Nothing new here

Talking about the latest US Farm Bill, the Economist (subscription) says, accurately:

The recipients [of government largesse] are hardly the most deserving: farm households make a third more than others, and the richest of them, which get most of the subsidies, bring in three times what the average non-farm household does. Instead of saving the family farm, the policy is destroying it, encouraging agricultural land consolidation and raising barriers to entry. And then there are the deleterious effects America's price-distorting payments have on foreign farmers and so on trade negotiations.

There's nothing new about this. What is striking about these policies are not their disastrous social and environmental impacts; rather it is their persistence, in the face of decades of evidence of their failure to meet stated goals.

Social Policy Bonds are radical; they would entail government relinquishing control of some of its policy instruments. They are untested and have not been refined or widely discussed. But when you get policies like the corrupt, profligate agricultural support policies of most western countries, you realize that the proper standard of comparison should not be not some ideal, wasteless, super-efficient policy paradigm, but the current system whose failings are not just severe and well documented, but persistent in the face of all rationality.

Ends, means and the financial sector

John Kay writes:

Since financial stability is unattainable, the more important objective is to insulate the real economy from the consequences of financial instability. Government should protect small depositors and ensure that the payment system for households and businesses continues to function. There should be the same powers to take control of essential services in the event of corporate failure that exist for other public utilities. The deposit protection scheme should also have preferential creditor status to restrict the use of retail deposits as collateral for speculative activities. More regulation will not prevent next crisis, 'Financial Times', 26 March

I agree, and think the same principle should be extended into other policy areas. Financial stability is not an end in itself, while looking after small depositors is a legitimate government function. Government should concern itself with such goals, without trying to prejudge how they shall be achieved. With the ever increasing complexity of our society and economy, identifying cause and effect is often near impossible. It's simpler for government to target goals than the supposed means of reaching them.

It's also more transparent and - crucially - enables greater public participation and hence buy in. Cutting back anthropogenic greenhouse gas emissions - which is not actually happening despite government hand wringing - is never going to be a popular or meaningful goal. But climate stability is a worthwhile goal, one that ordinary people can understand and buy into. Similarly with one of the other great dangers we face: the technical details of nuclear weapons limitation are arcane and irrelevant to most people. But we would enthusiastically support the drastic curtailment of the risk of a nuclear exchange. That is what governments should aim for, and that is what they should target. How to get there...that should be left to an enlarged pool of motivated people. That's where Social Policy Bonds come in.

Housing monoculture

Commenting on the mismatch between the US housing stock and people's wish to live in walkable urban environments, Christopher Leinberger writes:

[a third of people surveyed] wanted to live in mixed-use, walkable urban areas - but most had no way to do so at an affordable price. The next slum, 'Atlantic Monthly', March

Suburban housing is largely a product of central planning and government subsidies. Zoning requirements have done a lot to separate people from work, shops and entertainment, along with the subsidies for roading and the extraction and consumption of oil. The disaster has not only been to the physical environment. Suburban alienation and dependence on cheap, available oil are other results of this lifestyle choice made not by ordinary people but by the planners and technocrats in government and their friends (and paymasters) in gigantic construction corporates. The decision makers are now so remote from us, so beholden to large corporations and operating at such a high level of aggregation and abstraction that they can impose a monoculture, whose potentially catastrophic vulnerabilities are like those of its agricultural equivalent.

Social Policy Bonds are not just about efficiency, but about efficiency in achieving social and environmental goals that are meaningful to natural persons - as distinct from public sector macroeconomists and large corporations. They are about closing the gap between policymakers and the people they are supposed to represent. Policy under a Social Policy Bond regime means targeting agreed outcomes, and the subordination of all activities and institutions to those outcomes. If people want to live kilometres away from their work, friends, shops and other distractions that's fine, but there's no need for taxpayers to subsidise such lifestyle choices, still less to impose it on people who'd make different choices in an undistorted market.

