Don't rely on government

Don't rely on government to sort things out, nor to be the first to target outcomes as a policy priority, as against staying in power and disbursing funding to favourite lobby groups. Who in the private sector might be interested in privately issued Social Policy Bonds, and why?

• Philanthropists and others who are cash-rich but time-poor and have high ideals that can be expressed as quantifiable social and environmental objectives. They could collaborate and issue their own Social Policy Bonds, setting up an escrow account for funds to redeem them. Less wealthy people – ordinary members of the public – could be asked to swell this account by depositing their contributions into it. Philanthropists and their organizations, without exception, resolutely ignore my emails, but one lives in hope.

• Organizations in the private sector already involved in trying to achieve the targeted objective. They could seek funding from holders of the relevant Social Policy Bonds, who, if they believe these organizations’ activities are efficient will find it worthwhile to help finance their existing projects. 

•  People could set up new organizations specifically to buy the bonds, work towards the targeted objective, and sell their bonds once they have risen in value.

Playground psychology as a policy driver

The drivers of policy have little to do with outcomes. Perhaps the most important drivers are vested interests - government agencies, large corporations, trade unions, churches etc - whose over-arching goal is always self-perpetuation, which sometimes coincides with the interests of their members. Given the stakes, an even more worrying policy driver is playground psychology. Discussing how the US became embroiled in Vietnam, Frederik Logevall writes:

As Democrats, JFK and LBJ felt the need to contend with the ghosts of McCarthy and the charge that they were 'soft on Communism'. Frederik Logevall, quoted by Jonathan Mirsky in A debacle that could have been avoided (subscription), 'New York Review of Books, 25 October

John Kay writes about decision-making in business and politics:

 I once thought that however thin the public arguments for large corporate transactions, there was probably some serious analysis going on behind the scenes. Just as I once thought that whatever nonsense politicians might talk on public platforms, more substantive discussion took place when they retired to their offices. But closer acquaintance with business and politics dispelled both illusions. What you see and hear is more or less what there is. When I was sometimes employed to explain the economic rationale for a corporate transaction, I discovered that it was rarely useful to ask the principals why they were doing it. Usually you just heard those familiar clichés. Sometimes you got closer to the truth, sniffed the testosterone, glimpsed the inflated egos. Source

Until we subordinate all policymaking to meaningful outcomes, as would happen under a Social Policy Bond regime, this demented way of making policy is set to continue, with all its calamitous consequences. See also my post: How policy is made.

Reducing poverty

According to the [US] Congressional Budget Office, in 1979 over half of all federal social spending went to the poorest fifth of households. Now it is only 36%. The rich and the rest, 'The Economist', 13 October

There's nothing new about capture of taxpayer spending by wealthy individuals, corporations or the middle class, but its scale, persistence and degree of entrenchment make it less of a mildly corrupt, disguised, way of delivering largesse to favoured interest groups, and more of a threat to our entire social system. Perhaps we need to return to first principles. If we want to provide a safety net for the poorest households, then we need to reward people who provide a safety net for the poorest households. If we are in government we don't try to second-guess why households are poor, or how best to relieve their poverty. We, as government, are hopeless at such tasks. We don't have the imagination, nor the capacity to adapt to changing circumstances or to the myriad varying conditions within our geographical remit. What we are good at doing and what, indeed, only government can do well is (1) to articulate exactly what we want to achieve when it comes to reducing poverty, and (2) raise the revenue to achieve that goal.

That's where Social Policy Bonds that reward the reduction of poverty come in. Governments (or indeed anybody: see here) can undertake to redeem Social Policy Bonds for a high, specified sum, only when the poverty goal has been reached and sustained. We don't need to concern ourselves with how investors in the bonds will achieve our goal. Bondholders will have incentives to explore and implement the most effective, efficient ways of reducing poverty, taking full account of events and local circumstances. As important, and unlike many government interventions, they will have incentives to terminate failed projects. And, if they see their funds being diverted to the already better-off, as happens with so many government programmes all over the rich world, then they will see their bonds being bought by those who are better equipped to do the job that government has set them. Social Policy Bonds would lead to the setting up of organisations whose goals are identical with those of society. We don't know what form, structure or activities these organisations will assume - but we don't need to. We do know that they will prosper only to the degree that they achieve social goals efficiently and effectively. It's a big departure from the current system, which seems to reward those who are best at gaming the system, and it's one that is necessary and well overdue.

