmers complain of ruthless buyers', says the Sunday Telegraph. Farmers are complaining about the buying power of the big supermarkets in the UK. It's difficult to feel sympathy for the farmers, most of whom are essentially recipients of government welfare, though, perhaps because it's much higher than normal welfare for disadvantaged people, it's goes by the names of subsidy and protection. (You can find out how much individual farmers in the EU receive here.)

Yet there is a case to be made against the supermarkets. They are not exactly the subsidy-free market-driven businesses they would have you believe. They benefit from a government-financed transport infrastructure that systematically benefits the large and global at the expense of the small and local: roads, ports, airports. Much of the susbidies supposedly directed at farmers in fact ends up with large agribusiness corporates. (One measure of this is farmers in Europe pay much more for things like veterinary products than do their counterparts in subsidy-free New Zealand.) Industry concentration is a result, and the supermarkets benefit from this too. They also can manipulate and benefit from a regulatory environment that tends to favour large businesses at the expense of small.

Meaningless environmental targets

It seems EU leaders agreed at their summit in March that there should be a 10 percent target for biofuel use. There is also a 20% target for the proportion of EU energy from renewable sources by 2020.

This is exactly the sort of political gesture that gets us into trouble. Targets like these are not valid ends in themselves. They are a means to uncertain, unspecified, vague environmental objectives. So why not specify exactly the objectives we want to achieve and target them directly? Politicians would actually be quite good at that: one thing they do well is to articulate society's goals and raise the revenue necessary to achieve them. Where they fail is in specifying how our goals shall be achieved. Biofuel use is contentious on many grounds, and renewable energy is not necessarily better for the environment than, for example, energy conservation. When it comes to deciding how to achieve objectives politicians' record of failure is abysmal.

Thankfully these particular follies are being widely challenged before they can create and enrich interest groups whose raison d'etre will be to oppose them. A contrast to agricultural support programmes and other perverse subsidies, which do so much to waste billions of dollars, transfer wealth from the poor to the rich, and devastate the rural sector's physical and social environment, and which persist decades after their failings became known.

How many minutes to midnight?

Writing about the Middle East's nuclear surge in the International Herald Tribune, the authors, after discussing Iran's ambitions, say that:

...[the] countries that control over one-fourth of the world's oil supplies are investing in nuclear power programs. This is not about energy; it is a nuclear hedge against Iran. ... Egypt and Turkey, two of Iran's main rivals, are in the lead. Both have...announced ambitious plans for the construction of new power reactors. ... Not to be outdone, Saudi Arabia and the five other members of the Gulf Cooperation Council (Bahrain, Kuwait, Oman, Qatar, and the United Arab Emirates) at the end of 2006 "commissioned a joint study on the use of nuclear technology for peaceful purposes." Algeria and Russia quickly signed an agreement on nuclear development in January 2007, with France, South Korea, China, and the United States also jockeying for nuclear sales to this oil state. Jordan announced that it, too, wants nuclear power.

There's a real mismatch between the incentives on offer. The short-term financial gains to western suppliers of nuclear technology have far more leverage, currently, than those of us who are concerned both that nuclear proliferation is a problem in itself (if it discourages actions against oppressive states) and a precursor of catastrophe. But the payoff from an exchange of nuclear weapons though large, is diffuse and of uncertain magnitude and timing. The opportunity costs of not selling nuclear technology to the Middle East outweigh, at least in the minds of those making the decision, such nebulous gains.

A Social Policy Bond regime that rewarded nuclear peace - defined as the absence of the explosion of a nuclear weapon - would rebalance the incentives. Currently those who would oppose such an explosion are (presumably) in a massive numerical majority, but have few means of expressing their wishes in a way that is likely to forestall nuclear proliferation. Neither do we know how best to bring sustain nuclear peace. The tendency therefore is to assume that governments will sort it out, with the support of hard-working, well-intentioned non-governmental organizations. But all the evidence points the other way. We need to make the incentives to maintain nuclear peace at least as convincing as those working to undermine it. We might not know exactly how to reduce the chances of a nuclear exchange, but we have no excuse for not encouraging people to find out. We could issue Nuclear Peace Bonds ourselves, or encourage our governments to do so collectively. See here, for a short paper on Conflict Reduction Bonds, which outlines the principles involved.

Great share prices; shame about the calamity

In the absence of systematic targeting of numerical indicators, there is a risk that governments will implicitly, and perhaps unintentionally, target indicators that do a poor job of measuring societal wellbeing. Gross Domestic Product is one such indicator. It fails on many counts: most notably it does not measure environmental or social health; nor does not take into account leisure time. Another dangerous target is the value of leading shares. The Ludwig von Mises Institute brings us this story, from the catastrophe that is Mugabe's Zimbabwe:

Zimbabwe is in the middle of an economic disintegration, with GDP declining for the seventh consecutive year, half what it was in 2000. Ever since President Mugabe's disastrous land-reform campaign (an entire article in itself), the country's farming, tourism, and gold sectors have collapsed. Unemployment is said to be near 80%.

