The private sector can issue Social Policy Bonds

Governments are unlikely to be the first issuers of Social Policy Bonds. Doing so would mean they relinquish some of their power. They would be surrendering their power to dictate how specified social objectives shall be achieved. They would still be specifying what these objectives are, and they would still be raising, through the tax system, the funds that would be used to achieve them, but the decisions about how to achieve them would, in effect, be contracted out to the private sector. These contracts would be tradable, via the bond mechanism. But governments are not known either for their willingness to surrender power, nor for their deployment of innovative financial instruments.

So I now see the private sector as being the more likely first issuers of Social Policy Bonds. I have prepared a handbook using the example of female literacy in Pakistan, suggesting how this might be run. (This is a pdf file of about 15 pages.)

Terrorism, war and market incentives

The Greeks saw war as an inescapable fact of human life. In the aftermath of terrorist outrages many commentators take the same view; and preventing every such outrage is indeed a formidable task. Which is why, in my view, it should not be the sole responsibility of the state. Government, I believe, could contract out much of the work needed to eliminate terrorism. It could issue Social Policy Bonds redeemable for a fixed sum only when there had been no people killed or injured by terrorist attack for a sustained period.

Bondholders would then have incentives to prevent terrorism efficiently. They would explore and invent new, more diverse options than are currently open to government. They could, for example, subsidise intermarriage between members of different religious communities. They could sponsor school exchange visits, sports matches or the broadcasting of peaceful propaganda. They could arrange for the most virulent preachers of hate to take long, luxurious holidays in remote resorts without access to communication facilities. They could pay people to seduce arms dealers into other areas of activity. Whatever holders of bonds targeting war and terrorism do, they will have successes and failures. But they will also have incentives to terminate projects that are failing and to refine and replicate their successes - to be efficient, in other words.

Government has no such direct incentive. It cannot offer direct financial rewards for success, and its talent pool is limited, partly for that reason. It would get into trouble if it advocated things like intermarriage, or sponsored sybaritic vacations for rabble rousers. As in other areas of social policy, its options are limited. They tend to be one-size-fits-all, slow to adapt and justified mainly because they have been done before, rather than by their efficiency.

The private sector can and should be given the chance to operate more freely. After all, it is largely private incentives that have aggravated the problem of war and terrorism. We need to redress the balance and reward those who strive for peace.

Under a bond regime targetting war and terrorism, Government would still have the responsibility of defining our peace goal, and it would be the ultimate source of finance for achievement of that goal. But the actual achievement would be contracted out to the private sector, who would have powerful incentives to achieve it as cost-effectively as possible. Government and the private sector would each do what it does best: respectively, articulating its citizens' wishes, and finding the most efficient ways of achieving its goals.

Corporate goals are not social goals

The more than minimal fraud is in measuring social progress all but exclusively by the volume of producer-influenced production, the increase in GDP. J K Galbraith, 'The Economics of Innocent Fraud', Penguin Books, 2004.

By default, GDP, or GDP per capita, has become the measure of social progress. What Galbraith calls fraud, I would call a trap or an irrational tendency, which parallels, or arises from, our individual psychology. For most of us education has been almost entirely verbal. So we see happiness as a set of circumstances rather than a state of mind. But the correlation is neither strict nor necessarily positive. Our societal obsession with GDP is, in my view, an exact projection of our individual obsession with preconceived, generally numerical and monetary, goals. What gets lost are crucially important, but neglected public goods, such as a healthy environment, low rates of crime, or a low probability of war. Social Policy Bonds would explicitly target these goods and reward those who help achieve them. Our current incentive structure rewards those who increase GDP, even if they do so by, for example, destabilising the climate or selling weapons to corrupt despots.

Amsterdam

Conversation with Amsterdammers reveals much discontent with the way the Dutch Government allocates resources, particularly welfare. The attitude, by no means unique to the Netherlands, seems to be "because it's not perfect, I'm justified in going on the dole/ripping off the system/ripping off the rich/being permanently miserable".

My take on all this is that the problem is the wide and growing gap between people and their government. The gap is not going to close, I believe, until politicians express their goals in terms of outcomes that mean something to real people. Currently government goals are usually derived from an ideology, expressed as funding programmes for public agencies, or surreptitiously determined by the narrow interests of private corporations. Politicians are overwhelmingly ideologues or lawyers, skilled (or able to employ those who are skilled) with words and argument, but removed from the concerns of natural persons. Government should be about delivering outcomes for people, not about representing corporate interests, whether private or public. Social Policy Bonds, by inextricably linking policy goals to meaningful outcomes, would help to close the gap between government and people.