Metrics for peace

Middle East Peace Bonds, or Conflict Reduction Bonds, are all very well, but how are we to define what we mean by 'peace'? The conventional definition  doesn't necessarily mean human well-being, or the absence of the threat of war. There was no open conflict during the Cold War, for instance, but it wasn't exactly a stable, beneficial state of existence.

Fortunately, Social Policy Bonds are versatile, in that they can target an array of goals, each of which has to be satisfied if the bonds are to be achieved. Furthermore of these goals can take the form of a range of values, within which an outcome must fall for the bonds to be redeemed. Moreover, since our goal is for a sustained period of peace, that condition can also be embedded in the targeted outcome.

Experts and the public could come up with the necessary and sufficient conditions for a benign peace. Here are some suggested starting points:

• Numbers of people killed in armed conflict

• Spending and military strength

Military strength is an estimate of both military personnel and military equipment. The rationale for including this measure is similar to that for including military expenditure: it represents both the opportunity cost of resources lost to the life-enhancing parts of the world economy, and it is an indicator also of the potential for violence, and so an indicator of human insecurity or anxiety. While estimates of materiel could be subject to the same imprecision as spending on armaments, numbers of military personnel might be easier to quantify for targeting purposes in some regions of actual or potential conflict.

• Mass media indicators of impending conflict

Social Policy Bonds aiming at peace could also target events that are likely to lead to war, such as efforts to gain public support. There appears to be strong evidence (see Getting to war: predicting international conflict with mass media indicators, W. Ben Hunt, University of Michigan Press, 1997) that the underlying intentions of governments can be accurately gauged by a systematic analysis of opinion-leading articles in the mass media, regardless of the relative openness of the media in question. Such analysis allows the prediction of both the likelihood of conflict and what form of conflict - military, diplomatic or economic - will occur.  This sort of indicator could be useful as a target where military conflict has not begun, but appears possible, and where other data are scarce.

There are going to be problems with accurate assessment of all these measures, but they are unlikely to be insurmountable. 

Opaque by design

Peter Boone and Simon Johnson discuss Japanese, US and European policymaking:

We all have political systems that have figured out how to promise far more than can be repaid, and how to work with the financial sector to opaquely transfer resources to powerful groups—at a cost, it is often said, to be paid by future generations. Increasingly, however, it appears that future generations will not be the only ones harmed by our decisions; we are already feeling the negative impact. ....The era of large-scale, uncontrolled financial booms and busts—last seen in the 1930s—is back. The next panic, 'The Atlantic', October

The key word here is 'opaquely'. I often talk about the efficiency and effectiveness of Social Policy Bonds. But perhaps just as important is the bonds' transparency. Currently policymakers can - indeed must - express their decisions as vague declarations of intent, backed up by funding programmes for favoured bodies, be they government agencies or other interest groups. Often these bodies have edifying names, which makes the disinterested non-specialist think that there is some causal, positive relationship between, say, funds given to a government department for 'Development' or 'Overseas Aid' and the well-being of ordinary people in the poor countries. Or that funds disbursed by ministries of agriculture do something to help struggling farmers. It's nonsense of course, but it continues because it's opaque. If our governments openly stated that, for instance, the big beneficiaries of their agricultural support programmes would be wealthy landowners and massive agri-business corporates, even the least politically engaged citizen would have to take note.

Issuers of Social Policy Bonds couldn't get away with this subterfuge or the sort that Messrs Boone and Johnson describe. Transparency and accountability are built into a bond regime, as surely as they are excluded from the current policymaking apparatus. The financial, economic, social and environmental crises we face today are largely a result of scaled-up gaming of the system by powerful interest groups including, again, government itself. The losers are the vast majority of ordinary citizens and future generations.

We need something like a Social Policy Bond regime, which would target meaningful outcomes: outcomes that ordinary people can understand and in whose development they can participate. If outcomes were built into policymaking, as they are with Social Policy Bonds, the corrupt policies of recent decades would never have been discussed, let alone implemented. Instead of focusing on arcane legislative processes, esoteric structural arrangements and hidden funding arrangements - which appear designed to turn off all who aren't paid to follow them - a bond regime would encourage public participation in the policymaking process. This is an end in itself (pdf), as well as a means of bringing about the buy-in that will become increasingly necessary as our social and environmental challenges become more urgent.

