13 August 2017

Incentives and health

Dr James DiNicolantonio writes about the influence of the sugar industry on nutritional guidelines:
Throughout the years, the effects of conflicts of interest with the sugar industry were never quantified, until a recent systematic review of systematic reviews was published in 2013 in the journal PLOS Medicine. The review found that in studies with a conflict of interest with the food industry, 83.3 percent found no evidence linking sugar-sweetened beverages with weight gain/obesity. In contrast, when only studies without conflicts of interest with the food industry were analyzed, the same percentage (83.3 percent) found a positive association—that sugar-sweetened beverages have a definitive connection with weight gain and obesity. This one study provides just a small glimpse of how much science has likely been affected by these types of influences. The Salt Fix: Why the Experts Got it All Wrong and How Eating More Might Save Your Life, Dr. James DiNicolantonio, June 2017
Nothing particularly new, but we do need reminding of the importance of incentives even on hard-working, well-meaning, highly talented members of the medical profession. Of course, financial incentives can reinforce public health as well as degrade it. The Social Policy Bond concept, as applied to health, would align our national health goals with rewards to those who are efficient at achieving them. It's unfortunate that, under our current healthcare systems, there is little to encourage people to seek out those ways of improving our health at least cost. Medical specialists, expert in their field, advocate effectively for their share of limited resources, but the overall health of the nation isn't effectively targeted. Few people have any financial incentive to consider it, and especially not to question the current ways in which funding is allocated.

Health Bonds would be different. They would target our broad health goals, probably in the form of a range of indicators such as longevity and Quality Adjusted Life Years. For the bonds to be redeemed, each indicator would have to fall into a specified range, representing an improvement over the current level. Significant improvements in a nation's health will probably take decades to achieve, but Health Bonds would be tradeable, meaning that any coalition of interests who improve our health, however marginally, can profit from their doing so by virtue of the increased value of their bondholding. By backing and issuing Health Bonds, a government could effectively maximise the health gains per tax dollar spent without having to specify how such gains shall be achieved, nor who shall achieve them. Opportunities for the sort of corruption (whether deliberate or not) hinted at by Dr DiNicolantonio and the authors of the paper he cites, would disappear, to be replaced by a healthcare system in which the interests of practitioners and population would be entirely congruent.

04 August 2017

Health: too important to be left to the healthcare industry

Brian Nelson writes: 
That our payment incentives have had the unintended consequence of often harming patients has been recognized by payers (government included) and efforts are underway to change. Can we devise a system that pays for outcomes rather than paying for services regardless of effectiveness? Unless we do, I fear things will not change. A review by Brian W Nelson (orthopaedic surgeon), of Crooked: Outwitting the Back Pain Industry and Getting on the Road to Recovery, 21 May
There's an idea: pay for favourable health outcomes, rather than activities or institutions purporting to deliver those outcomes, but at least as concerned for their own well-being as those of the people they are supposed to be helping. We see this not only in orthopaedics, but in other areas of physical and mental health. There's nothing particularly startling about this: practitioners have their own families to support, and are reacting perfectly rationally to the incentives on offer. And those incentives encourage over-screening and over-treatment, and the neglect of commercially nonnviable preventive interventions. As the British Medical Association puts it, in a recent paper:
Despite the clear acknowledgement across the UK of the need to prioritise ill-health prevention and public health activities, the data analysed in this briefing show this is not matched by funding commitments. Funding for ill-health prevention and public health in the UK (pdf), British Medical Association, 2017
It's the same, or worse, in the US:
Almost 1.3 million people went to U.S. emergency rooms due to adverse drug effects in 2014, and about 124,000 people died from those events. [R]research suggests that up to half of those events were preventable. ... An estimated $200 billion per year is spent in the U.S. on the unnecessary and improper use of medication, for the drugs themselves and related medical costs.... Too many meds?, Teresa Carr, 'Consumers Reports', dated September 2017

It's time for a new approach. My suggestion is that rather than policymakers' focusing on the means by which they think good health can be achieved, they instead focus on targets for good physical and mental health, and provide incentives for people to achieve those targets. The Social Policy Bond concept, applied to health, would do this, and more: it would inject the market's incentives and efficiencies into all the processes necessary to improve a nation's health. Health Bonds would channel our scarce resources into the most efficient means of improving our health, including those currently neglected or not even considered by our current healthcare bodies, most of which have little incentive or capacity to consider broad health outcomes that fall outside their increasingly specialised remit.

Health Bonds wouldn't stipulate how our health goals shall be achieved, nor who shall achieve them. This allows a broader approach. For example: our current compartmentalised accountancy-driven policy approach would not take into consideration the adverse health impacts of subsidising advanced courses for young drivers of motorbikes or cars. But holders of Health Bonds would look at such measures, investigate their possible health impacts, and make an informed decision as to whether any improvement they might bring to the nation's health is worthwhile, compared to other possible interventions.

