SIBs can be better than existing policy

Though still skeptical about Social Impact Bonds - the non-tradeable version of Social Policy Bonds - I do now think that under some circumstances they will be an improvement over existing policy. My main concern with SIBs is the danger that, being necessarily more narrow and short term than Social Policy Bonds, they will stimulate achievement of their targeted goals at the expense of people whose well-being isn't targeted for improvement. This possibility is lessened when the beneficiaries of a SIB regime are markedly disadvantaged. I am thinking now of the use of SIBs to target goals such as improving the well-being of the mentally unwell. (Here are arguments for and against the issuing of SIBs to brighten the employment prospects of mentally unwell people in New Zealand.) There will need to be provisos and careful monitoring, of course, as not all attempts to game a SIB regime can be foreseen and written into the redemption conditions of the bonds. But at this point SIBs are controversial, which is a positive in that it means that bondholders will want to ensure compliance with the bond issuers' intent and not only the bonds' legal stipulations.  

The advantages of a SIB regime over existing policy arise from their rewarding of outcomes rather than activities. Not as effectively as a pure Social Policy Bond regime, to be sure, but they should nevertheless stimulate greater efficiency in current activities and some innovation of new activities - a big plus where existing policy is thought to be failing.

You'll notice that I still have my reservations about Social Impact Bonds. Being better than existing policy is not always a great recommendation, though it could mean a lot to those individuals who (as in the New Zealand example) are in urgent need of new approaches. A pure Social Policy Bond regime would represent a drastic change from current policy with, I believe, commensurate benefits for all. SIBs can be a useful intermediate step towards such a regime.

Bonds in New Zealand

This post is a follow-up to my previous post, where I discuss why I don't like Social Impact Bonds. Today, Sunday, there was a short tv debate shown in New Zealand about using Social Impact Bonds to address mental health problems. My name is invoked at the five-minute mark. I would say that both protagonists are not quite correct. I'm against these SIBs only because they are not tradeable, because then there won't be much of the (necessary) innovation that the pro-SIB man, Stephen Franks, was talking about.

Why I don't like Social Impact Bonds

When I first came up with the idea of Social Policy Bonds, their tradeability was an intrinsic part of their identity. Without tradeability, the bonds would be little more than prizes awarded to existing service providers for doing their jobs a bit more efficiently than previously. There's obvious scope for gaming here: perform badly, wait till the government issues SIBs, perform better, then cash in. But perhaps more important is the necessity for allowing new service providers - or, as I term them, outcome achievers - to buy the bonds at any stage and receive extra rewards, in the form of a rise in the market value of their bonds, for performing well. Without tradeability, that won't happen.

The way of the world is that big business and government go hand-in-hand. The way of Social Impact Bonds is is equally familiar and equally dubious: government thinks it knows best who will deliver certain services and rewards them if they improve their performance. These will be existing service providers or, just possibly, new bodies upon which the government is equally keen to bestow favour for some reason or other. The whole point of my Social Policy Bond idea is to bring about creative destruction into the achievement of social and environmental outcomes. Under a Social Policy Bond regime new approaches and new organizations will be rewarded if, and only if, they are more efficient than anyone else. Social Impact Bonds won't do that: existing organizations will be favoured; they will have some incentive to perform their existing functions more efficiently, but little incentive to look at new approaches. For one thing, innovation risks rocking the boat. For another, SIBs, because they are not tradeable, are going to be restricted in their time horizon to that of existing organizations: they will take a short-term view, relative to the complexity of our social and environmental problems. This is a major deficiency: it restricts the scope of the bonds to narrow, short-term goals. As well, the costs of monitoring progress toward such goals is going to be large relative to sums at stake.

