12 October 2012

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.

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