A single quality of life target?

Narrow social policy targets don't work. Take a goal like "halving the number of deaths from road accidents in the city centre". One response could be for city authorities to make driving attractive in all parts of the city other than the centre, with the same number of deaths occurring outside the target area. Another response (and one which would appeal to drivers in my neighbourhood) would be to encourage driving on the sidewalk, and exclude deaths occurring there from 'road' death statistics.

Even broad goals, such as improved health or educational outcomes, could conceivably be subject to the same manipulation or gaming, under a Social Policy Bond regime. Without very careful targeting, investors in the bonds could make unforeseen, negative trade-offs between societal goals.

Why not then target a single ‘quality of life’ indicator for the whole of society, taking into account all quantifiable social and environmental objectives: quality of life, physical and mental health, education level, environmental pollution, crime, homelessness unemployment, leisure time and any others? Surely targeting one single aggregated ‘social welfare’ indicator would be the optimal approach?

The more obvious objection to doing this is the daunting practical problem of defining a meaningful and measurable indicator of social welfare. The second is even more fundamental. Aiming for an increase in a single social welfare indicator carries with it an assumption that society’s needs can be traded off against each other. But for many of the needs for which government usually assumes responsibility such trade-offs cannot be made. For the neediest beneficiaries of government’s welfare programmes, a massive increase in priority for, say, health care would be unlikely to compensate for a total withdrawal of government funds from, say, basic education. ‘Safety net’ programmes in particular are scarcely amenable to trade-offs. In the same way a lowering of the crime rate, say, however welcome it might be, could hardly compensate for the total collapse of a country’s physical environment.

So experimentation and continuous refinement of the Social Policy Bond principle are going to be necessary. Issuers, public or private sector, will have to be vigilant to ensure that any particular bond issue does not break the spirit of society's stated and unstated goals, as well as the letter of the redemption terms. Of course, this sort of monitoring is necessary in today's policy environment as well - and it's not often practised.

Providing incentives to prevent humanitarian catastrophe

We have fairly well-developed markets to insure against financial disaster. Catastrophe bonds, for instance, as well as conventional insurance policies. But financial resources rarely correlate with human life and well-being. So incentives to prevent or alleviate humanitarian disasters are left to the caprice of well-intentioned (usually) governments, or superb charitable organisations, which respond quickly and efficiently to crises. Unfortunately, these efforts are unsystematic. There is probably less emphasis on prevention than there should be and there are no systematic efforts to maximise the humanitarian benefit per dollar spent.

Disaster Prevention Bonds could be one way of bringing the prevention of human suffering into the market, and so injecting efficiency into that goal. Markets these days are associated, rightly, with grotesque income and wealth inequalities, and the pursuit of private goals at the expense of social and environmental amenity. But markets can be made to serve the public good, and the Social Policy Bond principle would be one way of harnessing the market's incentives and efficiencies in the service of society's needs. The contrast between the insurance available for financial disasters as against human disasters is stark and quite tragic. But it is not inevitable.

Special interests benefit from obscurity and complexity

John Lanchester writes of the former chief economist of the International Monetary Fund:

[Simon Johnson's] day job involved going into crisis-struck countries and banging heads together to get them to accept reforms as a price of IMF aid. He acquired an extensive experience of countries which had effectively been captured by a ruling elite who governed entirely in their own interests. His startling conclusion about the current crisis is that the US has become of those countries. As the banking sector got richer, its power and influence over US government policy increased - power and influence which the bankers weren't at all afraid to use. John Lanchester, in Whoops!

Or rather 'abuse'. It's becoming a familiar pattern: special interests deploy complexity and obscurity as devices by which they can attract taxpayer funds away from a disengaged public. More regulation seems to be the obvious solution; but that adds to the complexity and obscurity. My suggestion, is, instead, to target outcomes, in such a way that ordinary people engage in policymaking and ensure that rewards are inextricably linked to the public interest rather than, as now, the private interests of those wealthy enough to pay lobbyists and lawyers to manipulate policy for their own purposes.

