Social Policy Bonds and price signalling

One of the less obvious benefits of a Social Policy Bond regime arises from the price signalling of the market for the bonds. At flotation, the bonds would be auctioned, and difference between the sums raised at flotation and the total redemption value of the bonds would supply the market's best estimate of the cost of achieving the targeted goal at that time. This estimate would vary over time, depending on many factors including bondholders' performance in undertaking or financing goal-achieving projects. The market for Social Policy Bonds, then, as with all markets, plays a vital role not only in allocating resources but also in signalling; in this instance to policymakers, the approximate costs of achieving social goals.

A competitive market for Social Policy Bonds would minimise the total cost of achieving a specified objective, as well as signalling it. More subtly, and more technically, it would also indicate the marginal cost of achieving further improvements. Say one million crime reduction bonds issued by a local authority were to sell for $5 each. This would tell the issuing body that the present value of the expected maximum cost, including bondholders’ profits, of reducing the crime level from, say 50 to 40 units, would be $5 million. The local authority might then suppose that it could afford to be more ambitious, and aim for a further fall to 30 units. It could issue a million additional bonds redeemable when this new lower rate were reached. These would (probably) have an initial market value of less than $5, reflecting the (probably) diminishing returns involved in preventing crime. The point is that, by letting the market do the pricing of the bonds, the local authority would be getting an informed view of the marginal cost of its objectives. So if the bonds targeting the new level of 30 units were to sell for $4 each, then the maximum cost of achieving that objective would be $11 million, being equal to: $5 million (paid out when the level fell from 50 to 40 units) plus $6 million (paid out when the level fell from 40 to 30 units). The marginal cost of a 10-unit drop in crime would thus have been revealed to have risen from $5 million to $6 million. Should the local authority aim for a further fall to 20 units? Following such crime rate-targeting bond issues it would have robust information about the cost of doing so.

This is, of course, a simplified example and in fact the bond market would continuously update its pricing information. Say that new research, of the sort that might be stimulated by an initial bond issue targeting crime, suggested new ways of reforming or deterring criminals. Bondholders may, for example, have financed successful research into more effective reform programmes, or set up more appealing alternative lifestyles for especially hardened criminals. How would the market react to such developments? Once their effectiveness had been revealed, the value of all the bonds would rise. Instead of being priced at $5 and $4, the two crime reduction issues of the example might sell for $8 and $7. The total cost to the government of redeeming these bonds would not change: it would remain at $11 million (though redemption would most probably occur earlier). But the market would be generating new information as to the likely cost of future reductions in the crime rate. The market would now be expecting reductions of 10 units of crime to cost $2 million (from 50 to 40 units), and $3 million (from 40 to 30 units). The new research would have reduced the costs from $5 million and $6 million (respectively). So the cost of any further crime reductions would also fall, and by following market price movements policymakers could gauge approximately by how much. 

These figures are hypothetical, but they do indicate the role that markets for Social Policy Bonds could play in helping the government, and taxpayers, decide on their spending priorities. The market for the bonds is elegantly efficient in conveying information about the cost of achieving objectives and, crucially for policymakers, how this cost varies with time and circumstances. I discuss this in chapter 5 of my book.

Creeping corruption afflicts charities too

I've blogged before about my two opinions about organisations, which I deem axiomatic:

• Every organisation, be it a church, trade union, university, government or whatever, will always seek to overplay its hand.


• Every organisation will, sooner or later, forget its founding ideals and its stated objectives, and devote its energies to self-perpetuation.

Sadly, but not unexpectedly, the list in the first axiom can be taken to include charities, which appear to be just as subject to creeping corruption as all the others. There's little point in trying to find why this happens, but there is a great deal to be gained, in my opinion, by remedying the problem.