But something odd is happening.

The Zimbabwe Stock Exchange is the best performing stock exchange in the world, the key Zimbabwe Industrials Index up some 595% since the beginning of the year and 12,000% over twelve months. This jump in share prices is far in excess of increases in consumer prices. While the country is crumbling, the Zimbabwean share speculator is keeping up much better than the typical Zimbabwean on the street.

The authors of this report attribute this to the rise in the money supply - and wonder how much of last 25 years' growth in western share markets is a result of similar increases in the rich world, and how much is due to wealth creation. My concern, though, is with the unsystematic use of indicators, that might lead those in government to regard the health of (say) the sharemarket or even 'the economy' (as measured by GDP for example) as accurate measures of society's welfare. In large societies some sort of numerical aggregates are going to have to be measured and targeted: I'd like such indicators to be measured explicitly, and to be inextricably linked to social and environmental wellbeing. In other words: government should aim to achieve outcomes that are meaningful to real people - as distinct from corporations.

Insurance against media hype

Amongst other points well made, Edward Luttwak says:

[H]umanitarians should note that the dead from Jewish-Palestinian fighting since 1921 amount to fewer than 100,000—about as many as are killed in a season of conflict in Darfur. The middle of nowhere

Media attention distorts many of our priorities. It means we are far less concerned about Darfur than the Middle East. If we were indifferent between war-induced deaths in either region, we'd focus a larger share of our scarce peace-making resources on Darfur. Even if policymakers are genuinely so indifferent, the clamour arising from unequal media coverage means their resolve to do the rational thing quickly crumbles.

A Social Policy Bond regime would be different. Its goals would be stable over time. Say a consortium of peace-makers, in conjunction perhaps with the United Nations, aimed to reduce global deaths arising from violent political conflict. Investors in the Conflict Reduction Bonds that such a body might issue would concentrate their efforts impartially on those regions where they could maximize the number of lives saved per dollar. Importantly, they would not be swayed from that goal by ephemeral events, such as the availability of film footage from the Middle East, and the absence of reporting from Darfur.

Policy goals are more stable than the means of reaching them

One of the reasons that the Economist (subscription, probably) gives for European companies not taking much interest in the carbon emissions market is that:

...in a business driven by government regulation, there is always the risk that fickle politicians might change the rules of the game, with unpredictable consequences.

Latvia is currently suing the European Commission for an increase in its allocation of allowances. There are another five such cases, and if any of them succeeds 'it could contribute to another glut in allowances and another slide in the [emissions] price'.

I don't see emissions trading as very wondrous. It might succeed in cutting emissions, but it will do so less efficiently than a carbon tax which itself, in my view, is far inferior to a Climate Stability Bond regime, which would reward people for actually stabilizing the climate, rather than inflict grievous upfront costs on the basis that cutting anthropogenic, according to 1990s science, is the most efficient way of reducing climate change. The argument in the Economist points to similar reason why, I believe, a Climate Stability Bond regime would be preferable: he the stated policy goal - a more stable climate - is less variable than the alleged means of getting there. It is not just our rapidly expanding knowledge of the magnitude, causes and consequences of climate change that threaten to invalidate Kyoto as a policy, but the vulnerability of Kyoto to political meddling - of which the Economist gives but two examples.

Not only that, but it would be much easier to achieve public participation and support for policy goals than for the alleged means of reaching them. Everybody wants to see climate stability and I am sure there would be more support for Kyoto if it could be shown that cutting anthropogenic greenhouse gas emissions were the most efficient means of achieving it. A Climate Stability Bond regime would contract out the achievement of climate stability to investors, who would have powerful incentives to explore and implement the most efficient solutions to climate change. It would be up to those investors to adapt their efforts and while they would have to react to new information, they would not have to allow for changing views of politicians as to the value or otherwise of the targeted climate stability objective.

Tools for an informed democracy

Commenting on democracy's flaws, Nicholas Kristof, writing in Tuesday's International Herald Tribune, says:

[W]e should be able to respond to evidence of democracy's failings with something more than Churchillian resgnation. So why not address the problem in [the US] education system, by teaching basic economics and statistics in high schools? Students usually now encounter statistics, if at all, in college. But simple statistics could easily be taught along with algebra in high school. Likewise, principles of economics could be taught in social studies classes.

Mr Kristof makes a strong case. With the current and widening gap between ordinary people and their supposed representatives, more, and more informed, public participation in policymaking would be an end in itself, as well as means towards the worthwhile end of better outcomes for average citizens, rather than corporations and government agencies. That it's easy to fool people with no statistics can be seen (if you have broadband) in this fascinating talk by Peter Donnelly.