28 October 2012

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.

15 October 2012

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 clich├ęs. 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.

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.

05 October 2012

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. 

01 October 2012

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.