Social Policy Bonds: the past and the future

In the past year there has been a rise in the number of issues of Social Impact Bonds - the non-tradable variant of Social Policy Bonds, about which I have had mixed feelings. They essentially function as performance-related bonuses to service providers. Because they aren't tradable, they favour existing bodies and so, in my view, can be gamed or manipulated more readily than could Social Policy Bonds. However, there are social services that are currently so poorly provisioned that SIBs could well represent an improvement over existing policy. And they might be a first step - perhaps even a necessary first step - to the issuing of Social Policy Bonds. Tradability would greatly expand the range of goals that could be targeted, and I discuss this and other advantages of Social Policy Bonds over SIBs here and here. (You could also search for "SIBs" on this blog.) This wikipedia page summarises where SIBs are being issued and other details.

As far as I know, Social Policy Bonds are not being issued anywhere. I believe, though, that the need for outcome-based policy is becoming increasingly urgent. Society grows ever more complex, and its problems ever less amenable to solution with our existing government machinery. As ever, there is a much broader consensus about the outcomes we wish to see than the possible means of achieving them. The gap between governments and the people they are supposed to represent keeps widening. The recent Paris meeting, which was supposed to address climate change, is the example par excellence of policymaking entirely disconnected from citizens. It will fail for several reasons, foremost of which is the total absence of buy-in from ordinary people - that is, people who aren't involved in policymaking or lobbying. With efforts to address global problems, there would be huge benefits arising from a market-based solution, which in economic theory and on all the evidence would optimise resource allocation.

For reasons of both buy-in and efficiency, then, and because of our increasingly interlinked world, I remain optimistic that Social Policy Bonds will play a role in achieving social and environmental outcomes in the future. Perhaps not in 2016 but, I think, within the next ten years.

Paris will fail

Why I think the Paris deal on climate change, which concluded on 12 December, will fail.

• It may not be enough. It targets, using ossified science, cuts in greenhouse gas emissions. But what if that achieves nothing? What if the climate continues to change much more than expected, because the deal's underlying calculations and assumptions are wrong? What then? The emission cuts are a supposed means to unspecified, but crucial, ends. It would be preferable to do the hard work of identifying exactly and explicitly what those ends are, expressed in terms of impacts on human, animal and plant life, perhaps combined with social and financial targets. Then we could target those ends directly and, importantly, measure progress toward them more accurately.


• It may be too much, in the sense that resources could be diverted into reducing gas emissions and away from projects that could have a much more positive impact on human, animal and plant life. 


• No buy-in. Ordinary people don't know or care about greenhouse gas emission volumes. What we do understand is adverse climatic events, and their effects on humanity and the environment. If we were to target those directly not only would we be solving real problems more efficiently, we'd also have more public understanding and commitment to the process. In short, you would get buy-in from the public, which is as essential as it is absent from the Paris agreement.

That said, the $100 billion to be transferred from the rich countries (that is, their taxpayers) to the developing countries (that is, their governments) to adapt to climate change could be useful - if that's where the money actually ends up. But, on past form, what isn't spent on luxury goods or otherwise squandered will end up in Swiss bank accounts.

To read more about how Social Policy Bonds could be applied to climate change see my paper here, or recent blog posts here, here and here.

Metrics for climate change

The Economist discusses metrics for climate change:

[T]aking the world’s temperature is not as easy as it sounds. Different parts of the planet warm at different rates, as do different layers of the atmosphere, so all sorts of corrections have to be applied to arrive at a single number. A truly simple, and arguably better, approach would be to use concentrations of greenhouse gases—the cause of the warming—as putative maxima. These gases mix rapidly into the atmosphere, so are easily sampled in ways that brook little dissent. Goal difference, 'the Economist, 5 December

I disagree, partly because greenhouse gases are not the sole cause of warming: we do not know, for instance, how big are the relative contributions of deforestation (through changes in albedo as well as carbon emissions) or different cloud types. Some proportion of climate change also comes from natural (non-anthropogenic) events. At least as importantly, our views about the greenhouse gases' relative contributions change dramatically with our growing scientific knowledge. There would, then seem to be a pragmatic basis, as well as the case for broader public engagement, for instead targeting for reduction the impacts on human, animal and plant life of adverse climatic events.

Climate Stability Bonds could set such impact reduction goals. If, in time, and with the market's incentives on offer, bondholders decide that the best way of achieving such goals is to reduce certain greenhouse gas emissions, then that is what they will do. But it would seem hubristic and inefficient for governments or UN bodies to assume that that this is the best way of achieving meaningful reductions in those impacts. There are too many uncertainties, and the science upon which such a policy is based is inescapably ossified. See also my other recent posts on this question.

But who allocates the funds?

From 'the Economist', in a feature about climate change:

Energy firms do not spend a lot on research because there is no product differentiation in energy (electrons are electrons) and thus nothing exciting to sell until the price falls below that of the existing technology. So taxpayers will have to stump up most of the cash. If more money were forthcoming, a good deal of it would be wasted on dead-end projects. But that is the nature of research and development. Second-best solutions, 'the Economist', 28 November

I'm not sure whether funding research into alternative ways of generating electricity is a goal that ordinary people would find meaningful. But putting that aside, and assuming that 'taxpayers will have to stump up most of the cash', there are better ways of allocating that funding than via the usual activity-based, outcomes-don't-matter, formula that typifies government research programmes.

My proposal would be for the government to do what it's good at: (1) raising the necessary funding and (2) specifying a goal to be achieved, but then to bow out and allow a motivated private sector to allocate the funding to its chosen projects - something that economic theory, and all the evidence, suggest it can do more efficiently than the central planners in government. Social Policy Bonds could directly target cleaner electricity production, though I'd prefer they target broader and more obviously meaningful goals. Either way, a bond regime would lead to diverse, adaptive projects and bondholders would have powerful incentives to back only the most efficient ways of achieving whatever goal is specified. When government allocates funding, all sorts of criteria other than maximising returns per taxpayer dollar creep in. And we don't need to go beyond the energy sector to see that.

Climate change, again

I posed this question before but it bears repeating: are we more concerned about climate change, or about the impacts of climate change on human, animal and plant life? The popular assumption is that the most efficient way of mitigating the negative impacts of climate change is to reduce that which current science suggests are one of its major causes: greenhouse gas emissions. But we don't know that for certain, and we don't know the degree to which we can do anything about it. And we'll never know whether any of the costly policies suggested in this article will have had any impact whatsoever. It would seem preferable to spend our scarce resources on dealing with the impacts of adverse climatic events - whether they're caused by greenhouse gases or not. Floods are just as devastating whether caused by greenhouse gas (ghg) emissions or not. Climate Stability Bonds would, in fact, encourage ghg emission cuts if they are found to be the most efficient way of dealing with the adverse impacts of climate change on human, animal and plant life.

When I wrote along the above lines to an internet comment forum, one respondent said: 'What you don't do is cause a problem, then ignore it while you "fix" the symptoms.' My response is that we should not be dogmatic about whether we tackle causes or symptoms. The 'cause' of a large proportion of the crime problem is 'young men': we don't force all boys to undergo a sex change just so we can save money on a justice system.

There are undoubtedly symptoms whose root causes we can identify readily and address. There are others whose root causes are currently unknown or too expensive to tackle. We could still, with Social Policy Bonds, target the symptoms for solution and motivate bondholders to work out whether or not the best way of dealing with them is to go after possible root causes. There are problems whose root causes might never be unambiguously identified. But if we issue Conflict Reduction Bonds, for instance, there's no need to resign ourselves to living on a planet wracked by war.

