Social Policy Bonds haven't gone very far

This is post number 1361; as good a time as any to look at why Social Policy Bonds haven't gone very far in the few decades since the idea has been in the public arena. 

Similar sounding Social Impact Bonds, with which I've had no involvement, have been issued in at least 25 countries. Unlike Social Policy bonds, they are not tradeable. I'm ambivalent about them for reasons I've explained more fully here and here, but in essence they are inherently short term in nature, and do not encourage new entrants nor much in the way of diverse, adaptive approaches; the range of social and environmental outcomes they can target is inherently narrow. However, they could be a stepping stone on the way to my original concept - or they could discredit the whole notion of injecting market incentives into the achievement of goals currently the remit of government.

The main reason why I think the original Social Policy Bond concept hasn't made much progress is that it threatens existing institutions, including those currently charged with allocating funds to service suppliers, and the service suppliers themselves. Under a bond regime, the government bodies that allocate funds to favoured service suppliers would relinquish that power, though government would still articulate society's wishes and raise the revenue used to redeem the bonds when targeted goals had been achieved. Existing service suppliers, would survive under a bond regime only if they were efficient, or deemed capable by bondholders of becoming so. 

Sadly, our existing institutions, by which I mean government at all levels and the bodies they fund, are failing in their duties to respond effectively to our social and environmental problems. At the national level, our politicians and senior bureaucrats appear unresponsive to the needs and wishes of ordinary people. At the global level, a concern such as the increasing probability of large-scale war is a lower priority, as measured by where human ingenuity and creativity are  most in evidence, than generating profits for the wealthiest investors or advertising dog-food. The gap between our leaders and the people they are supposed to represent grows ever larger.

Existing bodies, I realise now, aren't likely to do anything. Like every other institution, from trade unions to universities to religious organisations, their main priority is self-perpetuation. I've tried to interest philanthropists, via their journals, but I don't think that has achieved anything: perhaps philanthropists, like governments, relish their power to distribute funds to favoured organisations rather than to the achievement of social goals. My goal now is to carry on, and to keep my body of work on the bonds accessible over the internet for some years, via this site and the main Social Policy Bonds site and the papers and book chapters that are linked there. 

For more about applying the Social Policy Bond concept to peace, click here.

Status ≈ wealth, unfortunately

One takeaway, after watching a documentary on the life of Justice Clarence Thomas of the US Supreme Court is that money is becoming almost the sole criterion by which many of us measure success or fulfilment.

Robert Locke, writing about Japanese society, argues persuasively that 'what people are pursuing in the workplace is not so much money as the respect of the people around them…. [The Japanese] have understood that a large part of what money-seeking individuals really want is just to spend that money on purchasing social respect, through status display or whatever, so it is far more efficient to allocate respect directly.'

Rather than offer financial rewards we could perhaps reward people who help achieve societal goals with higher social status. An honours system could go some way toward rewarding people who forgo financial fortune for the good of society. Indeed, many countries have honours systems that are - or were - intended to do this. People also gain status merely by being admitted to exclusive societies, by working for a reputable organisation, or are pleased simply to be recognised in their role by cognoscenti. And many social reformers are quite happy to toil away without needing their efforts validated by any external body. They might be happier knowing that they are helping to improve the society in which they live but, for a very large number, their reward lies simply in knowing that they are making a contribution.

But whether for good or ill, the context within which social status is barely correlated with financial status is fading from many rich countries: social status is becoming more and more a function of high levels of wealth and income. The British honours system, for example, which used to compensate dedicated people for the financial sacrifices they made for the public good, is more and more following the trend, making awards to entertainers and sportspeople who, whatever their other troubles, are not financially impoverished. There are still fields of activity, in the academic and religious worlds, for instance, wherein social status and monetary reward do not always go hand-in-hand, but they are shrinking or indeed reward activities that most of us would see as anti-social. Re-instatement of a popular culture that confers high status on those who achieve social and environmental goals would be a difficult task in our highly mobile world. But in the meantime, facing severe and urgent social and environmental challenges, what are we to do?

One of the benefits of a Social Policy Bond regime is that it would create a means by which financial rewards are inextricably linked to social benefit. Under such a regime it would be politically easier to tax the income and profits of activities that have little (or negative) social impact. Great wealth might then be less divisive than under the current regime, where too much of it is generated by questionable or corrupt activities.

Obscurity causes obesity

Recently I did a post describing how complexity can be used to obscure the effects of a policy or the true intentions of policymakers influenced by corporate interests or other powerful groups - such as farmers. 

