15 March 2014


From Bloomberg Businessweek:

Global fuel subsidies cost as much as $1.9 trillion a year.... In 2011, US subsidies for petroleum products were more than 2 percent of GDP. ...
Egypt spends 9 percent of [its] GDP to keep gasoline prices low. ... The IMF says 61 percent of gasoline subsidies goes to the richest 20 percent of citizens, who own cars....Why fuel subsidies in developing nations are an economic addiction, and The cheap fuel trap, Brendan Greeley, 'Bloomberg Businessweek', dated 17 March
What is it about our policymaking system that perpetuates this insanity? It's clear that the fossil fuel industries are powerful and so can lobby effectively for the subsidised extraction and consumption of their products. And we might not have known, at first, what we know now: that these subsidies transfer funds from the poor to the rich, accelerate the destruction of our environment, and are extremely wasteful. But now that we do know...what then? It's the persistence of these insane subsidies, in the face of decades of evidence of the social and environmental damage they do that is the biggest indictment of our current policymaking system.

Policies as crazy as these get implemented because they sound quite plausible. Reducing the cost of fuel, say, 'stimulates the economy, which creates jobs and benefits everybody'. Nobody bothers to ask why, if we are intent on giving out scarce resources to favoured groups, we don't give them directly to the people we say are going to benefit: poorer people, let's suppose, who can then make their own decisions about the sort of society they want to live in. Our current system takes some plausible-sounding relationship and makes it the basis of policy. That can work well when social and environmental relationships are easy to identify and don't change much over time. It works less well when we are talking about much more complex, intricate relationships, with thousands of variables and time lags. To reduce the negative impacts of climate change, for instance, or to bring about world peace: these are beyond the scope of any organization that first identifies (or claims to) a relationship between cause and effect and then formulates policy accordingly.

The better alternative is to target outcomes directly, and let motivated people work out the best ways of achieving them. These ways will vary dramatically over time and space, the more so for bigger goals. A Social Policy Bond regime would not only target these outcomes and reward people for achieving them; it would also inject the market's incentives and efficiencies, ensuring that they would be achieved in the most cost-effective ways possible.

The old way of making policy has been corrupted, such that we cannot even discontinue our most obvious, spectacularly stupid and destructive subsidy schemes. It's time to target outcomes directly, and contract out the achievement of our social and environmental goals to people who will be rewarded, not because they are powerful or smart or well connected, but because they achieve society's goals most efficiently. 

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