30 December 2010

Lies, damned lies, and policymaking

An ethical doctor decides to examine, discreetly, a patient who is being looked at by other doctors:
[S]he’s concerned that, like many patients, he’ll end up with prescriptions for multiple drugs that will do little to help him, and may well harm him. “Usually what happens is that the doctor will ask for a suite of biochemical tests—liver fat, pancreas function, and so on,” she tells me. “The tests could turn up something, but they’re probably irrelevant. Just having a good talk with the patient and getting a close history is much more likely to tell me what’s wrong.” Of course, the doctors have all been trained to order these tests, she notes, and doing so is a lot quicker than a long bedside chat. They’re also trained to ply the patient with whatever drugs might help whack any errant test numbers back into line. What they’re not trained to do is to go back and look at the research papers that helped make these drugs the standard of care. “When you look the papers up, you often find the drugs didn’t even work better than a placebo. And no one tested how they worked in combination with the other drugs,” she says. “Just taking the patient off everything can improve their health right away.” David H Freedman, quoting Dr Athina Tatsioni in Lies, Damned Lies, and Medical Science, 'The Atlantic', November 2010
A potential difficulty with Social Policy Bonds is that they rely, almost entirely, on meaningful correlations between measured variables and that which society wants to target: most likely, some component of well-being. It's a difficulty, because people can game the system, complying with the letter, but not the spirit, of any defined target-setting.

What's not so obvious is that it's an even bigger problem under current policymaking regimes. In our industrial societies, with their large, complex economies, government bodies and non-governmental organizations have extremely complicated tasks. Increasingly, and of necessity, government already relies on numerical indicators to manage its resource allocation. and largely supplanted families, extended families, and communities in supplying a range of welfare services to a large proportion of their populations. .

But this use of indicators is relatively recent, unsystematic, unsophisticated and incoherent. Indicators such as the number of medical tests performed, or the size of hospital waiting lists don’t measure what matters to people or are prone to manipulation. Even when numerical goals are clear and meaningful they are rarely costed, they are almost always too narrow, and they are largely chosen to mesh in with the goals and capabilities of existing institutional structures. Those broad targets that are targeted with some degree of consistency tend to be economic aggregates, such as the inflation rate, or the rate of growth of Gross Domestic Product — which has come to be the de facto indicator par excellence of rich and poor countries alike. But GDP’s shortcomings as a single indicator of the health of an economy are serious, and widely known. Government would do better to target ends rather than means: social and environmental outcomes that are meaningful to natural persons, as against government agencies and corporate bodies, rather than growth rates or other abstract economic indicators.

It would appear that the choice will increasingly be between (a) the current de facto targeting of per capita GDP along with an almost random array of narrow, easily manipulated indicators that have no necessary relationship to societal goals, and (b) the targeting of consistent, transparent, mutually supportive indicators that represent meaningful social outcomes, under something like a bond regime.

Social Policy Bonds are not perfect, but they still, I believe, would be better than the current system.

18 December 2010

Government doesn't do diversity

Discussing some of the perils of the internet, Nicholas Carr mentions Frederick Taylor's system of scientific management. It brings great efficiency advantages to manufacturing, but took away the employee's need to:
'make his own decisions about how he did his work. ... After Taylor, the laborer began following a script written by someone else. ... The messiness that comes with individual autonomy was cleaned up, and the factory as a whole became more efficient, its output more predictable. Industry prospered. What was lot along with the messiness was personal initiative, creativity, and whim. Conscious craft turned into unconscious routine. Nicholas Carr, The Shallows (page 218)
The trade-off probably works in society's favour when the productivity gains are sufficiently great, and when employees have other outlets for their creativity. Where society stands to lose, though, is when ostensibly scientific scripts are applied inappropriately, and when there is no possibility of their being superseded either by better scripts, or adaptive behaviour. I think this applies to much of current policymaking, where we commonly see approaches that have been tried, tested and found to be inefficient or useless being applied again and again to social and environmental problems.

This need not be a total disaster, so long as there remains in the policy arena some approximation of the 'creative destruction' that characterises perfectly competitive markets. But, sadly, that condition applies less and less to our more serious global or national problems. Government wants to apply its monopolistic approach not only to those areas, such as provision of public services, where that can work well, but also to challenges, like climate change, that urgently demand diverse, adaptive approaches. Government at all levels increasingly takes away our autonomy and writes the script on our behalf. This tendency is partly a fear of litigation where, so long as you can prove that you've ticked all the boxes, you are covered. But it's also simple inertia, whereby government agencies react rationally to the incentives to enlarge their powers.

One remedy might be Social Policy Bonds, whereby government can still set targets and raise the revenue necessary to achieve them. But it can disengage from actually achieving them and from stipulating how they shall be achieved. For complex problems, where our current knowledge is scanty, and where a mosaic of different approaches is going to be necessary, we need to encourage 'creative destruction': that is, experimentation, with the termination of failed trials. We need, in short, diverse, adaptive approaches, of the sort that government (or any single, large organisation) cannot take. A bond regime, where highly motivated investors would always be on the lookout for better ways of doing things, could be the way forward.

13 December 2010

Going where government cannot go

In many policy areas, government does about a good a job as we could expect any single agency to do. Government does well when it's clear what sort of action is required, and when it alone has the organising capacity and authority to get things done. These are generally areas where the problems are obvious, have obvious causes, and where the ways of solving them have been tried, tested and (by and large) successful. Much of the low-hanging fruit has been picked. In most developed countries sanitation is universal or at least widespread, as are literacy and basic health, education and housing. But there are still serious problems, which our current political system seems incapable of addressing.

Perhaps most important are the potentially catastrophic events, often man-made, which our political system is adept at postponing into a fast-approaching future. But, as well, and equally as significant to many, are those policy areas where government has done a lot, but is trying to do more - and failing. And, because it's still trying, it has crowded out initiatives from others, so that the problems remain unsolved.

Take crime, for instance. Most of the heavy lifting has been done. By the standards of even 100 years ago rates of almost all crime are low. But crime still blights many lives and we could perhaps open up crime prevention to diverse, adaptive approaches, of the sort that government cannot follow. Similarly with infant mortality, domestic violence, basic education, health and, more broadly, poverty. Government probably can't do much more than it's already doing so long as it monopolises the actual attempts to alleviate these problems. The single agency, top-down approach tends to be inflexible, incapable of adapting to differing or rapidly changing circumstances.

Government can't solve these problems, but it can tax its population under the pretext of trying to do so. And that's where Social Policy Bonds could enter the picture. Rather than try to reduce crime still further (or raise literacy to 100 percent, or whatever), which it is not doing efficiently, it could contract out the achievement of these goals to the private sector. Under a bond regime it would still be aiming for the same goals, and it would still be the ultimate source of revenue for funding their achievement, but it would be investors in the bonds who would actually achieve them. They would be motivated by the consequent rise in the value of their bonds, as they help achieve the targeted goal.

The same reasoning applies at all levels, and to problems, such as the ending of war or the avoidance of catastrophe, where government hasn't even picked the low-hanging fruit.

For more about Social Policy Bonds, click here. For the application of the Social Policy Bond principle to catastrophe, click here.

09 December 2010

What drives policy?

What does drive policy? Ideology, soundbites, emotion, personality, and institutional inertia are all prime motivators. Another is the desire to be associated with glamour. As the UK Government looks at spending £30 billion of taxpayer funds, which it can ill afford, on high-speed rail, it's all too easy to see the appeal of the grandiose, at the expense of the public, the environment...well, everything really.
The macho culture of local and national politics means that councillors, county surveyors and politicians want to be associated with grand projects: building a bypass, or a bridge, or a tram or fast train line. Car Sick: solutions for our car-addicted culture, Lynn Sloman, 2006
Transport is typical policy-as-if-outcomes-are-irrelevant territory. You might think that poverty, housing, health and education are more obvious policy areas: in which government intervention can bring about meaningful improvements in wellbeing for society's most disadvantaged people. You might also think, with me, that if it's worth spending billions of pounds to upgrade rail links that will shave a few minutes off journey times, then the private sector should be bear all the risk. But no, politicians feel they must get in on the act.

