29 December 2008

Target outcomes, not economic variables

Reading the excellent Bad Samaritans: the guilty secrets of rich nations and the threat to global prosperity, by Ha-Joon Chang, it becomes clear that many of the assumptions underlying development theory have no basis in fact. All too often we accept, with little evidence, assertions that, for example, Foreign Direct Investment is good for a country's development prospects. But:
Not only is FDI not necessarily a stable source of foreign currency, it may have negative impacts on the foreign exchange position of the host country. FDI may bring in foreign currency, but it can also generate additional demands for it (eg importing inputs, contracting foreign loans). Of course, it can (but may not) also generate additional foreign currency through exporting, but whether it will earn more foreign exchange than it uses is not a foregone conclusion. (Page 89)
More FDI, like a lower rate of inflation (also discussed by Chang) is not an unmitigated blessing. Like a host of other variables such as economic growth itself, explicitly or implicitly targeted by governments in the rich and poor countries, they are imperfect indicators, that may have been highly correlated to societal well-being in some countries at some points in the past, but that are not always inevitably so. In a complex and interdependent world, there are too many other variables, time lags and other confounding factors that make targeting of anything other than outcomes problematic - as Chang illustrates throughout his book. And that is assuming that those doing the targeting on behalf of others (in Chang's book: the World Trade Organization, the IMF and the World Bank on behalf of the developing countries), are well meaning.

Social Policy Bonds would be a radical change in that they would target and reward the achievement of social and environmental goals themselves. Much work has been done, for example, on the Human Development Index, which, with a bit of tweaking could be targeted by governments in the poor and rich countries, or philanthropic groups. A modified HDI would be inextricably correlated with social well-being, and under a bond regime people could be rewarded for raising it however they did so. This would be a stark contrast with they sometimes cynical, often ideological and generally failed policies of Chang's Bad Samaritans.

22 December 2008

The party's over

An interesting article about the failure of the economics profession to foresee, let alone forestall, the current financial crisis:
An entire field of experts dedicated to studying the behavior of markets failed to anticipate what may prove to be the biggest economic collapse of our lifetime. And, now that we're in the middle of it, many frankly admit that they're not sure how to prevent things from getting worse. Paradigm lost, Drake Bennett, 'The Boston Globe', 21 December
There are plenty of reasons for this, some suggested by Mr Bennett. For myself, I think the goals of economists are have, like those in other professions, drifted away from their ideals; something that's inevitable when tenure, salaries and prospects depend on spurious micro-targets: number of papers published, frequency with which they are cited, and the rest. With the ever-lengthening and ever more tenuous link between the producers of economic theory & policy and the people they are supposed to be helping, the economics profession has become little different to that of politics and policymaking in general: governed by meaningless volume of output indicators, image, ideology - anything, that is, except outcomes. They have got away with it - until now. My suggestion is that they use this crisis to ask themselves the fundamental question: What is government for?

21 December 2008

Not very optimistic

Adam Shatz writes:
The one demand [the protesters in Greece] shared was that the government resign. Their protests struck a chord among students in other European countries dismayed by their dim economic prospects and unresponsive leaders. 'London Review of Books', 1 January 2009
Exactly so - see my previous post.

Blogger.com tells me this is my 600th post, and this blog has been going for four years now. So it's a good time to summarise where the Social Policy Bond idea is going. For the Social Policy Bond principle, it hasn't been a great year, to be frank. Most importantly, policy still seems to be driven by virtually anything except outcomes. I see policies that I regard as ineffectual or disastrous continuing to consume vast amounts of bureaucratic energy, political capital and other resources, without making people or the environment significantly better off. Little is being put in place to insure against nuclear proliferation, climate change or any other type of disaster - areas where, I think, the Social Policy Bond idea could score heavily over any other policy, even where such policies (like Kyoto) are at least being considered.

Intellectually, it's been more satisfying, in that I recently published my latest book on the subject. At 60000 words it's the definitive work on Social Policy Bonds, so far. But I couldn't find a publisher prepared to take it on, so I've had to publish it myself, at no cost, via Lulu enterprises. After a couple of months, sales to people other than myself (for proof-reading purposes) haven't made it into double figures.

According to my website statistics sources, this blog and the SocialGoals.com site between them are seen between about 10 or 20 times a day. But many of these visits are short; almost nobody this year has emailed me about the bonds or even left comments on this blog.

Taken together then, I'm not too optimistic and I am considering what to do with this blog and my time. Publication of my book and four years of this blog mean that a resource is available for those who are interested, and it might be better to let the idea lie until somebody is sufficiently motivated to take it further. I will have a think about that.

18 December 2008

Nothing changes

Ross Clark has been...
...trying to square the [British] Government's tough new proposals on welfare reform, which will involve slashing housing benefit and forcing single mothers of one- year-old children out to work, with its announcement last week of a mortgage rescue plan to allow homebuyers to take a two-year holiday on their mortgage repayments if they suffer a loss of income. But I am afraid I am not doing very well. The peculiar case of middle-class benefits, 'The Times', 8 December
Me neither. It is the persistence of these subsidies to the wealthy and middle classes, after decades of accumulated evidence of their wastefulness, that makes one despair. Originally well intentioned, they have largely been capitalised into asset values so that they fail even in the narrow terms of their stated original purpose. Our economies are so complex that policymakers can escape censure by stringing together high-sounding ideals ('home-ownership', 'food security', 'energy independence') with some seemingly apposite policy, which appears to bring us closer to the supposed ideal, but in reality leads off in a completely different direction: one that favours vested interests, wealthy individuals, big corporations - and economic inefficiency.

Under a Social Policy Bond regime, policies would be expressed in terms of what they actually achieve. All the activities they would then stimulate would be entirely subordinated to specified, agreed, transparent outcomes.

16 December 2008

What is government for?

With unemployment in the west soaring and millions of people likely to lose their savings and even their homes, it’s time to ask a very basic question: what is government for?

Governments have reacted in their instinctive way to the current financial crisis: they are either printing more money, or they are borrowing money to prop up the wobbly structures and sectors whose tactics created the crisis in the first place. In essence, they will rip off the older generation - those with savings - by inflating. And they will rip off the next generation, by borrowing.

This is smoke and mirrors – and cardboard and sellotape. It might or might not suffice to stave off an immediate and precipitous collapse, but either way the western financial and economic system is looking very precarious. That system depends on confidence and trust, and people believing that their lives or their children's have a good chance of getting better. That faith is evaporating. There is now a real danger of social collapse and blood in the streets. History tells us that bloody revolutions are not single events, but processes that can mean years of instability at best, and terror at worst. The riots we are seeing in Greece right now could portend the beginning of the end of democratic liberalism

The danger is that western governments’ bailout commitments to financial and corporates will turn out to be something like their farm support policies. These programmes have functioned as a tax on food bought by consumers in the rich countries. But the bigger victims are the landscape and wildlife in those countries, which suffer grievously from intensive farming; and farmers in the food-rich developing countries who depend on exports for a decent standard of living. The waste, inequity and environmental depredations of the rich countries’ corrupt and irrational agricultural policies have been known about for decades, but their governments have found it very difficult to stop them. They have created a sector entirely dependent on government; one that, thanks to government largesse, can spend significant sums on lobbying against the withdrawal of that largesse and a return to rationality.

But the latest subsidies - to the financial and automobile sectors – are bigger still. If the history of previous perverse subsidies is anything to go by, the US financial sector and its auto industry will become another ward of state for a long, long time. And where do ordinary members of the public feature in all this? In a crisis of this dimension, appearance is reality. And it looks very much as though millions of people are losing their jobs, homes and savings, while their government is bailing out the fat cats.

What is government for?

The western governments’ Pavlovian response to the financial crisis is probably all we could expect in the short run. But in the longer term we need a totally new basis on which to formulate government policy. We need to ask, and keep asking, the question ‘What is government for?’ Western governments, let’s not forget, spend about a third of national income, create statutes and regulations, and have a monopoly on legitimate violence. They have the potential to do a lot better than subsidise inefficient, parasitic or downright destructive, sector groups. And they have the potential, if they act quickly and wisely, to restore our faith in democratic liberalism.

Let’s be blunt: the purpose of government is not to prop up ailing industries. It's not to save particular corporations. And it's not to bolster asset values or abstract economic variables like the rate of growth or Gross Domestic Product per capita. Government's purpose is to supply public goods and services, and beyond that to provide a basic minimum level of health, education and welfare for all. In short, government should be looking after ordinary people.

