Why we are not surprised

Andy Kroll writes:

What cannot be disputed, however, is the [US government] financial bailout's biggest loser: the American taxpayer. The US government, led by the Treasury Department, has done little, if anything, to maximize returns on its trillion-dollar, taxpayer-funded investment. So far, the bailout has favored rescued financial institutions by subsidizing their losses to the tune of $356 billion, shying away from much-needed management changes and--with the exception of the automakers--letting companies take taxpayer money without a coherent plan for how they might return to viability. The Greatest Swindle Ever Sold, 'The Nation', 26 May

So why are we not surprised? The compelling reason is that there is no compass to give the bailout any meaningful, coherent, direction, unless it is simply to shore up the short-term prospects of the politicians in power and the most powerful interest groups. Ordinary people are well down on the list of things to worry about. It is this indifference that has characterised policymaking for many decades. Time was, though, that there was a reasonable correlation between the interest of powerful lobbyists and the wellbeing of the general public. Over the years, as inequalities have widened and society become more complex, that correlation has weakened. Bailouts to big business at the expense of society and the environment - the corporate-welfare state - are the result.

Social Policy Bonds would make passing this sort of corporate subsidy programme more difficult. They would subordinate all government interventions to the wellbeing of human, animal and plant welfare. How raising such welfare is to be achieved would be left to the private sector; under a bond regime raising welfare would be the private sector's goal, rather than doing things that can be sold to government as necessary or otherwise gaming the system for government funds.

State of paralysis

California has immense human and financial resources. It should not be in fiscal crisis; it should not be on the verge of cutting essential public services and denying coverage to almost a million children. But it is - and you have to wonder if California's political paralysis foreshadows the future of the [US] as a whole. State of paralysis, Paul Krugman, 26 May

More than 30 years ago Californians voted for Proposition 13, under which property tax rates were capped. This has made the state more dependent on income taxes, which have been falling steeply during this recession. Initiatives like Proposition 13 give consultation with the public a , 26 bad name. The problem as I see it is that the implications of such an initiative are just too complicated for anyone to understand. That's where expressing policy goals in terms of meaningful goals, as would happen under a Social Policy Bond regime, comes in. Policymakers could target goals such as reducing the crime rate or atmospheric pollution, and if they issue Social Policy Bonds, the cost of such goals would be much more apparent than under the current system: the system that leads to a free-floating feeling that government spending on public services is too expensive, and to crude and counter-productive efforts to put a lid on it.

How so? Simply put, Social Policy Bonds are a tradable contract to achieve a specified outcome. The bonds are issued on the open market. There would be competition amongst bidders for the bonds, and in that bidding they would, in effect, be pricing the targeted outcome. Competition ensures that that cost is minimised. Crucially, such a cost is visible to everyone: the bonds' prices would be quoted just like those of other financial instruments. The transparency of such a system would not allow politicians -whether at local, regional or national level - to make vague promises or to gull the public into false beliefs about the cost of getting things done. This transparency, as well as much greater efficiency, is one of the huge advantages that Social Policy Bonds would have over the existing system, whereby contracts are doled out for the provision of certain outputs and the risk of private sector failure almost always borne by the public.

A priesthood of politicians

I'm sure the irony won't be lost on many. The British Minister of Finance, the man who draws up the UK's taxation policy, claims for, and receives, £1400 of taxpayers' money so that he can pay somebody else to ensure that "the correct amount of tax was paid in respect of my office costs". It's not his personal fault, of course, that our politicians are now seen as a distinct caste. The rules they devise for the rest of us are too complex and too grubby for them to engage with fully. But being of the priesthood they have no need to. Frankly, I dread to see what form the public reaction to this expenses scandal and our parlous economic state will take. I hope it will re-orientate policy so that it is expressed in terms of meaningful outcomes for ordinary individuals, and that such a transition will take place without too much pain. I doubt it though.