Social Policy Bonds would lead to the creation of a new sort of organisation: ones whose composition and structure will adapt to changing circumstances. The bonds would encourage the achievement of social goals that will take longer to achieve than the current, relatively short, time horizons of people or bodies in the current system. Under a Social Policy Bond regime, the members of the coalition of bondholders targeting, say, better health, would gain by buying bonds, doing what they can to improve the nation's health, then selling their bonds at an increased value. They need not stay invested in the bonds for the lifetime of that bond. At every point in time between the flotation of the bond and its redemption, the bondholders would form the body that can advance goal-achievement most efficiently. Bondholders need not be directly involved in achieving the goal; they might be investment companies, whose role will be to allocate funds according to what they think will be the most efficient people or projects that will help bring about the next step toward achievement of the targeted goal, simultaneously raising the value of their bonds. The identity of any and all bondholders would change over time, if that turns out to be the best way of achieving our objective quickly. Blockchain technology could facilitate any shifts in the membership of the coalition of bondholders.

The important point is that every activity of every bondholder would be devoted to achieving our goal. Their self-interest would be exactly congruent with those of society - in stark contrast to what happens now under even the best of our current systems of government.

Listening to the 99.9 percent

Jeffrey Lewis writes about Our Nuclear Future: 

President Trump, for example, would have between two and four minutes to decide that computerized reports of [a nuclear] attack are not a false alarm and to give the order to retaliate. Our Nuclear Future, Jeffrey Lewis, 'The American Scholar', Summer 2017

The possibility of nuclear catastrophe is not confined to the Russia - US theatre:

If the 30 minutes that it would take for an intercontinental ballistic missile to fly from Russia to the United States imposes crushing time pressures, consider that flight times in South Asia will be five to 10 minutes, depending on the missile and the target. India and Pakistan are re-creating a Cold War deterrence framework under much more demanding conditions.

That's scary enough, and then there's North Korea.... What can be done to reduce the chance of catastrophic nuclear conflict? Mr Lewis writes about the Global Zero initiative, but that appears to be a failing attempt to eliminate all nuclear weapons. So, despite its fading somewhat from public consciousness, the nuclear nightmare hasn't gone away. In many ways it's getting worse. As Mr Lewis writes, the very narrow window available for decision-making 'requires an enormously complex computerized system to detect missile launches, convey that information to the president, and then transmit and execute his order. Every minute that is lost to these processes reduces the time in which the president must decide. As a result,
the pressure to automate much of the system is strong.' And with automation comes the possibility of malware or defective hardware or software.

The problem is magnified, in my view, by the mismatch between the enormous costs of nuclear catastrophe and the relatively minuscule rewards on offer to those working to prevent it. I am certain those involved in initiatives such as Global Zero, and in disarmament, whether they be UN or non-governmental agencies or other public- and private-sector bodies are hard working and well meaning. They probably couldn't work harder even if their salaries were tripled. But the point about lack of incentives is that they are needed to attract more, and more-talented people into striving for nuclear peace. Our current political systems have no way of funnelling sufficient funds into a goal, such as nuclear peace, that is inherently long term, and that has no powerful interest group to lobby in its favour, despite the enormous potential benefit to the 99.9 percent of humanity that would like to see it happen.

The Social Policy Bond principle could help, in the form of Nuclear Peace Bonds. We don't know how to achieve nuclear peace; we don't know who'll be best at achieving it, but we do know that, if we're going to achieve it, we need to offer higher rewards, so as to encourage a diverse, adaptive range of peace building initiatives. Some of these initiatives will be failures or inefficient; others will need research and refining before they can be implemented effectively. This points to the need for a long-term, guaranteed reward for success, as well as the need to make the bonds tradeable, so as not to discourage people from taking only partial steps toward our goal. It seems ridiculous to me, that the rewards to people who gamble with other people's money, keep their winnings and get taxpayers to pay for their losses, are in the billions of pounds, while the collective rewards for those working in an unglamorous but far more socially beneficial field - like nuclear peace - are much more modest and entirely unrelated to effectiveness. Nuclear Peace Bonds would fix that.

