Review

A relatively good year for Social Policy Bonds. There has been some interest in the novel concept of paying-for-results in social policy through the concept of Social Impact Bonds (a watered-down version of Social Policy Bonds). In April Professor Robert Shiller of Yale University suggest Social Policy Bonds as one of his Ten Ways Finance Can Be a Force for Good in Society. This was taken up here, for instance, and, in oral form, here, and has generated more views of this blog and my home site and some email correspondence.

One reason why no Social Policy Bonds have yet been issued is that their advantages over conventional policy are most marked on a large scale and for long-term or ambitious objectives. For such goals, diverse, adaptive approaches need to be researched, tried on a small scale, refined and implemented. The bonds, being tradeable, allow for and encourage such experimentation. There are few other ways of supplying explicit, transparent and stable incentives to bring about world peace, for instance, or to mitigate natural or man-made disasters. National goals, too, are amenable to a Social Policy Bond approach. Reducing crime, for instance, or improving health are goals that require multiple, adaptive solutions, rather than the one-size-fits-all, top down, reactive or fossilized approach characteristic of our current efforts.

For all such goals, people need to be motivated to shift resources, keep their eyes on the long term (though with incentives to achieve success in the short term) and, crucially, terminate failed approaches. For smaller goals, where relationships between cause and effect are readily identified and acted upon, conventional policy, if the incentives are right, can work. Social Policy Bonds issued on a trial basis to achieve such goals might just see problems exported to areas outside the bondholders' remit. But for national or global goals, which mean dealing with vastly complex linkages and time lags, Social Policy Bonds, I am convinced, are the way forward.

Incentives to sell off fountain pens

Academic research has suggested that human rights treaties either do not improve human rights at all or do so very little, for a limited group of treaty rights, and among a select group of countries, not the worst offenders. Why the U.S. Shouldn’t Sign On to Empty Human Rights Treaties, Eric Posner, 'Slate', 21 December

No surprises here. Not that different from the Kyoto process either. Motivation is important: but we need systems that supply motivation to achieve meaningful outcomes, not to sign useless treaties while grandstanding at the United Nations. Against what metrics are the current thug regimes tested for meaningful human rights outcomes? None of course. Perhaps we could persuade some genuine philanthropists to issue Human Rights Bonds, on the Social Policy Bond principle.

We'd need to devise reliable targets for human rights, raise some funds, then issue Human Rights Bonds that would be redeemable once our human rights targets had been achieved. Not very glamorous perhaps, and no possibility of selling off the pens used to sign meaningless treaties. But a Human Rights Bond regime could hardly be less effective than the current corrupt system.

Ticking boxes is not the same as achieving goals

Josie Appleton, of the UK's Manifesto Club, reads 'a lot of child protection policy documents':

They are often hundreds of pages long, yet I have never seen a proposal that would prevent a paedophile from getting access to children. Instead, there are all sorts of rules – rules about how you transport children to football matches, rules about how you take photographs, rules about late pick-up policies for when the parents don’t turn up on time to take their kids home from some activity or other. So there is this morass of bureaucracy, yet there’s not one identifiable useful functional element within it. What you have then really are rules for the sake of rules. Why everyday life is tied up in red tape, 'Spiked', 18 December

It's the triumph of process over outcomes. Ticking boxes has become more important than achieving society's goals. Avoidance of litigation becomes the guiding principle. Compliance with procedure is what matters. We see this in so many policy areas: from climate change to health care, where it takes the form of defensive medicine.

Society is increasingly dominated by government and big business. As Ms Appleton suggests, bureaucrats have as their goal the proliferation of rules and ensuring compliance with them. Politicians have the de facto goal of maximising Gross Domestic Product. And the private sector goal of maximising profits as measured by accountants, and ignoring any non-market negative impacts of their activities. In a crowded, complex world, with so many time lags and linkages, these goals are increasingly irrelevant to those of ordinary people. Worse, they often conflict with them.

Social Policy Bonds could realign the interests of government and big business with those of society. Instead of processes that are supposedly aimed at achieving outcomes, government would target the outcomes themselves. At the global level, it could target the negative impacts of climate change. At the national level, it could target meaningful health outcomes. A bond regime would encourage government to do what it does well: articulate society's goals and raise the revenue to achieve them. Where the current system goes awry is in government's trying to identify the processes that will lead to certain outcomes. In a complex, changing world, it cannot often do this effectively. So it's prone to listen to lobbyists for groups whose interests rarely coincide with those of society. The gap between government and people grows. Social Policy Bonds could close that gap.

Health Bonds

I have posted a short (1500-word) article on applying the Social Policy Bond principle to health here.

