More madness

How does it happen that we not only allow the destruction of the planet, but subsidise it? Even the poor countries are at it. A story in the current issue of the Economist (subscription) tells us that India subsidises diesel consumption at a cost of between 2-3 percent of GDP. The same story tells us that an IMF study of five emerging economies found that the richest 20 percent of households received 42 percent of total fuel subsidies; the bottom 20 percent less than 10 percent.

One of the arguments underpinning my advocacy of Social Policy Bonds is that there is no systemic way that compels governments to terminate their failed policies. Indeed, the pressure acts in the opposite direction: you subsidise people or corporations, make them richer, and so give them both the means and motivation to resist removing the subsidies. In the developing countries the victims as ever are the poor.

Social Policy Bonds could end that cycle. All activities, all spending, are subordinated to the goal of targeted social or environmental objective. We could still subsidise the destruction of the environment to allow the rich to drive their cars if we wanted - but we'd have to be upfront about it. Somehow, I don't see that happening.

Free riders?

One of the questions I get asked about Social Policy Bonds is about the free rider effect. The bonds most probably will rely on holders collaborating after in objective-achieving projects. Those holding large numbers would do best to co-ordinate their activities with each other. But why then would they not collude before the bonds are floated, in the bond market itself, holding off their purchases so that they pay less for the bonds than they would in a competitive market? This can certainly a problem under the current system where contracts to supply services are put out to tender. But existing corporations are structured around the sale of goods or the provision of services – not the achievement of outcomes. Social Policy Bonds are best applied to broad policy areas where the question of how best to achieve a specific social goal cannot be easily answered at the time the bonds are issued. For example, take a broad objective like reducing air pollution in a region. There will be a wide range of ways in which the bonds can increase in value. These can involve: lobbying for higher tax on petrol, subsidising the sales of catalytic convertors to cars-owners, subsidising buses and bikes, pedestrianising streets and a wide range of other possibilities. Most probably, the optimal approach will be a combination of many diverse activities, and this combination itself will be changing over time, in response to new events and expanding knowledge. There will be a kaleidoscopic continuum of optimal approaches, which will vary markedly according to the value of the bonds. So, for example a bond that can be redeemed for $100 may be floated. The optimal combination of possible bond-price raising measures when the bonds are priced at $50 will be quite different from when the bonds are priced at $48, and so will the range of corporations interested in buying the bonds. Remember too, that bondholders can profit without holding the bonds till redemption. There will be a range of potential purchasers all with different time periods in mind. Some will have little interest in holding the bonds for a long time, adding to the competitiveness of the bond market.

The likelihood then is that there will be intense competition for the bonds before they are floated, but collaboration between the large holders - tacit or not - afterwards. Of course, we can't know for certain what would happen, until Social Policy Bonds are actually issued.

Political triage

Social Policy Bonds would, I believe, minimise the cost of achieving goals, and they would cap the maximum cost of achieving them, but they don't tell us what we should target. Not directly. Right now, the prioritising of social and environmental goals seems to take place at a not fully conscious level, driven by concerns other than maximising returns on spending: media appeal, vested interests etc. Perhaps too, we are reluctant to acknowledge that resources are limited and we cannot solve all the world's problems. One organization that does look at such 'political triage' is Copenhagen Consensus. It does good work in questioning existing political the priorities, on the basis that though we'd like to solve all the world's problems, resources are limited and we have to prioritise. For instance, it estimates the existing cost of the Kyoto Protocol $180 billion a year and says it will make a minuscule difference to the world's climate, 'delaying temperature rises by just seven days by 2100'. But it calculates that

A tenth of the annual cost of the Kyoto Protocol - or a tenth of the US budget this year for the wars in Iraq and Afghanistan - would prevent nearly 30 million new infections of HIV/AIDS. The same sum could similarly be used to help the four million people who will die from malnutrition this year, the 2.5 million killed by indoor and outdoor air pollution, the two million who will die because they lack micronutrients (iron, zinc, and vitamin A), or the two million whose deaths will be caused by a lack of clean drinking water. A time for clarity

Assuming the figures are correct, it would seem clear that we ought to divert funds away from Kyoto towards AIDS and malnutrition prevention but that is to some extent a subjective view, because we are comparing the supposed week's delay with human lives saved. Taking the same quote, though, assume that the decision lies between saving the lives of the four million who would otherwise die of malnutrition this year or the 2.5 million killed by air pollution. Then, we'd be comparing like with like, and the choice should lie with saving the four million. There are a lot of assumptions necessary, but that is how an impartial reckoning at a global level, would go. The problem is that, even with all the caveats, such easily compared, objective criteria are rarely to hand.

Cost benefit analysis can help a bit, but the weighting problems are huge. How much, for instance, is biodiversity worth and, as we asked earlier, how can say, the interests of wildlife and biodiversity be weighed against people's wish for biofuels?