Self-entrenching atomisation

In a discussion about air travel, Steve Randy Waldman makes an interesting point:

Aggregate outcomes are not in general or even usually interpretable as an aggregation of individual preferences. When we learn about the Prisoners’ Dilemma, we don’t interpret the fact that both players rat as evidence that, really, they both just wanted to go to jail for a long time. After all, that is their revealed preference, right? No. We understand that the arrangement that would obtain if they could cooperatively regulate one another’s behavior is in fact the outcome that they would prefer. As isolated individuals, they simply have no capacity to express this preference. Source See also Prisoner's Dilemma

This explanation of the mismatch between the sum of individual preferences, and aggregate decisions makes a lot of sense, and we can see its implications beyond the air travel industry in the deficiencies of our policymaking system. (I'm not, incidentally, convinced by the rest of Mr Waldman's discussion of the air travel industry.) To my mind, it points to the need for more public engagement with policy; more discussion amongst ordinary people about the costs and benefits of policy alternatives. But policy itself is not really the issue: policy is a means to various ends, and those ends under our current system are rarely articulated, often  deliberately obscured, and often in conflict with each other and with the interests of anybody except those bodies wealthy enough to follow and influence them. We don't  "cooperatively regulate one another's behaviour" in the policymaking process, because that process is just too esoteric and time-consuming for ordinary people to follow.

The result is that our politics is ceded to powerful bodies, public- and private-sector, which benefit by ordinary people's unwillingness or inability to follow the policymaking process. A self-entrenching mechanism seems to be at work: certain policies weaken social and family bonds. I'd include amongst these policies that deal with welfare payments, subsidies to (for instance) road transport and capital-intensive agriculture, zoning laws, regulations that favour big business, and trade agreements. Importantly, the positive effects of these policies might well outweigh the negative, but the negative effects do tend to divide us. And, as atomised individuals or nuclear families, we exhibit exactly the behaviour that Mr Walden talks about: we cannot translate our wishes through a broken policymaking system, into 'an aggregation of individual preferences'. This cycle perpetuates itself.

Social Policy Bonds could help. They would refocus policy discussion onto outcomes that are meaningful to ordinary people. Goals, in short, that we could understand and debate. Under a bond regime anyone could engage with the policymaking process and, crucially, with each other, over policy goals and priorities. Even if our individual wishes were over-ruled, we'd have the satisfaction of knowing we'd been consulted. One result of this would be more buy-in: a crucial feature missing from politics these days. Another would be the solution to the problem to which Mr Waldman alludes: our individual preferences could be aggregated in a meaningful way. For example: few of us would want to see, say, a conflict anywhere in the world that led to the detonation of a nuclear device. Or, at the national level, most of us would like to see universal literacy and reductions in the level of violent crime. Currently, we have no way of articulating and debating these preferences in a systematic way: we can vote for political parties that may or may not offer different perspectives; we can join single-issue groups (which tend to deviate from their initial remit), and there are various other ad hoc activities we can undertake in support of some, but not all, of our individual goals. But they're unsystematic, often incoherent, and rarely exposed to moderating or contrary argument. And a large number of interest groups anyway replicates almost exactly the mismatch discussed above.

In contrast, a Social Policy Bond regime would enable us meaningfully to express goals that our current system finds difficult to target: goals like the avoidance of a nuclear conflict. The bonds could do this effectively because they would not presuppose how our goals shall be achieved, nor who shall achieve them. By focusing entirely on outcomes and costs, Social Policy Bonds would translate and modify our individual preferences into coherent, consensual policy goals. An invaluable by-product of a bond regime would be its reversal of the atomisation process afflicting western democracies.

How not to reduce the crime rate

Or: the importance of choosing your indicators carefully:

Source

Focus on outcomes, not party

Matt Taibbi discusses the US Democratic Party's reaction to the Bernie Sanders campaign, in a piece originally penned on 9 June 2016:

Politicians are so used to viewing the electorate as a giant thing to be manipulated that no matter what happens at the ballot, they usually can only focus on the Washington-based characters they perceive to be pulling the strings. Through this lens, the uprising among Democratic voters this year wasn’t an organic expression of mass disgust, but wholly the fault of Bernie Sanders, who within the Beltway is viewed as an oddball amateur and radical who jumped the line. Nobody saw his campaign as an honest effort to restore power to voters, because nobody in the capital even knows what that is. In the rules of palace intrigue, Sanders only made sense as a kind of self-centered huckster who made a failed play for power. Matt Taibbi, Insane Clown President, January 2017