Crime and incentives

Irwin Stelzer writing about politics and life in the UK:

Crime has significant psychic costs - ready for a nice relaxed evening walk on a deserted street in a major city, the sort of thing that was a routine pleasure a decade ago? Probably not, which is why 60 percent of those surveyed say Britain is a worse place in which to live than it was five years ago....The economic consequences of Mr Brown, 'The Spectator', 19 January

I'm pleased that somebody else feels the same way as me, but otherwise there's little to cheer about. The contrast with the private sector is compelling. No single corporation has all the answers to many of the problems they try to solve: how to market dogfood; how to maximize sales of laundry products, etc. But collectively they do a great job of satisfying our material needs. It's a Darwinian process to be sure: with many, many failed enterprises along the way. Now the UK has had decades of academic research into crime; countless strategies, initiatives, reorganisations, reports by government bodies and consultants and the rest. Why haven't they been translated into safe streets?

Part of the answer must be that the incentives aren't there. A police force that is too successful in reducing crime will see its funding cut. Neither are individual members of police forces paid in ways that are correlated to reductions in crime rates. It sounds very simplistic, but how else is one to explain the ingenuity that dramatically satisfies our needs as paying consumers and fails to satisfy our needs the 'psychic' human need to walk around in safety?

Getting rich by doing the right thing

The big advantages of Social Policy Bonds are their efficiency, transparency and stability of policy goals. But a less obvious benefit, pertinent at a time when the rich are being taxpayer funds are being used to bail out shareholders of banks that pursued disastrous policies but are deemed are too big to fail, is that they are means of accumulating wealth by performing public service. Social Policy Bonds, when issued by government bodies, would express society's goals: investors would gain by peforming functions that are inextricably linked to public benefit. Working successfully to achieve universally desired social and environmental goals would be seen as a laudable way of becoming rich. There are likely to be all sorts of intangible and unforseeable benefits from having people or institutions become rich in this way. People may see corporations' non-Social Policy Bond activities relatively less socially desirable. They may be more prepared to rein in the less attractive of such activities given that Social Policy Bonds provide a socially beneficial way of becoming rich.

Loudtalks

I've installed a new, free and compact program, Loudtalks, which will allow readers to talk to me through you computer if I'm online or to leave oral messages if I'm offline. If you want to add me as a contact, my Loudtalks contact name is Ronnie.

Social Policy Bonds as insurance

In an ever more complex, interlinked world more and more things that could be ignored or used to be handled informally now have to be managed by government. This applies to many aspects of the commons and particularly the environment. Given the record of government, this is quite scary. Government policymaking can succeed when it's well meaning, has sufficient resources and the problems it has to solve are easily identified and do not conflict too much with powerful interests. Unfortunately, many of the new problems arising from globalisation are difficult to anticipate and isolate from a myriad of possible causes. What's raised this concern in my mind is my reading of the methane clathrate gun hypothesis, but there are any number of other possible ways in which the lives of millions of humans could be endangered: other environmental disasters, nuclear proliferation, pandemics, asteroid impacts, etc. How should governments deal with such threats?

The UK government is the first to set up a National Security Forum as a result of its work on a National Security strategy. Terrorism seems to be given greater attention than perhaps is necessary, but the limitations of such an exercise are more serious, I think, than a bias towards highly visible shocks.

One way forward might be to issue Social Policy Bonds as insurance against large-scale disasters. The cause of the the disaster need not be specified: the bonds would function in a similar way to increasingly popular catastrophe bonds, except that they would have the purpose - and the backing- of making it worthwhile for investors to prevent disasters happening. A national government could issue Social Policy Bonds that would reward investors if an event killing more than, say 10000 of its citizens in any one 48-hour period, does not occur before a specified date. The bonds would encourage investors to investigate all sources of potential disaster, impartially; that is, without favouring those that have a high media profile, for example, or those that are the remit of existing public or private sector bodies.

Globally, the concept could be scaled up: a collection of governments under the auspices of the United Nations or non-governmental organizations could issue similar bonds, aimed at preventing even larger-scale disasters.