What government can and cannot do

Government seems to keep growing. We look to government for solutions to everyone else's problem. To the degree that government creates problems, this is understandable. The lunacy of industrial agriculture, with its subsidies to rich landowners and large agribusiness corporates can be solved only when government changes its policies. Similarly for fisheries. But today's North Korean nuclear test is a dramatic example of how little governments can do. North Korea doesn't care about the wellbeing of its people; its government is answerable to no-one. Any attempts by governments to influence North Korea is going to be sold to North Koreans as coercion, and raise the stakes accordingly.

But our governments are not completely powerless: they could issue Social Policy Bonds that reward investors for the avoidance of a nuclear exchange, however they do so. More generally, they could issue bonds that target reductions in all sorts of violent political conflict. Government might not know what actions to take. And, as in the case of North Korea, it might be inherently incapable of bringing about good outcomes directly. But it can create incentives for people to research, discover and implement their own solutions to the urgent and huge problems humanity faces.

SocialGoals.com

It appears that the program I used to re-create the SocialGoals.com website was not a legitimate version; this probably accounts for the scrolling or non-appearance of some of the pages and the flipped images. I will be working on a solution in the next few days.

Reform will happen

When a group becomes too rich and powerful, it can wield influence over politics and over commercial activities in which its members are not directly involved. The effect is to enhance that wealth and power. This process is likely to end in political and economic crisis. That was the history of royal courts across Europe, from Versailles to St Petersburg. More recently, it has been the experience of many developing countries and transitional economies. In the three decades since Margaret Thatcher and Ronald Reagan inaugurated the market revolution, it appears that Britain and the US have joined their ranks. Beware bail-out kings and backbench barons, John Kay

Big business and government have had an easy time of it over the past few decades. Our societies have all become richer on the back of cheap energy and globalisation. So it's been easy to be tolerant of distorted, corrupted markets and financial shenanigans in high places. It's been easy, too, for governments to spend huge proportions of national income inefficiently if not corruptly.

Those days are over. The transition will prove painful and where will it lead? I'd like to suggest that we'd do well to re-orientate policy so that it is focused entirely on outcomes that are meaningful to ordinary people. Its success or failure would be measured by how close it comes to achieving those outcomes. That sounds an obvious thing to do, but it would represent a stark change from the current regime where government (when it is well intentioned) rewards the ways it thinks will best achieve social goals. These alleged ways have led to bloated government agencies, a profound and tragic reluctance to terminate failed experiments, and resistance by public sector unions to any meaningful reform. They have also helped create the conditions by which big business has captured and corrupted government. Although Social Policy Bonds have been in the public arena for something like 20 years without any signs of take up (that I'm aware of), I am confident that something like them or, even more likely, outcome-oriented policy, will play a bigger role in the future. The question is: how far away is that future? John Kay continues:

But, as Louis XVI learnt as the guillotine fell, the longer reform is delayed, the bloodier the revolution. And the more unsettled and chaotic would be the eventual outcome for us all.

Non-monetary incentives

The king's counter to his subjects' reluctance to be knighted was a general order in 1234 to all sheriffs that they should proclaim throughout their bailiwicks that all men who held one or more knights' fees in chief of the the king should procure arms and cause themselves to be knighted. ... Nevertheless it is clear that through the greater part of the thirteenth century the government was trying ... to keep in being a military form of society which was out of date. It was probably with this end in view that kings stressed the pageantry of the ceremony by which men were admitted into the order of knighthood. ... Edward I realized that knighthood must be tied to the court and the glamour of the court if young men were to be drawn into the knightly order. English society in the early Middle Ages, Pelican History of England vol 3, Doris Mary Stenton, 1965

The conceptual leap that we have to make is that knighthood in those days was a burden. It entailed an obligation to serve the king in military conflicts. It's not clear how successful was the introduction of the elaborate ritual to which Lady Stenton refers. But the principle of getting people to do things for reasons other than monetary ones is clearly long established. In this recent post I refer to research showing that under some circumstances financial incentives can actually undermine our willingness to do the right thing. How would that sit with the Social Policy Bond principle, where monetary incentives at first glance seem paramount?

