Nothing new here

Talking about the latest US Farm Bill, the Economist (subscription) says, accurately:

The recipients [of government largesse] are hardly the most deserving: farm households make a third more than others, and the richest of them, which get most of the subsidies, bring in three times what the average non-farm household does. Instead of saving the family farm, the policy is destroying it, encouraging agricultural land consolidation and raising barriers to entry. And then there are the deleterious effects America's price-distorting payments have on foreign farmers and so on trade negotiations.

There's nothing new about this. What is striking about these policies are not their disastrous social and environmental impacts; rather it is their persistence, in the face of decades of evidence of their failure to meet stated goals.

Social Policy Bonds are radical; they would entail government relinquishing control of some of its policy instruments. They are untested and have not been refined or widely discussed. But when you get policies like the corrupt, profligate agricultural support policies of most western countries, you realize that the proper standard of comparison should not be not some ideal, wasteless, super-efficient policy paradigm, but the current system whose failings are not just severe and well documented, but persistent in the face of all rationality.

Ends, means and the financial sector

John Kay writes:

Since financial stability is unattainable, the more important objective is to insulate the real economy from the consequences of financial instability. Government should protect small depositors and ensure that the payment system for households and businesses continues to function. There should be the same powers to take control of essential services in the event of corporate failure that exist for other public utilities. The deposit protection scheme should also have preferential creditor status to restrict the use of retail deposits as collateral for speculative activities. More regulation will not prevent next crisis, 'Financial Times', 26 March

I agree, and think the same principle should be extended into other policy areas. Financial stability is not an end in itself, while looking after small depositors is a legitimate government function. Government should concern itself with such goals, without trying to prejudge how they shall be achieved. With the ever increasing complexity of our society and economy, identifying cause and effect is often near impossible. It's simpler for government to target goals than the supposed means of reaching them.

It's also more transparent and - crucially - enables greater public participation and hence buy in. Cutting back anthropogenic greenhouse gas emissions - which is not actually happening despite government hand wringing - is never going to be a popular or meaningful goal. But climate stability is a worthwhile goal, one that ordinary people can understand and buy into. Similarly with one of the other great dangers we face: the technical details of nuclear weapons limitation are arcane and irrelevant to most people. But we would enthusiastically support the drastic curtailment of the risk of a nuclear exchange. That is what governments should aim for, and that is what they should target. How to get there...that should be left to an enlarged pool of motivated people. That's where Social Policy Bonds come in.

Housing monoculture

Commenting on the mismatch between the US housing stock and people's wish to live in walkable urban environments, Christopher Leinberger writes:

[a third of people surveyed] wanted to live in mixed-use, walkable urban areas - but most had no way to do so at an affordable price. The next slum, 'Atlantic Monthly', March

Suburban housing is largely a product of central planning and government subsidies. Zoning requirements have done a lot to separate people from work, shops and entertainment, along with the subsidies for roading and the extraction and consumption of oil. The disaster has not only been to the physical environment. Suburban alienation and dependence on cheap, available oil are other results of this lifestyle choice made not by ordinary people but by the planners and technocrats in government and their friends (and paymasters) in gigantic construction corporates. The decision makers are now so remote from us, so beholden to large corporations and operating at such a high level of aggregation and abstraction that they can impose a monoculture, whose potentially catastrophic vulnerabilities are like those of its agricultural equivalent.

Social Policy Bonds are not just about efficiency, but about efficiency in achieving social and environmental goals that are meaningful to natural persons - as distinct from public sector macroeconomists and large corporations. They are about closing the gap between policymakers and the people they are supposed to represent. Policy under a Social Policy Bond regime means targeting agreed outcomes, and the subordination of all activities and institutions to those outcomes. If people want to live kilometres away from their work, friends, shops and other distractions that's fine, but there's no need for taxpayers to subsidise such lifestyle choices, still less to impose it on people who'd make different choices in an undistorted market.