31 July 2017

A successful Social Impact Bond

A flurry of reporting on the success of the world's first Social Impact Bond. The goal was to reduce reoffending rates of short-sentence ex-prisoners in the English city of Peterborough by at least 7.5 percent. The result was a 9.0 percent reduction:
The conclusion of the world's first social impact bond (SIB) will return all of the investment as well as a one off payment described by Social Finance as "just over 3% interest per annum" over five years go to 17 social investors after outcomes were achieved. All of the investors were charities or charitable foundations. Peterborough social impact bond investors see 3% interest, Lee Mannion, 'Pioneers Post, 27 July
Social Impact Bonds are the non-tradeable variant of Social Policy Bonds. I've had no direct involvement in any of the 89 SIBs in 19 countries which have now been issued. I'm ambivalent about SIBs and their non-tradeability - see here and here. But I think they can be helpful where the alternatives are neglect or poor policy. They might also serve as a handy stepping-stone to the full Social Policy Bond model. For current news about SIBs there is a database and relevant links, here.

30 July 2017

Nappies, LCAs, and the environment

From an article in a recent New Scientist:
Greenhouse gas emissions from the production of various materials reveal that recycling is always greener than using virgin resources Throwaway culture: the truth about recycling, Bob Holmes, 'New Scientist', 22 July
This is problematic for two reasons. First: I think it's a mistake to define 'greener' as 'generating a lower level of greenhouse gas emissions'. Why? Because production inevitably entails numerous other environmental impacts. Second: because 'always' is anyway too definitive.

Life Cycle Analyses (LCAs) are not a simple exercise, but one conducted by the UK's Environment Agency compared the environmental impacts of disposable nappies (diapers) against home- and commercially-laundered cloth nappies. The conclusion:
For the three nappy systems studied, there was no significant difference between any of the environmental impacts – that is, overall no system clearly had a better or worse environmental performance, although the life cycle stages that are the main source for these impacts are different for each system. Life Cycle Assessment of Disposable and Reusable Nappies in the UK (pdf), Environment Agency, 2005
This LCA considered a wide array of environmental impacts: 'resource depletion; climate change; ozone depletion; human toxicity; acidification; fresh-water aquatic toxicity; terrestrial toxicity; photochemical oxidant formation (low level smog) and nutrification of fresh water (eutrophication).' Climate change, note, is just one of these impacts. This study was published 12 years ago, and its conclusion might have changed since then - which is my second point: that even if we can say now that recycling aluminium, say, is currently 'greener' than producing from the virgin resource, it might not always be so. Weighting environmental impacts, apart from being largely subjective, can never be definitive: our scientific knowledge about these impacts changes, as do the technologies of extraction and recycling and numerous other relevant variables. Our current policymaking system, as applied most spectacularly to climate change, relies on our trying to identify the source of a problem and then basing policy instruments for decades ahead on that - ossified - knowledge of scientific relationships. As well as failing to account for our rapidly expanding scientific knowledge, it necessarily ignores potentially massive changes in social, financial or biological variables.

My suggestion is that policymakers or environmental campaigners stop focusing on how things are done and instead target environmental outcomes, measured in terms of human, animal and plant health. Environmental Policy Bonds could target quite ambitious goals at the national or even global level. Just choosing their target could force policymakers and the rest of us into clarifying what we really want to achieve. For example: do we primarily want to influence the climate, or are we more concerned about the adverse effects of the climate on human, animal and plant life? The difference is subtle, but it might be that doing the former is not the most efficient, nor even a feasible, way of mitigating the latter.

Clarification of goals is one crucial advantage of the Environmental Policy Bond concept. Another is that the bonds, being tradeable, could target ambitious, long-term goals that will probably require the lifetime of multiple democratic government administrations to achieve. A bond regime would not dictate how our goals shall be achieved, nor who shall achieve them. At any one time the bonds will be held by that coalition of interests who are - or who think they are - the people who will be most efficient at achieving the next step on way to the bonds' redemption.

In all, then, the Social Policy Bond concept, as applied to the environment, would motivate bondholders to explore and implement diverse, adaptive initiatives that will efficiently achieve our environmental goals. This is something that our current policymaking system, based as it is on the use of fossilised science and heavily influenced by vested interests, simply cannot do.

21 July 2017

Social Policy Bonds and free riders

Let’s say that the bonds have been floated, and that a high proportion of them have been sold to people or bodies have no intention of doing anything to achieve our targeted goal. These are would-be free riders, hoping to benefit from other bondholders’ efforts to achieve the goal, or a drift toward the goal that happens regardless of anybody’s efforts. (An example of this would be a holder of Climate Stability Bonds benefiting from new scientific evidence showing that the climate isn’t changing as quickly as the market thought it was when the bonds were issued.)