Without this clear sense of purpose, it goes awry. Instead of helping people, it gets seduced by the ever more turgid lobbying industry, who are experts at convincing government that the best use of its powers and tax revenues is to support - surprise, surprise - the groups they are paid to represent.

Government is a centralized, top-down decision-making body. It does not and cannot do adaptation or diversity - and it is precisely adaptation and diversity that a vibrant, prosperous liberal market economy needs. With its massive intervention and bailout of the US finance sector and the dinosaurs of Detroit the American Government is institutionalizing the corrupt incentives that led to the crisis in the first place while denying disadvantaged Americans the help they need. The US bureaucracy is like a supertanker: it’s going to take years to change this mentality.

Policy as if outcomes mattered

We need to realign government on the basis that our financial and economic systems are not ends in themselves, but means to ends, and those ends, first and foremost are about looking after ordinary people. The outcomes government needs to ensure are law and order, minimal standards of good healthcare for all, basic education and housing, a decent social and physical environment, and the provision of a tightly woven safety net for everyone.

Instead of spending taxpayer funds on bailouts government should clearly and unambiguously channel society’s scarce resources into avoiding the consequences of financial and economic crises for those who most need help. Government targets need to be inextricably linked to the well-being of ordinary people – as distinct from those of economists, bureaucrats or corporations.

But with a bit of imagination, this crisis of casino capitalism could mark the staring point for an improved policymaking process. One in which:

--Government targets outcomes that are meaningful to ordinary people,
--Government rewards people who achieve these outcomes, however they do so.

Government is good at articulating society’s concerns and raising revenue for their achievement. It is not so good at keeping to its core remit. As a big organisation itself, it spends far too time and treasure on its chums in big business at the expense of small enterprises, ordinary people and the environment. What is needed is a government that focuses on rewarding outcomes that are meaningful to ordinary people – rather than activities, institutions or large corporations.

12 December 2008

Riots in Greece

The riots in Greece are, I fear, a dismal portent of what is to come. Governments have consistently drifted away from what should be their real responsibility: to look after the interests of ordinary people. The logic of incremental adaptation has seen them make policy on behalf of big corporations, their own agencies, or abstract (and manipulated) economic indicators like Gross Domestic Product. Aware at some level of consciousness of their policy failings, they have responded with a blizzard of meaningless micro-targets. But they have lost sight of the big picture. And that is looking more alarming by the day.

By making self-perpetuation their over-arching goal, governments have, I believe, helped bring about the current crisis. They have sacrificed social cohesion and the environment on the altar of economic growth. Now that growth looks unlikely to happen, and the glue that holds our societies together - the expectation of an improving quality of life for ourselves or our children - is vanishing. Perhaps it was an illusion anyway.

My suggestion, and I have been making it for years, is that governments realign their policies in favour of outcomes that are meaningful to ordinary people. This does not mean bailing out the auto or finance sectors, or indeed maintaining any other of their corrupt, insane, perverse subsidy programmes (to agriculture, for instance, or the fossil fuel industry). Government has a legitimate role in shielding people from the consequences of disaster. Bailing out its chums in the large corporations has nothing to do with that. Instead government should target goals like the eradication of poverty, the maintenance of peace, law and order, and a decent physical environment. What else is government for?

07 December 2008

Why Kyoto will fail

From New Scientist:
Our new-found love for flat-screen TVs could come back to haunt us. Earlier this year, researchers warned that the growing popularity of this technology was releasing increasing amounts of a powerful greenhouse gas into the atmosphere. Now, researchers say levels of the gas are four times as high as previously estimated, and warn they are rising "quasi-exponentially". Nitrogen trifluoride (NF3) is 17,000 times more effective at warming the atmosphere than an equal mass of carbon dioxide. Yet the Kyoto protocol does not set limits on NF3 emissions because it was made in tiny amounts when the protocol was agreed in 1997. Warm glow of TV, 'New Scientist', 1 November
There we have it. Kyoto does not aim to reduce the rate of climate change. It does not even aim to reduce anthropogenic greenhouse gas emissions. It is concerned solely with reducing those gases that were thought to be greenhouse gases at the time it was devised. A Climate Stability Bond regime would be a big improvement. If we want a more stable climate, then we should reward people who help us achieve one however they do so. Our scientific knowledge is rapidly expanding. We cannot rely even on today's science to tell us what will be the best ways of stabilising the climate throughout the necessarily long time it will take us to do so. Relying on 1990s science, as Kyoto does, is even worse.

05 December 2008

Incentives for researchers

The Economist recently reported on research into the 'broken windows' theory of crime: that where the windows are broken, or similar conditions of 'disorder' prevail, crime rates go up:
The most dramatic result, though, was the one that showed a doubling in the number of people who were prepared to steal in a condition of disorder. In this case an envelope with a €5 ($6) note inside (and the note clearly visible through the address window) was left sticking out of a post box. In a condition of order, 13% of those passing took the envelope (instead of leaving it or pushing it into the box). But if the post box was covered in graffiti, 27% did. Can the can, 'The Economist', 20 November
It's good that this sort of research is conducted, and even better when it can be applied to solve social problems. In my view, though, there are too few incentives to explore this sort of relationship; the sort, that is, which is not at all obvious or intuitive. Most social and environmental problems are bedevilled by similar complexity, with the relationships between cause and effect obscured by huge numbers of variables, time lags, severe data limitations and the difficulty and expense of conducting trials. That said, a large proportion of the resources allocated to research programmes comes directly or indirectly from government, with all the usual deficiciences that that implies One important such deficiency, in my view, is that there will typically be no link between successful research and the financial rewards paid to the researchers. The result is predictable: too much academic research - in any academic field - has drifted away from the concerns of ordinary people. A glance at any economics (for instance) journal will convince most of that.

By subordinating policy to society's wishes, expressed in terms of clear, verifiable outcomes, a Social Policy Bond regime would automatically re-orientate the system of allocating research funding in ways that improve those outcomes. There will always be obsurities in research in the social sciences, but Social Policy Bonds would transfer the cost of conducting inappropriate or useless research to the researchers themselves, rather than, as is usual nowadays, the taxpayer.

03 December 2008

Seeing the forest

Sometimes I think we cannot see the wood for the trees: Grist quotes Rajendra Pachauri, chairman of the Nobel-winning Intergovernmental Panel on Climate Change (IPCC) as saying:
"It defies any kind of logic, if you look at the type of money that the world has spent on these [banking] bailouts, 2.7 trillion dollars (2.13 trillion euros) is the estimate, and it's been done so quickly and without questioning." Pachauri recalled that when the Millennium Development Goals for attacking poverty and sickness were being drawn up, a panel chaired by Ernesto Zedillo, the former president of Mexico, suggested "a fairly modest estimate" of 50 billion dollars a year in help for poor countries. "But everyone scoffed at it. Nobody did a damn thing," Pachauri said in the interview on Monday [1 December].
Perhaps cynicism is built into our system of resource allocation, or perhaps a banking crisis, being much more dramatic and televisual, outweighs in the public mind the misery of poverty and sickness, or the threat of catastrophic climate change.

We need, I think, to assess policy priorities coolly and rationally. One of doing so would be to express policy goals in terms of outcomes. Instead of reflexively allocating taxpayer funds to sectors or corporations in crisis, we should take the time to discuss and agree on what exactly is the purpose of government. Is the purpose of the current bailouts to support corporations, to reduce unemployment, or to alleviate poverty?

A Social Policy Bond regime targeting poverty, for instance, would not assume that existing industries or institutional structures are to be taken as given. There might be far more effective ways of eliminating poverty than, for instance, bailing out inefficient car manufacturers. Let the market, with all its ingenuity and its under-rated but essential willingness to terminate failed experiments, answer the question of how most efficiently to eliminate poverty. Providing, of course, we want government to serve people, rather than corporations or abstract economic variables.

30 November 2008


Social Policy Bonds have many advantages over the current system of policymaking. Most important is their efficiency. As well, they would have stable objectives over time - which means that very long-term goals can be targeted. Another advantage is that they are explicit and transparent in what they are targeting. This is both an end in itself, and means of achieving buy-in on the part of the public, who would be far more likely to participate in the policymaking process when outcomes are being discussed, rather than the current opaque mix of funding arrangements, legalisms, or tinkering with institutional structures.