Contrast this with Social Policy Bonds, which are not limited by the prejudices of government (or anyone else) as to how our goals shall be achieved nor who shall achieve them. So we can target long-term social goals that will inevitably require diverse, adaptive approaches: reduced crime rates, for example, or improved health. We can even target global goals, like human development or the sustained avoidance of violent political conflict. Governments that issue Social Policy Bonds don't have to take a view as to which organizations are best placed to achieve such goals, nor as to how they shall go about achieving them. That work is done by bidders for the bonds who will be motivated by the rewards they get for helping achieve the targeted outcome. Note the word 'helping': a single organization need not achieve the entire goal to be rewarded under a Social Policy Bond regime: helping raise the likelihood of early achievement of the goal will generate reward in the form of the increased value of the bonds they (or a contracting agent) owns. Social Policy Bonds encourage a coalition of interests, whose composition and structure will change in response to changing circumstances, to co-operate in exploring and implementing a diverse, adaptive array of initiatives with the aim of achieving our broad social goals, even ones as seemingly remote and unattainable as universal female literacy or world peace.

For more on this see my short article: why the bonds must be tradeable. Also previous blog posts. For another critical view of SIBs (in New Zealand) see here. Contact me if you would like to know more.

Chopping down trees to fight climate change

It's inefficient, at best, for central government to try to prescribe how to achieve most social or environmental goals. Society's just too complex for any large, fixed organization fully to understand. But politicians aren't known for their humility. This is what happens when government thinks it knows how best to achieve its environmental goal of reducing greenhouse gases (not to be confused with trying to prevent climate change, but that's another story):

For the sake of a greener Europe, thousands of American trees are falling each month in the forests outside this cotton-country town [Oak City, North Carolina, US]. .... Each day, dozens of trucks haul freshly cut oaks and poplars to a nearby factory where the wood is converted into small pellets, to be used as fuel in European power plants. Soaring demand for this woody fuel has led to the construction of more than two dozen pellet factories in the Southeast [of the US] in the past decade, along with special port facilities in Virginia and Georgia where mountains of pellets are loaded onto Europe-bound freighters. European officials promote the trade as part of the fight against climate change. Burning “biomass” from trees instead of coal, they say, means fewer greenhouse gases in the atmosphere. .... But ...scientists say, Europe’s appetite for wood pellets could lead to more carbon pollution for decades to come, while also putting some of the East Coast’s most productive wildlife habitats at risk. How Europe’s climate policies led to more U.S. trees being cut down, Joby Warrick, 2 June

It's a typical government intervention; confusing the causes of a problem (climate change) with the supposed causes of a problem (coal burning) and imposing a restricted (geographically limited to the EU) pseudo-solution to a problem that goes beyond politicians' sphere of influence. The result: government intervention makes things worse even on its own terms.

The same confusion arises in other areas, especially those where experts think they have all the answers. So we see the targeting of a surrogate indicator like blood cholesterol in medicine, through the mass prescription of statins, which might, but probably won't, do anything to reduce the overall health of a population - with large upfront and certain costs in terms of finance and side effects. Of one thing we can be certain: government will not (pdf) look back at its policies and learn from its mistakes.

The solution, I think, is for governments to stick to what they are good at: articulating society's goals and raising the funds to achieve them. But, for complex social and environmental goals, government should contract out the actual achievement to a motivated coalition of interests, which will have incentives to explore diverse, adaptive ways of achieving our goals. A Social Policy Bond regime would effect such a contracting out. The bonds, being tradeable, would imply that this coalition could change, always to be composed of those who will be most efficient at achieving our goals. This, in turn, would mean that we could target long-term goals, including those, like climate change, that transcend national boundaries.

Progress in development

Social Policy Bond principles are slowly gaining acceptance. Here is the Economist writing about trends in development aid:

Now donors are trying a new approach: handing over aid only if outcomes improve. “Cash on delivery” sees donors and recipients set targets, for example to cut child mortality rates or increase the number of girls who finish school, and agree on how much will be paid if they are met. ... In cash-on-delivery schemes, recipients choose their own paths towards their targets, subject only to basic rules, such as respecting human rights. ... By setting and measuring targets, cash-on-delivery donors hope to spur healthy competition. It’s not what you spend, 'the Economist', 23 May

For my thoughts on applying the Social Policy Bond idea to development click here. 

