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.