Who cares about patients?

Marty Makarty discusses the US health care system: 

A host of new studies examining the current state of health care indicates that approximately one in every five medications, tests, and procedures is likely unnecessary. What other industry misses the mark that often? Others put that number even higher. Harvey Fineberg, M.D., president of the Institute of Medicine and former dean of the Harvard School of Public Health, has said that between 30 percent and 40 percent of our entire health-care expenditure is paying for fraud and unnecessary treatment. Marty Makary, Are hospitals less safe than we think?, 'Newsweek', 17 September

We shouldn't really be surprised. The disconnect between the decision-makers and ordinary people is about as wide in medicine as it is in education, justice or politics the world over, which is to say: vast. This gap is filled by middlemen: lobbyists, government agencies with their own agenda, and other vested interests representing big corporations or purporting to represent labour. Outcomes that matter to ordinary people are a long way down the list of priorities for these organisations. Marty Makary's article later points out that there is information readily available that would see appalling doctors and surgeons struck off... but it's not made available to those who would benefit from it. Instead, hospitals, just like every institution, whether it be a government agency, corporation, trade union, or church, have as their over-arching goal that of self-perpetuation. The interests of the people they are supposed to serve are incidental. And the predictable result, in medicine as in other areas of social and environmental policy is tragedy and waste. Our impotence in the face of big government and powerful organisations leads to alienation and cynicism about the whole political process.

Social Policy Bonds could close the gap between policy and outcomes that actually benefit ordinary people. Instead of having to satisfy organisations with deceptive names that promise to get things done, a bond regime would reward only the successful achievement of meaningful outcomes; however they are achieved and whoever achieves them. In the world of medicine, enlightened governments (or philanthropists or non-governmental organisations) would issue and back bonds that are redeemable only when broad health outcomes  (perhaps expressed as an index of longevity, infant mortality, Quality Adjusted Life Years, etc) have been achieved and sustained.

Middle East Peace Bonds

This is a short, updated, and so far unpublished, piece on applying the Social Policy Bond principle to conflict in the Middle East

Peace in the Middle East: giving self-interest a chance

I have no solution to the anxieties and potential catastrophes facing Israel, nor to the wider problems facing the citizens of all the Middle Eastern countries. What I offer instead is a means to encourage people to find solutions. Everybody has their own ideas about what should be done. I offer a way of channelling resources into those ideas - but only if they are effective and efficient.

Incentives

Where we are now: rockets are daily fired into Israel; we might well be on the brink of a nuclear calamity; and the entire region is a seething cauldron of every sort of hatred: ethnic, confessional, sectarian and gender.

Most ordinary people in the region, given time to reflect and the freedom to express their opinions would like nothing more than to see an end to the violence in the region. But there are too many people with a vested interest in keeping conflict going. They include the men of religion, the ideologues, and many of the politicians and bureaucrats. The international agencies and the military, whatever their intentions, aren’t exactly helping either. There are also, of course, the more nakedly financial incentives on the ‘defence’ industries and their beneficiaries in government, to fuel the fear of conflict. Well-meaning idealists on all sides do what they can, but their efforts are relentlessly undermined by the powerful people and institutions that want them to fail.

Peace above all

Perhaps it’s now to time to give people incentives to create and sustain peace, rather than conflict.  For my proposal to work we need a verifiable definition of peace, which will probably consist of an array of conditions that have to be satisfied and sustained. These could include:

·         a much-reduced number of people killed in conflict;

·         a much-reduced level of terrorist events, or military incursions;

·         no use of nuclear weapons.

Under my proposal, investors in the bonds would be rewarded once these, and other agreed conditions had been satisfied and sustained for, say, 30 years.

We need to be just as single-minded as the arms merchants and fanatics in wanting peace to the exclusion of everything, which might mean putting aside feelings of fairness, justice and history, except insofar as they help our cause. Being single-minded about our goal doesn’t mean that we simply pick the one project that we think will work and go for that. The circumstances that fan the flames of conflict vary radically from place to place and over time. No one solution, nor even an array of solutions will work all the time. We need a system that will encourage those projects that are most efficient for their time and place, and that will terminate projects when they become inefficient. In short, we need diverse, adaptive solutions.