A Social Policy Bond regime wouldn't put up with such wasteful nonsense. Transport is a means to various ends, not an end in itself. Government should target those ends, and let motivated investors in Social Policy Bonds work out the best ways of achieving them. Clarity, in particular about the distinction between means and ends, is missing from today's policymaking environment. The result is we get lumbered with expensive, futile projects, while those things that government should be doing - and that only government can do well - are too often neglected.

05 December 2010

Safe prediction: Cancun will fail

It's too early to say whether the Cancun climate change summit will be deemed a success or not. By keeping expectations low, the myriad bureaucracies involved will be able to term any agreed string of words a victory. One thing though is certain: in any meaningful sense, Cancun will fail. How can I be so sure? For one thing, it is not concerned with climate change: it is entirely preoccupied with (1) political jockeying and finger-pointing, and (2) greenhouse gas emissions. For another, any agreement or commitment (or, more accurately, declared commitment) will be based on current science; it will not have the capacity to adapt to our rapidly expanding scientific knowledge. Bureaucracies understand top-down, one-size fits all, centralised decision-making. They don't understand diverse, adaptive approaches, and they certainly don't like relinquishing control to people who might be better at actually getting things done than government agencies or their pals who run gigantic corporations. Their real expertise at the international level is in making declarations of intent and organising the transfer of large sums of cash from taxpayers in the rich world to such corporations and third-world elites.

So is there anything positive I can suggest? I've talked and written about Climate Stability Bonds for many years now. As far as I know, nobody's thinking about issuing them. Yet they are the only instrument that I've heard of that can address the doubts (genuine or otherwise) about whether climate change is happening, the huge uncertainties over its likely effects and the best ways of dealing with it, and our rapidly expanding scientific and technological knowledge. Even more important, they are the only suggestion I've seen that will subordinate all policies and all activities and intervention to what we actually want to achieve, rather than to the supposed means of reaching it: a stable climate. That's a versatile and adaptive goal, which can encompass plant, animal and human health, and physical, social and financial targets and ranges.

Current policy, including Cancun, will focus on net emissions of those gases thought to be greenhouse gasses. That's not the same as climate stability. So, in the unlikely event of an agreement in Cancun with which the signatories will actually comply, you can be sure that in any meaningful terms the summit will fail.

25 November 2010

Innovation is a threat to the public sector

But the benefit of competition is not just that it serves customers’ needs today, but that it is a mechanism for adapting to what they will need tomorrow. The dynamism of a market economy comes from innovation in products and processes, and radical innovation in products and processes often – in fact usually – comes from outside the existing market structure. Apple is changing the nature of the phone industry, Amazon the book business. But anyone who had approached these industries from the marketing or the legal standpoint would have concluded that there was enough competition already. Radical innovation rarely comes from within, John Kay, 'Financial Times', 24 November
There are bodies, whose weaknesses Mr Kay discusses, that are charged with improving competition in the private sector. And it's true that they are often needed. It's unfortunate, though, that there's no such mechanism for public sector monopolies, because it's these bodies, typically government agencies, that are supposed to bring about social outcomes that, from a broad perspective, are far more important than reasonably priced books or phone calls. We rely on various levels of government to, for example, relieve poverty, reduce crime rates or insure against environmental - or financial - catastrophe. The absence of innovation in achieving these outcomes is an embarrassment. Yes, there have been some minor changes in the identity of the service-deliverers, some contractings-out and quite a few privatisations. But on the whole, the contrast between the private and sectors is stark. Our political system, like any other institution, has as its over-arching goal that of self-perpetuation, and its interests are not only different from those of ordinary people; they are often in conflict with them.

Perhaps Social Policy Bonds could re-align the goals of our policymakers with those of the citizens they are supposed to represent. Under a bond regime how outcomes are delivered, and who delivers them, would be less important that the fact of their delivery. There would be less discussion about structures and spending; instead there'd be a constituency of highly-motivated investors whose goals would be entirely congruent with those of society. By maximising their own rewards, bondholders would be necessarily achieving social goals, whether they be local, national or even global, as efficiently as possible. Innovation, to investors in Social Policy Bonds, would be an opportunity not, as under the current system, a threat.

14 November 2010

Catastrophe avoidance: we're not doing it

Stepping back from the society's turmoil for a moment, it's pretty clear that we aren't developing ways of dealing with our social and environmental problems. The negative impacts of a person or firm's profit-making used to be either small, or uncertain, or simply ignored because society as a whole counted for too little against the power of wealth. There was much distress, then, as costs of economic activity were socialised, while most of the gains accrued to the few. In response, we have laws, rules, and regulations. But the disparity between the wealth of the corporate sector and the ever more constricted and degraded lives of most individuals has rarely been so striking as today. On the whole, the aggregation of corporate incentives is not, these days, seen as improving the quality of life of most of the population. The planet is too small for the corporate sector's bye-products, social and environmental, to be absorbed or ignored as in the past. And corporate incentives now influence (to put it mildly) much of government: the form of organisation whose legitimacy is entirely based on its role in enhancing the lives of most of its citizens. No wonder, then, that we are facing multiple crises, taking the forms of cynicism and despair about politics, and threats of massive financial, economic and environmental disruption.

In response, I believe we need to make a conscious effort to re-align incentives. Society and the environment are too complex and rapidly changing for market failure to be addressed by laws, regulations and small-scale tax or price adjustments. We urgently need to give priority to things that really matter. I'd target, above all else, the avoidance of catastrophe, however caused.

Social Policy Bonds are one way in which we can give catastrophe avoidance the priority it deserves. It's clear now that it needs explicitly to be targeted, and Disaster Prevention Bonds are one way of rewarding people for maintaining a habitable planet. How would they work? Governments (and non-governmental organisations) would set up a fund that would be used to redeem bonds, issued on the open market, that would become valuable after a sustained period during which no major disaster has occurred. Investors in the bonds would have incentives to anticipate potential catastrophes and seek out those ways of avoiding them that are most cost-effective. The advantages over the current way of doing things are many: The exact nature of the catastrophe need not be known in advance. We'd stimulate a diverse, adaptive range of approaches. Cost-effectiveness is built into the bond mechanism. In effect, we'd be creating a new, protean, type of organisation: one that, in contrast to the current multiplicity of, mostly, ineffective bureaucracies, would be motivated not merely to turn up for work and perform various activities, but actually to achieve an explicit, urgent, and vital goal: the survival of human beings on planet Earth.

06 November 2010

Why wait centuries?

The late Tony Judt, historian, in an interview published in The Nation, 17 May:
Democracy has always been a problem. The truly attractive features of the Western tradition that we accidentally - and it really is accidentally - get the benefit of are the rule of law, liberalism and tolerance, all of which are virtues inherited from predemocratic societies, whether they were based in eighteenth-century Anglo-American aristocratic individualism or nineteenth-century European forms of a type of developed postfeudal legal state.
Indeed, the accidental effects of human actions can be beneficial as well as disastrous. Adam Smith's Invisible Hand generates material benefits, as does government planning. But they also create social and environmental problems, and only partly because of market failure. In my view, the world is too small now for the solution of social and environmental problems to be left to chance. And, once we have achieved, however haphazardly, virtues such as the rule of law, liberalism and tolerance, and once we see recognise their importance, we can consciously set out to maintain them.

This is what Social Policy Bonds could do. One of the great advantages of the bond approach is that we can encourage people to achieve social goals without anyone knowing in advance how they will do so. Issuers of 'Rule of law' Bonds could target the achievement of rule of law, in societies that currently don't have it; and its continuance in societies that do. The accidental achievement of rule of law (and liberalism and tolerance) in the societies that have it took centuries of conflict and bloodshed. We cannot know how best to achieve these virtues in remote, complex societies, nor how to sustain them in more fortunate societies. But we can offer incentives for people to do so. Yes, defining what we mean by 'rule of law' poses difficulties. But the alternative, waiting for societies to achieve it accidentally is unlikely to be any easier.

02 November 2010

No way...