Food processors appear to be doing something similar. Chris van Tulleken explains the UK's Nutrient Profile Model, NPM 2004/5, which was developed as a tool to regulate food advertisements directed at children:

If you struggle to make sense of the nutrient data table on the [package of food] to guide healthy eating for your child, then the NPM 2004/5 is going to blow your mind. You can’t look up the NPM score of a food easily – you have to calculate it using the following three steps, which I write out only to illustrate their complexity. First, you award a score for the bad stuff: calories, saturated fat, sugars and sodium. These are called ‘A’ points. Second, you add up the points for the good stuff: fruit, vegetables, nuts, fibre and protein. These are called ‘C’ points. (By the way, you may need to pay for access to something like the NielsenIQ Brandbank nutritional database to gather all this information.) After you’ve calculated the A and C points, there are other rules to be factored in, like: ‘If a food or drink scores 11 or more A points then it cannot score points for protein unless it also scores 5 points for fruit, vegetables and nuts.’ Clear so far? Well, then you subtract the C points from the A points to calculate a score out of thirty. Any food that scores more than four is classified as HFSS [High in (saturated) fat, salt and sugar]. But, even if you do all that, it isn’t clear whether children should eat these HFSS foods, or in what amounts. The designation determines only whether a food can be marketed to children at particular times and in particular ways. Chris van Tulleken, Ultra-Processed People, April 2023

By such means is the relationship between ultra-processed food and health obscured; and by such means do we understand how ultra-processed foods make up 60 per cent of the calories consumed by the average UK citizen, and at least 80 percent of the calories consumed by one in five citizens. So policies intended to safeguard the health of our children get corrupted in the black box of our policymaking, regulatory or legislative bodies. The result? As Mr van Tulleken tells us, over the past thirty years, obesity has grown at a staggering rate: '[A]mong children leaving primary school rates of obesity have increased by more than 700 per cent, and rates of severe obesity by 1600 per cent.' This is despite fourteen government strategies containing 689 wide-ranging policies addressing obesity having been published in England in that period. Oh, and children in the UK (and US) are shorter too: 'This stunting goes hand in hand with obesity around the world, suggesting that it is a form of malnutrition rather than a disorder of excess.'

Policymakers and their paymasters couldn't get away with such deceptive behaviour under a Social Policy Bond regime, in which the first step is an explicit setting of verifiable goals. Such goals would be meaningful to ordinary people, which means we could all engage in the policymaking process. So, for example, government would set broad health goals, using an array of indicators, such as longevity, infant mortality, quality-adjusted life years and others, all of which would have to fall into an agreed range for a sustained period before the bonds could be redeemed. (See here; or here for a longer essay on Tradeable Health Outcome Bonds.) Regulations to control adverts targeting children would be enacted only if they could be shown to have favourable health impacts. As with all Social Policy Bonds, investors would have as their sole criterion for the activities they undertake their efficiency in achieving the targeted goal. Currently, big corporations influence policy in their favour, and obscurity and complexity allow them to get away with it. By targeting broad, transparent, agreed outcomes, Social Policy Bonds could reclaim policy to the benefit of the people on whose behalf it nominally made.

Methane and supervolcanoes

This recent headline from ScienceNews says it all:

Methane may not warm the Earth quite as much as previously thought

There is much about the environment - and society - that we just do not know. Yet our policies are formulated as if we do know. We think climate change is mostly a result of our pumping greenhouse gases into the atmosphere. That may well be the true but, even now, we find that we don't know as much as we thought about the relative contribution of each greenhouse gas. In this instance, the original estimate was 30 percent off the latest estimate. But we are making policy as if the role of each greenhouse gas in climate change is certain and fixed. 

Not only is the science about each gas's relative contribution uncertain; so too is our knowledge about other determinants of climate change. Yet we enact policy as if we know everything. It's risky; especially as not only is our knowledge of the physics of climate change incomplete, so too is our ability to forecast the future. Eruption of a supervolcano is unlikely but:

[T]his gigantic eruption sent the world into a decade-long volcanic winter and caused the climate to be cold and dry for thousands of years after that. The resulting famine is theorised to have reduced the ancient human population down to just a few thousand individuals. Source

Lesser events, as well as surprises in the physics, could invalidate some or all of our efforts to deal with climate change. Policy should account for such gaps in our knowledge, and not only in environmental matters. Society is also too complicated for a policy approach that assumes that relationships are known and fixed. So, for example, reducing crime rates or increasing literacy is not simply a question of more funding for already-existing bodies. In my view, it's more a matter of putting in place incentives that reward people for achieving our goals, whoever they are, and however they do so. The risks of unanticipated events and failed approaches should be borne by those taking on the task.