In both cases, the particular merit of the Social Policy Bond approach is that there is no need for a handful of experts to try to anticipate the causes of future disasters and to allocate funds according to their views and today's knowledge. Investors in Social Policy Bonds would do this work themselves, without bias and during the entire lifetime of their bonds.

Sacrificing the environment

A quote from the current 'Economist's' report on China's quest for resources:

Pan Yue, a deputy minister at the State Environmental Protection Administration (SEPA), China's paramount environmental regulator, estimates the annual cost of environmental damage at 8-13% of GDP—much the same as the overall economic growth rate. If it continues like this, he expects levels of pollution to double over the next 15 years. A large black cloud (subscription)

There must be some subjectivity in Mr Pan's estimates, but even so, the comparison is alarming, and quite plausible.

Free-riding

People, especially economists, often mention the danger of free-riding when I talk about Social Policy Bonds. Free-riders would by the bonds hoping to benefit from any increase in the bond price without actually participating in any objective-achieving projects.

However, I think markets would work to limit the benefits from free-riding. To see this, assume that most of a particular issue of bonds were held by would-be free-riders. Then very little, if anything, would be done to help achieve the targeted objective. As the objective became more remote, the value of all the bonds would fall. And as the bonds lost value, they would make a more attractive purchase for people who were prepared actively to help achieve the targeted objective. So free-riders would be tempted to sell, even at a loss, rather than see the value of their bonds continue to fall. Some history of falling bond prices would tend to make free riding on Social Policy Bonds less appealing with future issues. Free-riding then would become a self-cancelling activity. There are other reasons why bondholding would be unattractive to potential free-riders:

Individual free-riders would have no incentive to collude with other free-riders, because the more they did so, the more remote the targeted objective would become, and the further would the value of their bonds fall. This would act so as to limit any free-riding activity to small players.

As with other financial instruments, small players would have to pay higher transaction costs than the bigger institutions — the ones that would be most likely to initiate objective-achieving projects.

Small players also would not have access to the research that would enable big players to value the bonds accurately. Therefore they would be at a disadvantage in the market.

Note also that even if free-riders were to gain from holding Social Policy Bonds, they would do be doing so only because their bonds had risen in value as a result of a targeted objective becoming closer to being achievement. As well, attempted free-riding would have positive effects: it would add liquidity to the bond market.

All this is speculation of course, and I may be wrong. We'll see, if somebody actually issues Social Policy Bonds.

Targeting broad outcomes

One of the advantages of a Social Policy Bond regime is that it allows backers of the bonds, be they private or public sector, to target things that are beyond or beneath the radar of policymakers. Things like war and violence, in general rather than in particular, or a nuclear exchange, or the spread of infectious diseases. More broadly, Social Policy Bonds could reward maintenance of the sorts of stability that we value: a stable physical climate, the absence of man-made or adverse impacts of natural catastrophes. For the most part, these problems are dealth with piecemeal, as they arise, and with a lot of guesswork about uncertain and ever-changing relationships. For instance, a huge task for governments around the world would be to agree that climate change is a problem worth spending resources to solve, but governments are supposed to articulate society's concerns and to produce legislation, and raise the funds necessary to achieve them. But for governments to go further and say they know how best to solve the problem is, in my view a mistake. With climate change they have focused on a single remedy - restraining anthropogenic emissions of greenhouse gases. But governments have no expertise in this matter; their scientific advice is necessarily fossilised and their approach necessarily top-down, one-size-fits-all and unresponsive to different and changing circumstances and our rapidly expanding scientific knowledge.

Far better to reward the achievement of a stable climate by issuing Climate Stability Bonds of sufficient value to motivate people to bring about the goal in ways they think will be most efficient. I don't think it's too far-fetched that governments will eventually target very broad goals for which their current approaches are manifestly inadequate. But, I have to admit, it doesn't seem to be happening right now.