The bias against unglamorous diseases

From a letter to the editor of the Economist:

[R]oughly speaking, mental health receives only about half the research funding it should in America, based on its health burden. The problem is that many interest groups lobby Congress vigorously for research funding for their disease. Patients with mental illness do not yet exert that kind of political pressure. letter from Michael Hanna of Mercury Medical Research & Writing, 'the Economist' dated 21 November

It's striking how unrelated is healthcare funding to need. Medical experts have little capacity or incentive to see beyond their own institution or speciality. Government - and not only in the US - responds to pressure from interest groups and allocates funds accordingly. Slipping through the cracks are unglamorous diseases including mental illness. Even within a class of diseases, such as cancer, funding discrepancies are stark: this paper looks at the UK. I think government here is failing in its purpose. It should target for improvement the broad health of all its citizens rather than merely respond to lobbyists, however dedicated, sincere and hard working. It should, as far as possible, be impartial as to the causes of ill health, and direct resources to where they can return the biggest health benefit per dollar spent. Applying the Social Policy Bond principle to health could do this. For more, see my short paper on Health Bonds.

Terror: too much too late

There is one simple solution to the problem of terrorism: kill lots of people, of which some are certain to be terrorists. Choose a terrorist-rich area, and if you kill everybody within it, then you can be sure no terrorists will originate from there ever again. It's a cruel policy and also a stupid one, in that it's likely to create resentment outside the killing zone, which will generate more terror later. Of course you can enlarge the killing zone, create a desert, and call it peace, but you cannot do that indefinitely, and the costs to everybody rise hugely as your killing zone expands. Unfortunately, politicians, the military and the public want a simple solution, and the Tacitean desert approach seems to be the policy of choice in today's world. It's the 'too much, too late' option, which, arguably, has led to numerous devastating wars.


I have another idea. Let's recognise that there is no simple solution. That it's likely that only a combination of different approaches, varying with time and over geographical area, will work, and that our goal is a sustained period during which terror will not occur. There are initiatives now that can help achieve that goal, But they're not co-ordinated and are heavily outweighed by the reactive policies of governments under pressure to 'do something' when an outrage occurs. Almost all the incentives on offer are to those with a strong interest, conscious or not, in keeping conflict going. This means the military, the men of religion, the ideologues on all sides, and the millions of intimidated and frightened ordinary citizens.

We need to put in place a system of countervailing incentives; one that encourages diverse, adaptive approaches, and one that will reward people who oppose or undermine the interests that generate conflict. We should focus on the long term, so that our goal would not be undermined by policy changes or unconsidered reactions to outrages. One way of doing this would be by issuing Conflict Reduction Bonds. These could be backed by any combination of governments, non-governmental organizations, philanthropists and ordinary citizens, whose funds would reward the achievement of a sustained period of global (or regional) peace. Incentives under a bond regime would cascade down into all sorts of initiatives, glamorous or not, high level or low level, bottom up or top down, old-fashioned or innovative: efficiency in reducing the prospects of conflict would be the sole criterion for the allocation of funds. For more see this previous post, or my papers on applying the Social Policy Bond concept to conflict reduction.

"There's no money in health..."

Suzanne Beachy talks to Dr Peter Breggin about the loss of her son 'due to psychiatry's failure to offer beneficial, caring human services, and indeed due to psychiatry's opposition to them.':

There's no money in health; there's only money in managing illness. Suzanne Beachy, Dr Peter Breggin Hour, 4 November

Ms Beachy is relating her experiences in the US, but the same applies to most western countries. The concept of 'health' is not one that can be readily addressed by our existing institutions. It suffers because it results from a huge number of influences, and because our institutions have grown up during times when that number of influences was much smaller. So these institutions and the systems they embrace aren't as good a fit in today's complex society's as they used to be. Curing short-term illnesses is a relatively visible and quantifiable activity. Treating or managing poor health can also be reduced to a series of procedures that can be performed by our current health care providers. Sure, clinical trials are performed, pills and equipment sold, and a whole array of indicators is measured and targeted. But much about the clinical trials - who performs them, how they're performed and which ones are quietly ignored - is questionable, and many of the targeted indicators are Mickey Mouse at best. They have evolved to measure highly specific rates of activity, rather than outcomes that are meaningful to ordinary people, healthy or sick. The result is exactly what Suzanne Beachy experienced: a system that motivates people and institutions to manage illness rather than optimise health. 

Here's another approach: measure the broad health of society, and target that for improvement. Society is so complex, and our knowledge about society and science is growing so rapidly that no government, however altruistic, generous, or far-sighted, can know how best to maximise our physical and mental well-being. But what a government can do is put in place a system that gives people incentives to find the most efficient ways to maximise society's health continuously. In short, government  can apply the Social Policy Bond principle to society's physical and mental well-being and issue Health Bonds.

Loyalty ... to what?

My previous post mentioned the climate change bureaucracy. Underpinning that bureaucracy are two assumptions: that it's better to deal with climate change than with its effects; and that cutting back greenhouse gas emissions is the best way of dealing with climate change. But what if those assumptions wrong?  Would the climate change bureaucracy reform itself?

Freeman Dyson reviews a biography of Max Planck:

My Princeton colleague Albert Hirschman published in 1970 a little book with the title Exit, Voice, and Loyalty ...., exploring these issues in a different perspective. Hirschman was writing as an economist about large-scale enterprises that he had seen in many countries, beginning with the railroads in Nigeria and ending with the American war in Vietnam. In each of these enterprises, gross failures were manifest, and the individuals occupying positions of responsibility had to choose between three alternative responses. Exit meant to quit the enterprise. Voice meant to stay on the job but speak out publicly for change of direction. Loyalty meant to stay on the job and give support to the continuation of failing policies. Hirschman observed that in the majority of enterprises, voice is sadly lacking. Most people choose loyalty and very few choose voice. Those who choose exit have only a small effect on the enterprise. If gross errors and injustices are to be corrected, voice must be fearless and fierce, loud enough to be heard. Max Planck: the tragic choices (subscription), Freeman Dyson, 'New York Review of Books', 22 October

"Most people choose loyalty": with existing organizations this means loyalty to the people in control and their way of doing things. It's perfectly understandable: most organizations have worthy-sounding goals and are staffed by ethical, hard-working people. I have met such people who work to ensure compliance with the Kyoto agreement's climate commitments. Their loyalty - naturally, understandably, but regrettably - is to the climate change bureaucracy. Though they may express private doubts about the value of their work, they feel they are in no position to question the bureaucracy that employs them or its underlying assumptions. The bureaucracy has an inertia of its own; it continues living and breathing and trying to grow, even when its goals conflict with those of society.

That is what conventional organizations do. Under a Social Policy Bond regime though, things would be different. A bond regime would lead to new kinds of organizations: ones whose composition, structure and range of activities would be subject to continuous change. Their entire purpose would be to achieve society's goals, as expressed in the redemption terms for Social Policy Bonds. Their composition and activities would depend entirely on how efficient its members and projects are in helping to achieve that goal. Assumptions as to who is best placed to achieve society's goals or how they will go about achieving those goals would be subject to continuous questioning by would-be investors in the market for the bonds. These investors would have interests exactly congruent with those of society as a whole: to achieve our social and environmental goals as efficiently as possible. They would, in short, be loyal to society's goals rather than, as at present, to a hierarchy, ideology or dubious assumptions.