But another advantage, and one that I have not stressed before, is empowerment. Under the current system, those charged with achieving social and environmental goals are mostly employed either by government or by non-governmental organizations. The contrast between the performance of the two groups is compelling.

"Ask yourself," wrote John Fund of the Wall Street Journal more than a decade ago, "If you had a financial windfall and wanted to help the poor, would you even think about giving time or a check to the government?" I think we'd all answer with a resounding "no". We'd much rather give to charity or a non-governmental organization. We know they will be more motivated and make better use of their limited funds. Part of the explanation, I believe, is that they are empowered to make important decisions, in ways that government employees increasingly are not. Consider the proliferation of narrow targets with which UK Government attempts to shape its National Health Service. A recent one is the stipulation that doctors must give after-hours care in the form of appointments that last ten minutes, and only ten minutes:
[UK Prime Minister] Gordon Brown believes in pre-booked, ten-minute appointments and will not pay us the extended hours money if we do seven and a half minute appointments. I’m not prepared to fudge, or lie (some practices are, he said sanctimoniously) so my late evening surgery is now booked at ten-minute intervals. I will see twelve patients rather than the usual sixteen. I will enjoy having that little extra leeway. I may even be able to use some of the time to catch up on paperwork. NHS Blog Doctor
It's not just the inefficiency that this sort of directive generates, or the gaming of the system that will occur. It's also the resentment that such micro-management will inevitably breed. Applied with ever more abandon, such micro-goals take away the intelligence from any form of decision-making. They imply and generate a low level of trust, and reinforce a command-and-control hierarchy.

The contrast with a Social Policy Bond regime targeting broad social and environmental goals is stark. In the health sector we need only agree on and target broad indicators encompassing length and quality of life - not a simple matter, but one that would clarify exactly what government's role should be and one, moreover, that would empower and motivate health experts to go about achieving them in the most efficient ways they can. The obvious disenchantment that NHS Blog Doctor feels along with others whose autonomy is eroded by misguided application of narrow targets would be a thing of the past.

24 November 2008

Smoke and mirrors: the limitations

If the current inflation rate is really 6-9 percent instead of the 2-3 percent claimed by government and most U.S. money managers, then Washington's official estimates that the economy still grew at a rate of some 0.6 percent in the first quarter of 2008 become nonsense. Subtracting a 6-9 percent inflation rate from nominal GDP growth would identify an economy that was deteriorating and shrinking, not growing. Concerned foreign dollar-holders would become even more concerned. Kevin Phillips, Washington's Great 'No Inflation' Hoax

Marvellous. Even the numbers that policymakers target are a part of the commons that they have degraded. We are a long way now from government by the people for the people. Mr Phillips makes it clear that the erosion of accuracy in US growth, inflation and unemployment statistics has been mainly an opportunistic process, begun in the 1960s. Perhaps it was inevitable that large corporations and very wealthy individuals would use every available means to pervert the policymaking process. When the result is a serious possibility that taxpayers will now subsidise failing car manufacturers there is clearly something very wrong with the current ways in which we formulate policy.

Put simply, I think it's that ordinary people think it's all too complicated. Whether it's by expressing policy in terms of arcane legalisms, institutional structures, tedious processes or, as we now see, misleading numerical indicators, our disengagement from the world of policy is almost complete - to the great satisfaction of those who share the spoils. That is, the very rich, the larger corporations, and government agencies themselves.

Perhaps this is the time then to reorientate policy along Social Policy Bond lines: express policy goals in terms of outcomes that are comprehensible and meaningful to ordinary people. Economic growth, even when measured accurately, is not an end in itself. It is a means to various ends, including the eradication of poverty and the provision of public goods and services. Government would do better to target these goals directly than to try to fool us all with their smoke and mirror arrangements, whose credibility is fast disappearing.

22 November 2008

Incentives to preserve the commons

Lewis Lapham wrote:
The United States has been ridding itself of its First World status for as log as it has been privatizing its critical infrastructure (a k a the common good), at the same time despoiling the natural resource embodied in the health, welfare courage, and intelligence of its citizenry. Over the past eight years, under the absentee landlord economic policies of the Bush Administration, the stepped-up rate of disinvestment has resulted in ...Third World confusion and management.... Estate Sale, 'Harper's Magazine', May 2008 (subscription)
The people who devised American democracy probably never envisaged such irresponsibility from those entrusted with power. The constitutional checks and balances are mainly about process, not outcomes. In a large society, erosion of the commons is permitted, encouraged, or even necessary, when we vote for individuals, ideologies, image or economic abstractions. Highly aggregated, highly mobile societies, whose composition is constantly changing, cannot evolve the ways in which traditional commons used to be safeguarded. If we want to keep the benefits of living in such societies, where appeals to do the right thing are likely to be ignored until it's too late, we shall have to constrain our behaviour more directly than through legislation. All the incentives are to externalise social and environmental costs, and corporations and their mates in government are adept at finding effective ways of doing so.

One answer may be to redress the balance: issue Social Policy Bonds that have as their explicit goal the preservation of the commons. Devise ways of measuring environmental health (not too difficult) and social cohesion (more difficult, but not impossible) that can be targeted. Monetary incentives for the preservation of the commons need not compromise principles of trust, character and stewardship. Social Policy Bonds that rewarded the maintenance of the common good would simply mean that people who want to benefit the commons have have more resources with which to do so.

19 November 2008

I think these explain a lot

All these are taken from Harper's Index, 'Harper's Magazine', August:
  • Number of US gas stations where the group Pray at the Pump has gathered to ask God to lower the price: 12

  • Total donations that John McCain received from the oil and gas industry in June [2008]: $1,100,000

  • Portion of this that came after he endorsed new offshore drilling on June 16: 3/4

13 November 2008

"How could these companies be so bad for so long?"

Thomas L Friedman asks the question:
Last September ... the chief executive of Chrysler [was] explaining why the auto industry, at that time, needed $25 billion in loan guarantees. It wasn't a bailout, he said. It was a way to enable the car companies to retool for innovation. I could not help but shout back at the TV screen: "We have to subsidize Detroit so that it will innovate? What business were you people in other than innovation?"

How could these companies be so bad for so long? Clearly the combination of a very un-innovative business culture, visionless management and overly generous labor contracts explains a lot of it. It led to a situation whereby General Motors could make money only by selling big, gas-guzzling SUVs and trucks. Therefore, instead of focusing on making money by innovating around fuel efficiency, productivity and design, GM threw way too much energy into lobbying and maneuvering to protect its gas guzzlers. This included striking special deals with Congress that allowed the Detroit automakers to count the mileage of gas guzzlers as being less than they really were - provided they made some cars flex-fuel capable for ethanol. It included special offers of $1.99-a-gallon gasoline for a year to any customer who purchased a gas guzzler. And it included endless lobbying to block Congress from raising the miles-per-gallon requirements. The result was an industry that became brain-dead. How to fix a flat, 'International Herald Tribune', 13 November
I'm getting a bit fed up of lobbyists telling us that the health of the economy depends on the health of the finance sector, the housing sector or the car industry. If it does, then 'the economy' is, to put it bluntly, not worth defending. What government should be about is looking after the wellbeing of actual people, not particular industries, failing corporations or abstract economic variables. If social and environmental wellbeing require a smaller or more responsive finance sector or car industry, and if that means some adjustment costs for these industries then so be it.
I'll go out on a limb here and say that taking taxpayers' money on such a scale and giving it so transparently to inefficient corporations is politically unsustainable. True, governments in the west have done this with agriculture for a long time now, but the disastrous effects of such transfers - on consumers, taxpayers, animal welfare and the environment - have been too slow-moving to arouse public anger. Bailing out the car industry and the bankers though, I think, is different.

What the French Revolution, writes William Doyle
most certainly was not, was a single event. It was a series of developments, bewildering to most contemporaries which stretched over a number of years. It was a sustained period of uncertainty, disorder, and conflict....
If our governments can't come up with any better solutions to the current financial crisis than by bailing out on a massive scale the deadbeats in industry and finance then I fear for the future.

11 November 2008

Car madness

Once again, it's time to ask: what is government for?

