The policy monoculture

The Organization for Economic Co-operation and Development reports on the subsidies, worth US$285 billion, given to OECD farmers in 2008:

Support is becoming increasingly conditioned by requirements on producers to follow certain production practices in pursuit of broader objectives, such as preservation of the environment, animal welfare or food safety. Payments involving the fulfilment of such requirements comprised 4% of [subsidies to farmers] in 1986-88, a share which had increased to 32% by 2006-08.... Agricultural Policies in OECD Countries 2009: Monitoring and Evaluation, summary (pdf)

As in agriculture, so in every other policy area: government assistance becomes conditional on doing things the way government wants you to. There are important considerations of freedom here, especially when government is becoming ever more involved in every aspect of social and economic organisation. But I am also concerned about the efficiency and risk management aspects of this sort of process-driven micro-management. They can be summarised briefly:

• Government does not always know the best ways of achieving social and environmental outcomes; when it gets it wrong it does so on a big, and possibly catastrophic scale;
  


• The ways government chooses are likely to be fossilised in time, and incapable of taking into account local circumstances; government intervention will discourage adaptive, diverse approaches, experimentation and the termination of failed approaches.


• Government's edicts are also likely to be heavily influenced by considerations other than efficiency, such as the interests of large corporations.

I write at greater length on this causes and consequences of this policy monoculture in my book - see the links in the right-hand column.

Ending war

I'm pleased that someone else shares my belief that we can, and should aim to, end war. Gordon Fellman is Professor of Sociology at Brandeis University. Here is a link to a talk he gives entitled Ceasefire: the case for ending war. Some, though not all, of the impetus for weapons-making and war comes from financial incentives, and I think that if we supply sufficient incentives to end war it will become less the intractable feature of human life (as the ancient Greeks thought), and more another social problem that is best addressed by adaptive, diverse responses, of the sort that would be stimulated by Social Policy Bonds. See my essay Conflict Reduction Bonds: give greed a chance.

England: 1381

Writing in History Today, Dan Jones describes England at the time of the 'summer of blood' in the year 1381. This was the Peasants' Revolt, when the lower classes, emboldened by the labour shortages that resulted from the Black Death, flexed their muscles. In the summer of that year they began the first English rebellion of workers against their masters. Mr Jones points out the 'profound echoes with our current times':

...ordinary people protesting against an ill-manged, expensive war [against France] and the corruption of the super-rich who were seen to grow fat while the rest of the population were taxed through the nose; consciousness of and resentment towards the interfering presence of government in everyday life; the fear of homegrown subversive elements in society, organised in secret cells and mobilised through local communities. The Peasants' Revolt (subscription), 'History Today', June 2009

Sounds familiar? asks Mr Jones, and indeed it does. Ordinary people, in much of the developed world, are having a rough time of it. Our political system seems biased heavily in favour of those who work for government agencies, or those in big corporations who can successfully influence government. The losers are small enterprises and the public. In so many broad policy areas: finance, the physical environment, the social environment, our politicians have taken the easy option, postponed the difficult decisions, and allowed problems to grow so that they have become systemic threats.

That way of doing things cannot, in my view, continue. Unfortunately, the scenarios on offer seem about as unappealing as the rioting , looting, terror and counterterror that followed the Peasants' Revolt. If that sounds far-fetched, consider this display of extreme attitudes depicted by Paul Krugman:

Last Thursday [5 November] there was a rally outside the US Capitol to protest pending health care legislation, featuring the kinds of things we’ve grown accustomed to, including large signs showing piles of bodies at Dachau with the caption “National Socialist Healthcare.” It was grotesque — and it was also ominous. Paranoia strikes deep, 'New York Times, 9 November

One way of closing the gap between people with different views, and the yet more grievous gap between politicians and ordinary people, is to recast policy in terms of outcomes. Our current system exaggerates the impact of special interests: it is these who bankroll the political parties, and they have little interest in the longer-term concerns of wider society. Ordinary people, rightly, feel disenfranchised and either adopt extreme attitudes, become cynical, or disengage from politics altogether.

Yet most people would probably find themselves in agreement about the policy outcomes they'd like to see: universal literacy, and basic minimum levels of income, housing and health care, for instance. There would also be a surprisingly wide consensus over the need to achieve some sort of climate stability - despite the huge gulf between people on different sides of the debate about what's actually happening to the climate.

Social Policy Bonds could help to close these gaps. Where people differ is less about the outcomes we want to see, and more about the ways in which government goes about achieving them - or failing to. A Social Policy Bond regime, with its focus on outcomes that are meaningful to ordinary people, would draw more people into the policymaking process. There will always be limited resources, and under a bond regime there would still be debates about priorities and costs. Politicians would have to relinquish their power to decide on how goals are to be achieved; they would, in effect, contract that out to the market. That would generate huge efficiency gains, but it would also mean an informed, public that participates and helps determine policy. Such a public would be far less likely to engage in the scary display of extremist attitudes that occurred last week in Washington DC, or the destructive, bloody actions that occurred in England in 1381.