Climate change: the fundamental question

Social Policy Bonds impose a useful discipline on policymakers. They oblige us to be very clear about what we want to achieve. Nowhere is this more necessary than with climate change. The fundamental question, which I don't see posed in policymaking circles or indeed anywhere else is:

Are we more concerned about climate change, or about the impacts of climate change on human, animal and plant life?

There seems to be a pervasive assumption that the most efficient way of mitigating the negative impacts of climate change is to reduce that which current science suggests (but does not know for certain) are one of its major causes: greenhouse gas emissions.

A Social Policy Bond regime would not make that assumption. Instead we would specify very clearly what we want to achieve. We would express our policy goal as a combination of physical, social, biological and financial measures that must fall within specified ranges for a sustained period. Only then would holders of Climate Stability Bonds be paid out.

In fact, there's a strong case for ensuring that policy be independent of our views about what's happening to the climate. For instance: a family made homeless by an earthquake or a missile is just as homeless as one made homeless by rising sea levels. Perhaps we should target for reduction the human cost of all disasters, whether caused by adverse climatic events, other acts of God, or by man. Impacts on animal and plant life could be targeted by other bond issues.

Unfortunately an entire bureaucracy has grown around climate change as a discrete problem. It seems to me that the existence and activities of this bureaucracy embody the assumption that our trying to influence the climate is the most efficient way of dealing with problems caused by unfavourable changes in the climate. I think that assumption needs to be challenged.

How to avoid societal collapse

We haven't evolved to think long term and globally, according to Joseph Tainter, author of The Collapse of Complex Societies. In a recent and fascinating podcast interview Dr Tainter sees the collapse of the Roman empire as a template for societal collapse: 

Everything the Roman government did in the short term was rational. Everything they did made sense at the time they did it. It's the long-term consequences that they couldn't foresee. ... It's the long-term cumulative effects that do the damage, and these are unforeseeable. Societal Complexity and Collapse, 'Omega Tau', 13 October

It is this lack of an over-arching objective that is (and, I suspect, always has been) missing from policy. At almost every level of policymaking we do not explicitly target the crucial goal of societal survival. We cannot anticipate and so we cannot, with our conventional policymaking process, forearm ourselves against all possible threats to society. That's because conventional policymaking relies on some body (usually, at the national level, government) trying to anticipate threats and then work out the best ways of dealing with them. But the most potent threats are those likely to be long term in nature and to arise from outside the purview of the policymakers - precisely the qualities that evolution has not equipped us to tackle.

What we can do though is this: target societal survival, whichever threats to it might arise, and reward people for achieving it, however they do so. We don't know what these threats will be and we don't know who will be best at nullifying them nor how they will go about doing so. But, under a Social Policy Bond regime, we don't need to know any of those things. We issue bonds, at the national or global level, that target the avoidance of such calamities as violent political conflict (war or civil war) or other disasters, natural or man-made. These bonds, floated on the open market, become redeemable for large sums, after a long period of societal survival. Policymakers don't need to identify specific threats, nor debate about their significance or relative priority. Investors or would-be investors in the bonds would do all that, and would be motivated to do so continuously, throughout the targeted time period: which could be two or three decades in length (after which, similar bonds could be issued for a further period).

Social survival is perhaps our most important goal: it's worth targeting it explicitly and motivating people to find the most efficient ways of ensuring it. We cannot and should not look to government to take care of threats to our survival. But we can - and should - set in place a regime that explicitly targets our long-term survival and rewards its achievement. With Social Policy Bonds we can do that.

Media news

Greg Bearup has written about the genesis of the Social Policy Bond idea, and applications of the non-tradeable version of it in Australia, in the cover article in the Weekend Australian Magazine, dated 10 October. If you cannot see the story on the WAM site, a pdf of the article (missing a picture or two) can be downloaded here.

Environmental policies that hurt the environment

As cities move beyond recycling paper and metals, and into glass, food scraps and assorted plastics, the costs rise sharply while the environmental benefits decline and sometimes vanish. “If you believe recycling is good for the planet and that we need to do more of it, then there’s a crisis to confront,” says David P. Steiner, the chief executive officer of Waste Management, the largest recycler of household trash in the United States. “Trying to turn garbage into gold costs a lot more than expected. We need to ask ourselves: What is the goal here?” The reign of recycling, John Tierney, 3 October

Say no more. Or rather, say it again and again: what is the goal? Recycling is not a goal: it is an alleged means to ends that remain unspecified. We'd do better to think about those ends, specify them, and then encourage people to achieve them. Recycling can and does play a role, but not always, as the article excerpted above shows.
We see something of the same lack of clarity about environmental goals in the recent Volkswagen debacle. A recent article title sums it up: The Volkswagen diesel scandal was driven by carbon obsession: 

From 2001, punitive rates of up to £500 were applied to cars [in the UK] which emit carbon emissions of more than 225g/km, while cars below 120 g/km were treated to token road-tax rates. As manufacturers quickly discovered, the only way to get many vehicles below these thresholds was to make them diesel.It was well known that diesel engines produced large amounts of tiny carcinogenic soot particles, but this was brushed over. Particulate emissions were meant to be dealt with by filters, yet these are known to become blocked if engines spend too much time idling, as they do on urban roads. Diesels also produce far higher levels of nitrogen oxides, the subject of the VW scandal. Ross Clark, 3 October

A Social Policy Bond regime would improve on this sort of  random policymaking. Certainly, the first steps would be difficult, but they are essential: defining the environmental goals we want to achieve. Most likely, we'd target for reduction pollutants that adversely affect human, animal and plant life. The bonds are sufficiently versatile that other objectives could be simultaneously targeted. The important thing is that, under a bond regime, we'd be targeting meaningful goals according to their lethality, rather than their media profile.

For more about application of the Social Policy Bond concept to the environment start here. There are also numerous posts about the environment on this blog.

Biology, engineering, and Social Policy Bonds

An academic paper about the use of the Precautionary Principle says:

Significantly, the failure of traditional engineering to address complex challenges has led to the adoption of innovation strategies that mirror evolutionary processes, creating platforms and rules that can serve as a basis for safely introducing small incremental changes that are extensively tested in their real world context. This strategy underlies the approach used by highly- successful, modern, engineered-evolved, complex systems ranging from the Internet, to Wikipedia, to iPhone App communities. Source (pdf)

The paper justifies the application of the Precautionary Principle where 'ruin', defined as low-probability, infinite cost policy outcomes, is a nonzero possibility.
Importantly, it also recognises the positive role that evolutionary processes play in engineering. As the authors say, this mirrors biological evolution. It results in more robust outcomes. I suggest we adopt the same mechanism for society's broad, long-term goals: create a policy environment within which diverse, adaptive approaches are tried, and only the most successful (in their place and time) are given the funds necessary to continue and proliferate. There's very little of this in today's policy world. The necessary first step, self-evaluation, is rare. Even less frequent are learning from failed policies and applying those lessons to current policymaking.
Explicit acknowledgement of the need for failed approaches is probably rare in engineering; it's equally unusual in the world of policy. But, society is approaching the complexity of that of biology. For those broad, long-term goals that we have failed to achieve (ending violent political conflict, for instance), it's clear that no single, top-down approach is going to work - especially one based on relationships that apply in only one part of society or at only one point in time.