No way to check emissions puts climate deal in danger reads the header of a recent article by Fred Pearce in 'New Scientist'. One example:
China does not record CO2 emissions from its small coal-burning factories and long-standing fires in mines which may result in under-reporting by as much as 20 per cent. The uncertainties for other greenhouse gases are even greater.... 'New Scientist', 9 October (page 12)
Another article, Dead Oceans, in the same issue (page 37) talks about the possible consequences of oxygen-deprived dead zones in the oceans; a result of warmer waters and the smaller quantity of dissolved oxygen they can contain. These regions:
...could come to host bacteria that emit nitrous oxide, a powerful greenhouse gas. Working out the likely extent of such feedback processes...will be a major preoccupation for scientists in the coming years.
We might not have those years. Our policymaking systems are incapable of dealing with a problem like climate change. Focussing as they do on processes and institutions they seek, at their best, to identify the causes of problems before they set up institutions supposed to solve them. Of course, these institutions develop their own agenda, and the people working for them aren't paid in ways that reward successful solutions but, given sufficient funding and sufficiently robust knowledge of the relationships between cause and effect, and plenty of time, this mechanism has been known to work.

Sadly, though, the deficiencies of such an approach become serious flaws with potentially disastrous challenges like climate change. The relationships, as the two snippets quoted above suggest, are just too uncertain and complex. Our knowledge of them, though expanding rapidly, is too sparse to generate the buy-in required to deliver effective solutions. We need diverse solutions that can adapt to changing circumstances and our expanding knowledge. And we need to target the outcome we want to achieve, rather than waste years trying (and, most likely, failing) to identify the important scientific and economic relationships before we take effective action.

That's where Climate Stability Bonds could help. They'd be issued by some global organisation, and be backed by contributions from national governments. They would define some climate target, probably in terms of a combination of physical, biological and financial indicators. The bonds would reward the maintenance of a climate whose index fell within defined boundaries. It would be up to investors in the bonds to decide how best to deploy resources to achieve our goal. They would have incentives to do so as cost-effectively as possible. It would be up to them to keep abreast of all the important science. They would adapt their approaches as our knowledge expands. Every aspect of this behaviour would be far, far better than the current approach, which, to put it mildly, is not working.

30 October 2010


Even little New Zealand feels it has to subsidise the rich:
The extra [NZ]$20 million subsidy for The Hobbit will be paid as a tax break on a pool of profits to be shared by actors and other workers on the films, including director Sir Peter Jackson, it is understood. The Government has kept under wraps details of the extra cash incentive to Warner Bros, which comes on top of the 15 per cent subsidy worth about $65m on the budget for the two movies of about $670m. Prime Minister John Key said yesterday that commercial confidentiality meant he could not say what the money would go on. Source
This is rancid politics. It's government pandering to the rich and glamorous with taxes paid by ordinary people. It's quite outrageous.

27 October 2010

The problems are systemic

Johann Hari sums it all up in an article about US politics, but which could apply to all the democratic countries:
If you want to run for national office in the US, you have to raise huge sums of money from corporations and very rich people to pay for the adverts and the mailings that get you on the ballot and into office. These corporations will only give you money if you persuade them that you will serve their interests once you are in power. If you say instead that you want to prevent anything destructive they are doing to ordinary people, or tax and regulate them, you will get no money, and can't run. As the Wisconsin politician Ed Garvey puts it: "Even candidates who get into politics with the best of intentions start thinking they can't get re-elected without money. Senators get so reliant on the money that they reflect it; they stop thinking for themselves, stop thinking like the people who elected them. They just worry about getting the money." ...[W]e have to be honest: the continuities with [President George W] Bush are far more pronounced than the differences. The real reason Obama has let us down - and endangered us, 25 October
Against this systemic flaw, what can Social Policy Bonds offer? The clue is in my tag line: Policy as if Outcomes Mattered. The current system is too indirect. Apart from representing our views and raising revenue, government and officials are employed by organisations that are supposed to achieve these goals: government agencies, or contractors working for them. This obscures the relationship between intention and achievement. It's particularly corrosive when there's no correlation between social outcomes and the rewards to the people who are supposed to be achieving them. The system is inherently cynical: if a government agency, at any level, is too successful in, say, reducing crime, or raising literacy, it's likely to shrink in size, with its funding reduced accordingly.

It's no surprise then that, with such a loose connection between government and outcomes, ordinary people are turned off by the whole exercise. Those who do take an interest are those who are paid to: lobbyists, usually employed by large organisations: corporations, trade unions, religious bodies, or government agencies themselves. These organisations have as their overarching goal, not the interests of society, but their own self-perpetuation. Who loses? Ordinary people. Who wins? The wealthy organisations, as Mr Hari elouqently points out.

Social Policy Bonds could help. Under a bond regime, society's goals would have to be declared at the outset. We'd focus on outcomes. Not the structures or funding of government agencies; not the personalities, peccadilloes or ideology of prominent politicians; and not the high-sounding, emotional, appeals to patriotism or other sound-bites, crafted solely to garner votes under an inherently corrupt system. Government's role would be to articulate our goals, and to raise the revenue required to achieve them. But, because our politics would be expressed in terms of outcomes and their costs, ordinary human beings could participate in the policymaking process. And end in itself, but also a way of engendering buy-in - something that we need if we are, as a society, to meet our urgent social and environmental challenges.

18 October 2010


[President Obama's] political difficulties began with the revelation that AIG, which had received $170 billion from the government, had paid out $165 billion in bonuses to the division that had brought the company down. [Treasury secretary Timothy] Geithner had known about the bonuses but insisted there were no legal grounds to block them. (It then came out that Geithner had pressured Senate Banking Committee Chairman Chris Dodd to insert a provision into the stimulus bill that protected the bonuses.) The Unnecessary Fall, John B Judis, The New Republic, 2 September
This is what happens when politics becomes a specialised craft; something so arcane that outsiders take no interest, out of apathy or cynicism. But it's the outsiders - that is, ordinary people - who suffer as a result.

One answer to the alienation caused by this extreme specialisation is perhaps more specialisation in the form of Social Policy Bonds. Under a bond regime, politicians would be limited to what they do best: articulating society's wishes and raising the revenue for their achievement. But the actual choice of objectives and their relative priority, would be in the hands of the public. And the public would be far more likely to take an interest: we'd be choosing outcomes. Outcomes that are meaningful to ordinary people. Targets like lower crime rates, more employment, a cleaner environment. Expressing politics in terms of outcomes is far more likely to engage the public than the (deliberately, one might think) opaque discussions about process, institutional structures and legalisms that feature most prominently in current politics. Once targets have been set, a bond regime would contract out their achievement to investors, whether they be public or private sector. They would have incentives to be efficient: the bonds would always be in the hands of those who believe they can achieve society's targeted goals most cost-effectively. A stark contrast with the current system, where most of the people working for organisations charged with achieving social goals are paid simply to turn up at the office. I refer, of course, to government agencies.

Social Policy Bonds, in short, would see politicians and the market each do what they are best at. Respectively: expressing our wishes as realizable, costed goals and raising revenue; and allocating resources to achieve these goals most effectively.

13 October 2010

The caste of politicians

Brendan O'Neill articulates our disenchantment with today's politics, commenting on the recent leadership contest for the UK opposition Labour Party:
[T]his was a decadent, neo-aristocratic affair, with various party grouplets shifting their allegiances around for no clear or rational reason, while media insiders sought to provide a political personality and narrative for Ed [Miliband, the eventual winner]. Spiked, 27 September
More than ever, politics resembles a caste system. Any causal relationship between the public's goals and actual outcomes seems more and more to be coincidental: a random occurrence, independent of the wishes or actions of the politicians.

Social Policy Bonds offer a way to reconnect the public with policymaking. Under a bond regime, instead of choosing professional politicians, people would choose the social and environmental outcomes they wish to see. Instead of government-funded ministries and departments choosing how to bring about undeclared, vague, or mutually conflicting objectives, as under the current system, a bond regime would see the spontaneous creation of a new type of organisation, whose structure and activities were entirely subordinated to society's goals.