From 'the Australian', 11 November:

Car industry praises $6.2bn assistance package

Car companies and component makers believe the Rudd Government's [Australian]$6.2billion assistance package will help safeguard the future of the automotive industry in Australia.
Meanwhile Associated Press is reporting that
President-elect Obama suggested to President Bush that the administration immediately help struggling U.S. automakers, aides to the Democrat say, in the first face-to-face meeting the pair had since Obama's election victory.

And the BBC's Robert Peston reports on another possibility:

For me, the most interesting story of the past 24 hours is that VW, the stressed German carmaker, is trying to raise €2.8bn (£2.2bn) from the European Central Bank. It plans to raise cash from the ECB in exchange for €2.8bn of securities backed by car loans. In effect, the ECB - and ultimately taxpayers in the eurozone - would be financing purchases of automobiles. Crikey, is all that comes to mind. What next? [My italics]
Indeed. As I have said many times, it's the persistence of this sort of mad subsidy that defies explanation. We know they redistribute our scarce resources to large corporates at the expense of ordinary people and the environment. We've known this for decades, but at a time of crisis, we cannot stop ourselves throwing more money in the direction of what are some of the least socially and environmentally sensitive corporations on the planet. This is, it seems to me, a failure of our entire system of government.

10 November 2008

Avoiding disaster, nuclear or otherwise

Reviewing The Culture of War by Martin van Creveld, Barry Gewen writes:
The world came perilously close to nuclear war during the Cuban missile crisis, and as more and more countries acquire nuclear weapons, it requires a real leap of faith to believe that deterrence will continue to work at all times in all places. And that's not to mention nuclear terrorism.
I share Mr Gewen's pessimism. Many believe that there's something intrinsic in our nature that means our species will persist. With some this is a religious belief, with others it's an expression of faith in our rationality or self-interest. For myself, and as with other existential challenges, I don't think we should rely on such feelings. I think we could do more, and that we should be concerned not so much about the survival of the human race, but about the potential loss of millions of lives.

One way of addressing the challenge would be to issue Disaster Prevention Bonds, which could act so as to moderate or countervail the incentives currently on offer to the people and corporations who are quite happy to militarize our planet. These bonds could function as an insurance policy, rewarding people who work to avoid human catastrophes of any sort, specified or not. Disaster Prevention Bonds would not prejudge how human calamities shall be avoided, but would simply reward the sustained non-occurrence of such calamities. Under a bond regime, diverse, adaptive approaches that are efficient would be rewarded. Failing policies would be swiftly terminated.

Nuclear proliferation and environmental disaster are only two of the existential challenges we face. Others are looming and we cannot anticipate all of them. Under a Disaster Prevention Bond regime there would be no need to. The outcome - the avoidance of millions of avoidable deaths - would be specified, but not the means of achieving it. They would seem to me to be more reliable than crossing our fingers and hoping for the best.

08 November 2008

Big government is monoculture

While one might quibble with the technicalities and the source, the Heritage Foundation's Index of Government Dependency does tell a convincing story: in the United States, as William Beach puts it "depen­dency on government has grown steadily and at an alarming rate in recent decades." Mark Steyn writes: "While few electorates consciously choose to leap left, a couple more steps every election, and eventually societies reach a tipping point." This appears to happen regardless of whether ruling parties are supposedly from the left or right, and regardless of the rhetoric about tax cuts, freedom, or rolling back the frontiers of state.

Does it matter? I think it does; partly because big government is generally remote government, and that is a loss in itself. But remote government is also cumbersome and inefficient. It's unresponsive to events. It can crowd out more efficient, more local ways of doing things. Being big, cumbersome and fond of one-size-fits-all policies, it generates the vulnerabilities of any monoculture. It is extremely exposed to disruptive, unanticipated events, and because of its size, the impact of its failure can be devastating. The current financial crisis is one symptom of this. Another is climate change, which in large part is a product of governments' favouring an infrastructure - and agriculture - that is entirely dependent on fossil fuels; often by subsidy, and almost universally by socialising the costs of fossil fuel use.

One answer could be Social Policy Bonds. Government would still take on the responsibility for raising revenue and targeting such desirable goals as the eradication of poverty or the end of violent political conflict. It would raise revenue to achieve such goals - something it can do very effectively. But by issuing Social Policy Bonds, it would contract out the actual achievement to the market. Organizations would be set up whose structure and activities were entirely subordinated to the targeted goals. Diverse, adaptive solutions would arise the product of our limitless ingenuity and the incentives that would be on offer. In short, by issuing Social Policy Bonds we could achieve important, broad social goals without the huge, coercive and monolithic government that we currently think is necessary.

04 November 2008

Make campaigning meaningful: focus on outcomes

[T]he opposite of competition is not solidarity, but monopolies and the maintenance of privilege. ...too much state spending involves taking money from the many, who pay taxes and consume goods, and handing it to the few: ex-state monopolies, special interests, regional favourites or incumbents. As a rule of thumb...politicians will rarely challenge interests that feature in children's books: such as farmers, fishermen, firemen and those who build exciting things. Europe's baleful bail-outs, 'The Economist', 1 November
It is not the size of these subsidies or their wastefulness or their contribution to environmental collapse and social injustice, but their persistence in the face of the overwhelming evidence of their perversity that makes one despair about the political system that cannot eliminate them. Consider some of the issues that did get the attention of the media in the US election campaign: the offhand comments of close relatives and pastors of the candidates; similarly casual comments about 'spreading the wealth'; costs of the candidates' clothes.... There's nothing necessarily wrong with raising these issues. It is just a pity that in the absence of any debate about substance we try to infer what the candidates' real intentions or character are from their behaviour. One of the benefits of a Social Policy Bond approach is that political debate would we could avoid this nonsense and focus directly on the outcomes that candidates say the want to achieve.

31 October 2008

Powerpoint presentation

I'm preparing a powerpoint presentation about Social Policy Bonds. A draft is here, complete with speaking notes. Its intention is to introduce the bond concept to new audiences. If you have any comments or suggestions, I'd be pleased to see them.

27 October 2008

Personal grooming costs versus outcomes

It's not surprising that the US election debates and commentary centre on questions of character, judgement, image and spin. The correlation between what candidates say and what they do is almost nil. Does anybody now remember the current President's talk of 'compassionate conservatism'? So people decide for whom to vote on the basis of factors that should be extraneous: past associations, church membership, personal grooming expenses, and the rest. Politics itself has diverged: on the one hand the rhetoric is simple-minded, bite-sized and calculated in every respect. On the other, actual policymaking is arcane, obscure and incomprehensible to outsiders.

In the middle of all this are ordinary people, voters, our children, the environment, and other aspects of the commons. Our politics doesn't address really speak to such interests, and it's becoming systemically less capable of doing so.

One solution, and the one I advocate, is to express policy goals in terms of outcomes that are meaningful to ordinary people. Not simply the sound-bites intended for public consumption, as under the current system; but policies themselves. Rather than, for instance, allow our leaders to invade countries on grounds that turn out to be spurious, we should target such goals as absence of use of weapons of mass destruction, or the elimination of terrorism directly. Under a Social Policy Bond regime, these goals could then be contracted out to the market, which would have incentives to achieve and sustain them at minimum cost. Similarly, we should see assistance to particular sectors, whether they be agriculture or banking as what they are - subsidies to rich corporations. Under a bond regime, it would still be possible to divert scarce resources from the poor to the rich, but we'd do it with our eyes open. Expressing policy in terms of goals means that we should have explicitly to vote for such policies before they can be implemented.
--Sales of my book have been minimal. If you have any suggestions as to how the Social Policy Bond idea, or the broader Policy as if Outcomes Mattered concept can be promulgated I'd be grateful to have them.

    22 October 2008

    Who cares about the space race?