Crime and incentives

Irwin Stelzer writing about politics and life in the UK:

Crime has significant psychic costs - ready for a nice relaxed evening walk on a deserted street in a major city, the sort of thing that was a routine pleasure a decade ago? Probably not, which is why 60 percent of those surveyed say Britain is a worse place in which to live than it was five years ago....The economic consequences of Mr Brown, 'The Spectator', 19 January

I'm pleased that somebody else feels the same way as me, but otherwise there's little to cheer about. The contrast with the private sector is compelling. No single corporation has all the answers to many of the problems they try to solve: how to market dogfood; how to maximize sales of laundry products, etc. But collectively they do a great job of satisfying our material needs. It's a Darwinian process to be sure: with many, many failed enterprises along the way. Now the UK has had decades of academic research into crime; countless strategies, initiatives, reorganisations, reports by government bodies and consultants and the rest. Why haven't they been translated into safe streets?

Part of the answer must be that the incentives aren't there. A police force that is too successful in reducing crime will see its funding cut. Neither are individual members of police forces paid in ways that are correlated to reductions in crime rates. It sounds very simplistic, but how else is one to explain the ingenuity that dramatically satisfies our needs as paying consumers and fails to satisfy our needs the 'psychic' human need to walk around in safety?

Getting rich by doing the right thing

The big advantages of Social Policy Bonds are their efficiency, transparency and stability of policy goals. But a less obvious benefit, pertinent at a time when the rich are being taxpayer funds are being used to bail out shareholders of banks that pursued disastrous policies but are deemed are too big to fail, is that they are means of accumulating wealth by performing public service. Social Policy Bonds, when issued by government bodies, would express society's goals: investors would gain by peforming functions that are inextricably linked to public benefit. Working successfully to achieve universally desired social and environmental goals would be seen as a laudable way of becoming rich. There are likely to be all sorts of intangible and unforseeable benefits from having people or institutions become rich in this way. People may see corporations' non-Social Policy Bond activities relatively less socially desirable. They may be more prepared to rein in the less attractive of such activities given that Social Policy Bonds provide a socially beneficial way of becoming rich.

Loudtalks

I've installed a new, free and compact program, Loudtalks, which will allow readers to talk to me through you computer if I'm online or to leave oral messages if I'm offline. If you want to add me as a contact, my Loudtalks contact name is Ronnie.

Social Policy Bonds as insurance

In an ever more complex, interlinked world more and more things that could be ignored or used to be handled informally now have to be managed by government. This applies to many aspects of the commons and particularly the environment. Given the record of government, this is quite scary. Government policymaking can succeed when it's well meaning, has sufficient resources and the problems it has to solve are easily identified and do not conflict too much with powerful interests. Unfortunately, many of the new problems arising from globalisation are difficult to anticipate and isolate from a myriad of possible causes. What's raised this concern in my mind is my reading of the methane clathrate gun hypothesis, but there are any number of other possible ways in which the lives of millions of humans could be endangered: other environmental disasters, nuclear proliferation, pandemics, asteroid impacts, etc. How should governments deal with such threats?

The UK government is the first to set up a National Security Forum as a result of its work on a National Security strategy. Terrorism seems to be given greater attention than perhaps is necessary, but the limitations of such an exercise are more serious, I think, than a bias towards highly visible shocks.

One way forward might be to issue Social Policy Bonds as insurance against large-scale disasters. The cause of the the disaster need not be specified: the bonds would function in a similar way to increasingly popular catastrophe bonds, except that they would have the purpose - and the backing- of making it worthwhile for investors to prevent disasters happening. A national government could issue Social Policy Bonds that would reward investors if an event killing more than, say 10000 of its citizens in any one 48-hour period, does not occur before a specified date. The bonds would encourage investors to investigate all sources of potential disaster, impartially; that is, without favouring those that have a high media profile, for example, or those that are the remit of existing public or private sector bodies.

Globally, the concept could be scaled up: a collection of governments under the auspices of the United Nations or non-governmental organizations could issue similar bonds, aimed at preventing even larger-scale disasters.

