The status quo is a tragedy

Tim Harford writes about healthcare in the US:

The US healthcare system is a monument to perverse incentives, unintended consequences and political inertia. It is astonishingly bad — indeed, it’s so astonishingly bad that even people who believe it’s bad don’t appreciate quite how bad it is. ... Reforming American healthcare will require an almighty effort. With politics gridlocked and soaking in lobbyist money, it’s not obvious that the US government is capable of running the kind of healthcare system that works elsewhere — even if Congress decides to try. But try it must, because the status quo is a tragedy. US healthcare is literally killing people, Tim Harford, Financial Times, 13 July

It's not just healthcare. Our political systems are comprised of, and help to sustain, institutions of all kinds that start out as well intended but, almost inevitably, become fossilised. They invest too much, emotionally and financially, in ways of doing things that might have been efficient at one point, but then become outdated as society and technology change. Eventually their overarching raison d'etre becomes that of self perpetuation. They become adept at resisting threats to their survival. In the private sector competition is supposed to keep businesses on their toes, but too often the smaller enterprises are smothered  by big business which, with its pals in government, regulates them out of existence. Nevertheless, there are still parts of the private sector where competition does its work, and creative destruction goes on.

It's much worse in the public sector or, rather, in the provision of social and environmental services, where people have much less information and power than service providers (healthcare) or where competition otherwise cannot operate effectively. The vested interests are government bodies, trade unions, big companies or, more and more these days, NGOs and charities. All have entrenched hierarchies and ways of doing things, and tend to resist changes that threaten their existence. So we get monstrosities like US healthcare, or the EU's Common Agricultural Policy, both of whose corrupt lunacies have been well documented for decades but about which little of significance has been done.

Social Policy Bonds might be the answer. They would inject competition into the solution of our social and environmental problems. They would lead to the creation of new sorts of organisation, comprising protean coalitions whose every activity would be aimed at achieving society's goals with maximum efficiency. They would have incentives to ensure inefficient approaches would be terminated - not, as nowadays, bailed out with eye-watering sums of taxpayers' money in order to save the face of their instigators.

To focus on health specifically: we need to reward the achievement of successful health outcomes, which, for a country, should be a combination of variables, each of which will have to fall into a specified range before the targeted outcome can be deemed achieved. The variables would be likely to include: longevity, Quality Adjusted Life Years, infant mortality and other objective data. Consider how far removed are the incentives in current healthcare systems - not only in the US - from rewarding good health. Today's incentives are, essentially, to screen, test and intervene - whether or not the intervening does any good at all. There's more about the application of the Social Policy Bond concept to health here. 

More generally, a bond regime would undermine the powerful institutions in the public- or private sector, whose existence is predicated on blocking reform. To give these bodies time to reform, and to shift their goal from self-perpetuation to serving the public, the bonds could be phased in over time, as I describe in chapter 4 of my book (all chapters downloadable free of charge here). Social Policy Bonds, at first sight, seem a radical, even zany, approach to the solution of the problems that we face. The question, though, is whether there's anything better. In health, the environment, nuclear proliferation, violence in poor countries, to take obvious examples, the challenges are huge and urgent, and it would doubtless be difficult to overcome the obstacles to progress. But, as Mr Harford would say: try we must, because the status quo is a tragedy.  

Targeting economic indicators is a cop-out

Vassilis Serafimakis writes to the London Review of Books, telling us why focusing on one particular economic variable - the fiscal deficit - is misguided:

...Diana Stone notes that ‘Zimbabwe’s fiscal deficit is around 12 per cent of GDP’ and that a country ‘can’t run a deficit that size without stealing from the future’  ... Deficits cannot be assessed in isolation. We need to examine the whole economy, especially productivity, whose prime indicator is the level of employment. And we need to focus on the real aspects of the economy rather than worrying about economic conventions. The whole concept of ‘sound finance’, with its corollaries of ‘fiscal discipline’ and ‘prudent finance,’ all code words for austerity, must be discarded and replaced with functional finance. Japan is the outstanding example of a state that has done this, albeit inconsistently. It has continuously low interest rates, low unemployment, low yet steady growth, and most important, an unmatched standard of living. All this despite the fact that every year the budget hits deficits in excess of 15 per cent of GDP, while Japan’s Treasury has amassed a debt of some 230 per cent. Yet if, geography aside, Japan were to apply for Eurozone membership its application would be rejected outright because the country is in violation of the Eurozone’s deficit and debt limits. This is evidence enough of the folly behind the Eurozone set-​up.... Vassilis Serafimakis, Letters, 'London Review of Books', 4 July 

There's a large and, I think, growing gap, between such measures as fiscal deficits, debt levels, GDP; and social well-being. An increasingly out-of-touch political caste has little knowledge or experience of the world in which live the people they are supposed to represent. So they rely on these economic aggregates for information about how society is doing. Along with many others I've inveighed against GDP or GDP per capita and its de facto targeting by politicians. As well as their inherent deficiencies, such measures as GDP and the fiscal deficit are subjects to Campbell's Law, which tells us that:

The more any quantitative social 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.

Which is why I believe we should target outcomes that are meaningful to ordinary people: goals that are inextricably bound up with social and environmental well-being. Goals such as better health, universal literacy or, at the global level, regional or world peace. We should be targeting and rewarding the achievement of such goals, rather than abstract entities like deficit reduction or GDP growth. Economic variables are, at best, means to ends. They are increasingly inadequate as such but worse is that they enable politicians to distract us by deflecting our attention to those measures that have improved under their governance, or deteriorated under the governance of the other side.

Social Policy Bonds are a way of channelling the market's incentives and efficiencies into the achievement of our social and environmental goals. That's one of their big advantages. But the other is more fundamental: the bonds require us, as a society, to clarify what are our goals and to come up with some sense of their priority. You would think this would be an essential feature of any democratic political system but no: what we experience today are sound bites, character assassination, personality cults or, as a very poor best: the targeting and manipulation of economic variables that don't really matter and about which none of us really care.

The JAMES Bond

Cao Honghui writes about a new type of bond that may be about to be issued in Hong Kong. The original Chinese is here; this is from the Google translation:

Inspired by socially functional bonds, the concept of Justice Achievable Market Enabler Savings Bond (JAMES BOND) can be used as a starting point for the financing of infrastructure companies. The justice market savings bond is inspired by the [Social Impact Bond] SIB and can be said to be SIB 2.0. The justice market savings bonds are different from the social function bonds. The justice market savings bonds will have a larger amount of funds, but the expected social benefits will be greater. Justice Market Savings Bond: JAMES BOND, Cao Honghui, Master-Insight.com, 3 July

I can't tell from the translation whether these bonds are actually being issued, nor whether they would be tradeable. Would any reader who understands the Chinese be able to comment? Tradeability is the crucial distinction between the (non-tradeable) Social Impact Bonds currently in issue in about fifteen countries, and the original Social Policy Bond idea. I write about the importance of tradeability here and here.