'Better than Kyoto'

'The Economist' pinched the title of my book on Climate Stability Bonds for its lead article on Kyoto. Its artticle is subtitled 'America should use the G8 summit to embrace carbon trading'. But I question that. Carbon trading may well be the most efficient way to reduce anthropogenic carbon dioxide emissions. But there is no evidence to say it's the most efficient way of stabilising the climate. What about removing carbon dioxide from the atmosphere? Shooting up mirrors into the atmosphere? Cyanobacteria that convert a carbon dioxide atmosphere into one dominated by oxygen? All unlikely to be the sole solution, but not necessarily more unlikely than Kyoto, which puts all our eggs into the one basket. 'Better than Kyoto' means looking at all potential solutions not just the one favoured by 1990s science. Climate Stability Bonds would give incentives to people to investigate all possible solutions and to look for the most efficient. Carbon trading, and Kyoto itself, are dangerous distractions from this goal.

Back in the UK

...after a few very pleasant days in Prague. I stayed at a modest hotel in Zizkov, a working class district two tram stops to the east of the city centre. At first I was apprehensive about the area, but it did not take much walking around to realise, or be reminded that, 'working class' does not necessarily mean menacing, nihilistic and drug-ridden as it seems to in the UK and increasingly in New Zealand, but can be synonymous with pride and dignity. Passing through customs at the airport back in the UK there are signs headed 'Assaults on Staff' warning us that anyone who beats up a customs official will be prosecuted. The authorities see no need to translate these into languages other than English.

Prague

In Prague, where memories of what happens when Government gets very far out of line are still prominent and sobering. A front page story in todayś International Herald Tribune quotes a Jiang Yhaohua, a Communist Party secretary for the township of Zegou, in Zhejiang in China

No matter how smart we are, we officials have limited information. The easiest way to avoid mistakes is by having more democratic decisions.

Impressive humility, and letś hope it portends a way forward for acting on complex problems such as crime, climate change, and violent political conflict, where officials, politicians and experts, however dedicated and well-meaning, are failing. A Social Policy Bond regime would democratise the finding of solutions to these problems by letting people decide both on the priorities they would give to problems, and the best ways of solving them.

UK

In the UK, where policy seems to be determined by anything other than outcomes and the state is enlarging its role by default. There is a serious effort to extend school opening hours to 0800-1800 so that both parents can more easily go out to work. Part of the motivation for this is doubtless the resulting increase in income tax revenues. In Spain, a controversial new law, will force men to do their share of housework. The legislation will oblige men to "share domestic responsibilities". Recalcitrant husbands will face the wrath of the courts in divorce proceedings.

Here in old Europe the first impulse of anybody facing any sort of problem is to blame the government and then to look to the government for a solution. Government doesn't mind intervening too much, because that is its raison d'etre, but the result is an enfeebled population, yet more dependence on governnment, and government enthusiastically going way beyond its competence.

A Social Policy Bond regime would clarify what government is about. Poverty and planet-threatening environmental problems would probably be given higher priority than the shortfall in baby-sitting services for double-income families. The state would probably not intervene when it comes to who does the vaccum-cleaning. I say 'probably' because the government's priorities would be determined by people, and they would choose outcomes that are meaningful to them. There may be many who think the government should run mass childcare establishments as an end in itself, but I suspect the state drifts into these activities through inertia rather than a as rational attempt to address the concerns of its citizens.

Old Europe

In the UK briefly, where the political hot topic of the day is road pricing. The same confusion about the difference between ends and means of policy that bedevils other policy areas is rife in transport too. First, traffic congestion is seen as an urgent problem that needs to be solved, rather than a symptom of deeper problems. Second, there is no agreement on what would constitute a successful solution. Presumably, uncongested roads. But that could be achieved by halving the road network, and raising costs of motoring so that road travel were cut by 95 per cent. We'd then have fewer roads, sure, but they'd be traffic free.

Uncongested roads are not valid as a policy goal for government, because they do not necessarily generate increased social welfare. They may or may not be a means to other ends. The right response from a government is to work out what these other ends are, then to target them. It should let people in a properly regulated market decide on whether and how to travel.

Government, by subsidising road building in previous decades, has made too many people and interest groups too dependent on low cost road transport. It has subsidised the big and global at the expense of the small and local. So any sensible initiative, such as road pricing, is going to be aggressively opposed and the result will be too little, too late. A Social Policy Bond regime would make clear exactly where government funds are going: it would express policy goals in terms of outcomes that mean something to real people rather than paid lobbyists or entrenched interests.

"The EU: regulations R us"

That was my entry for Tim Worstall's competition to design a bumper sticker for the European Union. It won an honourable mention from Tim, but the winners were:

MEP - my other car is a gravy train.

EU being serfed?

Don't Blame Me. I voted for Le Pen.

My own favourites are:

The EU: straighter bananas since 1992, and

The EU: putting the crass into bureaucracy