23 March 2011

A single quality of life target?

Narrow social policy targets don't work. Take a goal like "halving the number of deaths from road accidents in the city centre". One response could be for city authorities to make driving attractive in all parts of the city other than the centre, with the same number of deaths occurring outside the target area. Another response (and one which would appeal to drivers in my neighbourhood) would be to encourage driving on the sidewalk, and exclude deaths occurring there from 'road' death statistics.

Even broad goals, such as improved health or educational outcomes, could conceivably be subject to the same manipulation or gaming, under a Social Policy Bond regime. Without very careful targeting, investors in the bonds could make unforeseen, negative trade-offs between societal goals.

Why not then target a single ‘quality of life’ indicator for the whole of society, taking into account all quantifiable social and environmental objectives: quality of life, physical and mental health, education level, environmental pollution, crime, homelessness unemployment, leisure time and any others? Surely targeting one single aggregated ‘social welfare’ indicator would be the optimal approach?

The more obvious objection to doing this is the daunting practical problem of defining a meaningful and measurable indicator of social welfare. The second is even more fundamental. Aiming for an increase in a single social welfare indicator carries with it an assumption that society’s needs can be traded off against each other. But for many of the needs for which government usually assumes responsibility such trade-offs cannot be made. For the neediest beneficiaries of government’s welfare programmes, a massive increase in priority for, say, health care would be unlikely to compensate for a total withdrawal of government funds from, say, basic education. ‘Safety net’ programmes in particular are scarcely amenable to trade-offs. In the same way a lowering of the crime rate, say, however welcome it might be, could hardly compensate for the total collapse of a country’s physical environment.

So experimentation and continuous refinement of the Social Policy Bond principle are going to be necessary. Issuers, public or private sector, will have to be vigilant to ensure that any particular bond issue does not break the spirit of society's stated and unstated goals, as well as the letter of the redemption terms. Of course, this sort of monitoring is necessary in today's policy environment as well - and it's not often practised.

16 March 2011

Providing incentives to prevent humanitarian catastrophe

We have fairly well-developed markets to insure against financial disaster. Catastrophe bonds, for instance, as well as conventional insurance policies. But financial resources rarely correlate with human life and well-being. So incentives to prevent or alleviate humanitarian disasters are left to the caprice of well-intentioned (usually) governments, or superb charitable organisations, which respond quickly and efficiently to crises. Unfortunately, these efforts are unsystematic. There is probably less emphasis on prevention than there should be and there are no systematic efforts to maximise the humanitarian benefit per dollar spent.

Disaster Prevention Bonds could be one way of bringing the prevention of human suffering into the market, and so injecting efficiency into that goal. Markets these days are associated, rightly, with grotesque income and wealth inequalities, and the pursuit of private goals at the expense of social and environmental amenity. But markets can be made to serve the public good, and the Social Policy Bond principle would be one way of harnessing the market's incentives and efficiencies in the service of society's needs. The contrast between the insurance available for financial disasters as against human disasters is stark and quite tragic. But it is not inevitable.

07 March 2011

Special interests benefit from obscurity and complexity

John Lanchester writes of the former chief economist of the International Monetary Fund:
[Simon Johnson's] day job involved going into crisis-struck countries and banging heads together to get them to accept reforms as a price of IMF aid. He acquired an extensive experience of countries which had effectively been captured by a ruling elite who governed entirely in their own interests. His startling conclusion about the current crisis is that the US has become of those countries. As the banking sector got richer, its power and influence over US government policy increased - power and influence which the bankers weren't at all afraid to use. John Lanchester, in Whoops!
Or rather 'abuse'. It's becoming a familiar pattern: special interests deploy complexity and obscurity as devices by which they can attract taxpayer funds away from a disengaged public. More regulation seems to be the obvious solution; but that adds to the complexity and obscurity. My suggestion, is, instead, to target outcomes, in such a way that ordinary people engage in policymaking and ensure that rewards are inextricably linked to the public interest rather than, as now, the private interests of those wealthy enough to pay lobbyists and lawyers to manipulate policy for their own purposes.

Social Policy Bonds would do that. One target, for instance, could be the 'sustained avoidance of financial and economic collapse'. Such a collapse could be targeted as an array of financial, economic and social indicators, which would all have to fall within a defined range for a sustained period before the bonds would be redeemed.

More generally, bonds could be issued that targeted any sort of disaster, defined in terms of a combination of, amongst other things, numbers of deaths and serious injuries caused, financial costs, numbers of homeless, and an array of other social, physical and financial indicators. See my paper on Disaster Prevention Bonds. The Social Policy Bond principle though, is a broad one. Essentially, society would decide on what it wants to see, and target the achievement of these goals. It's 'policy as if outcomes mattered', where the outcomes are those that favour society as whole not, as now, a cartel of interest groups and their lobbyists.