That's where Social Policy Bonds can play a role. A bond regime would target society's long-term problems: problems that no single approach can ever solve. Investors in the bonds would have incentives to try many different approaches, and to continue to fund only those that are working efficiently at achieving society's goals. Unlike in today's world, failing projects would be terminated: bondholders would be motivated to end them swiftly, rather than, as today, lobby for government funds to keep them going. A Social Policy Bond regime would create new types of organization, whose activities would be entirely subordinated to achieving social goals efficiently. The bodies that currently are charged with achieving social goals are rarely paid in ways that encourage better performance. (Indeed, very successful organizations might even be punished by seeing their funding reduced.)

In policy, as in biology and engineering, we should let evolution do what it does efficiently: encourage a wide array of approaches and reward only those that are most successful for their time and place. Social Policy Bonds would do exactly that.

For more about Social Policy Bonds, please go to my main website. For examples of previous posts about the bonds and evolution see here and here.

Five-year survival rates: another Mickey Mouse indicator

Health statistics are tricky and, when they're used to make a case for increasing or diverting funding, we need to be especially vigilant:

Research published in the European Journal of Cancer shows the UK has the worst survival rates for cancer in western Europe, with rates one third lower than those of Sweden. UK cancer survival worst in western Europe, 'Daily Telegraph', 26 September

The article gives examples:

Five-year breast cancer survival was 79.1 per cent in England, 78.5 per cent in Scotland, and 78.2 per cent in Wales. In Sweden the figure is 86 per cent, with an European average of 81.8 per cent. In England, 80.3 per cent of men with prostate cancer were alive five years later, compared with 90.2 per cent in Austria, 90 per cent in Finland and a European average of 83.4 per cent.

At first glance, this seems an indictment of the UK's approach to diagnosing and treating cancer. But the five-year survival rate needs interpretation: it is the proportion of patients still living five years after diagnosis. We can improve the five-year survival rate by better treatment, which is unambiguously good, or by earlier diagnosis, which is far more questionable. Earlier diagnosis can simply mean more intervention and more treatment (and more side effects), but does not necessarily lead to a reduction in the cancer mortality rate - which is a far better indicator of healthcare efficiency than the five-year survival rate.

A Social Policy Bond regime aiming at improving the overall health of a population would refine and target more-robust indicators, such as mortality and longevity, and would do so impartially. For more about Health Bonds, click here. For more about how misleading are five-year survival rates click here or here.

Volkswagen: no surprise

[D]rivers of almost half a million cars in the US have now suddenly found that they are driving round vehicles which are a lot worse for the environment than they thought. The rigged tests masked the fact that these cars emit up to 40 times the legal limit of pollutants. And now VW has said that as many as 11 million cars worldwide could be affected. VW scandal threatens 'Made in Germany' brand, BBC, 22 September

Social Policy Bonds have big advantages over conventional policy when addressing a problem like air pollution caused by millions of point sources. Conventional policy cannot effectively measure the pollutants emitted by any more than a few major sources, and then reward or punish the emitters accordingly. What might work for power stations or cement factories won't work for cars or households. Corporations (like Volkswagen) have every incentive to cheat the system, and individuals have every incentive to go along such cheating. The bureaucratic burden of measuring the pollution generated by millions of machines or people is not just a misallocation of resources: it's likely to be intrusive and divisive. Plus, it's not a very exciting job.

Social Policy Bonds can help. They're at once both more direct and more versatile. So instead of targeting the air pollution generated by millions of point sources, they can target an array of pollutants, weighted according to lethality, and let the market for the bonds work out, dynamically, the best ways of achieving our pollution reduction goal. I first wrote about this approach back in 1991. My views haven't changed since then, so I won't repeat them here.

The root causes of war: don't bother

A Social Policy Bond regime makes inescapable the need to think about what we want to achieve. This should be an essential discipline, but in some instances it's never followed. There's much obfuscation - deliberate or not - and far too much attention given to identifying supposed 'root causes' at the expense of effective policy.

Take violent political conflict. It's still going on, killing, maiming and making homeless millions of people every year. The numbers so affected might be falling, but that says nothing (short pdf) about possible major violent future events. We could spend years analysing past outbreaks of war, but still never get close to identifying root causes in ways that forestall future outbreaks. Society is just too complex, diverse and fast-changing. Policymakers should begin by specifying society's desired outcomes, rather than distracting or indulging ourselves by trying to identify root causes - except perhaps for simple, relatively static, policy environments.

A bond regime wouldn't try to identify the root causes of war, which are a moving target anyway. Instead it would start by specifying exactly the outcomes we want to achieve, and then injecting market incentives into achieving those outcomes. Conflict Reduction Bonds are the means by which I propose we begin to end all war for all time. It's not idealism. It's giving incentives to motivated people to find solutions, rather than simply to turn up to work for a bureaucracy, corrupt or not.

Climate change: current policy is doomed to fail

[T]he representation of clouds in climate models (and of the water vapour which is intimately involved with cloud formation) is such as to amplify the forecast warming from increasing atmospheric CO₂—on average over most of the models—by a factor of about three. In other words, two-thirds of the forecast rise in temperature derives from this particular model characteristic. Despite what the models are telling us—and perhaps because it is models that are telling us—no scientist close to the problem and in his right mind, when asked the specific question, would say that he is 95 per cent sure that the effect of clouds is to amplify rather than to reduce the warming effect of increasing CO₂. If he is not sure that clouds amplify global warming, he cannot be sure that most of the global warming is a result of increasing CO₂. Uncertainty, scepticism and the climate issue, Garth W Paltridge, in 'Climate Change: the Facts,' edited by Alan Moran, 2015

The 'forecast rise in temperature' referred to by Professor Paltridge is that made by the Intergovernmental Panel on Climate Change (IPCC). The book in which Prof Paltridge's essay appears is a collection of skeptical essays, and one which, like the website Watts up with that? is at first persuasive to non-scientists like myself. But then so too are most of the arguments on the other side of the debate; the ones agreeing with what has become the mainstream view, that anthropogenic climate change is happening. (There's also an equally convincing website: RealClimate.org.) 

We know that science is not a consensual process. So what are policy people to make of these irreconcilable differences? We can all agree that there are uncertainties, not only about the fact of climate change but also about the details: the magnitudes, the causes, the impacts. We can also agree that these uncertainties are not going to disappear any time soon. Conventional policy has a hard time trying to deal with such uncertainty. It seeks to identify, with a high degree of certainty, those causes, magnitudes and impacts of climate change, then come up with something to tackle the root causes. Conventional policy has identified greenhouse gases as those causes and keeps coming up with measures aimed at cutting emissions of those gases into the atmosphere. Or, more cynically, aimed at pretending that such cuts in emissions will happen: these measures are unpopular, divisive and expensive. As well, the costs are all upfront and the climate benefits - there's almost universal agreement about this too - will be slow in coming and probably not very significant. (It's likely any cuts will have beneficial effects on things other than climate, but they are not driving policy.)

Conventional policy, then, is failing. I think there's a broad consensus about that too. Some think it's too little; others think it's too drastic. But either way, it's not good enough. Even in their own terms, Kyoto and subsquent agreements are failing.

