Social Policy Bonds: the acceptable face of capitalism

Social Policy Bonds have many advantages over conventional policymaking. Mostly, they would be more efficient, as investors would have incentives to achieve society's social and environmental goals quickly and cost-effectively. Clarity and transparency of policy goals are further advantages, arising from the bonds' focus on, and explicit targeting of outcomes rather than the supposed means of achieving them. The question of which goals should be targeted is one that most governments evade or obscure, leaving a vague goal, most commonly 'economic growth', expressed as GDP per capita, to fill the vacuum. For much of history, that goal would have been strongly correlated with the improved well-being of a country's population. Nowadays, though, that correlation appears to be broken, with most of the gains in national wealth and income accruing to a minuscule number of people dubbed 'the elite'. In the US, for instance, the most recent data show that top 1% families captured 52% of total real income growth per family from 2009-2015 (source, pdf). 

Under a Social Policy Bond regime, we could ask whether society sees such inequality as a problem to be targeted directly or, rather, whether our main income goal is the alleviation of poverty. Even if inequality were seen as a problem in itself, it might not be necessary to target it for reduction. This is because Social Policy Bonds would be a means of acquiring wealth with which private gain is strongly correlated with public benefit. Many bondholders would be rich and, if their bonds were redeemed early, they would become richer. But this would be a socially acceptable way of acquiring wealth. Bondholders would become richer only by efficiently and quickly achieving society's targeted social goals. This means of accumulating wealth would allow other, less socially beneficial ways – inheritance, say - to be taxed more heavily. It might even transpire that investors would find achieving society's social goals will be easier than the sort of ethically questionable ways of acquiring wealth that constitute the ever more unacceptable face of capitalism. Social Policy Bonds: a new means of acquiring wealth that actually leads to a more cohesive society? Call them 'the acceptable face of capitalism'.

Ideologues and vested interests impede good policymaking

A letter-writer reacts to the suggestion by the Economist that poor American consumers gain more from cheap imports than they would if imports were restricted and America produced the same goods:

Being able to buy a Chinese-made 50-inch TV when you work by flipping hamburgers for the minimum wage may be more efficient than working in a factory on wages where you can only afford the 30-inch American-made model. But Donald Trump’s voters weighed up factors that many economists and your newspaper often downplay: the marginal utility of consumer goods in a rich society, the distribution of wealth and a sense of self-worth. The medium through which they channelled their anxiety may be flawed, but their message is clear. Trump's triumph, Prof Diomidis Spinellis, the 'Economist' dated 19 November

Exactly so; countries as a whole benefit from free trade in that the benefits to the economy more than offset the losses, even if the losers - those whose jobs become obsolete - are fully compensated. The problem is that most of the gains are going to the wealthy, and the losers aren't being compensated.

One of the great advantages of the Social Policy Bond approach is clarity about ends and means. Free trade isn't an end in itself: it's a means to an end: the improved well-being of society. A bond regime targeting poverty or income levels would ensure adequate compensation to the losers from free trade (which could take the form of subsidies to struggling companies or laid-off individuals, or enhanced re-training opportunities). Or it could restrict trade, perhaps temporarily, if that were to better meet society's long-term income goal. Such measures would be heresy to the free trade ideologues, but in a bond regime it is outcomes that matter, not ideology.

We see similarly non-outcome driven approaches in other policy areas, where ideology or vested interests get in the way of rational, welfare-enhancing policies. Healthcare in the US is one example, where the interests of insurance companies and blind resistance to anything that could be called 'socialist' do so much to blight the security of even middle-class Americans.

Inequality

The Economist writes:

VOTERS’ anger over inequality is one explanation for the rise of politicians as varied as Donald Trump, Bernie Sanders and Marine Le Pen. Tough choices, the 'Economist', 26 March

Very true, and our governments don't seem very highly motivated to do anything about it. Many might not consider reducing inequality to be a goal worth targeting in itself. But, if we did move in the direction of targeting meaningful outcomes, that would be for society as a whole to decide. 

 

But Social Policy Bonds could reduce inequality in a less obvious, less direct way. A bond regime would be a means whereby private gain would be strongly, visibly and inextricably correlated with public benefit. Some bondholders, whether institutions or individuals, would start out rich and, if their bonds rose in value, would become richer. But working successfully to achieve desired social goals would most probably be seen as a laudable way of acquiring wealth. There are intangible benefits from having people or institutions grow rich in this way. There are many disaffected people who view with suspicion or alarm the very high incomes or profits of corporations engaged in activities of little obvious net social or environmental benefit. They are also unconvinced that ‘trickle-down’ occurs to any meaningful degree. Wealth, in these people’s eyes, must inevitably result from exploitation, either of other people or the commons. Social Policy Bonds could shift this worldview and, by helping people take a more positive view of the act of earning an income and accumulating wealth, could make for a more cohesive society. A socially acceptable way of becoming wealthy would also make it more politically feasible to tax less socially desirable ways more heavily – not necessarily an end in itself, but a means of raising more tax revenue for redistribution or increasing the number and quality of public goods and services.

Meantime the OECD is reporting that:

Income inequality in OECD countries is at its highest level for the past half century. The average income of the richest 10% of the population is about nine times that of the poorest 10% across the OECD, up from seven times 25 years ago.

Economic growth and inequality

One of the less obvious advantages of a Social Policy Bond regime is that it insists on defining our goals; transparently and explicitly. And perhaps the least laudable feature of the current regime is that there are few explicit goals, and those that are stated have little to do with society's well-being. The goal that is usually invoked to justify some policy or other is economic growth, expressed most often as Gross Domestic Product per person. I've blogged about the flaws in the targeting of GDP before (here and here, for instance). It needs restating, though, that economic growth, however measured, does not inevitably benefit everybody. Most people in the US, for instance, feel this, but work by Professor John Komlos tries to quantify it. His main conclusion?

The major consistent findings are what in the colloquial is referred to as the “hollowing out” of the middle class as well as the tremendous increase in the income of the top 1%. The income of the latter relative to the 1st [poorest] quintile increased from a factor of 21 in 1979 to 51 in 2011. Growth of income and welfare in the U.S, (pdf) 1979-2011, John Komlos, Professor Emeritus, University of Munich

In a column, Professor Komlos shows that US census data shows that:

[T]he bottom 20 percent of U.S. households is underwater with an average net worth of -$32,000, that is, the debts of about 60 million people are greater than all their assets combined. If you combine the first and second quintiles of the wealth distribution, it’s apparent that 120 million people’s average net wealth is still below zero at minus $11,000. These facts about inequality can’t be whitewashed, 21 December 2015

The essential lesson from all this is one that bears repetition: economic growth is not an end in itself. In our increasingly complex world we cannot rely on trickle-down economics to achieve our social goals. More explicit targeting of broad social and environmental outcomes is necessary. Social Policy Bonds are one way of setting such targets and ensuring that they are achieved efficiently.