And we need a way of promoting peace that can modify or circumvent people's uncooperative or obstructive behaviour. We need to mobilise the interests of the far greater number of people who want peace. We need to find a way that can co-opt or subsidise those people in positions of authority and power who want to help, and at the same time bypass, distract, or otherwise undermine, those opposed to our goal.

Ideally too, we would use market forces. Markets are the most efficient means yet discovered of allocating society's scarce resources, but many believe that market forces inevitably conflict with social goals: accentuating extremes of wealth and poverty, for example, or accelerating the degradation of the environment. So it is important to remind ourselves that market forces can serve public, as well as private, goals.

Middle East Peace Bonds

My suggestion is that philanthropists perhaps with governments and other interested organisations and individuals, collectively raise a large amount of money, put it into an escrow account, and use these funds to redeem a new financial instrument: Middle East Peace Bonds. These would be sold by auction for whatever they would fetch. They would be redeemed for, say, £100 000 each only when all the conditions for peace, as defined by the issuers, had been satisfied and sustained. Importantly, the bonds would make no assumptions as to how to bring about greater peace. Nor would they make any assumptions as to who would hold the bonds or carry out peace-creating projects. Those decisions would be made by investors in the bonds. Unlike normal bonds, Middle East Peace Bonds would not bear interest and their redemption date would be uncertain. Bondholders would gain most by ensuring that peace is achieved quickly.

Trading the bonds

Middle East Peace Bonds, once floated, must be readily tradable at any time until redemption. The operation of such a ‘secondary market’ would be critical to the working of the bond mechanism. Many bond purchasers would want, or need, to sell their bonds before redemption, which might be a long time in the future. With tradability,  these holders would be able to realise any capital appreciation experienced by their holdings of Middle East Peace Bonds whenever they choose to do so. Tradability would make the bonds a more attractive investment in the first place, and allow us to target an outcome as remote as peace in the Middle East, that will probably take longer to achieve than any bondholder’s investment horizon.

As the bonds are traded, they will tend to flow towards those who can do most to help reduce the violence. In fact, though, an actual flow of bonds would not be necessary. Large bondholders might simply decide to subcontract out the required work to many different agents, while they themselves held the bonds from issue to redemption. The important point is that the bond mechanism would ensure that the people who allocate the finance had an incentive to do so efficiently and to reward successful outcomes, rather than merely to pay people for undertaking activities. At the limit we can conceive of just one single buyer of all the bonds. If this buyer were determined to hold on to the bonds until redemption, then the bonds would function as a sort of performance-related contract, with the backers paying only when the objective had been achieved. The buyer could contract out most, or all, of the work required to achieve the objective, with the incentives given by the bonds for speedy accomplishment cascading down from the bondholder to those subcontracted to do the work of reducing the violence.

Too large a number of small bondholders could probably do little to help achieve peace by themselves. If there were many small holders, it is likely that the value of their bonds would fall until there were aggregation of holdings by people or institutions large enough to initiate effective peace-building projects. As with shares in newly privatised companies the world over, Middle East Peace Bonds would mainly end up in the hands of large holders, be they individuals or institutions. Between them, these large holders would probably account for the majority of the bonds. Even these bodies might not be big enough, on their own, to achieve much without the co-operation of other bondholders. They might also resist initiating projects until they were assured that other holders would not be free riders. So there would be a powerful incentive for all bondholders to co-operate with each other to help bring about peace in the Middle East. They would share the same interest in seeing targeted objectives achieved quickly. So they would share information, trade bonds with each other and collaborate on conflict-quelling projects. They would also set up payment systems to ensure that people, bondholders or not, were mobilised to help build peace. Bondholders would either trade bonds, or make incentive payments to ensure that any proceeds from higher bond prices, or from redemption, would be channelled in ways most likely to end the violence. Large bondholders, in co-operation with each other, would be able to set up such systems cost-effectively.

Regardless of who actually owned the bonds, aggregation of holdings, and the co-operation of large bondholders, would ensure that those who helped build peace were rewarded in ways that maximise the reduction in violence per unit outlay.