Another climate change shambles

Practically half of the EU’s renewable energy currently comes from wood and wood waste ... but a lack of sustainability criteria for measuring its environmental impact is stoking fears of a hidden carbon debt mountain.  Source

This highlights the flaw of using anything other than outcome-based policy for relationships that we just do not yet understand. Under the current system our politicians, preoccupied as they with things like the economy, identify 'renewable' as good, and burning trees as 'carbon neutral'. The result:

If living wood is simply burned for energy, a temporary carbon debt can be created until CO2 emissions caused by the release of all the carbon it has absorbed, and the loss to the carbon sink, are compensated for by fully-grown replacement trees. Climate scientists say that this time lag can run over many decades – sometimes centuries – causing environmental tipping points to be reached in the interim that render any expected eventual carbon savings moot.

This is what happens when we rely on our well-meaning, overworked, distracted or scientifically challenged politicians and bureaucrats to craft a policy that is supposed to anticipate our rapidly expanding knowledge. We are relying on them to identify a relationship - that between energy source and climate change - amidst myriad variables, using current science. Then we assume that they have tackled the problem. They haven't.

Here's another idea: target what we actually want to achieve. If it's a reduction in fossil fuel use, target that. If it's climate change, target that. Contract out the identification of the relevant relationships to people who are motivated to get the answer right and to adapt to our rapidly expanding scientific knowledge. We can best do that for long-term, complex goals by issuing Social Policy Bonds.

Health and Social Policy Bonds

An interesting discussion here, on Ben Goldacre's book, Bad Pharma: a Manifesto to Fix the Pharmaceutical Industry. My contribution reads:

Here's another idea: government targets broad, explicit health goals: a combination of longevity, Quality Adjusted Life Years and other impartial data. It issues and backs a large number of tradable non-interest bearing bonds, redeemable for (say) $1m each once the target health goals have all been achieved and sustained. That way government rewards successful initiatives for improving health (including, but by no means limited to, new drugs) regardless of how these initiatives work, or who implements them. Government still articulates society's broad desired health outcomes, and still raises the revenue for their achievement. But it contracts out the achievement to a motivated private sector in a way that rewards success, and only success. This sort of bond, which are an application of Social Policy Bonds, would stimulate diverse, adaptive ways of achieving goals and refocus efforts on the long term.

Screening is not a valid policy goal

In the absence of broad, clear, coherent policy objectives, we unfortunately default to Mickey Mouse micro-objectives that sound convincing, but whose achievement has little or nothing to do with social goals, and can even conflict with them. Narrow objectives are more likely to be gamed in this way, because resources can more readily be shifted from a similar goal that doesn't happen to be targeted. That is one of the reasons why, unlike with the well-publicised Social Impact Bonds, I have always insisted that Social Policy Bonds be tradable. (See here for an explanation of this logic.)


Here's another example of  a Mickey Mouse micro-objective which, after enough time has elapsed to prove its worthlessness, is at last being questioned:

Can we please stop using screening mammography as measure of how well our health care system is performing? That’s beginning to look like a cruel joke: cruel because it leads doctors to harass women into compliance; a joke because no one can argue this is either a public health imperative or a valid measure of the quality of care. Cancer Survivor or Victim of Overdiagnosis?, H Gilbert Welch, 'International Herald Tribune', 21 November

 

Creative self-entrenchment

The much-vaunted creative destruction that is supposed to underpin the wealth-generating bits of our economy fails to operate where government is concerned. Rather than terminate failed policies, government has powerful incentives to buy off the vested interests grown already rich from its largesse. Twelve years ago I wrote about the corrupt, insane agricultural policies of the rich world. At that time, the way these policies transfer wealth from the poor to the rich, their waste, their disastrous effects on the environment and animal welfare; all were well known and quantified, not least by the OECD - and had been for years. Yet, as George Monbiot eloquently points out, these policies persist:

It is a source of perpetual wonder that the people of Europe tolerate this robbery. Farm subsidies are the 21st century equivalent of feudal aid: the taxes mediaeval vassals were forced to pay their lords for the privilege of being sat upon. The fat of the land, 26 November

There is no systematic mechanism (pdf) for getting rid of discredited policies. If they are run by government, or any other monopoly, ludicrous policies are more likely to persist, at great cost to the rest of society, than be discontinued. They enrich powerful people, who use a small proportion of government's own largesse to lobby against their withdrawal. This is self-entrenchment and, as government accounts for every more of society's spending, it has hugely distorting, wasteful effects on our economy.

We need instead a system that will terminate failed policies. One that will supply incentives for people to solve problems, rather than to turn up for work for organisations that claim to solve problems. That is where Social Policy Bonds could come in. They would create a coalition of interests whose sole raison d'etre would be to achieve society's goals as efficiently as possible. The bonds would stimulate diverse, adaptive solutions to our social and environmental problems, and they would do so regardless of the identity or provenance of the investors. Under a bond regime, in stark contrast to today's politicians and bureaucrats, people would lose their own money if they persisted in failed projects.

Peace in the Middle East

Don't laugh!