Torture and the unimportance of outcomes

It shouldn't surprise me by now, but it does, that outcomes have so little bearing on policy. Crucial policy decisions are made for reasons ranging from media attention to ideology or the vested interests of campaign donors, but results hardly seem to feature. The decision makers go ahead anyway. You might think that ethically questionable policies are subject to more scrutiny than routine budgetary appropriations, but you'd be wrong:

President Bush has ...promised to veto a bill that would bar the CIA from using techniques such as sensory deprivation, water-boarding and temperature extremes, arguing they are needed to gain information that protects the public from terrorists. Such an 'end justifies the means' argument might sound persuasive to some, but it is worthless unless such techniques actually work. A report on this subject was released [in 2007] by the Intelligence Science Board.... The message it repeated over and over was that there is virtually no evidence to show the effectiveness of any of the interrogation techniques used by the US. The authors expressed 'surprise and concern over the lack of rigorous scientific examination....' (my emphasis) Modern barbarity, 'New Scientist', 23 February

This is policy as the rationalisation of what people feel like doing, and it's no basis for an efficient bureaucracy, still less an ethical one. I shouldn't be surprised of course. I have quoted before from Why states believe foolish ideas by Steven van Evera:

[G]overnment bureaucracies non-self-evaluate. At a minimum, agencies with evaluative responsibilities are not invited to evaluate - they are kept out of the loop, their opinions unsought. At a maximum, government agencies actively suppress their own internal evaluative units and are discouraged from evaluating the beliefs and policies of other agencies.

Whatever you might think about Social Policy Bonds, it's surely time to look at subordinating policy to transparent, meaningful outcomes, rather than continuing to have critical decisions made for us on the basis of no evidence whatsoever.

Follow the money

A useful site for keeping track of US political donations is http://www.opensecrets.org/, maintained by the Centre for Responsive Politics. Eric Janszen argues that the bubble that looks about to burst in the financial markets has been inflated by a 'credit-financed, asset-price-inflation machine organized around one tenet: that the value of one's assets...now goes in only one direction, up....' The US finance, insurance and real estate industries are the lead players. are the culprits. Government oversight has been weak and, as Mr Janszen puts it, these sectors, according to opensecrets.org:

gave $146 million in political donations for the 2008 election cycle alone, and since 1990 more than $1.9 billion - nearly double what lawyers and lobbyists have donated, and more than triple the donations from organized labor. Harper's February (subscription), summary here

Subsidising environmental destruction in India

Writing about the debate over the Nano, the Rupees 1 lakh (approximately US$ 2500) car launched by the Tata Motor Company, Sunita Narain says:

There is no doubt that any car that is small is better than a big car in terms of fuel economy and emissions. There is also no doubt that affordable cars are better than expensive ones. But the question is in what direction is Nano leading us. The issue is not small, cheap cars or big, expensive cars, but all cars. The issue is whether it is helping mobility and at what price.

Let's take the 'affordability' question first. The fact is that cars — small or big — are heavily subsidized. The problem is that when economists (including those who run the government) fret and fume about mounting subsidy bills, they think of farmers — fertilizer, electricity and food — not our cars. But subsidy is what they unquestionably get.

The subsidy begins with the manufacture of cars. When we read about the Singur farmers' struggle to stop government from acquiring their land for the Tata car factory we don't join the dots. We don't see this as the first big subsidy to motorization. The fact is, in Singur the manufacturer got cheap land, interest-free capital and perhaps other concessions — the Left Front government in West Bengal never made public full details of its attractive package. This brought down the cost of production and allowed the manufacturer to price the Nano at Rs 1 lakh. But this is not only about Tata or Singur. The fact is that, to compete, every manufacturer needs the same, if not better, package of benefits. The fact also is that every state government is competing to offer sweeter deals. We know that in the now contested special economic zones of Goa, the government had agreed to give industry all this and 15 years of electricity free of cost. We also know if West Bengal did not bend to please, Uttarakhand was waiting to entice the Tatas. In other words, we are certainly not paying the cost of manufacture of our cars, not to mention the full cost of running or parking them.