If too many Social Policy Bonds were held by would-be free riders who had no intention of doing anything to help achieve the targeted social objective, then the value of all the bonds would fall. At that point it becomes worthwhile for active bondholders to buy those bonds that are traded, do something to achieve the goal, and see the value of their bonds rise. This would benefit any remaining free riders of course, but not as much as the new bondholders, because these new bondholders would have paid less for their bonds. Most likely, we'd see aggregation of bond holdings as it becomes worthwhile for passive bondholders to sell their bonds. The resulting small group of large bondholders would then have incentives to cooperate with each other. This would mean, amongst other things, that they would all benefit by agreeing on how the specified social problem could best be targeted. One element of the optimal strategy will be to decide who will be responsible for what activities, and how they shall be compensated. Major bondholders will certainly have incentives to share information with each other. Many of the bonds would be traded between bondholders.

If the proportion of bonds held by free riders is small, then their passivity would have little effect on the market value of the bonds, and they might benefit by hanging on to their holdings if active bondholders are successful in their efforts to move towards the goal’s achievement. Such behaviour would, to a limited degree, undermine the Social Policy Bond concept, but keep in mind that:
  • The true standard of comparison is not perfection: just something significantly better than any alternative, and

  • Our goal is to achieve social goals as efficiently and quickly as possible; not to ensure that everyone is rewarded strictly in accordance with their efforts.
There is more about Social Policy Bonds and free riding in my book, chapter 4.

20 July 2017

Targeting long-term goals

James Hansen talks about climate change:
You’re talking about a system that responds on the timescale of decades to centuries — that’s a different time constant than the political constant.” James Hansen talking to David Wallace-Wells in The Uninhabitable Earth: Annotated Edition (reference 12)
It's not only climate change for which our current politics is inadequate. Any crisis building now, but whose effects will be felt only by future generations or, even more scarily, future administrations, is going to to be neglected within our current system. Our politicians face few incentives to consider future generations, and plenty of incentives to ignore them completely. We see this in the amassing of grotesquely inflated debt levels, badly thought-out immigration policies, under-investment in critical infrastructure, and environmental behaviours including, but by no means limited to, those that affect the climate. The narrow, short-term interests of powerful interests, public- and private-sector, win out every time. As for future generations: our politicians are expert at kicking the can down the road.

Social Policy Bonds could remedy this neglect of long-term consequences. They would create a coalition of interests in favour of achieving social and environmental goals that are currently too remote to receive much attention - though plenty by dystopian fiction writers. The way the bonds work would be to reward the achievement of our long-term goals at every stage of the process.

Social Policy Bonds (unlike Social Impact Bonds) are radeable, which means that bondholders don't have to hold them until redemption to see their value rise and realise a profit.. This allows the bonds to target effectively such remote goals as climate stability, universal literacy and world peace. The bonds would begin their work as soon as they were issued: those who buy the bonds would be motivated to begin the explore measures that would immediately raise the chances that the targeted goal will be achieved quickly. For most long-term goals, a large array of diverse measures will need to be proposed, implemented on a small scale, then either terminated or implemented more widely. No government can effectively oversee such a range of projects, nor can any single, conventional organisation. In particular, terminating failed approaches in favour of more efficient ideas does not come easily to government. But under a Social Policy Bond regime there would be every incentive to focus only on those approaches that will achieve our targeted goal most efficiently. And, crucially, the optimum mix of approaches will change over time - especially over the long time period that remote goals will require for their achievement. The bonds would give rise to a new type of organisation; ones whose composition and structure would change, perhaps radically, over the lifetime of the bonds, in response to changing circumstances and improving knowledge. Again, such adaptiveness is not a characteristic of government action, but it is an essential element of any attempts to solve our long-term problems.

Social Policy Bonds would represent a radical change from today's politics. But, as long-term problems threaten to overwhelm humanity (click on the source excerpted at the top of this post, for one example) it's clear that business as usual is not working. Targeting long-term goals and injecting market incentives into their achievement would seem to be our best hope. Social Policy Bonds, uniquely amongst policy instruments, would do both.

I've written about why I believe tradeability is important here, and why I am ambivalent about Social Impact Bonds here.

14 July 2017

Climate change: means and ends

A leader in the current 'Economist,' referring to public- and private-sector commitments to run their operations on 100 percent renewable energy is titled: Better to target zero emissions than 100% renewable energy:
Most important, a 100% renewables target confuses means with ends. The priority for the planet is to stop net emissions of greenhouse gases, especially carbon dioxide. Putting too much emphasis on wind, solar and other renewables may block off better carbon-reduction paths. 'The Economist', dated 15 July
No. The real ends of policy have to do with the problems caused by climate change. Whether, and by how much, greenhouse gas (ghg) emissions contribute to those problems is still an open question. And, whatever the answer to that question, still more important to policymakers is whether reducing ghg emissions is the best way of dealing with climate change. For that, we need to go beyond the cant about renewables and beyond the Economist's - and almost everyone else's - focus on greenhouse gases to ask whether we are more concerned about climate change, or about the impacts of climate change on human, animal and plant life?

A Social Policy Bond regime would not assume that reducing ghgs is the best way of achieving our goals. Instead it would specify very clearly what our goal actually is. Most likely, 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. We'd then issue Climate Stability Bonds that would be redeemed only when that had occurred.