Distracting the masses

How government spends your tax dollars:

The EU has contributed €16m to Paramount’s new park in Spain. Russia’s government is helping to finance a nationalist-themed park near Moscow. But official handouts are no guarantee of success: 70% of the 2,500 theme parks built in China, many with generous state help, have closed down or are losing money. Theme parks in Europe: bumpy rides ahead, 'The Economist', 9 May

If governments everywhere didn't waste your money on propping up inefficient industries everywere or bailing out failed banks you might almost think their goal in subsidising theme parks is the single one of keeping us distracted. As it is, it's uncertain whether that is their main goal, or whether they just enjoy speculating on photogenic projects with your money. Why immensely wealthy multinational corporations are thought to be more deserving of help than the poor, or disabled, or the homeless is not obvious.

Stupid incentives reward stupid behaviour

David Simon goes a long way toward explaining why policing in Baltimore has gone awry:

How do you reward cops? Two ways: promotion and cash. That's what rewards a cop. If you want to pay overtime pay for having police fill the jails with loitering arrests or simple drug possession or failure to yield, if you want to spend your municipal treasure rewarding that, well the cop who’s going to court 7 or 8 days a month — and court is always overtime pay — you're going to damn near double your salary every month. On the other hand, the guy who actually goes to his post and investigates who's burglarizing the homes, at the end of the month maybe he’s made one arrest. It may be the right arrest and one that makes his post safer, but he's going to court one day and he's out in two hours. So you fail to reward the cop who actually does police work. But worse, it’s time to make new sergeants or lieutenants, and so you look at the computer and say: Who's doing the most work? And they say, man, this guy had 80 arrests last month, and this other guy’s only got one. Who do you think gets made sergeant? And then who trains the next generation of cops in how not to do police work? I’ve just described for you the culture of the Baltimore police department amid the deluge of the drug war, where actual investigation goes unrewarded and where rounding up bodies for street dealing, drug possession, loitering such – the easiest and most self-evident arrests a cop can make – is nonetheless the path to enlightenment and promotion and some additional pay. Baltimore’s Anguish: Freddie Gray, the drug war, and the decline of “real policing.”, David Simon, 29 April

Two points I would make.

One: in our complex society we are going to have to target quantitative indicators. To do so effectively these indicators need to be meaningful to ordinary people must be, or must be inextricably linked to, improvements in well-being. The alternative to such indicators are the sort of Mickey Mouse, micro-targets that motivate the Baltimore police to maximise the number of arrests they make or, for instance, keep patients in UK ambulances hovering outside hospitals so that they can meet a 'seen within 4 hours of entry into hospital' micro-target. 

Two: incentives are important. People — even well-intentioned and hard-working people — will react to incentives; and if these incentives are to carry out stupid activities that conflict with society's well-being, then they will carry out those activities and we shall see a decrease in society's well-being. It's not that complicated.

Immigration to Europe

The large numbers of people trying to migrate on flimsy boats from Africa to Europe are not all poor and desperate. The cost of arranging these trips is beyond the means of most. Many of the people on these boats would be entrepreneurs in their own countries if there were even a slight prospect of a better life there. So why isn't there? Why do they leave their culture, their families, their support network and pay large sums to criminals to arrange a very chancy, unpleasant trip to countries that certainly don't want them (to put it mildly).

Not the whole explanation, but a large part of it, are the corrupt, insane European Union trade policies including especially the Common Agricultural Policy which, by subsidising farm production in Europe and imposing formidable barriers to imports has made it very difficult for the food-rich African countries to step onto the first rung of the economic development ladder. Europe adopted the same policies with respect to tropical products and textiles, all at the behest of their own powerful farm lobbies and corporations.

So what did they expect? By creating 'fortress Europe' the Eurocrats exported poverty and instability to poor countries. At the same time they give a few million dollars of funds collected from taxpayers in 'aid' and expect these countries to be grateful. And they act concerned when, after decades of kicking these countries off the development ladder, they are besieged by Africans looking for a better life. It would be unhelpful, childish and arrogant to say 'I told you so', so I won't say it even if it's true – which it is.