Q+As

My correspondent (see previous post) goes on to ask some further questions:

If the opportunity exists to commercialise social goals, who are the players?

• Who are the players for it?
• Who are the players against it?

...players for it...? Anyone sincerely interested in efficient solution of social problems. I'd have thought philanthropists or their journals would be interested, but not one has ever responded to my emails.

...players against it...? Plenty, especially government agencies. In the epilogue to my book I relate this episode: "In April 2002, I presented a paper on the bond concept to joint meeting of the Agriculture and Environment Committees at the Organisation for Economic Cooperation and Development (OECD) in Paris. ... Perhaps one of the delegates articulated the deeper feelings of those present, who were overwhelmingly government employees: ‘if this gets adopted we'll all be out of jobs!’ My OECD paper went no further. "

What would they use such platform for? How can be made sure that it does not back fire and turn into an accessory to pursue unintended/adverse goals?

I assume that philanthropists or public sector Social Policy Bond issuers would aim to achieve social and environmental goals about which there is a wide consensus. Perhaps along the lines of avoiding of catastrophe, or achieving basic minimum levels for such things as literacy, nutrition; or maxima for environmental pollution, unemployment, crime. As for the second question: I'd have to assume that (1) people or institutions would not want openly to declare themselves in favour of anti-social goals: remember the Social Policy Bond concept is entirely transparent; redemption terms are written into each bond issue and available to everyone, and (2) there is sufficient existing sanction against illegal acts. I do address the possibility of negative-but-legal actions in my book. (See link in right-hand column.)

Whose economic or political interests are supported by the securitisation of social goals, and whose big toe would it step on?

Similar answer to players for and against it, above. Also, obviously the finance industry would benefit from securitisation. I'd hope that sincere representatives of disadvantaged people or countries would be most interested in the concept.

At what point would the platform become a competition and to whom?

I envisage Social Policy Bonds would be a bit like equities: there would be competitive bidding for the bonds at flotation and at all times thereafter, but holders would have an interest in co-operating with each other to help achieve targeted social goals after purchase.

"Are there any forerunners of this concept, and if yes how did they go. What did they achieve, and what mistakes did they make?"

I don't think so. That's one reason I think Social Policy Bonds need careful trialling, discussion and refinement before they can be applied to larger issues. Sadly, this hasn't happened yet.

The private sector and social goals

A correspondent asks: According to the laws of economics if there was a potential gain for private enterprise in targeting social goals, they would have addressed it by now. If the opportunity exists, what was holding back the development of such a concept until now?

A first answer of course is that the private sector does help solve social problems, largely by employing people and paying them salaries, but only as a by-product of more financially profitable activities. A more relevant answer is that most of the funds available for directly achieving social and environmental goals are appropriated from the private sector and channelled through government agencies, which have their own goals (primarily self-perpetuation), and enriching the private sector is not one of them. If government relinquished control over the allocation of some of taxpayer funds, via for instance Social Policy Bonds, then that would animate the private sector much more than the relatively paltry after-tax sums ordinary people have for solving other people's problems. In fact, these sums go to charities and NGOs, and it's generally thought they are much more efficient at solving social problems than government. Mainly, though, the private sector would have to compete with government agencies, which apart from being big, entrenched monopolies are extremely reluctant to relinquish even control of funds, let alone funds themselves, to the private sector. Once a government did start to allow the private sector access to tax revenues, by for example issuing Social Policy Bonds, then we'd see entrepreneurs take a serious interest in solving social problems.

Heading for Disaster: Copenhagen and climate change

I've updated my article on Climate Stability Bonds to reflect the latest lack of progress.

Chaotic evolution

Centralised systems experiment too little. They find reasons why new proposals will fail – and mostly they are right. But market economies thrive on a continued supply of unreasonable optimism. And when, occasionally, experiments succeed, they are quickly imitated. If market economies are better at originating and diffusing new ideas, they are also better at disposing of failed ones. Honest feedback is not welcome in large bureaucracies.... John Kay, Chaotic evolution defines the market economy, 'Financial Times' 4 November

Thanks largely to over-centralisation, we are all in a position where we need the very solutions that centralisation cannot bring us. It was national governments that created and subsidised our absolute dependence on fossil fuels, for instance, and we are looking to a centralised non-solution - Kyoto - to solve the problem. Exactly the same goes for the finance sector.