Exactly. We need to reconnect politicians and their parties with voters. Policymaking systems have been subject to two principles which I deem axiomatic:

• Every organisation, be it a church, trade union, university, political party, large corporation or whatever, will always seek to overplay its hand. 
• Every organisation will, sooner or later, forget its founding ideals and its stated objectives, and devote its energies to self-perpetuation.

So political parties are no better, and not much worse, than any other large organisation, except in their oligopolistic power over the rest of us. I think our policymaking models are outdated. In the western democracies we choose a person or a party who promises to do something to help achieve some vague, usually unverifiable outcome at some indefinite time in the future, usually long after they can be called to account. It's a very indirect form of influence, and one that, as we see, has been corrupted, so that the link between the voter and the politician is distorted and broken by wealthy interest groups, whether they be corporations or government agencies who don't want their boat to be rocked.

I propose that instead of choosing people or parties, we choose outcomes: explicit, verifiable outcomes that are meaningful to ordinary people. Which means outcomes that are not phrased in terms of expenditure, institutional size, structure or remit, or regulatory or legislative powers. Outcomes such as improved health, or world peace, that people can understand, and that we can help choose and prioritise. I am not necessarily advocating Social Policy Bonds here: a shift toward discussing outcomes and their costs would be an improvement over our current systems. But Social Policy Bonds could focus debate more, and have the crucial advantage that they inject the market's incentives and efficiencies into all processes necessary to achieve society's goals.

Economics and politics: closing the gaps

Elisabeth Jacobs, in an essay, about Thomas Piketty's book Capital in the Twenty-First Century, says that politics is 'everywhere and nowhere' in his book. The reviewer points out that:

A focus on efficiency is unobjectionable in a world in which political and institutional stability can be taken for granted, much less so in a world in which it cannot. ... [E]conomists set themselves too easy, too useless a task if they can describe how capitalism works only when politics is unchanging. A new anthology of essays reconsiders Thomas Piketty’s “Capital”, the 'Economist', 20 May

Quite so. I've questioned the limited purview of the economics profession before. Economists find it safer to describe the world as it is, and to try (and usually fail) to predict what's going to happen to certain macro-economic variables. (There are exceptions of course.) The gap between economics and useful endeavours mirrors that between politicians and the concerns of the citizens they are supposed to represent.

In both cases, I think Social Policy Bonds could help close the gap. A bond regime would take as its starting point broad goals that are meaningful to a population: goals that are inextricably linked to our well-being and that we can understand. And because we can understand outcomes such as improved health, or nuclear peace, we can participate in assigning their priorities. (Economists could, perhaps, make a useful contribution here.) Such participation will give us more understanding of the trade-offs that inevitably need to be made. We might not see our own priorities replicated exactly in those  that society chooses to target, but we shall have been consulted, and so have far more buy-in, than under any of the current policymaking systems.

I think that lack of buy-in goes a long way in explaining why our political systems are failing, perhaps catastrophically. The gaps between policymakers and citizens; between the rich, the bureaucrats, media, academics, and ordinary people, are growing ever larger. Consultation about the outcomes we wish to see would start to close these gaps. Injecting the market's efficiencies and incentives to bring about those outcomes with optimal efficiency, would take that process a step further. The ultimate goal would be a politics that improves all our well-being, making for a more healthy, more prosperous and peaceful, more contented and cohesive society. A Social Policy Bond regime, I believe, could achieve all that.