Social Policy Bonds are one way of addressing the complexity of society and the environment. They reward the achievement of desirable outcomes, rather than the supposed means of achieving them. They set up incentives to reward promising approaches and - importantly - to terminate failing approaches. They transfer the risk of failure from the bonds' issuers (usually government) to investors in the bonds. They encourage investors to keep an eye on events as they unfold, and to respond to them appropriately. So, for example, investors in bonds targeting climate change would react to the research referenced above (if they did not carry it out themselves) by refining their attempts to deal with methane emissions. Under the current regime, nobody has incentives to change the assumptions on which existing models are based.

What happens if nobody does anything?

In my book I speculated that, if a goal targeted by a Social Policy Bond issue remains remote, the bonds' backers could issue more bonds, or swell the redemption funds and, by doing so, increase the incentive for bondholders to work to achieve the goal. I now see that this was probably naive, and that there would be a perverse incentive for investors to acquire as many bonds as they could, do nothing, and watch the value of their holding rise if the backers did as I speculated. 

So I have modified the original text of the relevant paragraph in chapter 3 of the book to read:

Note that the issuing body could add to the number of bonds in circulation after floating at any time, if it wanted to boost the efforts going into achieving a particular social goal, but this could encourage people to buy the bonds, and do nothing to achieve the targeted goal so that, when more bonds were issued, the value of their holding would rise. A better approach might be to declare the initial bond issue invalid, which would act as a spur to encourage would-be passive investors to become active, or to sell to active investors. If the issuers wanted, for whatever reason, to reduce such efforts, the situation would be a little more complicated. It could buy bonds back from holders, but doing so would reduce the total funds to be spent on achieving the targeted objective, and so would lower the value of all bonds in circulation. People might therefore be unwilling to buy bonds in the first place if they thought there were a high probability of the issuing body's buying some of them back in this way. They would demand some sort of premium for taking that risk. Alternatively, the issuing body could undertake either that it would never buy Social Policy Bonds back or that, if it did, it would pay the market price ruling before it announced its purchase intentions.

The intention is to deal with the criticism presented on this page; that is, the sixth criticism (beginning 'Expectations...'). Chapter 5 of the book is also slightly modified to reflect the same concern.
 

Taking advantage of complexity

Powerful interests use complexity to hide their anti-social behaviour:

Since 2013, ProPublica has exposed how Intuit, the maker of TurboTax, and other companies have resisted efforts to make tax preparation easier and less costly, including lobbying to ban the IRS from offering free, simple tax filing and deceiving customers who should qualify for the Free File product. Source

The evidence indicates that low-income Americans are not taking full advantage of government programs for a much more banal reason: we’ve made it hard and confusing. People very simply often don’t know about aid designated for them or are burdened by the application process. When it comes to increasing enrollment in social programs, the most successful behavioral adjustments have been those that simply raised awareness and cut through red tape and hassle. The High Cost of Being Poor, Matthew Desmond, New York Review of Books, 20 April

One of the advantages of the Social Policy Bond concept is its transparency. Policymakers would have to explicit about their intentions. So, for example, if they want to shovel billions of dollars from taxpayers and consumers to a small group of wealthy landowners who have devastated the environment, and helped impoverish developing countries, they would have to say so openly, instead of, as at present, waving their arms and mumbling about 'food security', 'saving the family farm', 'looking after the countryside', and relying on people's inevitably limited attention span. Likewise, as with poverty alleviation, it's not enough to put in place a few programmes with impressive-sounding titles that might be well meaning, but access to which is difficult for those without an abundance of time and energy; which is to say: those who need them most. Lack of transparency also allows politicians and bureaucrats to avoid accountability: if there are no explicit, verifiable goals, then success or failure are a matter of spin.

Social Policy Bonds: a sonnet

 I asked ChatRPG to write a sonnet about Social Policy Bonds:

In policy circles, talk of Social Bonds
Has grown in strength and scope in recent days
A tool to tackle ills that have prolonged
By focusing on outcomes, not just ways

And in this field, one name stands apart
Ronnie Horesh, a pioneer so bright
His insights help policymakers chart
New paths to achieve the social right

The bond's concept, to put it simply, shows
That we can make a market for progress
And fund the goals that society chose
By issuing bonds that we can all invest

So here's to Horesh and his vision bold
A brighter future for us all he'll hold.