Here is a short and, despite my best efforts, as yet unpublished, article on applying the Social Policy Bond principle to conflict in the Middle East.

Peace in the Middle East: giving self-interest a chance

 Cards on the table: I have no solution to the anxieties and potential catastrophes facing Israel, nor to the wider problems facing the citizens of all the Middle Eastern countries. What I offer instead is a way of encouraging people to find effective and efficient solutions.

Decades of negotiations and initiatives have failed. Rockets are daily fired into Israel, we might well be on the brink of a nuclear calamity, and the entire region is a seething cauldron of every sort of hatred: ethnic, confessional, sectarian and gender.

Most ordinary people in the region, given time to reflect and the freedom to express their opinions would like nothing more than to see an end to the violence in the region. But there are enough powerful people with a vested interest in keeping conflict going. They include men of religion, ideologues, politicians and bureaucrats. There are also, of course, the weapons merchants and their corrupt beneficiaries in government. Well-meaning idealists on all sides do what they can, but their efforts are overwhelmed and relentlessly undermined by the powerful people and institutions that want them to fail. 

Peace above all

We need to give people and organizations of all kinds the incentives to create and sustain peace, rather than conflict.  We also need a verifiable definition of peace, which will consist of a combination of conditions that have to be satisfied and sustained. These could include:

·         a much-reduced number of people killed in conflict;

·         a much-reduced level of terrorist events, or military incursions;

·         no use of nuclear weapons;

•    mass media incitements to violence.

We also need to focus exclusively on our goal of peace, which might mean putting aside feelings of fairness and justice, except insofar as they help our cause.

And we need ways of promoting peace that can modify or circumvent people's uncooperative or obstructive behaviour; ways that can co-opt or subsidise those people in positions of authority and power who want to help, and at the same time bypass, distract, or otherwise undermine those opposed to our goal.

Ideally too, we would deploy market forces. Markets are the most efficient means yet discovered of allocating society's scarce resources, but many believe that market forces inevitably conflict with social goals: accentuating extremes of wealth and poverty, for example, or accelerating the degradation of the environment. So it is important to remind ourselves that market forces can serve public, as well as private, goals.

Middle East Peace Bonds

My suggestion is that philanthropists perhaps with governments and other interested organisations and individuals, collectively raise a large amount of money, put it into an escrow account, and use these funds to redeem at some future time a new financial instrument: Middle East Peace Bonds. These would be sold by auction for whatever they would fetch. They would be redeemed for, say, £100 000 each only when all the conditions for peace, as defined by the issuers, had been satisfied and sustained.

Importantly, the issuers of the bonds would make no assumptions as to how to bring about greater peace. The circumstances that fan the flames of conflict vary radically from place to place and over time. No one solution, nor even an array of solutions will work all the time. The bonds instead will stimulate diverse, adaptive solutions.

Nor do we need to know who would hold the bonds or carry out peace-creating projects. Those decisions would be made by would-be investors in the market for the bonds. Unlike normal bonds, Middle East Peace Bonds would not bear interest and their redemption date would be uncertain. Bondholders would gain most by ensuring that peace is achieved quickly. As the prospects for peace brighten, the value of the bonds will rise.

Trading the bonds

Middle East Peace Bonds, once floated, must be readily tradable at any time until redemption. Many bond purchasers would want or need to sell their bonds before redemption, which might be a long time in the future. With tradability,  these holders would be able to realise any capital appreciation experienced by their holdings of Middle East Peace Bonds whenever they choose to do so.

The bonds will be worth more to those who believe they can do most to help reduce the violence, who will then own most of the bonds. Large bondholders might decide to subcontract out peace-building projects to many different agents, while they themselves held the bonds from issue to redemption. The important point is that the bond mechanism will ensure that the people who allocate funds have incentives to do so efficiently and to reward successful outcomes, rather than merely pay people for undertaking activities.

Too large a number of small bondholders could probably do little to help achieve peace by themselves. If there were many 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 peace-building projects. As with shares in newly privatised companies the world over, Middle East Peace Bonds would mainly end up in the hands of large holders, be they individuals or institutions. Between them, these large holders would probably account for the majority of the bonds. Even these bodies might not be big enough, on their own, to achieve much without the co-operation of other bondholders. They might also resist initiating projects until they were assured that other holders would not be free riders. So there would be a powerful incentive for all bondholders to co-operate with each other to help bring about peace in the Middle East. They would share information, trade bonds with each other and collaborate on conflict-quelling projects. They would also set up payment systems to ensure that people, bondholders or not, were mobilised to help build peace. Large bondholders, in co-operation with each other, would be able to set up such systems cost-effectively.

Regardless of who actually owns the bonds, aggregation of holdings, and the co-operation of large bondholders, would ensure that those who invest in the bonds are rewarded in ways that maximise their effectiveness in bringing about peace.