Unfortunately an entire bureaucracy has grown around ghg emissions. It seems to me that the existence and activities of this bureaucracy embody the assumption that our trying (and most probably failing, though we'd never know either way) 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. Clarity about what actually we want to achieve, of the sort that a Social Policy Bond approach would necessitate, is the only feasible starting point.

11 July 2017

Immigration: the need for buy-in

Tim Black writes about the immigration crisis facing Italy, where last year 181 000 migrants arrived via Libya, and 'already this year, a further 84 000 have arrived, which is 20 per cent more than arrived in the first half of 2016.'
Now, if those Italians whose towns have been turned into migrant holding stations had been allowed to debate the migration issue; if those living in Lampedusa and the other migrant destinations in Italy had been part of a process of democratic deliberation; and if they had been allowed to voice their concerns, and influence the decisions which have led to the influx of migrants, then perhaps the seething resentment, the sense of being imposed upon, of having their lives turned upside down with the stroke of pen in Brussels, might have been absent. Perhaps a more workable solution could even have been found. And perhaps the migrants themselves wouldn’t be treated as a problem, but as people just like us, sometimes fleeing wretched lives, always seeking better ones. The EU: pitting migrants against citizens, Tim Black, 'Spiked', 12 July
Sadly for everybody involved, our so-called representatives at the national and EU levels have got into the habit of not consulting us about almost everything. The results are as dismal as they are predictable: the gap between citizens and politicians grows ever wider. Ordinary people feel - and are - powerless. Politics are hyper-polarised. Anger and violence are now a normal feature of political discourse.

Our politicians just know they're right. So do those NGOs and philanthropists who support 'open borders', for example, though, unlike the rest of us, they don't have to live with the consequences of their momentous decisions.

It's time to change the way policymaking works. Social Policy Bonds have two main elements: identifying society's social goals, and injecting market incentives into their achievement. If we could strive for the first of these elements alone, that would be preferable to our current system. As it is, few ordinary people are consulted on issues, such as immigration, and our political class is now so removed from everyday life that they no longer have any feeling for what's important to us.

Social Policy Bonds could narrow the gap between politicians and the people they are supposed to represent. Political debate under a bond regime would focus on outcomes that are meaningful to ordinary people; things like physical and mental health, crime and housing. Because such concerns are meaningful to all of us, we could all contribute to discussion about which goals we should target, and their relative priority. Of course, none of us will be fully satisfied by our collective decision. But, crucially, we shall know that we have been consulted and that, if we wanted to, we could have contributed to the debate.

One happy result of that is that there would be widespread buy-in. We might not fully agree with every decision, but we were able to participate in the process, and we now have a fuller understanding of the trade-offs inherent in any political decision.

I've written more about Social Policy Bonds and buy-in on my main website here, and in various blog posts including, recently, here, here and here.


05 July 2017

The environment: what do we want?

John Michael Greer writes: 
A huge fraction of the energy consumed by a modern industrial society is used indirectly to produce, supply, and transport goods and services; an allegedly “green” technological device that’s made from petroleum-based plastics and exotic metals taken from an open-pit mine in a Third World country, then shipped halfway around the planet to the air-conditioned shopping mall where you bought it, can easily have a carbon footprint substantially bigger than some simpler item that does the same thing in a less immediately efficient way. Dark Age America, John Michael Greer, 2016
The sort of life-cycle analysis required to establish the environmental benefits or otherwise of shifts in our behaviour are bedevilled by boundary issues, measurement difficulties and the difficulty of weighting one type of environmental impact against another. They are better than blandly assuming that rail is ‘better’ than air travel, or that solar power is better than coal-fired power stations but, for the making of robust policy, they would need to be continually reassessed in the light of improving technology, our ever-expanding knowledge of the environment, and our ever-changing environmental priorities. Government policy cannot be so responsive: if government did use life-cycle analysis with the aim of altering our behaviour, it would probably do so on the basis of a one-time, one-size-fits-all, and possibly quite subjective assessment of environmental costs and benefits. It’s not good enough, but even worse would be what we largely have now: government environmental policy based on corporate interests, regulatory wrinkles, and 'feels-good' media stories and the launching of visually appealing initiatives that attract air time but otherwise achieve nothing.

Social Policy Bonds would take a different approach. They would subordinate environmental policy to targeted environmental outcomes. It might be, for instance, that society wishes to reduce its use of fossil fuels. A Social Policy Bond issue that rewarded achievement of such a reduction would generate incentives for bondholders to bring it about at least cost. They might well carry out life-cycle analyses in their attempt to do so. But there is an important difference between the way do they would conduct their research and the way government would do so: bondholders have incentives to achieve their goal efficiently. This is likely to mean responding to and stimulating: increased knowledge of scientific relationships, and technical advances.

More important, though, is that a Social Policy Bond regime would compel clarity over society's real goals. In this case, we'd have to answer the question: is reducing fossil fuel use an end in itself, or a means to other ends? And if the latter, what are those ends? Let's say those ends include, inter alia, improving air quality. Now, is improving air quality an end in itself, or is it the effects that air pollution has on human, plant and animal life that we really want to be targeting? And, if the latter, why not target these ends directly? There might be good reasons, involving the costs of monitoring, for targeting indirect means of achieving our goals, but we do need to keep these goals clearly in mind.