In both cases, the particular merit of the Social Policy Bond approach is that there is no need for a handful of experts to try to anticipate the causes of future disasters and to allocate funds according to their views and today's knowledge. Investors in Social Policy Bonds would do this work themselves, without bias and during the entire lifetime of their bonds.

Sacrificing the environment

A quote from the current 'Economist's' report on China's quest for resources:

Pan Yue, a deputy minister at the State Environmental Protection Administration (SEPA), China's paramount environmental regulator, estimates the annual cost of environmental damage at 8-13% of GDP—much the same as the overall economic growth rate. If it continues like this, he expects levels of pollution to double over the next 15 years. A large black cloud (subscription)

There must be some subjectivity in Mr Pan's estimates, but even so, the comparison is alarming, and quite plausible.

Free-riding

People, especially economists, often mention the danger of free-riding when I talk about Social Policy Bonds. Free-riders would by the bonds hoping to benefit from any increase in the bond price without actually participating in any objective-achieving projects.

However, I think markets would work to limit the benefits from free-riding. To see this, assume that most of a particular issue of bonds were held by would-be free-riders. Then very little, if anything, would be done to help achieve the targeted objective. As the objective became more remote, the value of all the bonds would fall. And as the bonds lost value, they would make a more attractive purchase for people who were prepared actively to help achieve the targeted objective. So free-riders would be tempted to sell, even at a loss, rather than see the value of their bonds continue to fall. Some history of falling bond prices would tend to make free riding on Social Policy Bonds less appealing with future issues. Free-riding then would become a self-cancelling activity. There are other reasons why bondholding would be unattractive to potential free-riders:

Individual free-riders would have no incentive to collude with other free-riders, because the more they did so, the more remote the targeted objective would become, and the further would the value of their bonds fall. This would act so as to limit any free-riding activity to small players.

As with other financial instruments, small players would have to pay higher transaction costs than the bigger institutions — the ones that would be most likely to initiate objective-achieving projects.

Small players also would not have access to the research that would enable big players to value the bonds accurately. Therefore they would be at a disadvantage in the market.

Note also that even if free-riders were to gain from holding Social Policy Bonds, they would do be doing so only because their bonds had risen in value as a result of a targeted objective becoming closer to being achievement. As well, attempted free-riding would have positive effects: it would add liquidity to the bond market.

All this is speculation of course, and I may be wrong. We'll see, if somebody actually issues Social Policy Bonds.

Targeting broad outcomes

One of the advantages of a Social Policy Bond regime is that it allows backers of the bonds, be they private or public sector, to target things that are beyond or beneath the radar of policymakers. Things like war and violence, in general rather than in particular, or a nuclear exchange, or the spread of infectious diseases. More broadly, Social Policy Bonds could reward maintenance of the sorts of stability that we value: a stable physical climate, the absence of man-made or adverse impacts of natural catastrophes. For the most part, these problems are dealth with piecemeal, as they arise, and with a lot of guesswork about uncertain and ever-changing relationships. For instance, a huge task for governments around the world would be to agree that climate change is a problem worth spending resources to solve, but governments are supposed to articulate society's concerns and to produce legislation, and raise the funds necessary to achieve them. But for governments to go further and say they know how best to solve the problem is, in my view a mistake. With climate change they have focused on a single remedy - restraining anthropogenic emissions of greenhouse gases. But governments have no expertise in this matter; their scientific advice is necessarily fossilised and their approach necessarily top-down, one-size-fits-all and unresponsive to different and changing circumstances and our rapidly expanding scientific knowledge.

Far better to reward the achievement of a stable climate by issuing Climate Stability Bonds of sufficient value to motivate people to bring about the goal in ways they think will be most efficient. I don't think it's too far-fetched that governments will eventually target very broad goals for which their current approaches are manifestly inadequate. But, I have to admit, it doesn't seem to be happening right now.