    What [President Eisenhower] hadn't seen was the way his enemies and vested interests within the aerospace industry and military would be able to use Sputnik as a stick to beat him with. Throughout the Cold War, fear of communism had been exploited less by governments than by self-serving minor politicians and bureaucrats like Senator Joseph McCarthy and the Machiavellian FBI director J. Edgar Hoover.... Moon Dust, Andrew Smith (page 130)
    It's all too easy for events to be used and abused to derail governments - under the current system. Whether the fear of the USSR or communism was genuine or not, it provided a pretext for the diversion of prodigious quantities of US government funding into its space programme. And whatever one thinks of the value of that programme, there's little doubt that the US people were not consulted about the reallocation of scarce resources:
    It is sometimes argued that concealing the development of high tech industry under the cover of "defense" has been a valuable contribution to society. Those who do not share that contempt for democracy might ask what decisions the population would have made if they had been informed of the real options and allowed to choose among them. Perhaps they might have preferred more social spending for health, education, decent housing, a sustainable environment for future generations...as polls regularly show. Failed States: The Abuse of Power and the Assault on Democracy, Noam Chomsky
    Space exploration became an end in itself - for the US Government. One huge advantage of Social Policy Bonds over the current system is the clarity it demands about ends and means. Another is the stability of those ends over long periods of time. Under a bond regime, if there were consensus that, say, the eradication of poverty had a higher priority than moonshots, then fears of losing the 'space race' would miss out, at least when it came to public sector funding. The continual chopping and changing of government means and ends, with their different and ever-changing priorities, is one reason why, in the richest societies that have ever existed, poverty, illiteracy, crime and homeless remain.

    19 October 2008

    Climate change and long-term planning

    .... Franco Frattini, the Italian foreign minister and former European commissioner, called for "flexibility" over the EU's ambitious plans to reduce planet-warming emissions by 20 percent by 2020, pointing out that such measures would cost 1.14 percent of his country's gross national product. Speaking in Rome, Frattini called for the proposals to be accompanied by an "impact study on the real economy," .... Germany is arguing for protection against foreign competition for sectors like steel, cement and aluminum, and Poland says it should have to shoulder less of the burden of combating global warming. Huge fight looms in EU over climate change 'International Herald Tribune', 14 October
    One of the advantages of targeting outcomes, rather than the supposed means of achieving them, is that outcomes are more stable over time. So long-term objectives, like climate stability, can be targeted. Consider the likely reaction of investors to the debate reported on above. Added to all the daunting scientific uncertainties about solutions to climate change now comes a policy uncertainty: will governments continue to give climate change the priority they gave it when the economy was in a better state? Any long-term planning becomes fraught with difficulties in such a policy environment. But long-term investment is exactly what is needed if climate change is indeed occurring.

    A Social Policy Bond regime would have many advantages over the current policymaking framework; efficiency, transparency and greater buy-in, to name some of the most important. But, from the standpoint of potential investors in bonds targeting remote objectives, another huge advantage is stability. A global consortium issuing Climate Stability Bonds would be declaring its intention to reward the achievement of climate stability regardless of what happens in other policy areas. Events, such as a banking crisis, could assume a higher priority for policymakers, but as far as would-be investors in the bonds were concerned, that would not affect their investment decisions. Policy goals are much more stable over time than the supposed or best means of achieving them and much more stable than the views or indeed the composition of governments.

    The Social Policy Bond principle enlarges the scope of policy goals that we can effectively target to embrace a range of very long-term objectives, including not only climate stability, but the eradication of world poverty and the ending of violent political conflict. Even if they take decades to achieve, bondholders would not be deterred from doing their best to help bring them about by the sort of uncertainty about policy that plagues today's decision-making environment.

    16 October 2008

    Food policy is not health policy

    Michael Pollan writes:
    Four of the top 10 killers in America today are chronic diseases linked to diet: heart disease, stroke, Type 2 diabetes and cancer. It is no coincidence that in the years national spending on health care went from 5 percent to 16 percent of national income, spending on food has fallen by a comparable amount — from 18 percent of household income to less than 10 percent. While the surfeit of cheap calories that the U.S. food system has produced since the late 1970s may have taken food prices off the political agenda, this has come at a steep cost to public health. ... Cheap energy, however, enabled the creation of monocultures, and monocultures in turn vastly increased the productivity both of the American land and the American farmer; today the typical corn-belt farmer is single-handedly feeding 140 people. Farmer in Chief
    Much like a see-saw, when government successfully achieves a narrow social or environmental goal, another problem asserts itself. Sadly, our level of aggregation is now so high and our interconnectedness so pervasive that we cannot target social and environmental problems in the usual way, which involves trying to tackle the supposed causes. Society is just too complicated; the relationships between cause and effect are too obscure, the time lags too long, and the number and impact of unanticipated factors so huge that only the broadest social and environmental goals should be explicitly targeted.

    And the most meaningful. Raising food production is not a meaningful objective, nor is reducing the price of food. These are bureaucratic or corporate goals, unrelated to the wellbeing of ordinary people. What would make a meaningful is the physical wellbeing of people: more difficult to quantify, granted, but not impossible. It is that goal that an enlightened government-backed Social Policy Bond regime would target, inter alia, law and order, the eradication of poverty, and basic levels of education and housing for all. Governments issuing Social Policy Bonds would focus on ends, rather than means, so that the tragic outcomes of government intervention in agriculture (for example) could be avoided and instead rewards would flow inevitably to those who help achieve social outcomes rather than, as at present, those who can best game the system.

    14 October 2008

    Incentives to avoid catastrophe

    In an earlier post and in my recent book, I talk about using Social Policy Bonds as a means of insuring against the possibility of catastrophe. As George Monbiot points out, we are no more capable of avoiding an environmental calamity than we were the financial calamity that we seem now to have narrowly avoided, or perhaps merely postponed. There have been dire warnings about both sorts of disaster, but all our incentives encourage us to ignore them, or hope that any serious problems can be kicked forward to be faced by future generations. It's in our nature to react rationally to incentives, and rather than bemoan our short-termism and our unwillingness to anticipate worst-case scenarios, we could rejig the incentives we face so as to encourage maintenance of the positive features of the status quo.

    Under a Social Policy Bond regime, these need not be specified precisely - which would be a difficult task. We need only target the broad stability of the major determinants of our wellbeing. This is one huge advantage of targeting outcomes, rather than the alleged means of achieving them. It is their impacts on natural persons (and the animal and plant world) that we target rather than each of their myriad causes. So, for instance, rather than try to cut back on greenhouse gas emissions, with all the bureaucratic nonsense that that entails, we target climate stability. Rather than specify how a banking system should operate, we target the physical and financial health of ordinary people.

    Current policymaking is obsessively short term. But a Social Policy Bond regime would reward people for making progress toward long-term goals, in a way that the current system does not. And broad, long-term goals, such as stability of climate or our financial system, don't vary very much, and enjoy a wider consensus than the day-to-day management type objectives that define our current politics and obscure the longer-term trends and threats. Of course there are people who care about our long-term prospects, but the incentive systems in place ensure that their voices are rarely heard, and still less commonly heeded.

    If Social Policy Bonds are issued with long-term stability as a goal, investors in the bonds benefit by ensuring that no disaster occurs during the time they hold the bonds. That need not be very long - the value of the bonds would probably rise as investors did what they could to avoid disaster. They could then sell their bonds, benefiting from the rise in their market value. It sounds quite mercenary; and it probably is. But then, society at large seems to be engaged in a form of mass suicide because of the systemic incentives that encourage, for instance, the destruction of environment. Countervailing incentives are desperately needed.

    12 October 2008

    Locking us into monoculture; as in agriculture so in banking

    As in agriculture, so in banking. Government wades in to rescue something abstract: a sector, a system. In doing so it amplifies the trend towards aggregation and monoculture. More, it locks us into that oligopolistic monoculture, and makes us still more vulnerable to the highly improbable - the 'black swans' of Nassim Taleb. In time, government finds it almost impossible to withdraw from the sector, which now has its highly paid teams of lobbyists whose sole function is to keep the subsidies or subsidy equivalents going.

    If government had a clearer idea about what should be its proper focus, this disastrous sequence of events would never get started. Government is not an investment company or a racing syndicate, whose goal is to pick winners, or maximise returns on taxpayer funds. Its role is not to target on abstract economic variables, financial indicators nor to rescue corporations nor even entire sectors. Government should instead be looking after the basic interests of ordinary people and all its activities should be subordinate to that over-arching goal. Or at least, that should be the starting point. Transferring billions of dollars from the poor to the rich is not only socially inequitable; it's bad for all of us, from the risk management point of view. We'll end up in banking, as in agriculture, with a highly specialised, highly concentrated finance industry, overly dependent on government favours, and we'll find it very difficult to get back to a sector whose size, structure and outputs are decided by the undistorted market, which is to say: ordinary people.