So here's my suggestion. Instead of targeting what might or might not be the cause of what might or might not be anthropogenic climate change, why not target exactly what we want to achieve? It could be an array of ranges within which physical, biological, social and financial indicators must fall, for a sustained period. We could aim for relative and sustained stability in those indicators that are important to plant, animal and human life. A Climate Stability Bond regime would do this, regardless of what we currently think is driving the climate. It is not only clouds (see excerpt above) whose contribution is uncertain: it's the relative contribution of the various greenhouse gases or any of a large number of other variables, anthropogenic or not. The conventional approach, which looks for root causes before doing anything significant, isn't working, and cannot work when our knowledge of such causes is expanding rapidly. Climate Stability Bonds, as well as being versatile in the range of variables that they target, would reward people who achieve our goals, whoever they are and however they do so. Bondholders would do the work of identifying the causes and effects of climate change on a continuous basis. They would research, explore and implement those measures that will achieve the best return on our scarce resources. They will, very probably, implement a very broad range of measures on a diverse, adaptive basis: something that no government or supra-national body can do. 

There are things that governments can do well. Indeed, there are things that only governments can do at all. These usually are areas in which causal relationships are clear and stable, and the benefits of an established approach are large and unchallenged. None of these conditions apply to climate change. It's time for a different approach.

BMI: the GDP of health

I've railed many times about the inadequacies, and worse, of using Gross Domestic Product as the de facto indicator of social well-being. Which it has become, in the absence of any serious thinking about the social goals we want to achieve and the priorities we give them.

A similar phenomenon seems to have occurred in the world of health, where the body-mass index (BMI) is a long-used measure of obesity. BMI is body mass in kilograms divided by the square of the body height in metres. Apparently, as measured by BMI, obesity in the US plateaued around the year 2004 at 35 percent of the population. But, just as GDP ignores such things as leisure time, state of the environment, income distribution; and counts useless or anti-social economic activities as positives, so too does BMI have its flaws:

It does not consider distribution of fat, type of fat, muscle tone, age, sex, or even big bones. In spite of these flaws, healthcare professionals continue to use BMI as a guideline. A BMI of 20-25 is considered ‘normal’, and anyone larger or smaller is automatically counselled to achieve a healthier weight. .... Obesity is generally understood as a risk factor for heart disease, stroke, cancer, and diabetes, as well as an increase in overall mortality. Excess body weight also increases stress on joints and internal organs. Given these concerns, it’s easy to understand why so many people have celebrated the plateau in BMI. Unfortunately...BMI may not be the best measure of obesity. Your percentage of body fat and waist or abdominal circumference are far more reliable personal indicators of health outcomes than BMI. For example, central obesity, measured by waist circumference, is a more accurate determinant of personal risk and shows an even stronger correlation with poor health outcomes. Caroline Weinberg, Fat but fit?,  'Aeon', 27 August 

There is no clarity about goals. If our intention is to improve the health of people, why not target indicators of people's health, instead of easy-to-calculate but flawed measures such as BMI? If our intention is to prevent disasters arising from adverse climatic events, why not target for reduction the negative impacts of such climatic events, instead of atmospheric carbon dioxide levels or temperatures recorded in weather stations? If our intention is to improve social well-being, why not target indicators of social well-being instead of those economic activities captured by GDP?

BMI, greenhouse gas emissions, GDP per capita: they might answer certain specific questions, but their use as policy instruments is inadequate at best, dangerous at worst. Policymakers need some humility here: neither they nor their advisors know the best ways of improving health, preventing climatic disasters or improving social well-being. Even if they did, at one particular point in space and time, circumstances vary with region and our knowledge grows with time. No government, no single organization can hope to use fossilised knowledge on a one-size-fits-all basis and achieve meaningful results. Instead, policymakers should set broad goals, and let a motivated coalition of interests explore diverse, adaptive approaches aimed at achieving society's broad social and environmental goals. Government can set these goals and, indeed, it is probably the organization best suited to doing so. And, if it concentrated on that, it would come up with a better array of target outcomes than the flawed indicators it now uses, whether explicitly or not.

Government can also raise the revenue to reward the people who achieve these outcomes. But it has no business dictating how they shall be achieved, nor who shall achieve them. We need diverse, adaptive approaches, and those are exactly the sort of approaches that government discourages.

Smoking and obesity; anxiety and sirens

The UK has seen an onslaught against tobacco smoking. At the same time cases of diabetes are soaring, such that 'diabetes medication now accounts for 10% of the NHS [National Health Service] drugs bill'. Research appears to show that people who give up smoking put on weight.

By doing everything possible to suppress smoking has the UK Government unwittingly encouraged obesity and diabetes?  Do the social costs of more obesity and diabetes outweigh the benefits of less smoking? I have no idea, but the important point is how little it is in anybody's interests to answer these questions and use their answers to influence government policy. With smoking the government has had an easy ride: 'everybody knows' that smoking is bad for you, just like 'everybody knows' that taking illegal drugs is bad for you, as is drinking alcohol. You see where I am going here: road traffic kills 1.24 million people annually worldwide, but there are benefits to it as well as costs, as there are for drinking, taking illegal drugs and, yes, smoking, especially, but not only, insofar as people who are denied the opportunity of smoking then may be more likely to be become obese and diabetic. These costs aren't easy to calculate of course, but government has created an environment in which nobody has an interest in doing those calculations. Instead, seeing that smoking directly and obviously causes some diseases, it reacts in the Pavlovian, short-term, one-size-fits-all manner that it, in common with other governments, adopts when they encounter the symptom of a problem. So now, in England: 'work smoking rooms and areas are no longer permitted. All smokers must take their smoke breaks outside.' I've no doubt that rates of lung cancer and other diseases directly related to smoking have fallen as a result. But, as well as the costs to freedoms of the campaign against smoking, there are also the indirect costs to physical health, possibly taking the shape of increased rates of obesity and diabetes. The cancer specialists, and the well-meaning (though perhaps hysterical and self-righteous) anti-smoking lobby have no incentive or capacity to see whether smoking bans help or damage the overall health of people. Nor, under the current policymaking regime, are there any incentives for others to do so. And smokers are an easy target. Car drivers not so much.

We see the same in the area of mental health. The small city in which I currently live is blighted, maybe 20 or 30 times in every 24-hour period, by emergency vehicle sirens. Designed to create alarm and panic, that is what they do, to thousands of people, day and night. I have no doubt that these sirens shave a few seconds off the average journey time of the police, fire and ambulance vehicles. And those few seconds, might, on occasion, make the difference between life and death. But has anybody looked at the costs in terms of mental health of these sirens? It's no surprise that urban living is 'found to raise the risk of anxiety disorders and mood disorders by 21% and 39% respectively'. Physical health too: we may well be at the point where, as well as their reducing the quality of life of thousands of citizens every day, these sirens create more accidents than they help ameliorate by disturbing sleep patterns and inducing panicky responses in other road users and members of the public. Again, under the current policymaking regime, it's in nobody's interests to find out.

If government is to intervene in matters of health, it must look at the overall physical and mental health of its citizens. There have been, and no doubt still are, areas in which relationships between cause and effect are easy to identify. Provision of sanitation for instance, is clearly beneficial. I'd also support bans on smoking in all areas where there will be children and adults who don't choose to be exposed to the fumes. (That would be on aesthetic as well as health grounds.) But society is complex, as are the human body and mind. Most scientific relationships aren't easy to identify; and they vary over space and they change with time. We need policies that allow for diverse, adaptive approaches and that target broad mental and physical health, rather than particular maladies.

I offer my suggestion in this essay, which applies the Social Policy Bond principle to health care. Briefly: governments would target for improvement the health of the population, as measured in Quality (or Disability) Adjusted Life Years. Bonds would be redeemed only after sustained periods of improved health. A bond regime would reward the most efficient ways of improving health by channelling society's scarce resources into the areas where they could do the most good. Unlike today's healthcare systems, it wouldn't assume that a one-size-fits-all approach, based on fossilised science, is good enough for everybody, for all time.