Social Policy Bonds would do that. One target, for instance, could be the 'sustained avoidance of financial and economic collapse'. Such a collapse could be targeted as an array of financial, economic and social indicators, which would all have to fall within a defined range for a sustained period before the bonds would be redeemed.

More generally, bonds could be issued that targeted any sort of disaster, defined in terms of a combination of, amongst other things, numbers of deaths and serious injuries caused, financial costs, numbers of homeless, and an array of other social, physical and financial indicators. See my paper on Disaster Prevention Bonds. The Social Policy Bond principle though, is a broad one. Essentially, society would decide on what it wants to see, and target the achievement of these goals. It's 'policy as if outcomes mattered', where the outcomes are those that favour society as whole not, as now, a cartel of interest groups and their lobbyists.

Black swans

In the Introduction to his book Whoops!, about the 2008 crash, John Lanchester says:

Many bright, literate people have no idea about all sorts of economic basics, of a type that financial insiders take as elementary facts about how the world works.

Nor can many of us follow the technical debate about climate change or the dangers of strangelets or supervolcanoes.... Along with the esoterica of the financial markets, the complexities and obscurities of the relevant scientific relationships just cannot be unambiguously fathomed by policymakers - or even teams of experts.

That's why I advocate that, instead of attempting the impossible task of trying to identify such relationships and their consequences, policymakers target outcomes instead. We don't have fully to understand the climate change debate to know that it would be to our advantage to avoid climate catastrophe. Nor should we have had to anticipate the myriad derivatives that the finance industry constructed to avoid the derailing of the entire global economic system. It's the outcomes that matter, not how we reach them.

Under a Social Policy Bond regime, we could define the circumstances we want to avoid, and issue bonds that become redeemable only when these circumstances have not arisen for a sustained period. Defining such circumstances would not necessarily be a simple matter. It could involve constructing an index that combines measures of human, animal and plant health, or physical and financial indicators. No, it would not be simple - but it would be preferable to the current policy, which is basically that of reacting to crises only after they have occurred and caused immense, and possibly fatal, damage. For more on using the Social Policy Bond principle to avoid catastrophe, however caused, see my paper on Disaster Prevention Bonds.

On another note, the Economist of 19 February has an article on Pay for Success Bonds (subscription), a US version of Social Impact Bonds. At first glance they suffer from the same (as I see it) weakness as SIBs: they would not be tradable, and so would be limited to fairly narrow, short-term goals whose would-be achievers are known in advance. (See my previous post, on Social Impact Bonds.) These bonds are definitely a step in the right direction, in that they reward successful achievement of social outcomes, rather than merely pay people to undertake ostensibly beneficial activities. But I think that, because they are non-tradable their scope is necessarily limited, and also that, as a result monitoring their success or otherwise might be too costly in relation to their benefits.

The book

My book Market Solutions for Social and Environmental Problems: Social Policy Bonds, is now also available from CreateSpace (part of Amazon) with ISBN number 978-1456512095. It costs US$19.95. It's a slightly updated version of the book available from Lulu (see right-hand column) and will eventually supersede it.

Social Impact Bonds - progress report

Social Impact Bonds (not to be confused with Social Policy Bonds) were launched in the UK in September 2010. SIBs are similar to Social Policy Bonds in the sense that investors receive higher returns if their social intervention is successful. They are being tried over four years with 3000 UK prisoners at Peterborough prison. The more their reoffending rate falls, the more the backers of the bonds will receive.

Toby Eccles, development director of Social Finance, says it hopes to launch half a dozen such bonds across the country and for a variety of social projects over the next 18 months. Other groups ... are looking to foster similar bond schemes in areas such as cutting the number of children going into care or handling people with long-term health conditions better. “Making these work is complex,” says David Hutchison, Social Finance’s chief executive. “You have to be able to measure success accurately and work out how much to pay for it and when. Peterborough is relatively easy – people either reoffend within a year or not. Bonds set to help prisoners break with past, by James Boxell and Nicholas Timmins, 'Financial Times', 10 February

I met Toby Eccles in London last June, and we discussed both Social Impact Bonds and Social Policy Bonds. SIBs are definitely a step in the right direction. The idea of rewarding desirable social outcomes (rather than paying people for simply turning up to work), while obvious in theory, is (sadly) revolutionary in practice. Social Impact Bonds have the great virtue of being easier to trial than Social Policy Bonds. But in other ways Social Policy Bonds have the advantage.