So, in contrast to today’s short-term, tried, tested and failed approaches, a Middle East Peace Bond regime would stimulate research into finding the  most cost-effective ways of achieving peace. Indeed, bondholders would be in a better position than governments to undertake a range of peace-building initiatives, having more freedom to try innovative approaches. They might, for example, finance sports matches between opposing sides, promote anti-war programmes on TV, set up exchange schemes for students of the opposing sides. They might try to influence the financial supporters of conflict outside the region to redirect their funding into more positive ways. They could offer the Palestinians and the citizens of neighbouring Arab countries different forms of aid, including education and scientific aid, and measures aimed at providing a secular education for all Arab citizens.

By appealing to people's self-interest, Middle East Peace Bonds would be more
effective than conventional efforts aimed at reducing violence. In channelling market forces into the achievement of this objective the bonds could bypass or even co-opt the corrupt or malicious people in government and elsewhere who currently benefit from conflict.

Middle East Peace Bonds would focus on an identifiable peace outcome and channel market efficiencies into diverse, adaptive ways of achieving it. They might sound implausible and radical but - let’s be frank - the alternatives are leading us into the abyss.

© Ronnie Horesh, November 2012.

Health, impartiality, and Social Policy Bonds

At a global or national level, Social Policy Bonds could target a combination of health indicators, including longevity, infant mortality and Quality Adjusted Life Years. One contribution to their enhanced efficiency in comparison with current health programmes would be their impartiality:

[A]t least 55 percent of people with lung cancer [in the US] either never smoked or no longer smoke; some quit decades ago. And yet, because lung cancer is generally associated with smoking, and smoking is an addiction and something only “morons” and “idiots” (to use Tea Party terminology) would ever, ever do, lung cancer does not get anything like the research funding from the National Institutes of Health that other cancers get, relative to the number of deaths it causes. There are no telethons or star-studded Hollywood galas, no race for the lung cancer cure, none of those weirdly cheerful “awareness” campaigns. Even the afflicted and their families tend to stay quiet—the stigma is too great. The You're-on-Your-Own Society, Katha Pollitt, 'The Nation', dated 26 November

 A Social Policy Bond regime would not discriminate between different causes of ill health, unless explicitly mandated to by qualifications to the bonds' redemption terms. Apart from being more recognizable as a fairer system of resource allocation, a bond regime's greater freedom to shift resources between different health programmes, and its incentives to do so, would lead to better outcomes with the same resources. See also this previous post.

Ending war

Contrary to the common perception, political alliances during civil wars are not formed along immutable religious, ethnic or linguistic lines.... How civil wars evolve, Peter Dizikes, MIT News Office, reviewing 'Alliance Formation in Civil Wars', by Fotini Christia

In other words, there's nothing intractable about these, or any other conflicts. Solutions are possible. The challenge is to put in place incentives to solve conflict, rather than create it. We can't expect the United Nations, NATO or any other government-backed initiative to help us here. We need diverse, adaptive approaches; ones that cannot be corrupted or undermined by interest groups of any kind. We need, in short, to issue Conflict Reduction Bonds.

The unimportance of being right

From 1493: Uncovering the New World Columbus Created, by Charles Mann:

Provincial, county, and village officials [in present day China] are rewarded if they plant the number of trees envisioned in the plan, not whether they have chosen tree species suited to local conditions (or listened to scientists who say that trees are not appropriate for grasslands to begin with). Farmers who reap no direct benefit from their work—they are installing trees that do not produce fruit, cannot be cut for firewood, and supposedly stop erosion miles from their homes—have little incentive to take care of the trees they are forced to plant. The entirely predictable result is visible on the back roads of Shaanxi: fields of dead trees, each in its fish-scale pit, lining the roads for miles. “Every year we plant trees,” the farmers say, “but no trees survive.” (page 230, my emphasis)

It's not only in China. Everybody makes mistakes, but we have political systems that don't look back on obviously failed experiments and learn from them. Very often instead they pump more scarce resources into them, afraid of admitting to themselves and others that there's something wrong with their policymaking process. Perhaps the politicians and bureaucrats believe that the system in which they are so invested must not be seen to be faulty. It might, then, be questioned. Whatever the reason, the consequences are dire.

Social Policy Bonds would change that paradigm. They would reward successful, efficient ways of achieving society's social and environmental goals. They would stimulate diverse, adaptive approaches, in stark contrast to the uniformity that afflicts government programmes in the west as well as in China. Crucially, under a bond regime, failed experiments would be terminated: their proponents would have every incentive to administer the axe themselves, freeing up resources to investigate better approaches, with their sole guiding principle that of being more efficient in achieving society's targeted goal.

Don't rely on government

Don't rely on government to sort things out, nor to be the first to target outcomes as a policy priority, as against staying in power and disbursing funding to favourite lobby groups. Who in the private sector might be interested in privately issued Social Policy Bonds, and why?