The car owner (and I am one as well) pays a one-time road tax, which is between 0.5-5 percent of the cost of the vehicle in most states. The bus pays an annual road tax and it also pays a passenger tax based on the number of people it carries — call it a penalty for efficiency as it moves more people, takes less road space and so emits less and consumes less fuel per passenger.

But this is only one part of the subsidies to car owners. There is also the cost of regulating traffic; of installing traffic signals; the cost of building flyovers, overbridges and subways; the cost of pollution control measures; the cost of pollution to our health. Since cars take up over 75 percent of the road space, even though they move less than 20 percent of the people, it is obvious whom this expenditure benefits the most. ...

The subsidy bill does not end here. There is also the cost of parking, which we refuse to pay any or full cost for, and which the government refuses to impose. But we forget or do not see that in our cities the largest number of people take the bus or cycle or walk to work or shop. The bus has not been replaced by the car, it has only been marginalized. In simple terms, this means that buses have no space to move — in all cities they crawl, commuters cannot reach destinations in time, and accidents keep getting worse as space constraints grow.

The question is should we discount the price of motorization so that some (and maybe a few more) can drive a car or a two-wheeler? Or should we pay the real cost of our commute so that the government can invest in mobility for all? The fact is that the government cannot afford to subsidize cars for all. Nor can it afford to invest in both cars and buses. Ultimately, it is not about economics. It is about politics and the imagination needed to build cities in which mobility does not mean cars. Flyovers can be built, but only if we know where they will lead. Source

My thoughts exactly.

Post 500

My 500th post on this blog and time for a free and frank appraisal of where Social Policy Bonds are going. The honest verdict has to be: not very far. At least not that I'm aware of. I don't know of anyone other than me who's working on them, nor any organizations that are thinking about issuing them. I get very few comments on this blog, which together with the main Social Policy Bonds web site get about 15 views daily (excluding RSS feeds and perhaps other views that my hitcounter doesn't register).

There is increasing interest in the value of markets for generating information in prediction markets, or information markets. More catastrophe bonds are being issued. But all these markets differ from Social Policy Bonds in that, while making use the dynamic information of markets to anticipate or insure against events, they don't attempt to modify behaviour. Participants in these markets are active only in the sense that they invest in them. Social Policy Bonds are in contrast designed to reward people for helping achieve society's goals.

The lack of interest is disheartening, but I am currently working on another book about Social Policy Bonds, and hope to have a first draft done in about three months. I intend to continue posting on this blog and maintaining the Social Policy Bonds website.

Motoring ourselves to death

Policy is often made without realising its implications. The result can be disastrous. Governments, realising that building roads was necessary at first, have gone overboard, subsidising road transport, oil extraction, storage of cars on public highways (parking). The massive social costs rarely enter the calculus. The 1.2 million deaths from road accidents every year are obvious and visible, but there is more:

Noise from rail and road transport is linked to 50,000 fatal heart attacks every year and 200,000 cases of cardio-vascular disease in the EU according to the new research published today by T&E. .... "[T]he lack of decent regulation combined with increased traffic and a trend towards bigger, more powerful and noisier vehicles is literally proving to be a lethal combination for Europeans. Unlike air pollution, which most major European cities are now starting to tackle, noise has been ignored for decades as the problem has worsened and the negative impacts on society have increased" ....

The World Health Organisation's threshold for 'serious annoyance' and onset of negative health effects from environmental noise is 55 decibels. The study found that around 210 million citizens of the European Union are regularly exposed to 55 decibels or more of road noise.... 50,000 heart deaths a year caused by traffic noise, T&E, 28 February

Conventional policymaking can't handle such adverse side-effects (negative externalities, in economists' jargon). It's difficult to measure the effects of noise on physical and mental wellbeing, but it's easy to measure the benefits of a new road in terms of time saved, and to put a monetary value on that time by multiplying it by road users' earning rates. The bias, which we see in so many other policy areas, is against crucial but unquantifiable components of our wellbeing and in favour of those impacts that can be quantified, monetised, and aggregated into something that sounds good, like economic growth. Memo to policymakers: a magnificent transport infrastruture is not an end in itself: it's a means to certain ends. You would do us all a favour if you targeted those ends directly rather than poured taxpayer funds into those schemes that you (and your buddies in big business) think are the best ways of achieving them.