Actually Social Policy Bonds are not merely a system by which all the people who help bring about social wellbing are financially rewarded. Rather it is a 'meta-system' that motivates bondholders to find the best ways of encouraging socially beneficial behaviour - whether these be monetary or not. In my book I mention the Japanese, who have carefully graded levels of respect for people according to how well they are seen to have served society. Paradoxically, holders of Social Policy Bonds would have financial incentives to devise nonfinancial ways of encouraging people to achieve our social and environmental objectives. This could be much more efficient than our current, somewhat haphazard system of rewards. And, as the Japanese and the old kings of England knew, it could be much less expensive.

The only alternative?

Financial capitalism has failed. We need to democratize the economy. Oskar Lafontaine, 'We want to overthrow capitalism', Interview with Spiegel Online

The global financial crisis is at a very early stage. What seems clear to me is that the western mixed economy model has been totally discredited. This is not to imply that there are any better systems out there; rather that it has lost the consent to operate that it enjoyed over the past few decades. The tacit agreement was that the private sector would work, within laws, regulations and unwritten codes of decency to maximise sales, market share or profits. Government would impose taxes on producers and consumers, mainly to provide public services (law and order, defence, infrastructure, education and healthcare etc) and transfer income to the poor. What happened? Big business and government corrupted each other, at the expense of small enterprises, ordinary people and the physical and social environment.

It was always a bit haphazard; the idea that trickle-down or government action would ensure that the net non-market impacts of corporate activity would be positive, and that the human (as distinct from corporate) casualties of capitalism would be looked after by a benevolent, caring state. There were always visible signs of rot, to those who had time to look at, for instance, who actually benefited from subsidies to agriculture and other corporate welfare scams. Now the extent of that rot has become visible to all.

How can we ensure a better working model, and avoid what looks like a very painful transition to it? One answer could be Social Policy Bonds; rather than leave the achievement of social and environmental wellbeing to chance or coercion, we could instead subordinate all government activities to our broad social goals. So, for instance, if we wanted to achieve full employment we'd reward people who help achieve it, however they do so. We wouldn't subsidise or bail out inefficient industries simply because they allegedly need some temporary help or are too big to fail (or more likely, have too much political muscle and aren't afraid of using it). Rather than gamble with climate change, by assuming (or pretending to assume) that cutting back (or aspiring to cut back) greenhouse gas emissions will bring about climate stability, we'd issue Climate Stability Bonds that would reward people for stabilising the climate, however they do so.

Governments everywhere have shown that they cannot master the inevitable complexities of an increasingly interlinked world. Perhaps no organization can. We need large numbers of diverse, adaptive programmes and projects to restore social and environmental harmony. Targeting outcomes, and rewarding the people who achieve them would, I believe, work better than either the corrupt corporatist-capitalist model whose day has recently ended or large-scale central planning, whose day ended many years ago.

Keeping the globe livable

Paul Krugman has been visiting China:

As the United States and other advanced countries finally move to confront climate change, they will also be morally empowered to confront those nations that refuse to act. Sooner than most people think, countries that refuse to limit their greenhouse gas emissions will face sanctions, probably in the form of taxes on their exports. They will complain bitterly that this is protectionism, but so what? Globalization doesn’t do much good if the globe itself becomes unlivable. It’s time to save the planet. Empire of Carbon, 'New York Times', 14 May

In an increasingly complex and interlinked world, like it or not, there's going to be a greater need for government regulation and restrictions on the ways we have been doing things. Diffusing the negative externalities of, for instance, power generation is no longer politically sustainable when the impacts could be drastic and far-reaching - even if there is uncertainty about the exact size of the impacts.

In our newly constrained world, there may be a place for Social Policy Bonds. There will be a sharper focus on bottom-line outcomes. Up to now, governments have got away with assuming away many negative externalities. So: economic growth has always been good; so too has been the freedom of movement of goods and capital. The assumption has always been that the market and non-market positive impacts have outweighed the negative. We can no longer make such an assumption. To have a globe that is livable is now something that will require co-ordinated government action.