Of course, any adjustment to such a rational system of policymaking would take time. In my book I describe a migration pathway; essentially entailing the gradual reduction in funds allocated to traditional organisations along with a corresponding expansion of funds allocated to redeeming Social Policy Bonds. It would mean a radical re-thinking of the way in which society is organised. But the alternative - the entrenchment of a political caste almost totally removed from ordinary people, and consequent alienation of even more of us from politics - would be far less edifying.

10 October 2010

Means and ends

Michael Mascarenhas asks "how do we actually measure this complex activity known as water access in subsistence communities?" and, as his article shows, it is a genuine problem. In rural Africa it's difficult to imagine any centralised system of programme funding allocation and assessment working well. The well-being of an individual or community, while it is likely to be accurately perceived by insiders, would be difficult to quantify in a way that's useful to national or NGO decision makers.

But the Social Policy Bond approach could help. Rather than try to measure such abstract concepts as 'availability', it would instead focus on, and target, the benefits that such availability will have on verifiable outcomes: infant mortality, morbidity, longevity, birth weights, to give a few possibilities. It would be a shame, I think, if the failed paradigms of the west - the implicit or explicit targeting of such close-to-meaningless accountancy-type abstractions as 'the economy', GDP etc - were to be adopted by the developing countries. They have led us astray, quite dramatically; with the full ramifications yet to be felt.

06 October 2010

Numbers have limits

The dietary guidelines for Americans should focus on whole foods and eating patterns rather than individual nutrients, argue Dr Dariush Mozaffarian and Dr David Ludwig in the Journal of the American Medical Association pointing out that this is not a radical approach at all, but a return to more traditional, time-tested ways of eating. ‘The greater the focus on nutrients, the less healthful foods have become,’ they write. Quoted in GI News
As society grows more complex and centralised, we see metrics taking over from intuition, instinct and insight. Much as we might try to define well-being in terms of numerical indicators, they are always going to be imperfect at best and in conflict at worst. We might, for instance, target an indicator like literacy for instance but, in doing so, transfer resources away from infant mortality, say, in such a way as to reduce overall social well-being. It's a difficulty for the Social Policy Bond approach, but it's also a difficulty with the current approach to policymaking.

The bonds do have the merit of forcing a focus on what policy is out to achieve, and to express these goals in terms of objectively verifiable numbers. That, in turn, would focus attention on those metrics that are inextricably linked to well-being. Lofty sounding goals ('punching above our weight', 'making us more secure', 'safeguarding the auto industry', 'saving the family farm') would be seen right from the beginning for what they are: distractions - and often very expensive distractions. A bond regime would probably then see more emphasis on safety-net measures: it is for the most disadvantaged that numerical indicators (of income, nutrition, literacy, for instance) most closely correlate with well-being. It would also show a sharper focus on reducing the probability of catastrophe (via Disaster Prevention Bonds, for instance) because, unlike under the current system, the precise nature of the catastrophe need not be specified in advance for funds to be devoted to its mitigation.

The limitations of metrics could function as a useful discipline. They would tend to concentrate government interventions on those policy areas where they can do most good: helping the disadvantaged and insuring against catastrophe. Government could limit itself to those areas without issuing Social Policy Bonds, of course. But they don't.

27 September 2010

Don't watch this space...

...well, not too avidly anyway.

My 800th post, so time once again to look at where Social Policy Bonds are heading. The answer is a little disheartening: nowhere. At least, not that I'm aware of. More dispiriting still, the distance between ordinary people and the politicians who are supposed (in the democracies) to represent them appears to be growing wider. But what about the Tea Party movement? Isn't that a genuine grass-roots, bottom-up, closing-the-gap, trend to be welcomed? At first sight, perhaps. But its funding sources raise suspicions and, more important (to me) is that it seems less interested in outcomes and more interested in the same distractions that bedevil conventional politics; foremost among them personality and ideology.

Politicians are becoming a class apart, sharing few of the concerns of their constituents. Corporations, and especially the biggest corporations, are ever more influential in determining policy. Natural persons view politicians with disdain; politics with indifference, cynicism or despair. A realignment, along the lines of Social Policy Bonds, whereby government targets outcomes that are meaningful to ordinary people cannot come soon enough.

21 September 2010

What did they expect?

An analysis published a few days ago by the campaigning group Sandbag estimates the amount of carbon that will have been saved by the end of the second phase of the EU's emissions trading system, in 2012; after the hopeless failure of the scheme's first phase we were promised that the real carbon cuts would start to bite between 2008 and 2012. So how much carbon will it save by then? Less than one third of 1%. Source
Climate change might be our most urgent environmental challenge. Or it might not. It might lead to catastrophic changes in weather patterns around the world, threatening millions of those people who are least able to adapt. Or it might not.

Our policymaking system doesn't deal well with such uncertainty. It's in most policymakers' interests to delay significant action until it becomes impossible to ignore the consequences of doing so. In similar policy areas, perhaps in most, that isn't too disastrous a policy. But there are occasions when the scale of the consequent disaster is immense.

In all these years of discussion about climate change, I haven't been persuaded that there's anything more likely to meet the climate challenge effectively than Climate Stability Bonds. Under a bond regime, the private sector would bear the consequences of over- or under-estimating the severity of the problem. And they would do so adaptively. That contrasts with the current approach, whereby policymakers employ a limited number of experts using today's science in an attempt to grapple with tomorrow's events - at a time when our knowledge of the causes and consequences of climate change is small, but expanding at a prodigious rate.

It's no wonder then that, perhaps at the unconscious level, our policymakers have decided to do nothing, other than engage in bureaucratic displacement activity. There's an unknowable, but non-zero, probability that we shall get lucky, and that this approach will prove to have been wise; but we can know that only in retrospect. And even if that were to be the case, Climate Stability Bonds, because of the way they work, would still have functioned as an insurance policy. One that could have a massive positive payoff, and one that in any event would be no more costly than the pointless rituals that signify the current way of pretending to deal with the problem.

20 September 2010

Incentives for peace

...I hear two of the wisest Israelis I know say quietly that, against all odds, these peace talks will succeed, because "we are all so tired, so weary for peace", then the Ararat test is the one to set. Can Jews and Arabs opt to forget en masse? When misery is a legacy, Peter Preston, 19 September
In truth, we don't really know whether tiredness - or forgetting, for that matter - lead to peace. Society is so complex, there are bound to be occasions when either condition could contribute to war. You might just as easily find an Israeli or Arab say "we are all so tired, so weary of being persecuted by the other side...". Which is not a gloomy hypothesis: it suggests that peace can break out at any time, regardless of expectations or the views of commentators or the opinions of political leaders.

But incentives matter, and the dice are still loaded in favour of protracted Middle East conflict. Entire bureaucracies and career pathways for ambitious politicians, arms companies and men (generally) of so-called religion depend depend on this and other conflicts continuing into the indefinite future. These people aren't not necessarily evil. They, for the most part, didn't deliberately or even consciously perpetuate the conflict or the conditions that keep it going. But they do depend on its continuing.

And that's why the Social Policy Bond principle can break the circle. The politicians, the generals, the men with beards and countless others are reacting rationally to the incentives on offer. Those incentives are geared toward perpetuating conflict, and not only in the Middle East. Changing these incentives so that peace is rewarded instead of penalised could change everything. And a bond regime could do that. The backers of Middle East Peace Bonds don't need to work out who or what is responsible for the conflict; they don't need to devise road maps or put their livelihoods (or lives) on the line. All they need to do is to define the sort of peace they want to see, and pump as much of their own and other people's money into redeeming the bonds once their peace target has been achieved and sustained. It would be up to investors in the bonds to work out the most effective and efficient ways of reaching that target. They would probably deploy a diverse range of approaches; they would have incentives to explore, implement and adapt the more promising of these, and to terminate the failures. The bonds' backers would be recasting the incentives to encourage peace making, and if there were sufficient funds behind them, there's no reason why they would not succeed.

People casually talk about conflicts that are 'intractable'. I say, read up about the 300-year conflict between England and Scotland, then take a look at the Anglo-Scottish border. It's pretty quiet these days.

14 September 2010

What drives policy?