• Philanthropists and others who are cash-rich but time-poor and have high ideals that can be expressed as quantifiable social and environmental objectives. They could collaborate and issue their own Social Policy Bonds, setting up an escrow account for funds to redeem them. Less wealthy people – ordinary members of the public – could be asked to swell this account by depositing their contributions into it. Philanthropists and their organizations, without exception, resolutely ignore my emails, but one lives in hope.

• Organizations in the private sector already involved in trying to achieve the targeted objective. They could seek funding from holders of the relevant Social Policy Bonds, who, if they believe these organizations’ activities are efficient will find it worthwhile to help finance their existing projects. 

•  People could set up new organizations specifically to buy the bonds, work towards the targeted objective, and sell their bonds once they have risen in value.

Playground psychology as a policy driver

The drivers of policy have little to do with outcomes. Perhaps the most important drivers are vested interests - government agencies, large corporations, trade unions, churches etc - whose over-arching goal is always self-perpetuation, which sometimes coincides with the interests of their members. Given the stakes, an even more worrying policy driver is playground psychology. Discussing how the US became embroiled in Vietnam, Frederik Logevall writes:

As Democrats, JFK and LBJ felt the need to contend with the ghosts of McCarthy and the charge that they were 'soft on Communism'. Frederik Logevall, quoted by Jonathan Mirsky in A debacle that could have been avoided (subscription), 'New York Review of Books, 25 October

John Kay writes about decision-making in business and politics:

 I once thought that however thin the public arguments for large corporate transactions, there was probably some serious analysis going on behind the scenes. Just as I once thought that whatever nonsense politicians might talk on public platforms, more substantive discussion took place when they retired to their offices. But closer acquaintance with business and politics dispelled both illusions. What you see and hear is more or less what there is. When I was sometimes employed to explain the economic rationale for a corporate transaction, I discovered that it was rarely useful to ask the principals why they were doing it. Usually you just heard those familiar clichés. Sometimes you got closer to the truth, sniffed the testosterone, glimpsed the inflated egos. Source

Until we subordinate all policymaking to meaningful outcomes, as would happen under a Social Policy Bond regime, this demented way of making policy is set to continue, with all its calamitous consequences. See also my post: How policy is made.

Reducing poverty

According to the [US] Congressional Budget Office, in 1979 over half of all federal social spending went to the poorest fifth of households. Now it is only 36%. The rich and the rest, 'The Economist', 13 October

There's nothing new about capture of taxpayer spending by wealthy individuals, corporations or the middle class, but its scale, persistence and degree of entrenchment make it less of a mildly corrupt, disguised, way of delivering largesse to favoured interest groups, and more of a threat to our entire social system. Perhaps we need to return to first principles. If we want to provide a safety net for the poorest households, then we need to reward people who provide a safety net for the poorest households. If we are in government we don't try to second-guess why households are poor, or how best to relieve their poverty. We, as government, are hopeless at such tasks. We don't have the imagination, nor the capacity to adapt to changing circumstances or to the myriad varying conditions within our geographical remit. What we are good at doing and what, indeed, only government can do well is (1) to articulate exactly what we want to achieve when it comes to reducing poverty, and (2) raise the revenue to achieve that goal.

That's where Social Policy Bonds that reward the reduction of poverty come in. Governments (or indeed anybody: see here) can undertake to redeem Social Policy Bonds for a high, specified sum, only when the poverty goal has been reached and sustained. We don't need to concern ourselves with how investors in the bonds will achieve our goal. Bondholders will have incentives to explore and implement the most effective, efficient ways of reducing poverty, taking full account of events and local circumstances. As important, and unlike many government interventions, they will have incentives to terminate failed projects. And, if they see their funds being diverted to the already better-off, as happens with so many government programmes all over the rich world, then they will see their bonds being bought by those who are better equipped to do the job that government has set them. Social Policy Bonds would lead to the setting up of organisations whose goals are identical with those of society. We don't know what form, structure or activities these organisations will assume - but we don't need to. We do know that they will prosper only to the degree that they achieve social goals efficiently and effectively. It's a big departure from the current system, which seems to reward those who are best at gaming the system, and it's one that is necessary and well overdue.

Metrics for peace

Middle East Peace Bonds, or Conflict Reduction Bonds, are all very well, but how are we to define what we mean by 'peace'? The conventional definition  doesn't necessarily mean human well-being, or the absence of the threat of war. There was no open conflict during the Cold War, for instance, but it wasn't exactly a stable, beneficial state of existence.

Fortunately, Social Policy Bonds are versatile, in that they can target an array of goals, each of which has to be satisfied if the bonds are to be achieved. Furthermore of these goals can take the form of a range of values, within which an outcome must fall for the bonds to be redeemed. Moreover, since our goal is for a sustained period of peace, that condition can also be embedded in the targeted outcome.