Of course, government doesn't have all the answers. But what it can do is determine, or rather articulate, the broad social and environmental outcomes that we wish to pursue and reward the achievement of those outcomes, however it is done. Such goals, I suspect, would include the avoidance of major catastrophe, whether natural or man-made, and the stabilising of a (carefully defined) array of indicators and measures of the global climate. Government is fairly clueless about how to achieve such goals, but it does have strengths in articulating them and raising revenue for their achievement. So, using the Social Policy Bond principle, it could issue Disaster Prevention Bonds, or Climate Stability Bonds. These would have the effect of contracting out the work necessary to achieve these fundamental objectives without prejudging how best to do so. They would also ensure that the livability of the globe would be achieved at minimum cost.

The true comparison

As so often, John Kay sums it up succinctly:

Regulation by rules invites compliance with the rules rather than the objective of the rules, and the more extensive the rules the easier it is to lose sight of the objective.

I'm sometimes asked what would happen if, for instance, holders of Social Policy Bonds targeting crime in a particular region simply laid on a shuttle bus service for burglars into an adjacent region. If, in short, the intent behind a bond issue were undermined while remaining within the letter of the bonds' redemption terms. There are difficulties with such negative-but-legal ways of achieving Social Policy Bonds' stated objectives but, and this is a crucial point, exactly the same difficulties apply under the current system. More generally, the proper comparison of a Social Policy Bond-based regime should be with the best of the current system, rather than some unattainable utopia.

Social Policy Bonds do need discussion, application on a small scale, and refinement before they can be widely applied to large social and environmental problems. Even then, they would have their drawbacks. But, in my view, at least until they have been tried and tested, they offer significant improvements over the current, activity- or institution- based ways of trying to improve social wellbeing. Under a bond regime, we'd still rely on people's willingness to comply with the spirit of bond issues. But that's exactly the same as under the current regime. As Mr Kay goes on to say:

It is hard, perhaps impossible, to remain honest when the culture is corrupt; hard, perhaps impossible, to live on an MP’s salary when others exploit the allowance system and accept dubious consultancies; hard, perhaps impossible, to manage a bank prudently when your competitors inflate profits by operating differently. That is why values of integrity, of public service, and of responsible stewardship of the money of others can never be replaced by rules or imposed by regulation.

Costing large objectives

When it comes to large social or environmental goals, such as reducing a (carefully defined) crime rate, one advantage of Social Policy Bonds is that they can defuse controversy about how much government should spend. Issuers of Social Policy Bonds, though they would have to decide on the maximum amount they want to spend on achieving their objective, would not have to work out how much the actual cost would be with any accuracy. That would be done by bidders for the bonds in the open market. Assume that bonds are to be used exclusively in pursuit of a 50 percent reduction in the crime rate, and that an urban authority issues one million bonds, of redemption value $10.00. If the market valued these bonds on flotation at $1.00 each, the net cost to the issuers of achieving the targeted objective (ignoring administration costs) would be $9 million. In other words, the market at the time of issue believes that the cost of achieving the objective, including its profit margin and after taking into account risk, would be $9 million.

Now suppose the bond issuers are completely in the dark about how much it will cost to achieve the targeted objective and instead of issuing one million bonds they issue ten million with the same redemption value, $10.00. They would then be liable for a maximum cost of $100 million. However, the market would still reckon that it could achieve the objective for around $9 million. So instead of valuing the bonds at $1.00 competition between potential investors would bid up the issue price of the bonds to around $9.10. (Social Policy Bonds would be an unusual financial instrument, in that the more that were issued, the higher would be their value!) The issuers therefore would not have to estimate with any accuracy how much a targeted objective might cost to achieve, and they would put a cap on their total liability by limiting the number of bonds issued. The costing of achieving the targeted goal has, in effect, been contracted out to the market, and the market bears the costs if it gets it wrong - not the taxpayer!

This could be a huge advantage in dealing with climate change, for example, where there are sufficient uncertainties to explain, if not justify, politicians' reluctance to do anything meaningful until, quite probably, it's too late.

