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.

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