These, and other, large problems require the diversity and adaptivity of markets. That means that governments are going to have to relinquish a degree of control. But they will still have vital tasks to perform, and that is where Social Policy Bonds could be valuable. Under a Social Policy Bond regime governments would articulate society's goals and raise the revenue to reward those who achieve them. Only democratic governments can do these things, and they do them very well. But governments should bow out of actually achieving these goals, and the market's 'chaotic evolution' choose the best approaches. Is it going to happen? Frankly, I think not in the foreseeable future.

Government and big business versus ordinary people

The world’s largest economies have agreed to end fossil-fuel subsidies, according to a statement made at the G-20 meeting in Pittsburgh on 25th September 2009. Leaders of the G-20 committed to phasing out the controversial subsidies ‘over the medium-term,’ blaming them for encouraging wasteful consumption and undermining efforts to combat climate change. Global Subsidies Initiative

Unfortunately, according to the same source: 'the announcement did lack details. In particular there was no information offered on how subsidies would be defined or the plan would be implemented.' A similar story on a larger scale is told by Simon Johnson, in 'the Atlantic':

recovery [in the US] will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time. The Quiet Coup, 'The Atlantic', May

It comes down to attacking the vested interests, who have become powerful enough, thanks to taxpayer funding, to resist the withdrawal of their favourable treatment. An essential first step, and one that is built into the Social Policy Bond idea, is to make policy transparent. It's quite possible that voters in a democracy would vote to sacrifice hospitals and schools to further enrich huge oil corporations or enormously wealthy bankers, so why not give us the choice? Or at least make what's going on comprehensible to outsiders. Simon Johnson again:

As the crisis has deepened and financial institutions have needed more help, the government has gotten more and more creative in figuring out ways to provide banks with subsidies that are too complex for the general public to understand.

Government and big business versus ordinary people. A familiar match. What chance have we got?

Lobbyists, buy-in and climate change

As policymaking becomes ever more remote from the people it's supposed to benefit, it's salutary to recall that it wasn't always like that:

As Kim Phillips-Fein recounts in her new book, Invisible Hands, most Fortune 500 firms didn't have Washington public-affairs offices in 1970, but 80 percent did by 1980.... Labour's last stand, Ken Silverstein, 'Harper's Magazine', July

That's aside from the the cash directed at the political parties. I think it's quite dangerous to have such a disconnect between politicians and the public. The corporations have objectives of their own, which have more in common with each other and government agencies than they do with ordinary people. Results are a widespread disenchantment with politics in general, apathy and cynicism. Issues such as climate change become highly politicised, which reduces their chances of being addressed properly.

A Social Policy Bond regime could narrow the gap between politicians and people. It would take as its starting point desirable social and environmental outcomes. These are more amenable to public participation than the legislative game-playing at which Washington lobbyists are so adept. Greater public participation would promote public buy-in to policies, some of which will urgently need it. To take climate change again: there are disagreements as to whether it's happening and (more so) about what we should do about it if it is happening. A Climate Stability Bond issue that targeted an array of physical measurements, and human, animal and plant life indicators could reward the achievement of a stable (however defined) climate to the satisfaction of ordinary people. It would be left to the market to assess, continuously, what's actually going on with the climate, and to bear the risks of failing to get it right. That has to be better than the current approach, which, bogged down as it is by lobbyists, charlatans and politicians of all flavours is, to be frank, going nowhere.

A victory for short-termism

In a fascinating article, unfortunately gated, Thomas Geoghegan writes about the US economy:

First, we removed the possibility of creating real, binding contracts by allowing employers to bust the unions....Second we allowed those same employers to cancel existing contracts, virtually at will, by transferring liability from one corporate shell to another, or letting a subsidiary go into Chapter 11 and them moving to 'cancel' the contract rights....As one company after another 'reorganized' in Chapter 11 to shed contract rights, working people learned that it was not rational to count on those rights and guarantees, or even to think in future-oriented ways. Infinite Debt: How unlimited interest rates destroyed the economy, 'Harper's Magazine' (subscription), April 2009

As with the environment, so with the financial system: our policymaking is heavily slanted towards the interests of the paymasters of the political parties. And these interests are overwhelmingly narrow and short-term. They have nothing to do with the long-term goals of society: indeed, they militate against long-term interests.

Rather than allocate blame for this flaw, I would advocate Social Policy Bonds as a possible solution. About policy objectives, there is a wider consensus than about the means of achieving them. Current policymaking centres on institutional structures, spending allocations, and government's necessarily limited thoughts about how best to manage problems. In contrast, a Social Policy Bond regime would subordinate all activities to society's targeted outcomes. These would be broad, and long term in nature. Stability of objectives would be one of the features of a bond regime that would make it more efficient than the current system; it would also be an end in itself; people would have a clearer idea about what society is aiming for, and what sorts of behaviour will be rewarded. As for the current system, as Mr Geoghegan says: 'No wonder people in our country began to live for the moment and take out loans and start running up debts.'