Experts and the public could come up with the necessary and sufficient conditions for a benign peace. Here are some suggested starting points:

• Numbers of people killed in armed conflict

• Spending and military strength

Military strength is an estimate of both military personnel and military equipment. The rationale for including this measure is similar to that for including military expenditure: it represents both the opportunity cost of resources lost to the life-enhancing parts of the world economy, and it is an indicator also of the potential for violence, and so an indicator of human insecurity or anxiety. While estimates of materiel could be subject to the same imprecision as spending on armaments, numbers of military personnel might be easier to quantify for targeting purposes in some regions of actual or potential conflict.

• Mass media indicators of impending conflict

Social Policy Bonds aiming at peace could also target events that are likely to lead to war, such as efforts to gain public support. There appears to be strong evidence (see Getting to war: predicting international conflict with mass media indicators, W. Ben Hunt, University of Michigan Press, 1997) that the underlying intentions of governments can be accurately gauged by a systematic analysis of opinion-leading articles in the mass media, regardless of the relative openness of the media in question. Such analysis allows the prediction of both the likelihood of conflict and what form of conflict - military, diplomatic or economic - will occur.  This sort of indicator could be useful as a target where military conflict has not begun, but appears possible, and where other data are scarce.

There are going to be problems with accurate assessment of all these measures, but they are unlikely to be insurmountable. 

Opaque by design

Peter Boone and Simon Johnson discuss Japanese, US and European policymaking:

We all have political systems that have figured out how to promise far more than can be repaid, and how to work with the financial sector to opaquely transfer resources to powerful groups—at a cost, it is often said, to be paid by future generations. Increasingly, however, it appears that future generations will not be the only ones harmed by our decisions; we are already feeling the negative impact. ....The era of large-scale, uncontrolled financial booms and busts—last seen in the 1930s—is back. The next panic, 'The Atlantic', October

The key word here is 'opaquely'. I often talk about the efficiency and effectiveness of Social Policy Bonds. But perhaps just as important is the bonds' transparency. Currently policymakers can - indeed must - express their decisions as vague declarations of intent, backed up by funding programmes for favoured bodies, be they government agencies or other interest groups. Often these bodies have edifying names, which makes the disinterested non-specialist think that there is some causal, positive relationship between, say, funds given to a government department for 'Development' or 'Overseas Aid' and the well-being of ordinary people in the poor countries. Or that funds disbursed by ministries of agriculture do something to help struggling farmers. It's nonsense of course, but it continues because it's opaque. If our governments openly stated that, for instance, the big beneficiaries of their agricultural support programmes would be wealthy landowners and massive agri-business corporates, even the least politically engaged citizen would have to take note.

Issuers of Social Policy Bonds couldn't get away with this subterfuge or the sort that Messrs Boone and Johnson describe. Transparency and accountability are built into a bond regime, as surely as they are excluded from the current policymaking apparatus. The financial, economic, social and environmental crises we face today are largely a result of scaled-up gaming of the system by powerful interest groups including, again, government itself. The losers are the vast majority of ordinary citizens and future generations.

We need something like a Social Policy Bond regime, which would target meaningful outcomes: outcomes that ordinary people can understand and in whose development they can participate. If outcomes were built into policymaking, as they are with Social Policy Bonds, the corrupt policies of recent decades would never have been discussed, let alone implemented. Instead of focusing on arcane legislative processes, esoteric structural arrangements and hidden funding arrangements - which appear designed to turn off all who aren't paid to follow them - a bond regime would encourage public participation in the policymaking process. This is an end in itself (pdf), as well as a means of bringing about the buy-in that will become increasingly necessary as our social and environmental challenges become more urgent.

Who cares about patients?

Marty Makarty discusses the US health care system: 

A host of new studies examining the current state of health care indicates that approximately one in every five medications, tests, and procedures is likely unnecessary. What other industry misses the mark that often? Others put that number even higher. Harvey Fineberg, M.D., president of the Institute of Medicine and former dean of the Harvard School of Public Health, has said that between 30 percent and 40 percent of our entire health-care expenditure is paying for fraud and unnecessary treatment. Marty Makary, Are hospitals less safe than we think?, 'Newsweek', 17 September

We shouldn't really be surprised. The disconnect between the decision-makers and ordinary people is about as wide in medicine as it is in education, justice or politics the world over, which is to say: vast. This gap is filled by middlemen: lobbyists, government agencies with their own agenda, and other vested interests representing big corporations or purporting to represent labour. Outcomes that matter to ordinary people are a long way down the list of priorities for these organisations. Marty Makary's article later points out that there is information readily available that would see appalling doctors and surgeons struck off... but it's not made available to those who would benefit from it. Instead, hospitals, just like every institution, whether it be a government agency, corporation, trade union, or church, have as their over-arching goal that of self-perpetuation. The interests of the people they are supposed to serve are incidental. And the predictable result, in medicine as in other areas of social and environmental policy is tragedy and waste. Our impotence in the face of big government and powerful organisations leads to alienation and cynicism about the whole political process.