A Social Policy Bond regime would necessarily entail asking ourselves what are the real goals of, say, environmental policy. It would then contract out the achievement of these goals to those people or bodies - public- or private-sector - who, at any one time, will form that coalition that can most efficiently take us along the route towards achieving our goals. Even a perfect life-cycle analysis cannot do this: technology and our knowledge are changing constantly. Policy should therefore limit itself to articulating our environmental goals, and raising the revenue for their achievement.

Most of our important environmental goals will require diverse, adaptive responses. These are precisely the sort of responses that government does very badly. Government can and should articulate society’s environmental goals, and can help pay for their achievement: in the democratic countries it performs these functions quite well and, indeed, it is the only body that can do so. But actually achieving these goals requires continuous, well-informed and impartial decisions to be made about the allocation of scarce resources. For that purpose, Social Policy Bonds, with their incentives to achieve targeted outcomes efficiently would, I believe, be far better than the current ways in which environmental policy is formulated. For more about how Social Policy Bonds could target improve the environmental goals, see here.

01 July 2017

Blockchain-based investing and the Social Policy Bond principle

Zipper Global Ltd, on 28 June, released a draft paper that marries the Social Policy Bond and blockchain concepts. The aim is to address some of the flaws in current startup protocols. The abstract of their draft:
Blockchain based investing and contributing to early stage token projects
Today’s startup funding protocols have several serious flaws. Startup founders struggle to get early stage funding and spend significant amount of their time fundraising instead of building their company and community. Investors are stuck with their illiquid investments for years, and have to make risky investments without knowing if startups are able to execute their plans. Zipper investment platform fixes these pain points and disrupts startup funding with milestone and token based investments. The platform, based on Ethereum blockchain, provides professional investors an early access and safe way to invest into even the most ambitious startups’ tokens, as funds are released to startups in tranches based on reached, smart contract controlled milestones. Investors can exit anytime by selling the startup’s tokens, and startups can scale more easily by giving tokens to their network such as users and contractors as incentives. Startups spend also significantly less time in fundraising as less funding rounds are needed. ZIP token, the platform’s native usage token, grants investors the right to invest through the platform. Moreover, a smart contract controlled Startup Trust scales the platform by investing into selected startups in the platform with the ZIP tokens the Trust holds. ZIP token holders co-decide which startups the Trust invests into and how to spend the Trust's investment profits, such as purchasing ZIP tokens from the open market which would create demand and liquidity for the tokens.  
The paper - full text here  (pdf) - is a first draft, and Zipper Global invite comments via either zipperglobal.com or https://slackin-qhgawovsyq.now.sh/.

27 June 2017

Social Policy Bonds and price signalling

One of the less obvious benefits of a Social Policy Bond regime arises from the price signalling of the market for the bonds. At flotation, the bonds would be auctioned, and difference between the sums raised at flotation and the total redemption value of the bonds would supply the market's best estimate of the cost of achieving the targeted goal at that time. This estimate would vary over time, depending on many factors including bondholders' performance in undertaking or financing goal-achieving projects. The market for Social Policy Bonds, then, as with all markets, plays a vital role not only in allocating resources but also in signalling; in this instance to policymakers, the approximate costs of achieving social goals.

A competitive market for Social Policy Bonds would minimise the total cost of achieving a specified objective, as well as signalling it. More subtly, and more technically, it would also indicate the marginal cost of achieving further improvements. Say one million crime reduction bonds issued by a local authority were to sell for $5 each. This would tell the issuing body that the present value of the expected maximum cost, including bondholders’ profits, of reducing the crime level from, say 50 to 40 units, would be $5 million. The local authority might then suppose that it could afford to be more ambitious, and aim for a further fall to 30 units. It could issue a million additional bonds redeemable when this new lower rate were reached. These would (probably) have an initial market value of less than $5, reflecting the (probably) diminishing returns involved in preventing crime. The point is that, by letting the market do the pricing of the bonds, the local authority would be getting an informed view of the marginal cost of its objectives. So if the bonds targeting the new level of 30 units were to sell for $4 each, then the maximum cost of achieving that objective would be $11 million, being equal to: $5 million (paid out when the level fell from 50 to 40 units) plus $6 million (paid out when the level fell from 40 to 30 units). The marginal cost of a 10-unit drop in crime would thus have been revealed to have risen from $5 million to $6 million. Should the local authority aim for a further fall to 20 units? Following such crime rate-targeting bond issues it would have robust information about the cost of doing so.