What really matters?

What really matters to voters? You might think, as I, naively, used to, that it's outcomes. But our politics and our policymaking process are almost entirely concerned with spending, institutional structures, legalisms, outputs or activities, all of which have very little bearing on outcomes that are meaningful to ordinary citizens. Come election time candidates and their handlers routinely emphasise almost everything except outcomes when canvassing for votes: the personality, gender, ethnic origin or social class of the would-be politician, or how they perform on television. I have proposed Social Policy Bonds as a way of subordinating all our politics and all our politicking to broad, meaningful outcomes, which would be more amenable to public participation and therefore help bridge the widening gap between politicians and the people they are supposed to represent. A mistake?

 Recent US research shows that:

[M]any average voters with strong party commitments -- both Democrats and Republicans -- care more about their parties simply winning the election than they do either ideology or issues. Unlike previous research, the study found that loyalty to the party itself was the source of partisan rivalry and incivility, instead of a fundamental disagreement over issues. Study: Most partisans treat politics like sports rivalries, instead of focusing on issues, University of Kansas, 15 April

Maybe then the Social Policy Bond concept, which focuses primarily on outcomes, is too idealistic? I think not. I believe that we, the voters, think of politics as a game only because our governing elites have made the policymaking process so arcane, long-winded and boring that only large institutions — public- and private-sector — can afford to pay people to understand and manipulate it. Naturally then, for our entertainment, we focus on whether our team, Democrat or Republican, Labour or Conservative, left or right will win their game, but the real game is government and big business versus the electorate. That match is too one-sided to generate much excitement.

Anything but outcomes

Social and environmental problems are complex. Faced with these problems we delegate much of the responsibility for solving them to government. And how do those lucky enough to be given the chance of choosing who shall govern us go about it? One thing we don't do is look dispassionately at each political party's past record and choose on that basis. Even the experts don't do that. So how do we make our selection at the ballot box? We listen to promises by politicians about their stated spending priorities - inputs, in other words. Or we focus on the appearance of each candidate, or how well they come across on television. Now there's identity politics, as Brandan O'Neill writes:

If you want to see how small politics has become in the 21st century, just look at Hillary Clinton’s chucking of her hat into the 2016 US presidential race. Or better still, look at the response to her unveiling of her presidential ambitions, the chorus of cheers and whoops that greeted her decision to make hers a gender-focused, grandmotherly, womanish campaign, in which, as one excited observer puts it, sex - as in biology, not raunch - will form a ‘core plank’ of Hillary’s stab for the White House. What this speaks to is the suffocating extent to which the politics of identity, the accident of who we are, the lottery of our natural characteristics, is now paramount in the political sphere, having violently elbowed aside the old politics of ideas, and substance, and conviction. Hillary’s presidential launch confirms that, in the space of just seven years, identity has become pretty much the only game in the town of politics. The rise of Hillary and the death of politics, Brendan O'Neill, 'Spiked', 13 April

I'm not as cynical as Mr O'Neill. I'm not a great supporter of ideas or conviction in politics - not if they donit relate to 'substance' or, as I'd put it, meaningful outcomes. The fact is that not only do we not look at a politician's or a party's past record; often we cannot. There are too many variables, too many linkages and too many time lags for us to be able fully to evaluate past performance. Identity politics is a symptom of that problem, rather than a cause.

My solution? Social Policy Bonds. Agree on a set of broad outcomes, such as universal literacy, improved general health, reduced crime rates or, on a global scale, the elimination of violent political conflict (war and civil war), or catastrophe, whether natural or man-made. Then issue bonds that will reward people for solving these problems, however they do so. In short, target outcomes and don't focus too much on the identity or media performance of people who promise to spend taxpayer revenue on our behalf. Rely, instead, on a motivated coaltion of bondholders, who will have every incentive to subordinate all their activities to the achievement of society's targeted goals.