So, in contrast to today’s anaemic, short-term, tried, tested and failed approaches, a Middle East Peace Bond regime would stimulate research into finding ever more cost-effective ways of achieving peace. Indeed, bondholders would be in a better position than governments to undertake a range of peace-building initiatives. They have the freedom as well as the incentive to try innovative approaches. They might, for example, finance sports matches between opposing sides, promote anti-war programmes on TV, set up exchange schemes for students of the opposing sides. They might even facilitate intermarriage between members of the opposing communities, or try to influence the financial supporters of conflict outside the region to redirect their funding into more positive ways. They could offer the Palestinians and the citizens of neighbouring Arab countries different forms of aid, including education and scientific aid, and measures aimed at providing a secular education for all Arab citizens.

Bondholders could lobby, or work with, the Israeli and Arab governments to, say, give a higher priority to peace studies in schools, but they could also develop peace-teaching projects of their own. While immediate peace might not result, much more could be done to enhance the prospect of peace in the future. Bondholders could, for instance, make strenuous efforts in Israel and the neighbouring countries to have some mixed classes of Jewish and Palestinian children at kindergarten and school. Both groups could be given the chance of spending time with each other. At the very least, bondholders might think, there should be opportunities for the younger people from both sides of the conflict to meet, discuss, argue and form friendships.

Some powerful people in governments, religious institutions or militant organisations would resent the targeting of such objectives by external agencies in this way. But, while under the current system they can oppose peace in ways that attract support, under a Peace Bond regime, they would have openly to declare their opposition to peace itself. It is precisely this focus on the outcome of peace –  rather than activities or institutions – that would help strengthen the coalition working to achieve it. We could broaden the definition of peace to include not only numbers killed or injured, but other quantifiable goals, such as the amount spent on defence in the region, the results of surveys of people’s fears and anxieties, or net migration rates. For the bonds to be redeemed, all goals shall have to be achieved and sustained.

By appealing to people's self-interest, Middle East Peace Bonds are likely to be more effective than conventional efforts aimed at reducing violence. In channelling market forces into the achievement of this objective the bonds could bypass or even co-opt the corrupt or malicious people in government or elsewhere who stand in the way of peace.

In today's emotional climate decision-making is too often reactive. It is too easily swayed by those with a propensity for violence or those who benefit from it, whether financially or emotionally. Governments can evade or deflect censure on grounds of communal affiliation or patriotism, because the adverse effects of their policies are difficult to relate to their cause. Middle East Peace Bonds would focus on an identifiable outcome and channel market efficiencies into exploring the ways of achieving it. They could be the most effective means of achieving the peace that the people of the Middle East yearn for and deserve.

© Ronnie Horesh, September 2012.

Barnacles

 From the Economist

Modern governments play a much larger role in the economy than the ancient Greeks or the founding fathers could have imagined. This makes political leaders a huge source of patronage, in the form of business contracts, social benefits, jobs and tax breaks. ...[T]hese goodies are highly valuable to the recipients but the cost to the average voter of any single perk will be small. So beneficiaries will have every incentive to lobby for the retention of their perks and taxpayers will have little reason to campaign against them. Over time the economy will be weighed down by all these costs, like a barnacle-encrusted ship. The Greek economy could be seen as a textbook example of these problems. One answer could be to take fiscal policy out of the hands of elected leaders, just as responsibility for monetary policy has been handed to independent central bankers. Democracies and debt (subscription), 'The Economist', 1 September

And not only the Greek economy. It is not so much the existence, but the persistence of these barnacles that is the biggest indictment of the way we currently run things. In important respects they are self-entrenching: the more favoured are certain interest groups, the more resources they have to lobby against withdrawal of their special privileges. It's true that one reason for their persistence is because 'the cost to the average voter of any single perk will be small'. Another reason is that the cost to the voter of understanding what's going on is large. Current policymaking is incomprehensible to outsiders. It's very difficult to trace the vague statements about policy goals to actual policies, and no easier to identify links between policies and outcomes. Only people who are highly motivated will make the effort to do so. Whether such obscurity is deliberateis not that important. (Though I suspect it largely is where enormous subsidies and tax breaks for wealthy landowners and large corporations are concerned.) More important is: what to do about it?