Where we're at

How are Social Policy Bonds doing?

It's about 27 years since they first entered the public arena (see here). In that time the Social Policy Bond idea has won praise from distinguished economists (point 8 here), but no Social Policy Bonds have actually been issued.

It's not all doom and gloom though. There is widespread, though belated, recognition now that rewarding better performance in the public sector is a good thing, and non-tradeable variants of Social Policy Bonds are being issued on a trial basis in the UK, US, Australia and Israel. They are also being considered in New Zealand (see here for a short video discussion).These bonds have various names including Social Impact Bonds, Social Benefit Bonds and Pay for Success Bonds.

I have my reservations about them, which I've expressed here and here. Essentially, their being non-tradeable drastically reduces the scope - in breadth and time horizon - of the goals that can be considered. They favour existing service providers, and their administrative costs are likely to be relatively higher than Social Policy Bonds. As well, because they aren't openly traded, they generate no price information that could be extremely useful to policymakers. Nevertheless, these bonds do reward greater efficiency in achieving their limited objectives, and they might well improve on current policy where that is particularly inefficient. They could therefore be a handy (and though I am hesitant to say so, necessary) first step toward a fully-functioning Social Policy Bond.

That said, I'd disappointed that, as far as I am aware, the backers of all the Social Impact Bonds being issued have been, or will be, governments. I'd have much preferred the private sector, in the form of non-governmental organizations or philanthropists, take the lead. The bonds being issued are intended to help vulnerable or disadvantaged people and it seems regrettable in today's climate that the other beneficiaries of taxpayer funds will be financial intermediaries who will take their cut of the transaction costs. Indeed, it seems these bond issuers will benefit whether or not the bonds work as intended. If the bonds do work as intended, that's fine, but we should remember that they are an experiment and, it would be a shame if they come to be seen as a means by which the financial services sector syphons off yet more cash from taxpayers while contributing nothing (at best) to wider society. The other danger is that if Social Impact Bonds fail - and especially if they do so while the brokers benefit - they could discredit the Social Policy Bond concept. For many reasons, therefore, I hope they succeed....

Hidden metrics

Hidden metrics, not to be confused with the hidden variables of quantum mechanics, are one possible way of preventing the gaming that could otherwise result from targeting specific quantitative outcomes.

Let me explain. Say we are targeting female literacy in Pakistan. We issue bonds that will be redeemed when the literacy level of 15-year old girls in Pakistan exceeds 95 percent each year over a ten-year period. Campbell's Law tells us, rightly I think, that:

The more any quantitative social indicator (or even some qualitative indicator) is used for social decision-making, the more subject it will be to corruption pressures and the more apt it will be to distort and corrupt the social processes it is intended to monitor. Source

What metrics could we deploy that measure, accurately and inevitably, that which we want to achieve: namely, near-universal literacy for 15-year old Pakistani girls?  We could subject every girl of that age to a standard reading test, but we know that academic tests and their results, even in developed countries, are manipulated. Girls could be taught to the test (by, for instance, being given the test in advance and taught to memorise it by rote). Or anyone up the ladder from the administrators of the test to the collators of the results could be bribed to alter the data at any stage.

So instead we could take a random sample of, say, 100 schoolgirls from 100 districts around Pakistan at ten yearly intervals, and test them in non-standard ways for their literacy. We don't reveal which districts, let alone which girls, will be chosen; nor do we release exact details of the test. That makes it much harder to game the outcome.

More complex is the goal of peace. Now, nuclear peace is relatively easy to target: we can issue bonds that will not be redeemed, say, until a thirty-year period has elapsed during which there has been no detonation (accidental or not) of a nuclear weapon that kills more than 100 people. But what about peace more generally? Hot wars are fairly easy to recognise and define and so would be correspondingly easy to deter using a bond regime. But there are more nebulous ways of fomenting conflict between states (Ukraine), or of ratcheting up tension to levels that severly curtail quality of life.  In these instances we could use an array of metrics such as: trans-border movement of weapons, numbers of people killed or fleeing their homes. Even the lack of information could also be an indicator of conflict that could find its way into our calculations. We could also use survey data, such as attitudes about potential enemies, or expressions of fear. Other potential indicators are disruptions to food, water or electricity supplies and other results of damage to infrastructure. 
 
The important point is that in this as in other goals, we need not and indeed should not specify in advance exactly which combination of metrics and indicators will be used to determine whether or not the bonds' redemption terms shall be deemed satisfied. In general, we try, as far as possible, to target metrics that are, or that are inextricably linked to, exactly what we want to achieve. Where that is difficult, we try to prevent gaming by not specifying too far in advance the exact redemption terms of the bonds. The aim, at all times, is for bondholders to comply with the spirit as well as the letter of the goals set by the backers of the bonds.

Irrational health funding

This is irrational, but not surprising:

The [US] National Institutes of Health last month published a startling analysis of how it allocates its funding: in 2010, HIV research received nearly $3.1 billion in funding, while a deadly lung disease that has more than six times the health toll in the United States got only $118 million. Two diseases with a similar health burden, breast cancer and chronic liver disease, received wildly different levels of support: $763 million for the cancer best known for iconic pink ribbon awareness efforts, versus $284 million for a disease commonly caused by alcohol abuse. Autism receives more than five times the funding of eating disorders, but their impacts on health, measured in years of disability and premature death, are quite close. Why the diseases that cause the most harm don’t always get the most research money, Carolyn Johnson, washingpost.com, 17 July

I've inveighed against this sort of bias in government policy for years. In health, as in other policy areas, I am sure that government is well meaning and hard working. But it suffers from its inherently uniform, top-down approach. Government can also be short term in its thinking, reactive rather than proactive, and disdainful of innovation while favouring tried, tested but failed approaches. It has to make its resource allocation decisions on the basis of data that are necessarily incomplete. How can it know in detail the effect that spending on, say, cancer diagnostic machinery will have on the overall health of the nation, as compared with subsidising the cost of nicotine chewing gum?

So, by default, health expenditure is influenced by groups of medical specialists with little incentive or capacity to see improvements in the overall health of a large population as an objective. Funding decisions are also heavily influenced by the public profile of a disease or its victims, rather than on what would best meet the needs of society. It’s also a question of diet, exercise, transport, and culture. Recent research shows, for instance, the beneficial effects on health of green spaces in our cities (see here (pdf) for instance). The way government is structured, with its discrete funding bodies, makes it unlikely that such benefits will influence funding decisions.

We cannot expect a government nor any single organization to identify the huge numbers of variables, with all their time lags and interactions, that influence the nation’s health. We can, though, devise a system that rewards people who explore and implement the most cost-effective health solutions, even when circumstances and knowledge are changing continuously. I have tried to do this with my essay on Health Bonds, which would aim to distribute scarce government funds to where they would do most good, as measured by such indicators as Disability Adjusted Life Years. One small caveat though: I'm assuming that most of us - at least in our most rational moments - favour such a distribution of health resources. But there is a possibility that the current (mis)allocation of resources originates in unvoiced but widely held preferences. Ms Johnson quotes one expert: "...we tend to underfund things where we blame the victim". It's unlikely that the large disparities in health funding outlined above do reflect such deliberate choices. But even if they do, it would be better to be explicit about it.