The biggest difference is that, compared with SIBs are less tradeable than Social Policy Bonds. There would be no transparent market for them. The composition and structure of the organizations trying to achieve outcomes under a SIB regime are therefore fixed and pre-determined. Under a Social Policy Bond regime, on the other hand, the type, structure and composition of organizations working to achieve the target would be subordinate to the most efficient way of reaching it. This means, amongst other things, that broad, longer-term goals could be targeted. Such goals can be more closely aligned with society's wants and needs. Rather than target a relatively narrow indicator (like the re-offending rate of a certain set of people), over a period of a few years, they could target regional or national crime rates over a period of decades.

Nevertheless, I am pleased to see Social Impact Bonds being tried and I hope that their major departure from current policy - rewards that are inextricably linked to relevant performance - is taken up more widely.

Say no more

In his dissenting opinion for Citizens United v. Federal Election Commission, a case that gave the notion that money equals speech and corporations equal individuals the imprimatur of the Supreme Court, Justice John Paul Stevens went so far as to make a sort of bitter joke out of the whole thing: "While American democracy is imperfect, few outside the majority of this Court would have thought its flaws included a dearth of corporate money in politics." Murdoch Triumphant (subscription), by Marvin Kitman, Harper's Magazine, November 2010

Foreign Aid for Scoundrels

Wiliam Easterly writes:

[T]he nations and organizations that donate and distribute aid do not care much about democracy and they still actively support dictatorships. ... [T]he French government continued to aid the Hutu government [of Rwanda] even after the genocide had become public knowledge. Foreign Aid for Scoundrels, William Easterly, 'New York Review of Books', 25 November 2010

How does this happen? One reason is institutional inertia:

Aid agencies exist to give aid, so they must keep the money flowing. The department of an aid agency assigned to help a country may not get a budget next year if its officials don't disburse to the country's ruler this year; so they hand out funds no matter how autocratic he is.

And it's a fact that institutions have objectives that can have little to do with their lofty mission statements. Indeed, their over-arching goal, the one that over-rides all others is that of self-perpetuation. How could it be otherwise? As in biological evolution, considerations such as well-being are important only insofar as they they influence survivability. Since funding determines survivability of institutions, and since nobody bothers to check (pdf) the performance of institutions, let alone reward them according to their success, the current, corrupt, destructive aid regime is an inevitable result.

This is where Social Policy Bonds could make a difference. Under a bond regime, organizational existence would not be taken as a given. In a neat reversal of the current system, the efficient achievement of a targeted outcome (the welfare of a poor country, say) would determine the structure and nature of the organizations that pursue that goal. If any agency trying to improve the welfare of a poor country's people were inefficient, it would lose funding by investors in the bonds. The structure, composition, and all activities of all agencies would be totally subordinated to the bonds' targeted goal.

Of course the Social Policy Bond principle can be applied to the welfare of people in the rich countries too, where there is plenty of inefficiency and the system of poor people subsidising the rich is a long-established tradition (see my posts aid for big business, fisheries, and energy and New Zealand's policy of subsidising movie tycoons). It can also be applied to global challenges, such as climate change or, indeed, any catastrophic event.

It won't be though. The Social Policy Bond idea has been in the public arena for more than 20 years now. The level of interest from individuals, the academic world and think-tanks is heartening; but from policymaking institutions - well, the word 'nil' perhaps overstates their enthusiasm for this (or any other) idea that threatens their funding.

Different or divergent?

The protests in Tunisia and Egypt are not difficult to explain. Rising aspirations are colliding with the inability and unwillingness of governments to meet them. The interests of the politicians and the other pillars of the establishment (the police, the military) are not different from those of their people but, increasingly, in conflict with them. And there's no mechanism, other than by revolution, by which the widening gap can be closed. So it's not just that people's expectations aren't being met under the current regime; it's that the regime is systemically incapable of aligning itself with those expectations.