Social Policy Bonds could close the gap between policy and outcomes that actually benefit ordinary people. Instead of having to satisfy organisations with deceptive names that promise to get things done, a bond regime would reward only the successful achievement of meaningful outcomes; however they are achieved and whoever achieves them. In the world of medicine, enlightened governments (or philanthropists or non-governmental organisations) would issue and back bonds that are redeemable only when broad health outcomes  (perhaps expressed as an index of longevity, infant mortality, Quality Adjusted Life Years, etc) have been achieved and sustained.

Middle East Peace Bonds

This is a short, updated, and so far unpublished, piece on applying the Social Policy Bond principle to conflict in the Middle East

Peace in the Middle East: giving self-interest a chance

I have no solution to the anxieties and potential catastrophes facing Israel, nor to the wider problems facing the citizens of all the Middle Eastern countries. What I offer instead is a means to encourage people to find solutions. Everybody has their own ideas about what should be done. I offer a way of channelling resources into those ideas - but only if they are effective and efficient.

Incentives

Where we are now: rockets are daily fired into Israel; we might well be on the brink of a nuclear calamity; and the entire region is a seething cauldron of every sort of hatred: ethnic, confessional, sectarian and gender.

Most ordinary people in the region, given time to reflect and the freedom to express their opinions would like nothing more than to see an end to the violence in the region. But there are too many people with a vested interest in keeping conflict going. They include the men of religion, the ideologues, and many of the politicians and bureaucrats. The international agencies and the military, whatever their intentions, aren’t exactly helping either. There are also, of course, the more nakedly financial incentives on the ‘defence’ industries and their beneficiaries in government, to fuel the fear of conflict. Well-meaning idealists on all sides do what they can, but their efforts are relentlessly undermined by the powerful people and institutions that want them to fail.

Peace above all

Perhaps it’s now to time to give people incentives to create and sustain peace, rather than conflict.  For my proposal to work we need a verifiable definition of peace, which will probably consist of an array of conditions that have to be satisfied and sustained. These could include:

·         a much-reduced number of people killed in conflict;

·         a much-reduced level of terrorist events, or military incursions;

·         no use of nuclear weapons.

Under my proposal, investors in the bonds would be rewarded once these, and other agreed conditions had been satisfied and sustained for, say, 30 years.

We need to be just as single-minded as the arms merchants and fanatics in wanting peace to the exclusion of everything, which might mean putting aside feelings of fairness, justice and history, except insofar as they help our cause. Being single-minded about our goal doesn’t mean that we simply pick the one project that we think will work and go for that. The circumstances that fan the flames of conflict vary radically from place to place and over time. No one solution, nor even an array of solutions will work all the time. We need a system that will encourage those projects that are most efficient for their time and place, and that will terminate projects when they become inefficient. In short, we need diverse, adaptive solutions.

And we need a way of promoting peace that can modify or circumvent people's uncooperative or obstructive behaviour. We need to mobilise the interests of the far greater number of people who want peace. We need to find a way that can co-opt or subsidise those people in positions of authority and power who want to help, and at the same time bypass, distract, or otherwise undermine, those opposed to our goal.

Ideally too, we would use market forces. Markets are the most efficient means yet discovered of allocating society's scarce resources, but many believe that market forces inevitably conflict with social goals: accentuating extremes of wealth and poverty, for example, or accelerating the degradation of the environment. So it is important to remind ourselves that market forces can serve public, as well as private, goals.

Middle East Peace Bonds

My suggestion is that philanthropists perhaps with governments and other interested organisations and individuals, collectively raise a large amount of money, put it into an escrow account, and use these funds to redeem a new financial instrument: Middle East Peace Bonds. These would be sold by auction for whatever they would fetch. They would be redeemed for, say, £100 000 each only when all the conditions for peace, as defined by the issuers, had been satisfied and sustained. Importantly, the bonds would make no assumptions as to how to bring about greater peace. Nor would they make any assumptions as to who would hold the bonds or carry out peace-creating projects. Those decisions would be made by investors in the bonds. Unlike normal bonds, Middle East Peace Bonds would not bear interest and their redemption date would be uncertain. Bondholders would gain most by ensuring that peace is achieved quickly.

Trading the bonds

Middle East Peace Bonds, once floated, must be readily tradable at any time until redemption. The operation of such a ‘secondary market’ would be critical to the working of the bond mechanism. Many bond purchasers would want, or need, to sell their bonds before redemption, which might be a long time in the future. With tradability,  these holders would be able to realise any capital appreciation experienced by their holdings of Middle East Peace Bonds whenever they choose to do so. Tradability would make the bonds a more attractive investment in the first place, and allow us to target an outcome as remote as peace in the Middle East, that will probably take longer to achieve than any bondholder’s investment horizon.