Targeting surrogate indicators

In the absence of broad, agreed, explicit goals, governments fine it convenient to target surrogate outcomes. Climate change is one example: instead of targeting the adverse effects of climate change, governments target greenhouse gas emissions, which may or may not have something to do with climate change, and they target them in ways that even in their own terms achieve nothing. More generally, instead of targeting anything as meaningful as human well-being, the de facto target of most governments is gross domestic product (or GDP per capita).

It's not just governments. It's big companies too. Instead of targeting anything that's inextricably linked to physical health (Quality Adjust Life Years, for instance), they try to get us to focus on surrogate outcomes. Cholesterol levels are one such surrogate outcome. Statins have been the preferred - by the pharmaceutical companies - vehicle for reducing cholesterol levels but, now that their patents are running out, a new class of drug, PCSK9 inhibitors, is on its way.

Reducing cholesterol levels might bring about a reduction in heart attacks, but it appears to do nothing for overall mortality. Indeed, overall mortality is not really a concern of many medical specialists, nor of big pharma. It's government that should be articulating our broad health goals. But in this, as in climate change and other policy areas, it's instead taking instruction from the wealthy and powerful, at the expense of the people it's supposed to represent.

Greenhouse gas emissions accelerating

Michael Le Page, writes in New Scientist (18 July) about the 'coal renaissance' and in particular about the heavy investments in coal power of poor, fast-growing countries in Asia and Africa. The result is that 'global CO2 emissions are rising faster than ever. And they are likely to continue to grow.' Indeed 'not only are carbon emissions rising, the pace has accelerated since 2000'. A graph (in the print issue) illustrates this: emissions rose at an average rate of 1.3 percent a year from 1970 to 2000, and have been rising at 2.2 percent since then.

I have for years been pointing out the futility of the Kyoto agreement and other apparent attempts to cut greenhouse gas emissions. I favour a clearer identification of what we actually want to achieve. Is it reduced greenhouse gas emissions? Even with that exceptionally narrow and arguable goal (can we really identify all the greenhouse gases and weight their contribution to climate change accurately?), Kyoto, as Mr Le Page tells us, is a failure. Will reducing greenhouse gas emissions, even were we to be successful in doing that, actually affect the climate? To what end? Nobody knows. But perhaps Kyoto and its interminable followups is intended to be a respectable-sounding forum within which bureaucrats from all countries can talk to each other and syphon off enough taxpayers' money to bring up their families. Ok, yes, it's had more success there. But that's probably not an achievement that taxpayers support with enthusiasm.

We do need to focus on what we want to achieve. Climate Stability Bonds, which I advocate, don't need to be exclusively, or even partly, about aiming to reduce the variability of the earth's climate. We could target some physical and biological indicators of climate change, but we could instead, or as well, target social and financial measures, such as the numbers of people killed or made homeless by adverse climatic events and the cost of compensating them, or the costs of preventing the negative impacts from arising at all.

A bond regime would be sufficiently versatile to include all these indicators, and more. It wouldn't even require people to agree on the - still questioned - thesis that the climate is actually changing or that, if it is changing, it's something for which we are responsible. It would, though, require clarity and honesty about what we want to achieve. Hmm, perhaps that's why it's gone nowhere in the 25 years or so it's been in the public arena. But all is not lost, yet. For more, see this page, and the links therefrom.

Health: it's complicated

At lower levels of general health we have a good idea about what's needed: basic sanitation, inoculations, and education about hygiene, for starters. A benign government with funds can get things done. It gets a lot more complicated at the health levels prevailing in western countries. Here cause and effect are far more difficult to identify; there are huge numbers of, and possible interactions between, lifestyles and interventions that affect health. And these are changing constantly as our scientific knowledge grows. As well, lobbies are adept at influencing policy in their favour, often at the expense of the general health of the population. This is where an outcome-based approach can succeed where existing policy seems to have lost its way and is likely to be generating diminishing - even negative - returns.

Jerome Burn, here, points out some of the flaws of evidence based medicine as practised in the rich countries. He quotes Dr David Unwin, a general practitioner in Liverpool, UK:

We had to balance evidence based medicine – you come with a problem; I give you a solution – with evidence based practise. That means drawing on my years of clinical experience, rather than just relying on guidelines, and applying it to patient’s own experience. They are the expert on their lives, what they need and what works for them. Without taking that into account you are not going to change anything.

Mr Burn continues:

Even if charities or the government dug deep into their pockets and began to run many more RCT’s [Randomised Control Trials] on lifestyle changes, they are the wrong tool to use. The lifestyle approach we need to integrate much more effectively into medicine doesn’t involve just changing one thing – drug or no drug – it involves doing lots of things at once – for example: different diets and more exercise combined with psychological techniques such as stress reduction. RCTs have difficulties with such multiple interventions. Yet when they are tested they often turn out more effective than drugs.

The existing rich countries' healthcare systems don't encourage the approach that Dr Unwin and Mr Burn are advocating. What's more, they cannot do so. Drug companies' priority is to deliver returns to shareholders. One way of doing this is to influence government, which could not anyway gather, collate and exploit the data necessary to optimise the general health of the population.

Outcome-based policy, and Social Policy Bonds in particular, could be the answer. Improving rich countries' health is complicated and long term in nature. Existing policy isn't working very well. Broad metrics for physical health are fairly well established and robust. A gradual transition in the rich countries to a Social Policy Bond regime would reward efficient existing approaches and channel our limited funding into the most promising new ones. For more, see my essay on Health Bonds.

Scary

 Max Fisher concludes his long piece, How World War III Became Possible:

We may have escaped the Cold War, but we have not escaped the nuclear threat, which not only remains but is growing. The sense that this danger is resigned to history books, common in Washington and other Western capitals, is precisely part of its danger. It is another echo of the months and years before World War I, when the world drifted unknowingly toward disaster.

In April of last year, just after Russia had annexed Crimea, the London-based think tank Chatham House published a report on the dangers of unintended nuclear conflict. It was not pegged to the events in Ukraine, and at that point few people, including the report's authors, saw Crimea as the potential beginning of a larger conflict. Even still, it was dire in its warnings. "The probability of inadvertent nuclear use is not zero and is higher than had been widely considered," it stated. "The risk associated with nuclear weapons is high" and "under-appreciated." Their warnings were widely ignored. As the report itself noted, the world has concluded, wrongly, that nuclear weapons no longer pose an imminent threat. Attention has moved on. But the seeds of a possible war are being sown in Europe. How World War III Became Possible, Max Fisher, 29 June

You don't have to agree with all Mr Fisher's contentions to be scared by his discussion about how Russia and NATO might be sleepwalking toward devastating conflict. Still less should we be concerned to allocate blame. Probably there are faults on both sides, but trying to weigh them so as to have an opinion about which side is worse than the other is something a self-indulgence; understandable perhaps, given how powerless we ordinary people feel.

But I'd say we can do better than watch and debate on the sidelines. I cannot suggest a way out of any impending nuclear conflict, but what I do suggest is that we offer incentives for people to find ways of avoiding such a conflagration. Rather than leave everything to the politicians, ideologues, military men and the war-gamers, we could encourage people to back Conflict Reduction Bonds that will be redeemed only when there has been a sustained period of nuclear peace. Backers could include any combination of governments, international organizations, non-governmental organizations and philanthropists, and their funds could be swelled by contributions from the rest of us.

The maintenance of nuclear peace is a goal that is ideal for solution via Social Policy Bonds:

• it has an unambiguous, verifiable metric
• existing policy doesn't seem to be working
• nobody now knows the best ways of achieving the goal
• the goal is long term
• the goal is likely to require a multiplicity of diverse, adaptive approaches.   