Social Policy Bonds may be an improvement on one-off cost-benefit analyses or the other ways in which costs are estimated. The market prices of the bonds at flotation and thereafter generate estimates of the total and marginal costs of achieving targeted goals. The total cost estimates would probably be better estimates than those calculated from cost-benefit analysis, while the marginal costs derived from bond prices would represent a big improvement over the information currently available to decision makers once they have decided which projects to support. But those decisions, ultimately, will have to be made on a political basis. The bonds would make it easier, I think, for people to participate in making them by generate better cost estimates but they will not remove the need to take difficult decisions about the relative weighting of different goals.

Closing the gap, with outcome-based policy

Our chief problem with policymaking, as I see it, arises because it is only incrementally adaptive. That is, it's driven by short-term concerns, and proceeds along lines laid down decades ago. That's one reason why failed policies - such as subsidies to rich farmers and agribusiness corporates - are so difficult to get rid of. Now, if policymaking evolved in the Darwinian way, such policies would be terminated because they are maladaptive. But within countries, and increasingly, between countries as well, there is a policy monoculture. National governments and corporations have similar interests, so there is little policy diversity even at a global level.

Of course, there are differences between, say, Chinese and US capitalism but the vested interests are so deeply entrenched, the global challenges so urgent, the level of aggregation at which problems need to be solved is so high, and the world is so much smaller, that the Darwinian method of allowing optimal solutions to emerge from what is a reasonably wide a range of possibilities will probably not work. There is too little time to wait for incremental adaptation to address, say, climate change or nuclear proliferation. And we have only one planet; the result of a successful policy mutation may not only be too late, but can be swamped too readily by the wrong choices.

This is the end point of the urban monoculture – dominated by government and the big corporations – in which we live. We still have the possibility of adapting, but more and more it is brought into the service of these organizations, and the objectives of those organizations are, at best, different from those of ordinary persons and, at worst, in conflict with them.

Disenchantment with, and disengagement from, politics seems to be the response. And who can blame the voters? Politics seems to be run by the corporations, for the corporations, with some ideology thrown into the mix. One way of reconnecting people with government, I think, is for government to start expressing goals in terms of outcomes that are meaningful to real people. Rather than propose, say, to increase spending on health services or education, government should target, explicitly, life expectancy or literacy. This, of course, is the Social Policy Bond approach.

Social Policy Bonds and the Polluter Pays Principle

There are some quite elegant economic solutions to social and environmental problems. Take the example of a lake polluted by the run-off of nearby farms. Where the lake is grossly polluted and the farmers are wealthy, the political process would probably demand that the farmers pay to clean it up or have their polluting activities legally restrained or taxed. But where the lake is already healthy, though not quite healthy enough to attract fee-paying fishers, then the beneficiaries of a clean-up - would-be tourist operators around the lake, perhaps - could reasonably be asked to pay for it to be cleaned up, or to compensate farmers for reducing their polluting activities. Note that in this instances, which is in microcosm that of many larger environmental issues, the debate about who pays generally precedes the cleanup.

Now simply assume that the lake is polluted and either a local authority of a group of nearby residents on their own initiative, decide to issue their own Social Policy Bonds: 'Lake Health Bonds'. These would be redeemable for a fixed sum only when the lake's water quality had reached a target level for a sustained period. The local authority or the residents could contribute to the redemption funds used to redeem the bonds. Bondholders could then begin the cleanup operation immediately. Part of the cleanup could entail lobbying one or other tier of government to impose taxes on the polluters or the beneficiaries – whichever is most cost-effective. In other words, the issue of who pays would be secondary to that of the cleanup.

Social Policy Bonds are therefore quite compatible with the use of the Polluter Pays Principle, or indeed pollution taxes or the principle that beneficiaries pay. Such instruments, and others such as straight regulation, should be seen merely as tools to reach society’s environmental goals. Social Policy Bonds, rather than being merely another economic instrument, are a means by which the most efficient economic instruments, or combination thereof, will be deployed.

Social Policy Bonds could formalise rational behaviour

In the cold light of day we'd probably be indifferent between, say, war deaths in the middle east and war deaths in Africa. We'd allocate our scarce conflict-reduction resources to where they could do most good. But our actual policy priorities don't reflect rationality; they are largely a function of where the media happen to be able to film footage for television. So the middle east commands our attention while Africa languishes. It's too early to say what the response to the cyclone in Burma will be: it does seem to be a case where a comparatively small aid effort now could save many lives.

A Social Policy Bond regime could formalise our rationality and give it more scope. A global body such as the United Nations, or a group of philanthropists could issue Social Policy Bonds that target world deaths from large natural disasters over, say, five years. 'Large' could mean any disaster that kills more than 500 people, regardless of where it happens. Say that the number of people killed in these disasters averages 50000 a year. The 'Disaster Relief Bonds' could pay up if the number falls below 30000. In the first instance, this would generate incentives for investors to prevent loss of life by, for example, installing warning systems or supplying emergency information. The key point is that bondholders would look rationally at where they could expect to save the largest number of lives per dollar spent.