Sometimes rationality takes a back seat:
Based on surveys ...the top five worries of parents are, in order:

1. Kidnapping
2. School snipers
3. Terrorists
4. Dangerous strangers
5. Drugs

But how do children really get hurt or killed?

1. Car accidents
2. Homicide (usually committed by a person who knows the child, not a stranger)
3. Abuse
4. Suicide
5. Drowning

Quoted by Bruce Schneier, orignally from NPR
Unfortunately, policy is often made on the basis of public perception, rather than a cool, rational appraisal of the facts. It's a widespread problem:

…policies are often adopted on the basis of less careful analysis than their importance warrants, leaving wide room for mistakes and misperceptions. Forces of knowledge destruction are often stronger than those favoring knowledge creation. Hence states have an inherent tendency toward primitive thought, and the conduct of public affairs is often polluted by myth, misinformation, and flimsy analysis. Source (pdf)

Social Policy Bonds could make a difference here. We react to events impulsively and irrationally but we do so for a reason: generally, to return to the status quo ante. Often, in our irrationality, we overreact. 'Too much, too late', is the common, and destructive, impulse. A bond regime, in contrast, would supply incentives to achieve the same goal, but more rationally. So, for instance, if our goal is to minimize the dangers to children, we could issue Social Policy Bonds that would aim to reduce the numbers of people dying or suffering serious injury, from any cause, before the age of 18. This goal would be stable over time, despite events that in today's environment would sway politicians and lead to irrational policy. But at the same time, investors in the bonds would have incentives to react rationally and efficiently to genuine changes in the number and severity of threats to children.

09 September 2010

The American ruling class

Today, few speak well of the [American] ruling class. Not only has it burgeoned in size and pretense, but it also has undertaken wars it has not won, presided over a declining economy and mushrooming debt, made life more expensive, raised taxes, and talked down to the American people. Americans' conviction that the ruling class is as hostile as it is incompetent has solidified. The polls tell us that only about a fifth of Americans trust the government to do the right thing. The rest expect that it will do more harm than good and are no longer afraid to say so. America's Ruling Class -- And the Perils of Revolution, by Angelo M. Codevilla, 'The American Spectator', July-August
Even years after policies have been implemented, it's often difficult to know whether they were right or wrong. For that reason alone, public buy-in is increasingly necessary, as society becomes still more complex and interdependent. One reason such buy-in is difficult to bring about in today's policymaking environment is the casting of policy in terms of activities, lofty but vague ideals, spending patterns, and arcane legislative decisions. It's difficult for ordinary people to understand and follow the policymaking process.

Social Policy Bonds could help generate more public participation and more buy-in. Their starting point is the targeting of outcomes that are meaningful to natural persons - as distinct from abstractions like corporate profits, or 'the economy'. Discussion would centre on these outcomes, their costs and relative priority.

It's dangerous, I think, when people become feel so alienated from the political class that we become cynical or despairing. Even sound, sensible policies then become objects of suspicion. Buy-in to crucial policy decisions, in times such as these, is not a luxury. It's a necessity and one that the current system is failing to provide.

04 September 2010

I estimated that the subsidy for off-street parking [in the US] in 2002 was between $127 billion and $374 billion, or between 1.2 percent and 3.6 percent of the gross domestic product. In comparison, in 2002 the federal government spent $231 billion for Medicare and $349 billion for national defense. Donald Shoup, Shoup to O’Toole: The Market for Parking Is Anything But Free, 1 September
How do we get ourselves into this sort of mess? Bureaucracy and the big corporations have their own agenda. When it comes to parking, it takes the form of mandated parking spaces for new buildings, residential and commercial. To the vast majority of us who are turned off by the whole policymaking process, minimum parking requirements sound sensible, at first hearing. (So too, did subsidies to 'family' farms, many decades ago.) The end result is the apotheosis of the car; subsidies from the poor (who have no, or minimal access, to cars) to the rich, and an aesthetic and environmental calamity.

One thing that outcome-based policy would do right from the start is bring into question such superficially appealing notions as minimum parking requirements. By focusing on ends, rather than means, Social Policy Bonds would lead to a total reappraisal of transport and town planning policy - and one in which ordinary people could participate. Is easy transport a means to an end, or an end in itself? What exactly are town planners trying to achieve? Are ordinary people consulted? Perhaps we'd all be better off if government at all levels were to target the minimal well-being of all its citizens rather than (inadvertently, perhaps, and surreptitiously, almost always) the agenda of big corporations.

03 September 2010

Through failure to success

If you want to be more successful, increase your failure rate. Attributed to Thomas Watson, founder of IBM
We can probably all attest to the wisdom of that dictum. The problem, as I see it, is that with highly centralised government and huge corporations, we are creating a policy environment that eliminates the diversity that gives rise to success through repeated experimentation and adaptation. Decisions in policy areas such as the environment or finance are taken at such a high level of aggregation that there is no realistic chance of comeback if they fail. Government favours the uniform approach, and big corporations can attribute much of their size to their ruthless elimination of competition - in defiance of their much-lauded 'market forces' - with the full connivance of government. The entities that dictate how our ever-smaller planet shall be run now are so large that we can't afford an increase in the failure rate.

We need to revert to an environment in which failure can not only be tolerated, but can perform its necessary function of generating improved policy. Social Policy Bonds are one possibility. Under a bond regime decisions could still be taken with the aim of improving outcomes at the global level. But, unlike under the current system, the bonds would stimulate the exploration, implementation and refinement of diverse solutions. By contracting out the achievement of broad social and environmental outcomes to the private sector, the bonds would encourage diverse approaches, many of which would fail to be efficient and effective solutions to our social problems. Et voila: an increased failure rate!

28 August 2010

Surrogate markers, in medicine and policy

A surrogate marker is an event or a laboratory value that researchers hope can serve as a reliable substitute for an actual disease. A common example of this is blood cholesterol levels. These levels are surrogates, or substitutes, for heart disease. If a medical study demonstrates that a medication can lower cholesterol level 10%, then we assume that this will also lower the risk of cardiovascular disease. Why doesn’t this same study determine if an anti-cholesterol drug decreases heart attack rates directly? After all, most folks would rather be spared a heart attack than have a silent decrease in their blood cholesterol levels. ...Surrogates often take on a life of their own, far removed from the actual disease they represent. Patients shouldn’t care if their ‘surrogates’ are improving; their objective should be to prevent disease, feel better and live longer. Evidence-based medicine in disguise: beware the surrogate, 'MD Whistleblower' (blog by Michael Kirsch), 1 August
Quite so. And as in medicine, so it is in policymaking, and for much the same reasons: 'It's much easier and cheaper ...to measure surrogates than actual disease events.' It's much, much easier to measure a government agency's spending than it is to measure its success or otherwise in delivering meaningful outcomes.

The problem isn't always that of measurement, or of short-term interests trumping long-term benefits. There is also the inescapable subjectivity of an important components of welfare: psychological wellbeing. To take one example that has obvious policymaking implications: in the UK for several years crime appears to have fallen, while fear of crime has risen (see here). The answer, if there is one, might be to re-localise some policymaking. Some of the most important components of wellbeing simply cannot be quantified and aggregated for efficient use by our highly centralised bureaucracies. Withdrawing unemployment benefit, for instance, could actually help someone who's lacking in motivation and would gain by being made to find a job. To another person, though, the loss of a welfare payment could mean calamity. No bureaucracy can make such a distinction, and we might not want one with the intrusive powers that could.

Social Policy Bonds are no different from conventional policy in that respect, except that they have to answer, upfront, the difficult question of whether a specified goal is a surrogate (a supposed means to an end) or an end in itself. Having to do that at the outset of making policy, is probably an advantage over the current system in which, too often, objectives are vague, conflicting, and only tenuously related to policy instruments allegedly supposed to bring them about.

25 August 2010

Biodiversity and Social Policy Bonds

Already the UN has conceded that the targets for safeguarding wild species and wild places in 2010 have been missed: comprehensively and tragically. Talk has not halted biodiversity loss - now it's time for action, Guillaume Chapron and George Monbiot, Guardian.co.uk, 13 August
It's a tough one. Some Guardian readers' ideas, many of them worth considering, are presented here. Could the Social Policy Bonds principle help? Part of the problem is to clarify whether biodiversity is a means to an end or an end in itself; and another is how to quantify what biodiversity is and what we want from it.