This is, of course, a simplified example and in fact the bond market would continuously update its pricing information. Say that new research, of the sort that might be stimulated by an initial bond issue targeting crime, suggested new ways of reforming or deterring criminals. Bondholders may, for example, have financed successful research into more effective reform programmes, or set up more appealing alternative lifestyles for especially hardened criminals. How would the market react to such developments? Once their effectiveness had been revealed, the value of all the bonds would rise. Instead of being priced at $5 and $4, the two crime reduction issues of the example might sell for $8 and $7. The total cost to the government of redeeming these bonds would not change: it would remain at $11 million (though redemption would most probably occur earlier). But the market would be generating new information as to the likely cost of future reductions in the crime rate. The market would now be expecting reductions of 10 units of crime to cost $2 million (from 50 to 40 units), and $3 million (from 40 to 30 units). The new research would have reduced the costs from $5 million and $6 million (respectively). So the cost of any further crime reductions would also fall, and by following market price movements policymakers could gauge approximately by how much. 

These figures are hypothetical, but they do indicate the role that markets for Social Policy Bonds could play in helping the government, and taxpayers, decide on their spending priorities. The market for the bonds is elegantly efficient in conveying information about the cost of achieving objectives and, crucially for policymakers, how this cost varies with time and circumstances. I discuss this in chapter 5 of my book.

17 June 2017

Creeping corruption afflicts charities too

I've blogged before about my two opinions about organisations, which I deem axiomatic:
  • Every organisation, be it a church, trade union, university, government or whatever, will always seek to overplay its hand.

  • Every organisation will, sooner or later, forget its founding ideals and its stated objectives, and devote its energies to self-perpetuation.
Sadly, but not unexpectedly, the list in the first axiom can be taken to include charities, which appear to be just as subject to creeping corruption as all the others. There's little point in trying to find why this happens, but there is a great deal to be gained, in my opinion, by remedying the problem.

Social Policy Bonds would lead to the creation of a new sort of organisation: ones whose composition and structure will adapt to changing circumstances. The bonds would encourage the achievement of social goals that will take longer to achieve than the current, relatively short, time horizons of people or bodies in the current system. Under a Social Policy Bond regime, the members of the coalition of bondholders targeting, say, better health, would gain by buying bonds, doing what they can to improve the nation's health, then selling their bonds at an increased value. They need not stay invested in the bonds for the lifetime of that bond. At every point in time between the flotation of the bond and its redemption, the bondholders would form the body that can advance goal-achievement most efficiently. Bondholders need not be directly involved in achieving the goal; they might be investment companies, whose role will be to allocate funds according to what they think will be the most efficient people or projects that will help bring about the next step toward achievement of the targeted goal, simultaneously raising the value of their bonds. The identity of any and all bondholders would change over time, if that turns out to be the best way of achieving our objective quickly. Blockchain technology could facilitate any shifts in the membership of the coalition of bondholders.

The important point is that every activity of every bondholder would be devoted to achieving our goal. Their self-interest would be exactly congruent with those of society - in stark contrast to what happens now under even the best of our current systems of government.

13 June 2017

Listening to the 99.9 percent

Jeffrey Lewis writes about Our Nuclear Future
President Trump, for example, would have between two and four minutes to decide that computerized reports of [a nuclear] attack are not a false alarm and to give the order to retaliate. Our Nuclear Future, Jeffrey Lewis, 'The American Scholar', Summer 2017
The possibility of nuclear catastrophe is not confined to the Russia - US theatre:
If the 30 minutes that it would take for an intercontinental ballistic missile to fly from Russia to the United States imposes crushing time pressures, consider that flight times in South Asia will be five to 10 minutes, depending on the missile and the target. India and Pakistan are re-creating a Cold War deterrence framework under much more demanding conditions.
That's scary enough, and then there's North Korea.... What can be done to reduce the chance of catastrophic nuclear conflict? Mr Lewis writes about the Global Zero initiative, but that appears to be a failing attempt to eliminate all nuclear weapons. So, despite its fading somewhat from public consciousness, the nuclear nightmare hasn't gone away. In many ways it's getting worse. As Mr Lewis writes, the very narrow window available for decision-making 'requires an enormously complex computerized system to detect missile launches, convey that information to the president, and then transmit and execute his order. Every minute that is lost to these processes reduces the time in which the president must decide. As a result,
the pressure to automate much of the system is strong.' And with automation comes the possibility of malware or defective hardware or software.

The problem is magnified, in my view, by the mismatch between the enormous costs of nuclear catastrophe and the relatively minuscule rewards on offer to those working to prevent it. I am certain those involved in initiatives such as Global Zero, and in disarmament, whether they be UN or non-governmental agencies or other public- and private-sector bodies are hard working and well meaning. They probably couldn't work harder even if their salaries were tripled. But the point about lack of incentives is that they are needed to attract more, and more-talented people into striving for nuclear peace. Our current political systems have no way of funnelling sufficient funds into a goal, such as nuclear peace, that is inherently long term, and that has no powerful interest group to lobby in its favour, despite the enormous potential benefit to the 99.9 percent of humanity that would like to see it happen.