New concepts in Mickey Mouse micro-targets

What determines the targets that our governments aim at? Something that sounds good? Something that they're already measuring? Something that they know they can easily achieve without doing anything? One thing's clear: whether the goal is big (GDP, net immigration, inflation) or small (waiting times at hospitals), the goals chosen have nothing to do with the well-being of the citizens our governments are supposed to represent.Two examples recently cited:

Fifteen years ago police in Hokkaido, in Japan’s sparsely populated north, conspired with yakuza gangsters to smuggle guns into the country so they could meet quotas for finding them. As crime dries up, Japan’s police hunt for things to do, 'the Economist, dated 20 May

Some road space rationing scheme have had perverse knock-on effects. According to some reports, people in Mexico and Beijing have started buying second vehicles with different licence plates to get around restrictions. Often the second car will be cheap and more polluting. Cutting through the smog: What to do to fight air pollution, Nic Fleming, 'New Scientist', 3 May

In our complex societies quantitative targets are probably necessary. But these targets need to be both meaningful to ordinary people and inextricably linked to, improvements in well-being. The alternative to such indicators are the sort of Mickey Mouse micro-targets, like those above, that actually conflict with societal well-being. Social Policy Bonds would clarify what exactly as a society we want to believe. Targets would be the subject of debate in which the public can participate. They'd be broad and relevant, comprehensible and explicit. Targets are too important to be left to the interests of those with an interest in keeping them narrow, short term and irrelevant (at best) to the nation's well-being.

Bribes for peace

A headline from Mailonline:

Could $175bn pay for the removal of Kim Jong-un? Huge bribes of $30m may be enough to convince North Korea's top officials to abandon their dictator, says expert by Julian Robinson, 12 May

I'm happy to see that the judicious use of financial incentives to achieve a desirable social outcome is at least being considered by one academic. The piece continues:

In his book, Stop North Korea!: A Radical New Approach to Solving the North Korea Standoff, [Professor Shepherd] Iverson imagines a scenario where the top tiers of North Korea's power elite could be bribed to ensure a peaceful transition.

I've made similar suggestions myself: under a Social Policy Bond regime targeting, say, Middle East peace, bribes could be paid to troublemakers, but only if bondholders think that to be one of the most efficient ways of ensuring peace. As I'm sure Professor Iverson would agree, while the fanatics themselves are unlikely to be moved by lavish cash handouts, their enablers and supporters are another story.

This particular type of activity is one that neatly illuminates one of the less obvious advantages of a Social Policy Bond regime: whereas governments would find it politically impossible to pay such bribes, and whereas if they were anyway to offer such payments, there would very likely be a counterproductive reaction, holders of Social Policy Bonds need suffer no such qualms. Even if the bonds were issued and backed by some government or combination of governments, bondholders are not agents of government. It's entirely up to bondholders to decide how best to achieve the targeted goal, and if bribery is the most effective way of doing so, then that's how they'll do it. Notions of justice and fairness may have to be suspended but, in the case of North Korea (and others), avoiding catastrophe should be our highest priority.

I don't know

'I don't know.' How often do we hear this from policymakers? Ask them how they plan to reduce crime, improve the environment or grow the economy and they will talk about things to do with funding allocations, institutional structures, laws, regulations and processes. They will never say 'I don't know.' We could even ask them how they intend to bring peace to the Middle East, to reduce the chances of a nuclear exchange, or to deal with climate change...and they'd still come up with superficially adequate responses. Responses, though, not answers.

Simple goals - sanitation, basic education, satisfying the nutritional needs of children etc - are those for which cause and effect are easy to identify, don't vary much over space, and don't change much over time. A benign and reasonably efficient government knows how to achieve these things. The more complex problems, though - including how to bring about benign and efficient government where it is absent - require a range of approaches to be tried, with only the most efficient being implemented. This is something policymakers don't do very well. Probably no single conventional organisation can do it well, beholden as they are to fixed world views, and the interests (monetary, ideological) of their supporters and employees.

I don't know how to bring about world peace, nor improve a nation's health, nor prevent or mitigate disasters, man-made or natural. I offer no solutions, but I do think that the Social Policy Bond concept is a way of encouraging people to find solutions: a way that channels the market's efficiencies and incentives into all the processes necessary to discover and implement the optimal mix of approaches to solving our complex problems. So, when asked how to solve the world's problems, I answer 'I don't know. However...'