    10 October 2008

    The experts aren't in control

    There are worrying parallels between the world's financial situation and the global environment. Both are complex systems that are deregulated in the sense that people can do what they want to them with few real controls, and everyone has to live with the consequences because (1) there are so many of us and (2) their failure affects everyone. Traditional management systems that took centuries to evolve and were based on trust, loyalty, and morality have all gone out of the window. The current sentiment is to do what you can for yourself, try to stay within the law, and externalise the negative impacts. That mentality has always been around, but in the past the damage it could do was more limited.

    03 October 2008

    What is government for?

    The current turmoil in the financial markets and the reaction of our ruling politicians to it reveal something about the way we make policy. Simply: it’s haphazard. There’s little sense of where we should be going. The United States Government didn’t set out to bail out reckless lenders, but that is what it is going to do. Its rescue package is another, and probably the most disastrous, in the long line of perverse subsidies that have done so much to waste scarce resources, divert taxpayer and consumer funds from the poor to the rich, and devastate the social and physical environment. From agriculture to fisheries, road transport to energy, these perverse subsidies invariably favour the large and global at the expense of the small and local; and corporations and abstract economic variables at the expense of ordinary people.

    How does it come about that government ends up subsidising the forces that have done so much to make live miserable for the average citizen? Its interventions start out as well intended, and even apparently necessary. Take agriculture: after the Second World War, food availability was critical and governments – disastrously - identified that with local food production. So government intervened: imposing trade barriers, price controls, and giving open-ended guarantees to farmers. That logic led to structural surpluses to be dumped onto the third world, undermining developing countries' own food production. It also bid up the price of farmland at home, intensifying agriculture at great cost to the environment and animal welfare, and making it difficult for ordinary people to enter farming, unless they were lucky enough to inherit land.

    Worse, the bidding up of asset values made it very difficult for government to contemplate withdrawing its support. Like a drug habit, subsidies were easy to start, difficult to end. And of course, the subsidies created a whole new set of lobbyists whose entire raison d'etre is to oppose their withdrawal.It's a similar story with the other sectors. Government begins its intervention for well-intentioned but short-term reasons. The sector becomes dependent on government for its survival, and ends up, in effect, a nationalised industry. When the sector is small, the financial burden is perhaps bearable, though its subsidies still represent a diversion of scarce resources from things that are valuable - education, health care etc - into things that are worse than useless: massively overcapitalized farming and fishing, and grotesque overinvestment in road transport – all of which, note, entrench an absolute dependence on fossil fuels.

    But the latest perverse subsidy - to the financial sector - is bigger than all of these. How it will play out is difficult to foresee. But it seems that institutions that were 'too big to fail' are to be replaced by even bigger institutions. And if the history of previous perverse subsidies is anything to go by, the US financial sector will become another ward of state for a long, long time.

    The root cause of this tragic misallocation of resources is the lack of clarity at the highest levels about what government is actually for. It's not there to prop up ailing sectors. It's not there to save particular corporations. And it's not there to bolster asset values or abstract economic variables like the rate of growth or GDP per capita. Government's purpose is to supply public goods and services, and beyond that to provide a basic minimum level of health, education and welfare for all. Once it starts trying to work out how to achieve these things it goes awry. Government is a centralized, top-down decision-making body. It does not and cannot do adaptation or diversity - and it is precisely adaptation and diversity that a vibrant, prosperous market economy needs. With its massive intervention and bailout of the finance sector the US will throttle its creativity, institutionalize the corrupt incentives that led to the crisis in the first place, and deny disadvantaged Americans the help they need.

    What the US Government should do is to work on the basis that:

  • Our financial and economic systems are means not ends.

  • The ends, for government, are law and order, minimal standards of good health for all, basic health and education, a decent social and physical environment, and the provision of a tightly woven safety net for everyone.

  • The health or otherwise of any particular sector are of interest to the government only insofar as they affect the ends.

    Instead of spending taxpayer funds on avoiding a catastrophe it should have clearly and unambiguously channelled society’s scarce resources into avoiding the consequences of that catastrophe on those who most need help. Government targets should be inextricably linked to the well-being of ordinary people – as distinct from government agencies, economists or corporations. Its failure to realize this wouldn’t matter if government were small, and diversity and adaptation could flourish outside its restricted confines. But of course government isn’t small at all.

    The US Government cannot now back away from supporting the finance sector any more than western governments can suddenly withdraw support from its other wards of state. But it can put a definite time limit on such support. More generally, governments must clarify what their goals are. They have a crucial role to play in limiting the impacts of any sort of catastrophe on ordinary people – but not to foresee and try to prevent the catastrophe itself. There must be no expectation that government will bail out any sector for any reason. Our governments should do something they should have done a long time ago: realign their policy to serve ordinary citizens. All their policies and interventions should be subordinated to the provision of public goods and services, the maintenance of a decent social and physical environment, and help to those who most need it. Sadly, the bailout of the finance sector, like the persisting perverse subsidies in other policy areas, looks like taking our governments further away from those guiding principles.
  • ■ George Monbiot writes about US subsidies to big business here.

    02 October 2008

    Complexity: a reason to target outcomes

    Writing about the current financial turmoil, James G Rickards says:
    But beyond chaos lies complexity that truly is unpredictable and cannot be modeled with even the most powerful computers. Capital markets are an example of such complex dynamic systems. A Mountain, Overlooked: How Risk Models Failed Wall St. and Washington
    A more technical explanation of the same phenomenon, by Nassim Taleb appears here. Confronted with such systems, how should we make policy? I suggest: target outcomes rather than the supposed means of reaching them. Our failure to do so assumes that government knows or can always identify cause and effect - a feat whose impossibility when applied to social and environmental systems is obscured by the ever-increasing quantities of data and information about them.

    The Social Policy Bond approach contracts out the responsibility for achieving targeted outcomes to the private sector. It gives investors in the bonds incentives to adopt diverse, adaptive projects and to terminate the ones that fail. It recognises our epistemological limitations by substituting adaptability and evolution for central planning and over- our under- regulation.

    27 September 2008

    Conspiracy to distract - or just too much information?

    Peter W Galbraith writes:
    John McCain proclaims his goal [in Iraq]to be victory and says we are now winning in Iraq .... He considers victory to be an Iraq that is "a democratic ally." George W. Bush has defined victory as a unified, democratic, and stable Iraq. Neither man explained how he will transform Iraq's ruling theocrats into democrats, diminish Iran's vast influence in Baghdad, or reconcile Kurds and Sunnis to Iraq's new order. Remarkably, neither the Democrats nor the press has challenged them to do so. Is This a 'Victory'?
    Is there too much information about? Do we miss the forest for the trees? It's easier to believe not so much that there is a conspiracy to keep us focused on the celebrities, sport or petty politics, but that, being ceaselessly bombarded with information and entertainment, we lose perspective. That goes not only for ourselves as citizens and voters, but perhaps also for the decision makers and the media. The Democrats and the press have little incentive to focus on what's important, because that's not we, as voters, are urging them to do, even supposing they do have the capacity. With our shrinking attention spans, and the sheer volume of information and entertainment available, we tend to focus on the immediate, the visual, and, often, the trivial. Disasters that are too slow moving or too complex for the visual media - the unravelling of our financial system, nuclear proliferation, for instance - cannot compete with the proverbial skate-boarding rhinoceros or the religious beliefs of would-be political leaders.

    One way a Social Policy Bond regime would be an improvement over the current system is that it would focus our resources, if not our constant attention, on what is important. We can all understand outcomes, even if we don't know how to reach them. Indeed, we cannot be expected to know how to achieve them, because that often takes a long time and is rarely amenable to a single, simple, predictable approach. Experimentation, the exploration of alternatives, the termination of failed methods: all these are essential to finding the best solutions to our social and environmental problems. Under a bond regime, we might still follow trivial issues, but most of our scarce resources would be channeled into achieving social goals. Right from the outset, and at every time thereafter until they are achieved, we'd know exactly what those goals are.