The Social Policy Bond principle could help, in the form of Nuclear Peace Bonds. We don't know how to achieve nuclear peace; we don't know who'll be best at achieving it, but we do know that, if we're going to achieve it, we need to offer higher rewards, so as to encourage a diverse, adaptive range of peace building initiatives. Some of these initiatives will be failures or inefficient; others will need research and refining before they can be implemented effectively. This points to the need for a long-term, guaranteed reward for success, as well as the need to make the bonds tradeable, so as not to discourage people from taking only partial steps toward our goal. It seems ridiculous to me, that the rewards to people who gamble with other people's money, keep their winnings and get taxpayers to pay for their losses, are in the billions of pounds, while the collective rewards for those working in an unglamorous but far more socially beneficial field - like nuclear peace - are much more modest and entirely unrelated to effectiveness. Nuclear Peace Bonds would fix that.

06 June 2017

Self-entrenching atomisation

In a discussion about air travel, Steve Randy Waldman makes an interesting point:
Aggregate outcomes are not in general or even usually interpretable as an aggregation of individual preferences. When we learn about the Prisoners’ Dilemma, we don’t interpret the fact that both players rat as evidence that, really, they both just wanted to go to jail for a long time. After all, that is their revealed preference, right? No. We understand that the arrangement that would obtain if they could cooperatively regulate one another’s behavior is in fact the outcome that they would prefer. As isolated individuals, they simply have no capacity to express this preference. Source See also Prisoner's Dilemma
This explanation of the mismatch between the sum of individual preferences, and aggregate decisions makes a lot of sense, and we can see its implications beyond the air travel industry in the deficiencies of our policymaking system. (I'm not, incidentally, convinced by the rest of Mr Waldman's discussion of the air travel industry.) To my mind, it points to the need for more public engagement with policy; more discussion amongst ordinary people about the costs and benefits of policy alternatives. But policy itself is not really the issue: policy is a means to various ends, and those ends under our current system are rarely articulated, often  deliberately obscured, and often in conflict with each other and with the interests of anybody except those bodies wealthy enough to follow and influence them. We don't  "cooperatively regulate one another's behaviour" in the policymaking process, because that process is just too esoteric and time-consuming for ordinary people to follow.

The result is that our politics is ceded to powerful bodies, public- and private-sector, which benefit by ordinary people's unwillingness or inability to follow the policymaking process. A self-entrenching mechanism seems to be at work: certain policies weaken social and family bonds. I'd include amongst these policies that deal with welfare payments, subsidies to (for instance) road transport and capital-intensive agriculture, zoning laws, regulations that favour big business, and trade agreements. Importantly, the positive effects of these policies might well outweigh the negative, but the negative effects do tend to divide us. And, as atomised individuals or nuclear families, we exhibit exactly the behaviour that Mr Walden talks about: we cannot translate our wishes through a broken policymaking system, into 'an aggregation of individual preferences'. This cycle perpetuates itself.

Social Policy Bonds could help. They would refocus policy discussion onto outcomes that are meaningful to ordinary people. Goals, in short, that we could understand and debate. Under a bond regime anyone could engage with the policymaking process and, crucially, with each other, over policy goals and priorities. Even if our individual wishes were over-ruled, we'd have the satisfaction of knowing we'd been consulted. One result of this would be more buy-in: a crucial feature missing from politics these days. Another would be the solution to the problem to which Mr Waldman alludes: our individual preferences could be aggregated in a meaningful way. For example: few of us would want to see, say, a conflict anywhere in the world that led to the detonation of a nuclear device. Or, at the national level, most of us would like to see universal literacy and reductions in the level of violent crime. Currently, we have no way of articulating and debating these preferences in a systematic way: we can vote for political parties that may or may not offer different perspectives; we can join single-issue groups (which tend to deviate from their initial remit), and there are various other ad hoc activities we can undertake in support of some, but not all, of our individual goals. But they're unsystematic, often incoherent, and rarely exposed to moderating or contrary argument. And a large number of interest groups anyway replicates almost exactly the mismatch discussed above.

In contrast, a Social Policy Bond regime would enable us meaningfully to express goals that our current system finds difficult to target: goals like the avoidance of a nuclear conflict. The bonds could do this effectively because they would not presuppose how our goals shall be achieved, nor who shall achieve them. By focusing entirely on outcomes and costs, Social Policy Bonds would translate and modify our individual preferences into coherent, consensual policy goals. An invaluable by-product of a bond regime would be its reversal of the atomisation process afflicting western democracies.