As the bonds are traded, they will tend to flow towards those who can do most to help reduce the violence. In fact, though, an actual flow of bonds would not be necessary. Large bondholders might simply decide to subcontract out the required work to many different agents, while they themselves held the bonds from issue to redemption. The important point is that the bond mechanism would ensure that the people who allocate the finance had an incentive to do so efficiently and to reward successful outcomes, rather than merely to pay people for undertaking activities. At the limit we can conceive of just one single buyer of all the bonds. If this buyer were determined to hold on to the bonds until redemption, then the bonds would function as a sort of performance-related contract, with the backers paying only when the objective had been achieved. The buyer could contract out most, or all, of the work required to achieve the objective, with the incentives given by the bonds for speedy accomplishment cascading down from the bondholder to those subcontracted to do the work of reducing the violence.

Too large a number of small bondholders could probably do little to help achieve peace by themselves. If there were many 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 peace-building projects. As with shares in newly privatised companies the world over, Middle East Peace Bonds would mainly end up in the hands of large holders, be they individuals or institutions. Between them, these large holders would probably account for the majority of the bonds. Even these bodies might not be big enough, on their own, to achieve much without the co-operation of other bondholders. They might also resist initiating projects until they were assured that other holders would not be free riders. So there would be a powerful incentive for all bondholders to co-operate with each other to help bring about peace in the Middle East. They would share the same interest in seeing targeted objectives achieved quickly. So they would share information, trade bonds with each other and collaborate on conflict-quelling projects. They would also set up payment systems to ensure that people, bondholders or not, were mobilised to help build peace. Bondholders would either trade bonds, or make incentive payments to ensure that any proceeds from higher bond prices, or from redemption, would be channelled in ways most likely to end the violence. Large bondholders, in co-operation with each other, would be able to set up such systems cost-effectively.

Regardless of who actually owned the bonds, aggregation of holdings, and the co-operation of large bondholders, would ensure that those who helped build peace were rewarded in ways that maximise the reduction in violence per unit outlay.

So, in contrast to today’s anaemic, short-term, tried, tested and failed approaches, a Middle East Peace Bond regime would stimulate research into finding ever more cost-effective ways of achieving peace. Indeed, bondholders would be in a better position than governments to undertake a range of peace-building initiatives. They have the freedom as well as the incentive to try innovative approaches. They might, for example, finance sports matches between opposing sides, promote anti-war programmes on TV, set up exchange schemes for students of the opposing sides. They might even facilitate intermarriage between members of the opposing communities, or try to influence the financial supporters of conflict outside the region to redirect their funding into more positive ways. They could offer the Palestinians and the citizens of neighbouring Arab countries different forms of aid, including education and scientific aid, and measures aimed at providing a secular education for all Arab citizens.

Bondholders could lobby, or work with, the Israeli and Arab governments to, say, give a higher priority to peace studies in schools, but they could also develop peace-teaching projects of their own. While immediate peace might not result, much more could be done to enhance the prospect of peace in the future. Bondholders could, for instance, make strenuous efforts in Israel and the neighbouring countries to have some mixed classes of Jewish and Palestinian children at kindergarten and school. Both groups could be given the chance of spending time with each other. At the very least, bondholders might think, there should be opportunities for the younger people from both sides of the conflict to meet, discuss, argue and form friendships.

Some powerful people in governments, religious institutions or militant organisations would resent the targeting of such objectives by external agencies in this way. But, while under the current system they can oppose peace in ways that attract support, under a Peace Bond regime, they would have openly to declare their opposition to peace itself. It is precisely this focus on the outcome of peace –  rather than activities or institutions – that would help strengthen the coalition working to achieve it. We could broaden the definition of peace to include not only numbers killed or injured, but other quantifiable goals, such as the amount spent on defence in the region, the results of surveys of people’s fears and anxieties, or net migration rates. For the bonds to be redeemed, all goals shall have to be achieved and sustained.

By appealing to people's self-interest, Middle East Peace Bonds are likely to be more effective than conventional efforts aimed at reducing violence. In channelling market forces into the achievement of this objective the bonds could bypass or even co-opt the corrupt or malicious people in government or elsewhere who stand in the way of peace.

In today's emotional climate decision-making is too often reactive. It is too easily swayed by those with a propensity for violence or those who benefit from it, whether financially or emotionally. Governments can evade or deflect censure on grounds of communal affiliation or patriotism, because the adverse effects of their policies are difficult to relate to their cause. Middle East Peace Bonds would focus on an identifiable outcome and channel market efficiencies into exploring the ways of achieving it. They could be the most effective means of achieving the peace that the people of the Middle East yearn for and deserve.

© Ronnie Horesh, September 2012.