    24 September 2008

    The market: a means not an end

    Recent research showed that of the 121 fisheries using Individual Transferable Quotas 14% were over-fished to the point of exhaustion. By contrast, those fisheries without ITQs suffered twice the rate of collapse (28%). David Bollier takes up the story:
    The New York Times faithfully trumpeted the news: “Privately Owned Fisheries May Help Shore Up Stocks.” But are ITQs truly effective because they rely upon a “market-based system”? Or do they work because they set overall fishing limits, a commons-based solution?
    Mr Bollier was pointed to research by Seth Macinko and Daniel W. Bromley, who have written:
    All the talk about rights-based fishing and [ITQs] is a red herring that throws all of us off the track of what is important. [ITQs] do not work because they are rights, or because they are property rights…. [They] work because they involve an assigned catch, as opposed to having catch be determined competitively.
    This chimes with my belief that the market is only a means to various ends. They can be effective and efficient, but it when it comes to crucial social and environmental goals, markets must be subordinated to specified outcomes. Markets allocate resources efficiently; but that's a fairly limited vision. If we are to use their formidable efficiencies to solve social and environmental problems, they need to be constrained by the political process. A Social Policy Bond regime would do that: specific outcomes would be debated and agreed. Social Policy Bonds would be issued that targeted these goals. Until the goals were achieved, the bonds would not be redeemed. Their value would be inextricably dependent on how well investors achieve social goals.

    22 September 2008

    Government should help people, not sectors

    I see the US bailout of its financial sector as another, and probably the most disastrous, in the long line of perverse subsidies that have done so much to waste scarce resources, divert taxpayer and consumer funds from the poor to the rich, and devastate the social and physical environment. From agriculture to fisheries, road transport to energy, these perverse subsidies invariably favour the large and global at the expense of the small and local, and corporations and abstract economic variables at the expense of ordinary people.

    How does it come about that government ends up subsidising the forces that have done so much to make live miserable for natural persons? The motivations start out as well intended, and even apparently necessary. After the second world war, food availability was critical and governments (mistakenly) identified it with local food production. So government got into the business of intervention; imposing trade barriers, providing open-ended guarantees to farmers, and all the rest. That logic led us to structural surpluses to be dumped onto the third world, undermining developing countries' own food production. It also bid up the price of farmland at home, intensifying agriculture at great cost to the environment and animal welfare, and making it difficult for ordinary people to enter farming, unless they were lucky enough to inherit farmland. Worse, the bidding up of asset values made it very difficult for government to contemplate withdrawing its support. Like a drug habit, subsidies were easy to start, difficult to end. And of course, the subsidies created a whole new set of lobbyists whose entire raison d'etre is to oppose their withdrawal.

    It's a similar story with the other sectors. Government intervenes for short-term but well-intentioned reasons. The sector becomes dependent on government for its survival, and ends up, in effect, a nationalised industry. When the sector is small, the financial burden is perhaps bearable, though it still represents a diversion of scarce resources from things that could be valuable - education, health care etc - into things that are worse than useless: overcapitalized farming and fishing, grotesque overinvestment in road transport and dependence on fossil fuels, for instance.

    But the latest perverse subsidy - to the financial sector - is bigger than all of these. How it will play out is difficult to foresee. But it seems that institutions that were 'too big to fail' are to be replaced by even bigger institutions. And if the history of previous perverse subsidies is anything to go by, the US financial sector will become another ward of state for a long long time.

    The root cause of this tragic misallocation of resources is the lack of clarity at the highest levels about what government is actually for. It's not there to prop up ailing sectors. It's not there to save particular corporations. And it's not there to bolster asset values or abstract economic variables like the rate of growth or GDP per capita. Government's purpose is to supply public goods and services, and beyond that to provide a basic minimum level of health, education and welfare for all. Once it starts trying to work out how to achieve these things it goes awry. Government is a centralized, top-down decisionmaking body. It does not and cannot do adaptation or diversity - and it is precisely adaptation and diversity that a vibrant, prosperous market economy needs. By its latest massive intervention and bailout it will throttle the US economy, institutionalise the corrupt incentives that led to the crisis in the first place, and deny disadvantaged Americans the help they need.

    What the US Government should do is something it should have done a long time ago: realign its policy to serve its ordinary citizens. All its policies and all its interventions should be subordinated to the provision of public goods and services, the maintenance of a decent social and physical environment, and a safety net for all. Sadly, its bailout of the finance sector looks like taking it further away from those guiding principles.

    19 September 2008

    Thinking aloud

    This week's financial turmoil speaks to me of a confusion in high places between policy ends and means, but I confess I have no easy answers. It shouldn't have got to this point, of course, where taxpayers prop up the financial system, rather than the other way round. Under a Social Policy Bond regime the health or otherwise of any single industry - financial, agricultural, manufacturing or whatever - would be subordinated to goals that are meaningful to ordinary people. In other words, instead of targeting the health of particular sectors ('means') we'd target objectives like literacy, physical and mental health, environmental well-being and the eradication of poverty. Government objectives are currently too obscure or too mutually conflicting, so that it's not in any people's interests to prevent this sort of catastrophe. Or rather, the oversight is done by government agencies, which, as in any other policy area, is not rewarded in line with its achievement. This is the same sort of oversight that has led to nuclear proliferation, for instance, with all its attendant, catastrophic, dangers.

    A Social Policy Bond regime would reward the successful, sustained, avoidance of catastrophe, however caused. And it would inject market incentives into the maintenance and improvement of the standard of living of natural persons, rather than abstractions such as 'the financial sector'.

    17 September 2008

    Disaster Prevention Bonds

    A new short article about applying the Social Policy Bond principle to the prevention of humanitarian disasters can be found here.

    13 September 2008

    Who decides what is a social problem?

    In Australia today, there is a ‘social policy establishment’ that defines what ‘social problems’ are and prescribes the policies needed to resolve them. It includes academics working in universities and research institutes, welfare state professionals, political activists working in the nonprofit sector, social affairs journalists and commentators employed in the media, and bureaucrats employed in federal and state governments to research social problems and advise ministers on the best solutions. Most of these people believe similar things and think in similar ways. They were educated in the same kinds of degree courses, reading the same books and internalising the same basic theories and perspectives. They interact regularly at seminars and conferences where they reaffirm the core ideas they share. They referee each other’s writings, award each other research contracts, and evaluate each other’s job applications. They often live in the same neighbourhoods, send their children to the same schools, and read the same newspapers and periodicals. Collectively, they ‘know’ what our society is like, and they ‘know’ what needs to be done to improve it. Six social policy myths, Centre for Independent Studies

    These authors argue that inequality, for instance, is labelled a social problem when, in fact, it isn't a real one. I think their argument is valid so far as it goes. I agree that the group doing the labelling is too small narrow and unrepresentative, and I believe that widening this group would be an end in itself. But the main difficulty is that even when there is a wide consensus over what constitutes a social (or environmental) problem, there is very little linkage between the resulting policy and the problem's solution. Somewhere along the way, policies become corrupted. They generate interest groups that are adept at manipulating government action in their favour. So instead of addressing poverty directly, with explicit, clear goals the achievement of which they will be held accountable, government policies end up subsidising the wealthy (the western world's agricultural policies, for instance) or the destruction of the environment (agriculture, fisheries and transport policy).

    This grotesque disjunction between what people what government to do and what it actually does is not so much a result of an unrepresentative group of people deciding what are social problems (though that is a factor), but rather a result of the way in which government bodies operate. In particular, there is no link between their effectiveness in achieving social goals, and how much they contribute to that achievement. They have no incentives to do well, nor to terminate failed policies. Indeed, if they are extremely successful, they are likely to be disbanded.

    A Social Policy Bond regime would inextricably link the solution of social problems to incentives. Markets would allocate funding. And it would be in investors' interest to end disastrous, or even merely inefficient, programmes - in stark contrast to the current system.

    11 September 2008

    More about car parking

    I've posted before about the hidden costs of 'free' car parking, in relation to The High Cost of Free Parking by Donald Shoup. Writing about Australia in particular, Christian Seibert concludes:
    Minimum parking regulations are costing Australia. A standard component of the urban planning frameworks of our towns and cities, they distort transport choices, skewing them away from walking, cycling, and public transport. They encourage the growth of sprawling cities that do not reflect their inhabitants’ true land-use preferences. They make housing more expensive, a particular concern given that housing affordability is a major issue in Australia. They harm those on low incomes, because they make basic goods, services, and housing more expensive for those who can least afford cars and so benefit least from parking. Finally, the parking lots built to meet minimum parking regulations blight our urban landscapes. There’s No Such Thing as a Free Parking Space
    I agree. Minimum parking regulations are a typically well-intended, but ultimately destructive, over-reaction to a highly visible symptom. Policymakers can't see the forest for the trees and they confuse means with ends; the result is unpleasant and dangerous cities for everyone. Oh, and no solution to parking problems either. Social Policy Bonds would make us focus on objectives, rather than supposed means of getting there. And if there are no clear, agreed, unambiguous objectives, then we'd leave that policy area alone.