30 May 2017

Focus on outcomes, not party

Matt Taibbi discusses the US Democratic Party's reaction to the Bernie Sanders campaign, in a piece originally penned on 9 June 2016:
Politicians are so used to viewing the electorate as a giant thing to be manipulated that no matter what happens at the ballot, they usually can only focus on the Washington-based characters they perceive to be pulling the strings. Through this lens, the uprising among Democratic voters this year wasn’t an organic expression of mass disgust, but wholly the fault of Bernie Sanders, who within the Beltway is viewed as an oddball amateur and radical who jumped the line. Nobody saw his campaign as an honest effort to restore power to voters, because nobody in the capital even knows what that is. In the rules of palace intrigue, Sanders only made sense as a kind of self-centered huckster who made a failed play for power. Matt Taibbi, Insane Clown President, January 2017
Exactly. We need to reconnect politicians and their parties with voters. Policymaking systems have been subject to two principles which I deem axiomatic:
  • Every organisation, be it a church, trade union, university, political party, large corporation or whatever, will always seek to overplay its hand. 
  • Every organisation will, sooner or later, forget its founding ideals and its stated objectives, and devote its energies to self-perpetuation.
So political parties are no better, and not much worse, than any other large organisation, except in their oligopolistic power over the rest of us. I think our policymaking models are outdated. In the western democracies we choose a person or a party who promises to do something to help achieve some vague, usually unverifiable outcome at some indefinite time in the future, usually long after they can be called to account. It's a very indirect form of influence, and one that, as we see, has been corrupted, so that the link between the voter and the politician is distorted and broken by wealthy interest groups, whether they be corporations or government agencies who don't want their boat to be rocked.

I propose that instead of choosing people or parties, we choose outcomes: explicit, verifiable outcomes that are meaningful to ordinary people. Which means outcomes that are not phrased in terms of expenditure, institutional size, structure or remit, or regulatory or legislative powers. Outcomes such as improved health, or world peace, that people can understand, and that we can help choose and prioritise. I am not necessarily advocating Social Policy Bonds here: a shift toward discussing outcomes and their costs would be an improvement over our current systems. But Social Policy Bonds could focus debate more, and have the crucial advantage that they inject the market's incentives and efficiencies into all processes necessary to achieve society's goals.

23 May 2017

Economics and politics: closing the gaps

Elisabeth Jacobs, in an essay, about Thomas Piketty's book Capital in the Twenty-First Century, says that politics is 'everywhere and nowhere' in his book. The reviewer points out that:
A focus on efficiency is unobjectionable in a world in which political and institutional stability can be taken for granted, much less so in a world in which it cannot. ... [E]conomists set themselves too easy, too useless a task if they can describe how capitalism works only when politics is unchanging. A new anthology of essays reconsiders Thomas Piketty’s “Capital”, the 'Economist', 20 May
Quite so. I've questioned the limited purview of the economics profession before. Economists find it safer to describe the world as it is, and to try (and usually fail) to predict what's going to happen to certain macro-economic variables. (There are exceptions of course.) The gap between economics and useful endeavours mirrors that between politicians and the concerns of the citizens they are supposed to represent.

In both cases, I think Social Policy Bonds could help close the gap. A bond regime would take as its starting point broad goals that are meaningful to a population: goals that are inextricably linked to our well-being and that we can understand. And because we can understand outcomes such as improved health, or nuclear peace, we can participate in assigning their priorities. (Economists could, perhaps, make a useful contribution here.) Such participation will give us more understanding of the trade-offs that inevitably need to be made. We might not see our own priorities replicated exactly in those  that society chooses to target, but we shall have been consulted, and so have far more buy-in, than under any of the current policymaking systems.

I think that lack of buy-in goes a long way in explaining why our political systems are failing, perhaps catastrophically. The gaps between policymakers and citizens; between the rich, the bureaucrats, media, academics, and ordinary people, are growing ever larger. Consultation about the outcomes we wish to see would start to close these gaps. Injecting the market's efficiencies and incentives to bring about those outcomes with optimal efficiency, would take that process a step further. The ultimate goal would be a politics that improves all our well-being, making for a more healthy, more prosperous and peaceful, more contented and cohesive society. A Social Policy Bond regime, I believe, could achieve all that.

19 May 2017

New concepts in Mickey Mouse micro-targets

What determines the targets that our governments aim at? Something that sounds good? Something that they're already measuring? Something that they know they can easily achieve without doing anything? One thing's clear: whether the goal is big (GDP, net immigration, inflation) or small (waiting times at hospitals), the goals chosen have nothing to do with the well-being of the citizens our governments are supposed to represent.Two examples recently cited:
Fifteen years ago police in Hokkaido, in Japan’s sparsely populated north, conspired with yakuza gangsters to smuggle guns into the country so they could meet quotas for finding them. As crime dries up, Japan’s police hunt for things to do, 'the Economist, dated 20 May
Some road space rationing scheme have had perverse knock-on effects. According to some reports, people in Mexico and Beijing have started buying second vehicles with different licence plates to get around restrictions. Often the second car will be cheap and more polluting. Cutting through the smog: What to do to fight air pollution, Nic Fleming, 'New Scientist', 3 May
In our complex societies quantitative targets are probably necessary. But these targets need to be both meaningful to ordinary people and inextricably linked to, improvements in well-being. The alternative to such indicators are the sort of Mickey Mouse micro-targets, like those above, that actually conflict with societal well-being. Social Policy Bonds would clarify what exactly as a society we want to believe. Targets would be the subject of debate in which the public can participate. They'd be broad and relevant, comprehensible and explicit. Targets are too important to be left to the interests of those with an interest in keeping them narrow, short term and irrelevant (at best) to the nation's well-being.