Truly sobering

About the disappearance of large fishes from the Caribbean coral reef, scientist John Bruno commented:

Seeing evidence of this ecological and economic travesty played out across the entire Caribbean is truly sobering... 'Sobering' Decline Of Caribbean's Big Fish, Fisheries: Overfishing Deemed Most Likely Cause, ScienceDaily, 6 May

With a rising human population, the article goes on to say, and the increasing demand for ocean-derived protein, Given that about half the world's populations live near coastlines and that the world population is growing, demands for ocean-derived protein will continue to increase, prospects look bleak. One scientists warns that:

meeting such demands while retaining healthy coral reefs may require multiple strategies, including implementation of marine reserves, finding alternative sources of protein, and increased efforts to implement family-planning strategies in densely populated areas.

The difficulty, and this is one that is common to many social and environmental problems, is that we are not very good at multiple strategies. We have handed responsibility for meeting this sort of challenge to a highly centralised body: that is, government. Any single large institution finds it almost impossible to conceive of the diverse, adaptive approaches necessary to meet our most urgent challenges, still less to implement them. Traditional societies evolved their own forms of property rights, their own taboos and disciplines, for dealing with the problems that are now given over to government bodies. So climate change, for instance, is something that will be dealt with by a top-down, one-size-fits-all, policy of controlling emissions of greenhouse gases - or rather, those that were identified in the 1990s as greenhouse gases. Such a policy is incapable of adapting to changed circumstances or our rapidly expanding knowledge of scientific relationships.

A Social Policy Bond regime would be different. It would recognise the necessity for high-level centralised decision-making about the planet's needs, but it would have the effect of devolving the ways of achieving them to smaller bodies, who would have incentives to try different solutions and, unlike typical government organizations, terminate their failures and concentrate on their successes. Applied to the Caribbean reef fish ecology, a bond regime would no doubt try the multiple strategies mentioned above, and probably several more. Under the current system, there is, I fear, little reason to be optimistic.

Now in Linux!

...I hope. I've redesigned the main Social Policy Bonds website, and it should now be viewable in Linux browsers, unlike the previous version. I've tried it on Firefox, and it works. I'll tidy it up, but if it is not viewable in your browser (or if you come across any dead links) please let me know. I've also corrected the broken links, in the right-hand column of this blog, to the main page and to the Powerpoint presentation.

Swine flu and Social Policy Bonds

The response to swine flu suggests that a decentralized approach is best. This crisis is only days old, yet we’ve already seen a bottom-up, highly aggressive response. In the first place, the decentralized approach is much faster. Mexico responded unilaterally and aggressively to close schools and cancel events. The U.S. has responded with astonishing speed, considering there are still few illnesses and just one hospitalization. ... Second, the decentralized approach is more credible. ... Finally, the decentralized approach has coped reasonably well with uncertainty. .... David Brooks, Globalism goes viral, 'New York Times', 28 April

We probably have a more centralised policymaking process than we should have if we were used to expressing policy in terms of outcomes rather than activities or institutional funding. There are benefits to centralisation, certainly when it comes to articulating society's goals and raising the revenue to achieve them. But the penalties of too much centralisation are ever more apparent, and Mr Brooks alludes to some of them. It is the efficiency of the decentralised approach to policy achievement that is most convincing. This efficiency derives from the combination of its adaptability and its diversity. Decentralised, bottom-up, decisionmaking, as Mr Brooks says, is faster. It terminates failed initiatives and encourages the exploration and implementation of successes.

A Social Policy Bond regime would entail centralised direction-setting, but decentralised, bottom-up, project initiatives. Social Policy Bonds, whether issued by government or the private sector, would guide investors towards society's common social and environmental goals. But the actual projects would be done - and done efficiently - by a decentralised body of highly motivated bondholders. Swine flu, like other diseases, is adaptive and highly goal-oriented. Social Policy Bond regimes, would deploy the same qualities in favour of our species.