It's not that different in the rich countries. Our policymaking is in thrall to special interests; mainly big corporations, trade unions, wealthy individuals, and their lobbyists. Policies that turn out to be counterproductive (to put it mildly) are not just implemented, which would be excusable, but they persist. So we see agribusiness corporations and wealthy landowners in Europe and the US subsidised by taxes on the poor to the tune of billions of dollars annually: not just for a short time during which there is a transition to saner policies, but for decades. Our collective response to the unsustainability of ludicrous policies has been to borrow more money to keep them going; to prop up a corrupt system, at all costs to everyone and everything except the special interests. The special interests are the only winners. The losers are ordinary people, our social environment, and our physical environment.

It doesn't have to be like this. Instead of the special interests dictating policy we could find a way of orienting our politics to society's interests rather than those of the powerful. This is where outcome-based policy in general should play a role. Social Policy Bonds are one way by which all government activity and funding would be subordinated to the greater good. Under a Social Policy Bond regime, government would do what it's good at: articulating society's goals, and raising the revenue for their achievement. These goals would be expressed not, as today, in terms of vague, high-sounding but unverifiable ideals, but in terms of quantifiable outcomes, whose achievement would be inextricably bound to improvements in social and environmental well-being. So, rather than target 'economic growth', say, or GDP per capita, we'd be targeting things like universal literacy, or reduced crime rates, or a cleaner environment. We'd target ends, rather than the supposed means of achieving these ends.

No longer would policy, despite the best intentions of the hard-working people in our government agencies, drift away from the the concerns of ordinary people and align itself with those of large corporations and other special interest groups. Policymaking under a Social Policy Bond regime would be entirely subordinated to society's wishes. Rewards would benefit only those who help make such wishes a reality. Only when the interests of government and people are aligned can we be sure of avoiding north-Africa-style turmoil and social collapse.

Accountants shape society

Who, any more, sees social well-being as anything other than a set of numerical variables to be optimised, subject to financial constraints?

Patients are to be told to examine themselves at home and email their GP with the results rather than meeting face to face. They would send in a short message describing symptoms which would be answered by a doctor between appointments or at the end of the working day. Now you must email your GP, Sophie Borland, ' [UK] Mail Online', 24 January

Perhaps because easily quantified units of manufacturing output used to be strongly correlated with well-being, we tend to think that something like Gross Domestic Product per capita is a reliable indicator of social welfare. An extrapolation from the corporate sector seems to be going on. Corporations measure their success almost entirely in terms of financial variables; with considerations such as market share or employee welfare only really entering the picture insofar as they affect the long-term financial figures. Any negative impacts of their activities that can be successfully offloaded onto society or the environment will be - and have been, spectacularly so in recent years by the financial sector. All that matters is the numbers. Extrapolating from this, we tend to think that corporate success equals a society's success. It isn't true though. Apart from the non-market social and environmental costs of corporate activity there is, increasingly relevant, the concentration of the financial rewards into ever fewer hands.

It's up to politicians to articulate society's concerns, to regulate the corporations, and to redistribute according to society's wishes. And it's failing. Even when it tries, as with the UK's National Health Service, it apes the corporations in choosing a narrow range of micro-indicators as a way of measuring success. Increasing a doctor's throughput, measured in terms of numbers of patients dealt with per day is, like targeting hospital waiting lists, a waste of time. These indicators are too narrow and too easily manipulated to do much good. We should be targeting broad health outcomes: things like longevity, infant mortality and Quality Adjusted Life Years. Unfortunately, government takes the current institutional structures as given, and applies a set of accountancy-type objectives to them. The incentives, as with doctors reading emails, are to satisfy pre-determined criteria - to tick boxes and apply algorithms - rather than to consider the overall health of the patient.

A Social Policy Bond regime would be different. Under a bond regime, broad outcomes that are meaningful to real people (as distinct from corporations) would be explicitly targeted. Any institutions that arise as a result would be well advised to subordinate all its activities to achieving these social goals, or it will find its bonds bought up by a more efficient investor.