One option could be to for experts to list their top, say, 10000 plant and animal species, according to their intrinsic value, or their status as indicator species, representing the broader state of the environment, including biodiversity. It would probably be impractical to legislate effectively against serious depredations of such a large number of species. But a Biodiversity Bond, following the Social Policy Bond principle, could be issued, perhaps by a combinatin of governments, non-governmental organizations, and environmental bodies. What would such Biodiversity Bonds target? Not the health or survival of the full panoply of 10000 species; that would be too complex and expensive. But what about the health and habitats of, say, 100 of these species? That would be a fairly simple matter. The key to such a regime is that the 100 species would not be known in advance by either the bonds' issuers or investors in the bonds.

Instead, the 100 species could be randomly chosen from the 10000 towards the end of bonds' stipulated expiry period. The bonds could target a broad definition of biodiversity, encompassing the 10000 species, 30 years hence. Towards the end of that 30 years, 100 out of those 10000 species or habitats would be randomly chosen. If all 100 were doing well, surviving and thriving, the bonds would be redeemed. If not, they wouldn't.

Bondholders would then have incentives to preserve biodiversity of all the 10000 species (or ecological systems), but there need be no onerous, contentious and expensive monitoring of all 10000 species. Only a fairly small sample, randomly chosen after 29 years, need be examined. That, in my view, would make targeting biodiversity a practical proposition.

Your thoughts or comments on this idea are particularly welcome.

17 August 2010

An argument for a governing aristocracy?

Or perhaps, lottocracy? In a review of Philip Ziegler's biography of the former British Prime Minister, Edward Heath, Ferdinand Mount says:
[Heath] promised a 'quiet revolution', in terms which understandably convinced his right wing that he had come over to their way of thinking. By instinct, though, he preferred to control things rather than let them run free and endure the consequences. Plonking, Ferdinand Mount, London Review of Books, 22 July (subscription)
I wonder whether this is a feature of all non-aristocratic policymakers. Which is to say, those politicians - almost all of them nowadays, and definitely Mr Heath - who had to struggle mightily to get to their position. Effort is all very well but, especially when it has successfully advanced a person's career, it will predispose to a controlling mindset; one that will be predisposed to work on problems, rather than let them solve themselves. One that will be biased toward intervention and top-down, one-size-fits-all planning, rather than creating an environment whereby adaptive, diverse policies can achieve outcomes without government prejudging how they shall do so.

Social Policy Bonds could perhaps be a compromise. Under a bond regime, politicians would still articulate our social goals, and control their funding and priority; they would, though, relinquish their power to dictate how these goals shall be achieved.

15 August 2010

The costs of free parking

In his book, Professor Shoup estimated that the value of the free-parking subsidy to cars [in the US] was at least $127 billion in 2002, and possibly much more. ... “Who pays for free parking? Everyone but the motorist.” Free parking comes at a price, Tyler Cowen, 'New York Times', 14 August
One big advantage of Social Policy Bonds is their transparency. If we wanted to subsidise car drivers, for example, a Social Policy Bond regime would require that we do so with our eyes open. Under the current arcane, opaque policymaking process those interest groups with (essentially) the most muscle can manipulate the legislative and regulatory environment to suit their own ends. So we end up with free car parking for the minority of people who drive cars a lot. The price is high, but it's borne by society in general. The car drivers who benefit, pay very little. It's the same pattern in other sectors. The well resourced use the vagueness of current policymaking to their own advantage. And who are the well resourced? Large corporations or government agencies. More and more, it seems, their goals are not only different from those of ordinary people; they are in conflict with them.

14 August 2010


An article in the Atlantic, highlights the likelihood of Iran's developing nuclear weapons.
The Iranian leadership’s own view of nuclear dangers is perhaps best exemplified by a comment made in 2001 by the former Iranian president Ali Akbar Hashemi-Rafsanjani, who entertained the idea that Israel’s demise could be brought about in a relatively pain-free manner for the Muslim world. “The use of an atomic bomb against Israel would destroy Israel completely while [a nuclear attack] against the Islamic countries would only cause damages,” Rafsanjani said. It is this line of thinking, which suggests that rational deterrence theory, or the threat of mutual assured destruction, might not apply in the case of Iran, that has the Israeli government on a knife’s edge. The Point of No Return, Jeffrey Goldberg, 'The Atlantic', September
And much of the rest of the world. But if the leaders of Iran aren't rational human beings, that doesn't mean they aren't susceptible to incentives. The usual incentives might not apply to them, themselves. But the people who work for them, who follow their orders, who supply their centrifuges or generate their electricity: some of them will be susceptible. And this is where Social Policy Bonds could help. A Middle East Peace Bond or, more broadly applicable, a Disaster Prevention Bond, could focus people's attention on what needs to be done in a more systematic, incentive-driven manner, than the current array of high-stakes bluster, talks about sanctions, talks about talks and all the rest of it.

08 August 2010

Socialism, American style

That's the title of a post by Denis Weisman, which outlines some of the laws that protect US car dealers from having to beheave competitively.
Some states make it illegal to sell cars at lower prices to high-volume dealers than to low-volume franchisees. Some prohibit car companies from selling directly to the public (say, via the Internet) because it would adversely affect the competitive position of the dealers. Socialism, American Style, Denis Weisman, 26 July
How did this come about? It's the usual tawdry tale of lobbyists filling the vacuum created, in my view, by a complex political system that's opaque to non-specialists; that is, ordinary people, as distinct from corporations.
In the American political system, a highly focused, well-funded lobby with tight connections in every House district is almost unbeatable when it chooses to play rough.
It's policymaking by the rich, for the rich, and there's little sign of it ending any time soon.

You can see where I am heading with this. A Social Policy Bond regime would target outcomes. Outcomes that are meaningful to ordinary people. Corporate success would be a by-product of a prosperous population, not something that grows out of the power of the lobbyist. Government's raison d'etre is to enhance the wellbeing of the population, not corporations. Policymaking should subordinate corporate interests to those of ordinary citizens, and a Social Policy Bond regime would do that.

03 August 2010

Give greed a chance

Tyler Cowen asks:
How many [books on morality and markets] take seriously the notion that our moral intuitions can be badly misguided for judging the operation of an impersonal market economy in the modern world? Not so many, though all seem to think they do. Source
I sometimes am asked how Social Policy Bonds, which envisage self-interest as playing a still bigger role in our economy, can be reconciled with morality and ethics? I have two answers. One, that morality is at least as much a matter of outcomes as about the means of reaching them. Our private sector, whose motivation is profits (or sales, market share, or revenue), generates much of the tax revenue with which we help the disadvantaged and supply public goods and services. It also contributes much in the way of positive non-market impacts: through employment it alleviates poverty and crime, etc. In short, a system based (apparently) on greed, as regulated by government, enables us to raise the wellbeing of all, especially the disadvantaged: greed can be good.

My other answer is that what is labelled as self-interest and is disdained for that reason can be no more than someone going to work for money, to support him/herself and his/her family. Under a Social Policy Bond regime, investors in the bonds would make capital gains if they help achieve society's targeted goals. That doesn't make them profiteers or worthy of condemnation. It makes them entrepreneurs willing to take a risk so that they can pay themselves and people who work for them (at a lower risk) salaries. Competition for the bonds would bid away excess profits anyway. Largely for reasons of history and (I think) too-little-examined moral disdain for self-interest, we've been reluctant to channel self-interest into the solution of social problems. Those who are charged with solving them are rarely rewarded in ways that correlate with their success in doing so. Social Policy Bonds are my suggested way of channeling the incentives and efficiencies of the market into the achievement of social goals, including those, such as world peace and the elimination of poverty, that most would agree are morally uplifting. My header says it all.

