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.