Of course, the bond approach can run in parallel with existing policy, such as it is. It's likely to strengthen the hand of those whose activities seem to be working, as well as encourage new approaches, including those beyond current conception.

SIBs can be better than existing policy

Though still skeptical about Social Impact Bonds - the non-tradeable version of Social Policy Bonds - I do now think that under some circumstances they will be an improvement over existing policy. My main concern with SIBs is the danger that, being necessarily more narrow and short term than Social Policy Bonds, they will stimulate achievement of their targeted goals at the expense of people whose well-being isn't targeted for improvement. This possibility is lessened when the beneficiaries of a SIB regime are markedly disadvantaged. I am thinking now of the use of SIBs to target goals such as improving the well-being of the mentally unwell. (Here are arguments for and against the issuing of SIBs to brighten the employment prospects of mentally unwell people in New Zealand.) There will need to be provisos and careful monitoring, of course, as not all attempts to game a SIB regime can be foreseen and written into the redemption conditions of the bonds. But at this point SIBs are controversial, which is a positive in that it means that bondholders will want to ensure compliance with the bond issuers' intent and not only the bonds' legal stipulations.  

The advantages of a SIB regime over existing policy arise from their rewarding of outcomes rather than activities. Not as effectively as a pure Social Policy Bond regime, to be sure, but they should nevertheless stimulate greater efficiency in current activities and some innovation of new activities - a big plus where existing policy is thought to be failing.

You'll notice that I still have my reservations about Social Impact Bonds. Being better than existing policy is not always a great recommendation, though it could mean a lot to those individuals who (as in the New Zealand example) are in urgent need of new approaches. A pure Social Policy Bond regime would represent a drastic change from current policy with, I believe, commensurate benefits for all. SIBs can be a useful intermediate step towards such a regime.

Bonds in New Zealand

This post is a follow-up to my previous post, where I discuss why I don't like Social Impact Bonds. Today, Sunday, there was a short tv debate shown in New Zealand about using Social Impact Bonds to address mental health problems. My name is invoked at the five-minute mark. I would say that both protagonists are not quite correct. I'm against these SIBs only because they are not tradeable, because then there won't be much of the (necessary) innovation that the pro-SIB man, Stephen Franks, was talking about.

Why I don't like Social Impact Bonds

When I first came up with the idea of Social Policy Bonds, their tradeability was an intrinsic part of their identity. Without tradeability, the bonds would be little more than prizes awarded to existing service providers for doing their jobs a bit more efficiently than previously. There's obvious scope for gaming here: perform badly, wait till the government issues SIBs, perform better, then cash in. But perhaps more important is the necessity for allowing new service providers - or, as I term them, outcome achievers - to buy the bonds at any stage and receive extra rewards, in the form of a rise in the market value of their bonds, for performing well. Without tradeability, that won't happen.

The way of the world is that big business and government go hand-in-hand. The way of Social Impact Bonds is is equally familiar and equally dubious: government thinks it knows best who will deliver certain services and rewards them if they improve their performance. These will be existing service providers or, just possibly, new bodies upon which the government is equally keen to bestow favour for some reason or other. The whole point of my Social Policy Bond idea is to bring about creative destruction into the achievement of social and environmental outcomes. Under a Social Policy Bond regime new approaches and new organizations will be rewarded if, and only if, they are more efficient than anyone else. Social Impact Bonds won't do that: existing organizations will be favoured; they will have some incentive to perform their existing functions more efficiently, but little incentive to look at new approaches. For one thing, innovation risks rocking the boat. For another, SIBs, because they are not tradeable, are going to be restricted in their time horizon to that of existing organizations: they will take a short-term view, relative to the complexity of our social and environmental problems. This is a major deficiency: it restricts the scope of the bonds to narrow, short-term goals. As well, the costs of monitoring progress toward such goals is going to be large relative to sums at stake.

Contrast this with Social Policy Bonds, which are not limited by the prejudices of government (or anyone else) as to how our goals shall be achieved nor who shall achieve them. So we can target long-term social goals that will inevitably require diverse, adaptive approaches: reduced crime rates, for example, or improved health. We can even target global goals, like human development or the sustained avoidance of violent political conflict. Governments that issue Social Policy Bonds don't have to take a view as to which organizations are best placed to achieve such goals, nor as to how they shall go about achieving them. That work is done by bidders for the bonds who will be motivated by the rewards they get for helping achieve the targeted outcome. Note the word 'helping': a single organization need not achieve the entire goal to be rewarded under a Social Policy Bond regime: helping raise the likelihood of early achievement of the goal will generate reward in the form of the increased value of the bonds they (or a contracting agent) owns. Social Policy Bonds encourage a coalition of interests, whose composition and structure will change in response to changing circumstances, to co-operate in exploring and implementing a diverse, adaptive array of initiatives with the aim of achieving our broad social goals, even ones as seemingly remote and unattainable as universal female literacy or world peace.

For more on this see my short article: why the bonds must be tradeable. Also previous blog posts. For another critical view of SIBs (in New Zealand) see here. Contact me if you would like to know more.

Chopping down trees to fight climate change

It's inefficient, at best, for central government to try to prescribe how to achieve most social or environmental goals. Society's just too complex for any large, fixed organization fully to understand. But politicians aren't known for their humility. This is what happens when government thinks it knows how best to achieve its environmental goal of reducing greenhouse gases (not to be confused with trying to prevent climate change, but that's another story):

For the sake of a greener Europe, thousands of American trees are falling each month in the forests outside this cotton-country town [Oak City, North Carolina, US]. .... Each day, dozens of trucks haul freshly cut oaks and poplars to a nearby factory where the wood is converted into small pellets, to be used as fuel in European power plants. Soaring demand for this woody fuel has led to the construction of more than two dozen pellet factories in the Southeast [of the US] in the past decade, along with special port facilities in Virginia and Georgia where mountains of pellets are loaded onto Europe-bound freighters. European officials promote the trade as part of the fight against climate change. Burning “biomass” from trees instead of coal, they say, means fewer greenhouse gases in the atmosphere. .... But ...scientists say, Europe’s appetite for wood pellets could lead to more carbon pollution for decades to come, while also putting some of the East Coast’s most productive wildlife habitats at risk. How Europe’s climate policies led to more U.S. trees being cut down, Joby Warrick, 2 June

It's a typical government intervention; confusing the causes of a problem (climate change) with the supposed causes of a problem (coal burning) and imposing a restricted (geographically limited to the EU) pseudo-solution to a problem that goes beyond politicians' sphere of influence. The result: government intervention makes things worse even on its own terms.

The same confusion arises in other areas, especially those where experts think they have all the answers. So we see the targeting of a surrogate indicator like blood cholesterol in medicine, through the mass prescription of statins, which might, but probably won't, do anything to reduce the overall health of a population - with large upfront and certain costs in terms of finance and side effects. Of one thing we can be certain: government will not (pdf) look back at its policies and learn from its mistakes.

The solution, I think, is for governments to stick to what they are good at: articulating society's goals and raising the funds to achieve them. But, for complex social and environmental goals, government should contract out the actual achievement to a motivated coalition of interests, which will have incentives to explore diverse, adaptive ways of achieving our goals. A Social Policy Bond regime would effect such a contracting out. The bonds, being tradeable, would imply that this coalition could change, always to be composed of those who will be most efficient at achieving our goals. This, in turn, would mean that we could target long-term goals, including those, like climate change, that transcend national boundaries.