30 July 2010

Evolutionary fitness

...5% of movies pay for the other 95%, and success or failure is unpredictable. The best the studios can hope to do is find contractual mechanisms that back success after it happens and thus leverage their profits. This was what they had with distributors and cinemas, and it worked. They just didn’t realise it was these deals and almost nothing else that was paying for their Cohiba cigars. The movie industry was what Arthur [de Vany]] loves best: “a complex, adaptive, decentralised system”. Exactly like the human body. Evolutionary Fitness: the diet that really works, Brian Appleyard [UK] 'Sunday Times', 17 August 2008
And exactly like human society. The problem is that top-down planning cannot deal with such a system: it much prefers to impose the idea of equilibria, steady states, homeostasis and normal distributions about the mean on systems to which they don't apply.
Almost all dietary and fitness regimes are based on a homeostatic view of the body – meaning it is a self-regulating system that maintains itself in a continuous, stable condition. The average is the ideal. So we are told to eat regular meals consisting of a balance of the food groups and to take regular exercise, dominated by steady aerobic activity like cycling or jogging. This is all wrong.
We have seen where this line of thinking takes us in banking and finance too (see my post about Black Swans). And I suspect it fails in other policy areas, such as welfare, health and education. Our tendency is to ignore or discount the possibility and impact of catastrophe.

This is one area where Social Policy Bonds can function as a societal insurance policy against large-scale disasters that policymakers would otherwise neglect. The cause of the the disaster need not be specified: the bonds would function in a similar way to increasingly popular catastrophe bonds, except that they would have the purpose - and the backing- of making it worthwhile for investors to prevent disasters happening. A national government (or a consortium of corporations, non-governmental organizations and concerned philanthropists) could issue Social Policy Bonds that would reward investors if an event killing more than, say 10000 of a country's citizens in any one 48-hour period, does not occur before a specified date.

Such Disaster Prevention Bonds would encourage investors to investigate all sources of potential disaster, impartially. Unlike current attempts at disaster prevention, then, they wouldn't concentrate on those disasters that have a high media profile, for example.

The concept could be scaled up: a collection of governments under the auspices of the United Nations or non-governmental organizations could issue similar bonds, aimed at preventing even larger-scale disasters, such as a nuclear exchange. It's also conceivable that, again, the private sector could issue bonds that could, for example, aim to defuse regional conflicts (preventing war), or lessen the impact of malaria or crop failure in specified parts of the world.

26 July 2010

Heading for disaster: Kyoto, Copenhagen and climate change

This is an updated version of an article that first appeared in Economic Affairs, 22 (3), September 2002, published by the Institute of Economic Affairs, London. If you wish to publish it, please email me.

There is overwhelming, but not quite conclusive, evidence that the global climate is changing. That said, scientists are divided as to (a) how fast climate is changing, (b) what is causing it to change, (c) the likely effects of climate change, (d) how much we can do about it, and (e) how much we should do about it. Despite these uncertainties, climate change has the potential to inflict serious harm on large populations, so there is a strong argument for doing what we can to prevent it or minimise its adverse effects.

The December 1997 Kyoto treaty required developed countries to bind themselves internationally to numerical targets. Despite Kyoto’s flaws, between 1990 and 2007 emissions of greenhouse gases did fall by 4% in these countries. (Carbon dioxide, which is given off by fossil fuel combustion, is thought to be by far the most important of the man-made greenhouse gases that form an insulating blanket around Earth.) But evaluations by leading scientists indicate that Kyoto’s environmental effects, for all the bluster and bureaucracy, may be so small as to be almost unnoticeable.

Yet we are heading for more of the same. If any successor to Kyoto is ever agreed - or, more important, implemented - we can look forward to minimal reductions in emissions; undetectable effects on the climate; ingenious attempts to game the system; and the squandering of billions of dollars on wasteful, corrupt schemes all over the world. The big beneficiaries will be third-world dictators, Swiss bankers, and the burgeoning bureaucracies at national and supra-national level who will be charged with administering and ensuring compliance with whatever absurd regime is agreed. This is not cynicism, it’s realism: Canada has exceeded its Kyoto target by 29%,[1] but does anyone imagine it will be punished? And do we really want to see national democratic governments coerced by yet another supra-national governmental body into doing something to which their electorates object?

The successor to Kyoto will share the same, ludicrous assumption that afflicted its predecessor: that government knows the best way of achieving its goals. But with climate change the biological and physical relationships involved are many and complex. Even specialists in climatology disagree about the degree to which any of the myriad components of the world’s climate contribute or react to climate change. It would therefore appear to be poor policy to impose expensive, divisive, unpopular and upfront controls on certain activities on the basis that they might help bring about a slightly more stable climate some time in the future.

People who were serious about addressing climate change would not embody the assumption that they know exactly how the Earth’s climate is changing, what is causing it to change, and what is the best way of dealing with any change. They would not ignore a potentially catastrophic problem, but would try to be as cost-effective as possible, especially because of the colossal expenditures that will inevitably be incurred. An ideal policy would encourage innovative solutions, stimulating the investigation and adoption of promising new technologies, and be open to new information about the causes and effects of climate change. It would most probably seek to constrain the negative impacts of climate change, while doing little to discourage any positive effects.

An ideal solution would also use markets. Now markets are getting a bad press right now. Many blame them for the current financial crisis and for environmental depredations. And it’s true that unregulated markets are being abused to serve purely private interests at the expense of the wider public. So it is important to remind ourselves that a market economy is consistent with many different outcomes and that market forces can serve public, as well as private, goals. Markets are simply the most efficient means yet discovered of allocating society’s scarce resources. An ideal solution to the climate change problem would use market forces to channel people’s self-interest into the solution of the climate change problem.

If such a solution could be found, it would be bound to attract more support from world leaders, non-governmental organisations, and the public in general than Kyoto. Such buy-in is essential, because any solution is probably going to entail enormous costs and sacrifices.

Targeting outcomes, not activities: Climate Stability Bonds

Climate Stability Bonds would be a new globally backed, financial instrument, designed to achieve climate stability, rather than to regulate emissions, activities or institutions. These bonds would be issued on the open market and would become redeemable for a fixed sum only when the climate had achieved an agreed and sustained level of stability. In this way there is no need for the targeting mechanism to make assumptions as to how to stabilise the world climate - that is left to bondholders.

There are obvious difficulties involved in defining what a stable climate actually is, but the same difficulties apply when attempting to monitor the success or otherwise of Kyoto, neo-Copenhagen or any other regime. A Climate Stability Bond regime could target an array of objectively verifiable indicators such as temperature, change in temperature, rate of change of temperature, precipitation, frequency of extreme climatic events, ice sheet volume and many other variables, at a wide range of locations. It could also target for reduction the effects of a changing climate on human, animal and plant life. All indicators would have to fall into a satisfactory range for a sustained period before the bonds would be redeemed.

Normal bonds are redeemable at a fixed date, for a fixed sum, and so yield a fixed rate of interest. Climate Stability Bonds would not bear interest and their redemption date would be uncertain.

Bondholders would gain most by ensuring that climate stability is achieved quickly.

Internationally backed Climate Stability Bonds would be issued by open tender, as at an auction; those who bid the highest price for the limited number of bonds would be successful in buying them. A fixed number of bonds would be issued, redeemable for, say, $10 million each, only when climate stability, as certified by objective measure­ments made by independent scientific bodies, has been achieved and sustained. Once issued, the bonds will be freely tradeable on the free market.

What will determine the price of the bonds? Most obviously, the market’s assessment of how close climate stability is to being achieved. Interest rates on alternative investments will also be a factor. The bonds would sell for small fractions of their issue price if people thought there were virtually no chance of climate stability being achieved in their lifetime. People will differ in their valuation of the bonds, and their views will change as events occur that make achievement of a stable climate a more or less remote prospect. They would also change as new information about climate, and about the causes of climate change, is discovered. But the bonds, once issued, would be transferable at any time. Bondholders, having done their bit to achieve climate stability, could sell their bonds, realising the capital gain arising from the higher market price of their bonds. These market prices would be publicly quoted, just like those of ordinary bonds or shares.