Why poverty persists in rich countries

Without even mentioning corporate welfare and subsidies to agriculture, Matthew Desmond writes about the tragedy of US poverty. Longish excerpts, because it's paywalled:

The evidence indicates that low-income Americans are not taking full advantage of government programs for a much more banal reason: we’ve made it hard and confusing. People very simply often don’t know about aid designated for them or are burdened by the application process.

 In 2020 the federal government spent more than $193 billion on homeowner subsidies, a figure that far exceeded the $53 billion allocated to housing assistance for low-income families.

I can’t tell you how many times someone has informed me that we should reduce military spending and redirect the savings to the poor. I’ve met far fewer people who have suggested we boost aid to the poor by reducing tax breaks that mostly benefit the upper class, even though we spend over twice as much on them as on the military and national defense. According to recent data compiling spending on social insurance, means-tested programs, tax benefits, and financial aid for higher education, the average household in the bottom 20 percent of the income distribution receives roughly $25,733 in government benefits a year, while the average household in the top 20 percent receives about $35,363. The High Cost of Being Poor, Matthew Desmond, New York Review of Books dated 20 April

If we allow that programmes ostensibly designed to relieve poverty are actually intended to relieve poverty, then these facts point to a tragic failure of policy. Perhaps the system isn't wholly cynical, in that policymakers find the programmes just as confusing as do the intended beneficiaries. Assuming good intentions, then, my solution would be to:

1. recognise that poverty is a complex problem, requiring long-term, diverse, adaptive approaches;
   
2. decide exactly the goals we want to achieve, in quantitative, robust, verifiable terms;
3. reward people for achieving those goals.

Sadly, policymakers do not work like this. When it comes to poverty alleviation, as with climate change, water pollution, housing and the rest, if there are stated goals at all, they will be vague and incoherent sound bites. There will be changes in the funding of established bodies, or the creation of new bodies and, perhaps, some Mickey Mouse micro-targets set in the sure knowledge that nobody will actually check on whether their achievement or otherwise has done anything useful. 

Politicians can escape blame for absurd, destructive and corrupt programmes such as their supposed policy alleviation efforts because they are not expected to express society's goals in terms of outcomes. One of the advantages of a Social Policy Bond regime is that policymakers would have to express policy goals in explicit, transparent and verifiable terms. These would be expressed in ways that ordinary people can understand. Few would argue for programmes that favour wealthy corporations, farmers and individuals, but those are the policies in place now. Making poverty goals transparent would go a long way to solving the poverty problem. A bond regime would generate further gains by providing incentives for those working to relieve poverty to do so cost-effectively.

It's not uncommon to hear the wealthier beneficiaries of government largesse bemoaning the cost of supporting single mothers, the homeless and other unfortunate and genuinely struggling individuals. The politicians deceive the people, and the rich welfare beneficiaries deceive themselves.

Tax breaks are nice if you can get them. In 2020 the mortgage interest deduction allowed more than 13 million Americans to keep $24.7 billion. Homeowners with annual family incomes below $20,000 enjoyed $4 million in savings, and those with annual incomes above $200,000 enjoyed $15.5 billion. Also in 2020, more than 11 million taxpayers deducted interest on their student loans, saving low-income borrowers $12 million and those with incomes between $100,000 and $200,000 $432 million. In all, the top 20 percent of income earners receives six times what the bottom 20 percent receives in tax breaks. We have chosen to prioritize the subsidization of affluence over the alleviation of poverty. And then we have the gall—the shamelessness, really—to fabricate stories about poor people’s dependence on government aid and shoot down proposals to reduce poverty because they would cost too much.

--

I have finished adding several pages to SocialGoals.com under the Criticism header

More on free riding

My previous posts have discussed points raised at an OECD meeting in Paris when the environmental application of the Social Policy Bond concept was discussed. I am collating these criticisms and my responses, and uploading them onto a Criticism page on my website. I will now go into more detail about free riding, often cited as a reason not to consider the concept further.

Free riding

Much of the criticism of Social Policy Bonds has centred on the free rider problem. I should make clear at the outset is that Social Policy Bonds are intended to be the best possible way of achieving many of our complex, long-term social and environmental goals for which there are currently no successful, efficient policies, and many of which are thought to be intractable. This is the over-arching aim of the bonds: the aim of the bonds is not to eliminate the possibility of free riding. 