Growth at all costs

James Fallows, discussing the Chinese economy and in particular its high savings rate:

Better schools, more-abundant parks, better health care, cleaner air and water, better sewers in the cities - you nake it, and it it isn't in some way connected to the factory-export economy, China hasn't got it, or not enough. ... [S]aying that China has a high savings rate describes the situation without explaining it. Why should the Communist Party of China countenance a policy that takes so much wealth from the world's poor, in their own country, and gives it to the United States? The $1.4 trillion question, 'The Atlantic', January/February

Growth at all costs seems to be the answer, in the hope that more jobs will reduce China's social tensions and generate jobs for the rural poor. It's hard to blame the Chinese government for this. Economic growth is the de facto target for most governments and, arguably, it tracks increases in wellbeing more accurately in China than in richer countries. But that's not to say very much. In China and the densely populated industrial countries the downsides of economic growth - environmental pollution and loss of social cohesion, for instance - may be uncertain, difficult to quantify but they are also very large. They might well outweigh the similarly incalculable positive-but-unmeasured effects of economic growth; including the alleviation of poverty. There's no way of knowing, and the results of governments' getting it wrong could be disastrous.

Another way might be to recognize that economic growth - even if it could be measured accurately - is not an end in itself. It's a means to various ends, many of them private, and best decided by individuals and households. Encouraging, and subsidising mothers to join the work force and send their children to childcare centres might boost GDP figures, but it should hardly be a matter for government policy. Perhaps government can best intervene by specifying public goals in terms of minimum levels: of poverty, pollution, health, educational achievement, employment, etc, and then to let people make their own decisions as to the necessary trade-offs. Social Policy Bonds lend themselves to this: government could issue bonds that would reward people only if minimum levels of (say) literacy or physical health were maintained.

In such a regime, government would be doing what it does best: articulating and paying for the supply of legitimate, measurable, public goods and services that correlate well with social wellbeing. Beyond those minima, people would make their own decisions about whether, for example, to subsidise profligate US consumers or big-box retailers.

Broad indicators are essential

Focusing on narrow indicators is easy, but rarely of great value. I've blogged before about the Mickey Mouse micro-targets (the length of hospital waiting lists for example). Similarly, if a government were to target accidents to cyclists, the evidence appears to be that risk compensation would occur:

In one experiment, a British psychologist, Ian Walker of Bath University, simply got on his bicycle and monitored the behaviour of 2,300 vehicles that overtook him. When he wore a helmet, drivers were much more likely to zoom past him with little room to spare; when he was bare-headed (and indeed when he wore a female wig) the amount of space that motorists left would increase. A hazardous comparison, The Economist, 28 February

But even targeting road deaths in general wouldn't necessarily improve things:

An experiment in Munich found that the drivers of taxicabs fitted with anti-lock braking systems were involved in no fewer accidents than those without. That is because the former used those superior brakes not to practise prudence but to drive more aggressively. ... John Adams, a transport expert at University College London, has compiled data from all over the world to show that laws making drivers wear seatbelts do not make roads safer; they move deaths from inside cars to outside them because they encourage bad driving.

What about aiming to reduce the number of children killed on the roads? John Adams points out that this:

has fallen in recent years ... but mainly because they are rarely allowed out alone, so today's teenagers have less skill at navigating hazardous roads; and as a result, the number of teenagers killed in car accidents has jumped.

Sometimes the difficulty of picking appropriate indicators for targeting under a Social Policy Bond regime is pointed out to me. But exactly the same problems apply to policymaking under the current regime - except that there is rarely any transparency about what is being targeted. And that leaves the way open for expensive (and mostly futile) responses to the relatively small number of deaths caused by terrorism, while an estimated 1.2 million people are killed on the world's roads every year.