One answer might be to express policy in terms of goals that are meaningful to ordinary people. Instead of talking about, for example, the institutional structures for health care, for instance, or funding arrangements, we should talk about national (or global) health care outcomes and ensure that whatever agencies are set up, and whatever their activities, they are all aimed at achieving these outcomes. Similarly with education, housing, crime or pollution or whatever. What is important is not who achieves our goals, nor how they do so, but that they have sufficient incentives to do the job.

A Social Policy Bond regime would immediately refocus our attention on our social and environmental goals. Under a bond regime we could target long-term, broad, societal goals, and reward those who are most efficient at achieving them. Because of the way the bonds work, it would be the disinterested market, rather than politicians who would make these decisions. Would people still opt to transfer wealth, as we do now, from the working poor to the ultra-rich? Unlikely, but if we did we'd at least be doing so with our informed consent. That in itself would be an improvement over the current policymaking environment.

The US election: who cares?

Who cares about the US election circus? More from Predator Nation:

[An] effective response to internal industrial decline [in the US] and foreign challengers required major changes in American government as well as industry. It required major improvements in the educational system, aggressive pressure to force incompetent industries to reform, ... and a variety of regulatory changes. But those measures had no focused, powerful, well-financed interest group to lobby for hem. Charles H Ferguson, Predator Nation, May 2012

What did those powerful interest groups decide to do? Mr Ferguson continues:

...to start using money to get what they wanted. But only what they wanted, individually - not what the country as a whole needed. Indeed, what was good for their company's profits was quite often bad for the nation.

Most voters probably know, at some level, that the politicians have not the slightest interest in the long-term well-being of the nation and its citizens or, rather, that they cannot afford to rule as if they have. The problem is self-reinforcing. It cannot reform itself. The people and the politicians live in different worlds and those worlds are moving away from each other. 

Despite recent interest (here for instance), I have no illusions about the likelihood of Social Policy Bonds being issued by national governments, but I will continue to put the idea forward as a possible solution. A bond regime would target outcomes that are meaningful to ordinary people: things like better health, lower pollution, or reduced risk of disasters, however caused. By focusing relentlessly on outcomes, rather than the current array of vague or unspecified targets, the bonds could shame governments into catering to the needs of all their citizens, rather than the wealthy and powerful. That's because governments would have explicitly and publicly to declare the outcomes that the bonds would target. And, because political debate would centre on these outcomes, rather than activities, outputs, funding arrangements, laws, regulations, personalities and hairstyles, it's far more likely that ordinary people would participate in the policymaking process. Under a bond regime we, the non-powerful, general public could still, as we are now doing, acquiesce in our tax payments being used to bail out a corrupt financial sector, or subsidies huge industrial and agricultural conglomerates and fossil fuel extraction and consumption. But, in that unlikely event we'd at least be doing so with our eyes open. Even that would be an improvement over the current system built, as it is, on deception.

Should teachers be paid?

Charles Ferguson, discussing the activities of people gaming the US financial system, writes:

we seem to have reached an unhappy position in which a substantial fraction of our most intelligent and articulate citizens either sit at Bloomberg terminals or jet around the world in very expensive tailor-made suits “ding deals” that, judging by the recent record, have no purpose except to put more money in their own pockets, and that on a net basis are economically detrimental to the rest of the population.  Charles H Ferguson, Predator Nation, May 2012

Surely we can do better than that? People sometimes argue that Social Policy Bonds are a means by which investors make money out by doing what they should be doing anyway. It is true that some wealthy bondholders could become even more wealthy by first buying Social Policy Bonds, then doing something to achieve the targeted objective, then selling the bonds. If that seems reprehensible, it is far better than the reality that Mr Ferguson describes above. 

It might not even be that individuals will amass huge fortunes under a bond regime, even if they do successfully achieve society’s goals and profit from their bondholding. The way the market for Social Policy Bonds works would mean that excess profits could be bid away by competitive would-be investors. The market would convey a huge amount of information, openly, that will indicate the constantly varying estimated costs of moving towards a targeted goal. 

The sums of money at stake might be huge, particularly for Social Policy Bonds that target apparently remote, national or global goals, but there’s no particular reason to assume that, in the long run, it would be shared out any less equitably than, say, teachers’ salaries. Those are other examples of people making money by undertaking a socially useful activity. There are perfectly logical arguments against paying for teaching or nursing services but they don’t sound very convincing these days.