    10 September 2008

    A multitude of inventions

    William D. Nordhaus writes:
    The history of technology suggests that we should avoid trying to pick the winners in our search for revolutionary energy technologies. Radical invention is fundamentally unpredictable. Who could have predicted the nature of modern electronics, biotechnology, or communications a century ago? Similarly, it is a safe bet that we have only the foggiest ideas about the technologies that will save the globe from climate change a century hence. We should avoid thinking that we need a climate Manhattan Project to develop the key technology. It seems likely that new climate-friendly technologies will be the cumulative outcome of a multitude of inventions, many coming from small inventors, and originating in unrelated fields. 'The Question of Global Warming': An Exchange, 'New York Review of Books' [my emphasis]
    Exactly. The key principle is that government can supply incentives for the endeavours of the inventors, but it cannot get too closely identified with them, because if it does, it won't terminate failed inventions. A Social Policy Bond regime could channel government incentives into finding solutions to the climate change problem, or other quantifiable problems. In that way, government could do what only government can do, and what it does best: articulating society's goals and raising the revenue required to achieve them. But through the Social Policy Bond mechanism it would let the market does what it does best: allocating scarce resources to meet our goals with maximum efficiency. For more about Social Policy Bonds and climate change, read this short paper about Climate Stability Bonds.

    09 September 2008

    The myth of the tragedy of the commons

    Community management isn't an infallible way of protecting shared resources: some communities have mismanaged common resources, and some commons may have been overused to extinction. But no commons-based community has capitalism's built-in drive to put current profits ahead of the well-being of future generations. Ian Angus, The Myth of the Tragedy of the Commons

    This is an important essay. The 'tragedy of the commons' myth has provided intellectual backing for the destruction of many of those things, difficult to define and more difficult still to quantify, that give life meaning. As Mr Angus points out, self-regulation by communities was the way in which the commons were looked after. The notion of communities itself is disappearing (largely, in my view, for the reasons identified by Robert Putnam: too much immigration and diversity). Could Social Policy Bonds help preserve the commons? One way might be to target those benefits that real, self-regulating communities generate, and reward people for achieving them - or for removing the obstacles to their achievement.

    Take crime. Freedom to walk around cities at night is one of those difficult-to-quantify things that has been lost, at least in the countries I know best, New Zealand and the UK. Current efforts to reduce street crime seem to focus on better policing or increased surveillance; but perhaps more thinking out of the box is required. A Social Policy Bond rewarding safer streets (measured by, say, something like a sophisticated footfalls: crime ratio), could see the emergence of more subtle and less obvious approaches. These could include the provision of entertainment facilities for young potential robbers; better street lighting; deregulated taxis; subsidised public transport. Together an optimal combination of measures could bring about not just the benefits of the commons, but also the community that self-regulates.

    There's little in our current political approach that enhances community. Friction between individuals is inevitable, but our current ways of dealing with it tend to encourage even greater mutual isolation, mirroring the institutional structures that government embodies and understands. Problems like those of crime or the preservation of scarce resources or the maintenance of other aspects of the commons are not always amenable to the straightforward, cause-and-effect, one-size-fits-all, top-down approach that government does best. A Social Policy Bond regime, targeting desirable, broad outcomes of the sort that the community evolved to provide, could be one answer to the question: how do we best preserve the commons?

    05 September 2008

    Fossil fuel subsidies: Norman Myers interview

    From an interview with Norman Myers, environmental scientist:
    it is absolutely urgent that we begin calculating the cost of climate change, and pass the cost on to the people who are doing the burning and emitting. .... The number of people who die each year in China because of air pollution is in the order of 400,000. That’s a huge mortality rate, and the cost should be built into the price of fossil fuels.
    Why then do governments continue to subsidise fossil fuel extraction and use?
    Well, it’s partially inertia. Fossil fuels play a very large role in our economies, and to phase them out would cause a lot of disruption. However, it will not be nearly as difficult as living in a world that has been ravaged by climate change. The other reason is the influence of lobbyists. In Washington, for example, there are large numbers of lobbyists who whisper in the ears of Congress in order to keep subsidies to fossil fuels in place. I believe that lobbyists are spending as much as US$250 million a month in the United States, much of which goes to lobbying on behalf of the fossil fuels.
    As with agriculture, fisheries and road transport, fossil fuel subsidies have always been perverse. Right now they appear to be suicidal as well. They are the sort of policies that get implemented when nobody thinks about outcomes but only about the supposed means of reaching them. The tragedy is that they don't stop even when the evidence about their perversity is overwhelming, and has been overwhelming for decades.

    A Social Policy Bond regime would be different. From the start it would clarify what are society's goals, and what, like, say, cheap, easy transport, are not necessarily goals at all. And then it would inextricably link rewards to the achievement of them. A government-backed bond regime wouldn't spend billions of taxpayer funds on corrupt, insane policies that are financial and environmental disasters. It would subordinate all projects, all activities, all institutions to the goals themselves. Apart from much greater efficiency, there would be a lot more transparency. Current institutional structures, both public and private sector, would be threatened, to the extent that they impede rather than assist achievement of social goals. Mr Myers is writing a book titled How Institutions Block Our Road to Sustainability. It should make interesting reading.

    31 August 2008

    Management of the market

    In today's Observer:
    For three decades a single dominant thought has crowded out all others: that managing, whether of economies or organisations, is a matter of switching on the automatic pilot of the market's invisible hand and letting rational selfishly motivated individuals do the rest. .... But the dominant idea is now under attack. One prong of the offensive is the course of events; after all, it wasn't supposed to be like this. Over the past decade, rather than a stimulating pat on the back, the invisible hand has administered a succession of increasingly damaging haymakers: South East Asia, hedge fund LTCM, the dotcoms, Enron and other corporate scandals, now the sub-prime shambles. After several knockdowns, the unfettered market has put the global economy on the canvas for the count. [And] just as the practice of financial capitalism is being questioned, so are its intellectual underpinnings. As it excavates the foundations, the burgeoning school of behavioural economics is shouldering aside the desiccated calculations of economic man to make legitimate space for emotion, altruism and fair play in economic behaviour. Simon Caulkin, 31 August
    Mr Caulkin points out that there are many incentive structures that can bring about excellence in the private sector and that:
    It has nothing necessarily to do with stock options, private ownership or extravagantly paid senior executives. It does have to do with effective work organisation and systems, which the individual performance management regimes favoured by the private sector are as likely to destroy as to support. It is now apparent that where the private sector does excel is in disguising the full costs of its incentives by externalising their dysfunctional results on to society as a whole. Today's credit crunch is the most stunning example of this perverse behaviour in economic history.

    Mr Caulkin ends by saying that 'Management of the market is as important as management by it'. I can't disagree with this, except to point out:

    1. that the public sector also behaves anti-socially (see passim on this blog or the websites at right references to perverse subsidies) and
    2. that the broader incentives do matter when it comes to the private sector externalising its costs (onto the environment as well as 'society as a whole').

    There are few incentives not to so externalise. The private sector is always going to 'excel in disguising the full costs' of its negative impacts on the rest of us if it doesn't get punished for doing so, or rewarded for not doing so. It is reacting rationally (and anti-socially) to the incentives on offer. So the question is not so much 'how is the market to be managed?', but rather 'how can we rejig the incentives so that the organizations - whether they be private or public sector - behave themselves?' That's where Social Policy Bonds enter the picture. They can act as a market-based device for correcting market failure. If the product of the mix of private and public sector bad behaviour is a filthy environment or a high rate of crime, then rather than regulate with a (pace Mr Caulkin) not-always-efficient public sector, a bond regime with environmental and social goals that are understood and agreed by ordinary people could be the solution. Social Policy Bonds could be issued that reward people for bringing about a cleaner environment and a lower crime rate, however they do so.

    So management of the market could in effect be done by the market. The beauty is that under a bond regime it is that the market would be allowed to do what it is best at doing - allocating scarce resources - but in the service of social and environmental goals, rather than the private accumulation of wealth.