Bondholders could also intervene after a disaster has struck. Again, they would allocate resources rationally and impartially, and independently of the type of media footage.

Biofools

What's interesting about biofuels is how we're marching towards the financial, human and environmental disaster they represent with our wallets and our eyes open. We know that the rush to biofuels is accelerating the destruction of Amazon rainforest. We know they are a nonsense in that they offer little, if any net reduction in fossil fuel use or greenhouse gas emissions. We suspect that they are helping drive up the price of food. And we can see very clearly that we are transferring taxpayer funds to subsidise the stuff:

[M]uch of the biodiesel produced in the United States from soybeans and corn (and subsidised by American taxpayers to the tune of $1 a gallon) winds up in Europe, where it benefits from still further subsidies. That’s great for farmers in the Midwest, but offers little consolation to motorists across America. Source

I used to think that the corrupt, deranged agricultural policies of the US and Europe could only be implemented because they were devised behind closed doors and the real beneficiaries - wealthy landowners, large agricultural corporates and the legions of bureaucratic policy administrators - concealed their true purpose from a naive, distracted public. But now I'm not so sure. We cannot plead lack of information any more. Perhaps it's the opposite: too much information?

The superclass and its world

Listening to a talk by David Rothkopf about the subject of his book Superclass I'm struck by the degree to which the interests of those in the superclass not only differ from those of everyone else but are diverging. Who are the members of is the superclass? Leaders in international business, finance and the armaments industry, mainly: and that is another important point; nation states and their governments play a subordinate role to the interests of the world's largest corporations. Government and bigness do seem to go hand-in-hand, and a sustained period of heavy government involvement in industry does seem to lead to a high degree of 'industry concentration', in which a few very large corporations dominate. This is demonstrably true of agriculture, construction and the armaments ('defence') industries, but as government regulatory powers expand is becoming a reality in other sectors.

I think is worrisome for several reasons. First, we - that is ordinary people - are ending up with more bigness than we want. That's a problem in its own right. Second, the curse of bigness is that it doesn't respond readily and appropriately to urgent challenges. Likewise, it imposes a uniform way of doing things - a monoculture - which has all the vulnerability to shocks of its agricultural counterpart. The large scale of corporate and government activities has both heightened our vulnerability to shocks and reduced our capacity to respond to them. It's difficult to do much about this: in many ways we are so locked in to the ways of doing things that the corporatist-government complex has favoured. For instance, our urban lifestyle and our farming systems are now entirely dependent on low-cost fossil fuel; more so than they would have been had market forces been undistorted by the big players.

It is sad to reflect that the superclass has so organised society that in our chaotic, perilous world, the US Presidential campaign may well be won and lost over who promises to knock a few cents off the price of gasoline for the summer season.

Transcending government structures

In the early days of government intervention it was quite clear what needed to be done. Society would benefit unambiguously by increased health, education and infrastructure spending. This still holds for much of the developing world. But in the rich countries things are now much more complicated. At higher levels of development the correlation between government spending and social and environmental wellbeing breaks down. The boundaries between the remits of governmental agencies become hazy: society has become too complex, and too interlinked to fit into self-contained adminstrative boxes. Education is no more just about schooling. It's influenced by policy on the arts, broadcasting, health and even taxation (if tax policy encourages women to work, for instance, that will affect, in non-straightforward ways, the way in which children learn). Health is no longer just about supplying clean water, sewers, and legislating against food adulteration. Crime and fear of crime are about more than policing.

Unfortunately, we lack ways of dealing with these complexities. Identifying the relationship between cause and effect is no trivial task, with all the obscure relationships and time lags. Eventually, I think we will come round to targeting outcomes, as Social Policy Bonds do. Government will specify an outcome, and reward people for achieving it, however they do so. Who is rewarded, by how much, will be left to the market. Currently these questions pre-occupy government agents to such a degree that they inhibit action. Organizational objectives supersede those of society and the result is a sort of policy paralysis. Bickering between government agents and the hijacking of policy goals by government employees are the result. This is particularly important when confronting those challenges for which there is little precedent: we'd pay a lot to insure against a nuclear exchange anywhere in the world, for instance, but our current system has few ways of channeling resources into that goal.

Under a Social Policy Bond regime, targeting such goals would be more feasible. There's no need to specify which government department shall be charged with achieving them. So not only would that achievement become more efficient, but we could think about targeting goals that do not fall into the traditional bureaucratic structures. I'd like to see nuclear proliferation and the risks of catastrophic environmental disasters (natural or man-made) targeted in this way, but there are plenty of other pressing issues that cannot get a proper hearing within the current institutional framework. And until we move to an outcome-based policymaking structure - it need not necessarily involve Social Policy Bonds - they're not likely to.