Assume that Climate Stability Bonds, redeemable for $10 million each, have been issued, and that they each sell for $1 million. People, or institutions, now hold an asset that can give them a return of 900 percent once a stable climate has been achieved. It is this prospect of capital gain that gives bondholders a strong interest in bringing about a stable climate, as cost-effectively as possible.

Climate Stability Bonds could be issued by a world body, perhaps one supervised by the United Nations or World Bank. This body would undertake to redeem the bonds using funds that could perhaps be obtained from all countries, in proportion to their Gross National Product. It would be up to individual countries to decide how to raise funds, presumably from taxation revenue. Importantly though, no bonds will be redeemed until the objective of a more stable climate has been achieved and sustained.

What would bondholders do?

How might bondholders aim to accelerate the achievement of a stable climate? They could:

· help finance countries’ or companies’ greenhouse gas emission control programmes;

· pay vacationers to stay at home rather than fly;

· supply solar heaters to villages and households in poor countries;

· carry out, or subsidise, research into schemes to remove greenhouse gases from the atmosphere.

Bondholders can also be expected to finance other climate stabilising initiatives, the precise nature of which we cannot, and need not, know in advance. Of course, governments, research institutes and others are already carrying out many of these activities. But there is a crucial difference. Under a Climate Stability Bond regime, the motivation arises from the self-interest of bondholders, who have the incentive to seek out those ways of achieving a stable climate that will give them the best return on their outlay. Their outlay, of course, is the taxpayers’ outlay. But note that it is only when the targeted degree of climate stability is achieved that governments end up paying for it. Until then, it is bondholders who have to finance the initiatives that they think will achieve climate stability. The issuing body will, in effect, be contracting out the achievement of climate stability to the private sector. But it will be stipulating the degree of climate stability that it wants, and undertaking to reward bondholders when that objective has been achieved.

Many will be skeptical that bondholders can actually do anything to combat climate change. It is true that too large a number of small bondholders would probably do little in isolation to bring about climate stability. If there were many such small holders, it is likely that the value of their bonds would fall until there were aggregation of holdings by people or institutions large enough to initiate effective problem-solving projects. As has happened with share privatisation issues, the bonds would mainly end up in the hands of large holders - probably institutions, brokers, governments or corporations.

Even then, each such body would probably not be big enough, on its own, to achieve much without the cooperation of other bondholders. They might also resist initiating projects until they were assured that other holders would not be ‘free riders’. But note that they will have a strong incentive to cooperate with each other, and to do so as cost-effectively as possible. If they did not, the market value of their bonds would fall. Their common interest in seeing climate stability achieved quickly means that they would share information, trade bonds with each other and collaborate on climate-stabilising projects. They would also set up payment systems to ensure that people, bondholders or not, would have an incentive to perform efficiently. Large bondholders, in cooperation with each other, would be able to set up such systems cost-effectively. Governments holding bonds would benefit by enacting legislation aimed at achieving climate stability, while large bondholders could lobby for such legislation, targeting their lobbying energies at those governments who will respond most readily.

Advantages of Climate Stability Bonds

There are two critical advantages that Climate Stability Bonds have over Kyoto and its likely successor. One is that the bonds do not rely on the robustness of our existing scientific knowledge. Kyoto aims to reduce emissions of a small range of gases. But there may be other causes of climate change that are far more important, of which we are currently unaware. And these need not be man-made: natural variability of climate has had severe impacts on human life in the past. Kyoto, responding to effects whose causes are uncertain, embodies a limited number of fixed ideas about the nature of the relationships involved. A bond regime, targeting climate change directly, may well lead to cuts in greenhouse gas emissions, but it would not assume that doing so is the best solution. Climate Stability Bonds improve on Kyoto because they encourage behaviour leading to the desired outcome, rather than seeking to control activities whose effects on the climate stability are not fully known.

The other major advantage of a Climate Stability Bond regime is that bondholders will support whichever climate stabilising projects will give them the best return for their outlay. These may involve controlling greenhouse gases, but they could also mean furthering research into such ideas as genetically engineered cyanobacteria that can soak up carbon dioxide from the atmosphere. The more efficient bondholders are in achieving climate stability the more they will gain from appreciation in the value of their Bonds. This efficiency maximises the degree of climate stability that can be achieved per dollar outlay. Because of the colossal sums involved, the benefits that Climate Stability Bonds offer in comparison to activity-based regimes, such as Kyoto, are likely to be huge.

Further advantages of a bond regime are:

· the bonds would have considerable informational advantages over such measures as Kyoto, which target activities rather than outcomes. Greenhouse gases are emitted from many sources. About half of carbon dioxide emissions, for instance, come from dispersed sources, such as cars and home heating systems. Immense quantities of information would be needed to establish and monitor a comprehensive system of control using taxes or tradeable emission permits. Costs of obtaining such information and resentment against the intrusiveness required to ensure compliance are going to be high. By contrast, Climate Stability Bonds would target and monitor a much smaller number of global indicators.

· governments would pay up only when a stable climate has been achieved - any risk of failure or of undershooting the climate stability target is borne by bondholders, rather than taxpayers;

· funds for global climate stability could bypass corrupt or inefficient governments or, by appealing to their financial self-interest (if they were bondholders, or bribed by bondholders) could effectively modify their behaviour in favour of achieving climate stability; and

· formulating the redemption terms for Climate Stability Bonds will entail clarifying of what is actually wanted. Framing the debate in terms of outcomes, rather than institutions or activities, will bring about greater public participation and buy-in to the entire process: essential of the challenge is to be met.

Achieving a stable climate will unquestionably require a wide range of diverse, responsive projects. Reducing greenhouse gas emissions or sequestering carbon may be helpful ways, but they are not necessarily going to be the most cost-effective. Other ways yet to be discovered may be far cheaper. Kyoto is, in my view, deficient, in that it offers no incentives to find out how to achieve a stable climate most cost-effectively. Climate Stability Bonds would encourage the most efficient solutions given the knowledge available at any time, and they would stimulate research into finding ever more cost-effective solutions. This occurs because of the nature of the bond mechanism, and requires no presupposition as to the optimal set of solutions. Scientists and governments would need to decide only on the objective - climate stability - not on the ways of achieving it.

Of course, the Climate Stability Bond concept involves surrendering of policy instruments to the private sector, and this may be difficult for politicians to swallow, even though, under a bond regime, they would continue to set, and be the ultimate source of finance for, the targeted objective. The potential benefits of a bond regime are colossal. In economic theory, and on the evidence of recent history, market forces are the most efficient means yet discovered of allocating society’s limited resources. Under a bond regime, government would do what it's good at doing: articulating society’s wishes and raising the revenue for achieving them. Where government often fails is in actually achieving these goals efficiently and that is where investors in the bonds would do what they are best at; exploring, investigating and implementing an array of approaches, while responding to events and our rapidly expanding scientific knowledge; all in the service of the overall goal of climate stability. Investors’ rewards would be inextricably linked to their success in bringing about society's climate stability goal, as articulated by national governments. Rather than punish countries, upfront, for dubious long-run benefits, the bonds would reward and motivate people for achieving demonstrable gains in climate stability.

Climate Stability Bonds are intended to channel the market’s incentives and efficiencies into the achievement of society’s overriding environmental objective. By appealing to people’s self-interest, Climate Stability Bonds could be far more effective at achieving climate stability than Kyoto or whatever deal is struck in Copenhagen. And, by targeting a desired outcome but leaving it for the market to achieve, the principles underlying the bond concept could show the way to solving other seemingly intractable global problems, including other environmental problems, war, civil war, disease and malnutrition.

© Ronnie Horesh, November 2009


Injecting incentives into the solution of social problems: Social Policy Bonds (September 2000), Ronnie Horesh, Economic Affairs, 20 (3), Institute of Economic Affairs, London, UK.

Injecting incentives into the solution of social and environmental problems: Social Policy Bonds (January 2001), Ronnie Horesh, iUniversity Press, USA. ISBN: 0-595-15374-7

‘Investing for the Future’, UK CEED Bulletin No 35 (September-October 1991), Centre for Economic and Environmental Development, Cambridge, UK.

[1] Avoiding a crash at Copenhagen, ‘The Economist’, 24 September 2009