The goals that Social Policy Bonds are best suited for are those that are:

•    long term;
•    broad;
•    require diverse, adaptive approaches and, quite likely, a mix of these; and
•    resistant to any current or envisaged efforts by policymakers to their achievement.

If Social Policy Bonds are to be of value, then, they need not be elegant in an economic sense. They just need to better than alternative approaches, including the approach of not doing anything. Which is all to say that, even if free riding does occur under a bond regime, it need not be so significant as to detract from the bonds' ability to tackle some of our most challenging social and environmental problems.

The first thing is to note that free riders gain only if the value of their bonds rises; that is, if the goal is seen to be more likely to be reached, which usually means that something is being done to achieve the goal. The real problem arises if so many bonds are owned by passive investors (would-be free riders) that nobody does anything or, rather, that the goal remains unachieved as a result of their passivity. 

The more bonds in the hands of would-be free riders, the less likely that the targeted goal will be achieved quickly. The market value of all the bonds will therefore fall. As it falls, so the potential rewards from holding the bonds rises, so that more people would become interested in buying the bonds. If the price keeps falling, the would-be free riders will be tempted to sell their bonds to these buyers. Some might be tempted to become active investors themselves, rather than sell to such investors. The bonds are worth most to those prepared to do something to help advance the targeted goal. Nevertheless, there will certainly be some who will hang on to their bonds, and it is likely that, yes, there will be an irreducible number of bonds in the hands of free riders, who will profit as the targeted goal comes closer to achievement. The question is whether these holdings would be sufficiently large to make Social Policy Bonds less efficient than alternative policies. 

Because large quantities of the bonds held by a single passive investor would be big enough to devalue the bonds, it's unlikely that a passive holder will want large quantities of the bonds. More likely the bonds held by would-be free riders will be distributed amongst a large number of people with small holdings. It's possible that would-be active investors, if the bonds are falling in value, eyeing the total number of these bonds, would make offers greater than the current value to these small, passive, investors, and that the result would be aggregation of holdings into a holding sufficiently large, and bought at sufficiently low cost, to encourage the holder to be an active investor.

The goal is not to minimise free-riding, or to create policies that generate no free-riding. Indeed, most policies can be interpreted as rewarding free riders, in the sense of people taking advantage of the efforts others have made to supply some collective good without actually contributing themselves. Society accepts even spectacularly egregious cases of free riding, such as the rewards reaped by property owners when transport infrastructure is extended to their locale.

But to repeat, the over-arching goal of Social Policy Bonds is to set in place the most efficient practical way of solving humanity's social and environmental problems. Free riding is problematic only if it so blights the Social Policy Bond concept that it becomes less efficient or less effective that any other policy, including the policy of doing nothing. 

Writing in this year, 2023, when global tensions are high and there is a non-negligble chance of nuclear conflict, I feel certain that most people would accept the price of a few passive investors benefiting from holding the bonds in exchange for a new approach to reducing the probability of say, nuclear conflict; especially given the obvious and frightening inadequacy of current efforts.

One other point

In chapter 5 of my book I discuss issues of bonds that are failing to achieve their intended purpose. That could be because of insufficient funding. If progress is obviously too slow, the funders (government, usually) could simply increase the size of the redemption funds. But that would have the effect of immediately raising the value of all existing bonds, which would lead to 'moral hazard' in that free riding would be rewarded: people could hold a large number bonds hoping that by doing nothing to achieve the issuers could increase the redemption value of each bond, or issue more bonds, which would have the effect of raising the value of these passive investors' holdings. My thinking now is that the issuers might be better invalidating existing bond issues, perhaps stating in advance that if no significant progress is made toward goal achievement within, say, ten years, then that bond issue will be invalidated. They could then issue new bonds targeting the same goal, with greater funding.

Futures, options and perverse incentives

I continue to look at concerns raised by delegates at an OECD meeting that discussed a paper I presented on the environmental application of Social Policy Bonds. My previous post was the first; this is the second. 

Perverse incentives could arise from trading of Environmental Policy Bond derivatives. For example, one could make financial killing by selling bonds short (or by purchasing put options) and then dumping a million tons of manure in the Chesapeake Bay, or simply by not following through with promised abatement activities.

Futures and options markets in Social Policy Bonds would enable people to benefit from a falling bond price, so giving them an incentive to delay achievement of the targeted goal.

It is quite likely that there would be futures and options markets for large bond issues, and it is almost certain that the price of any particular Social Policy Bond would not always be rising monotonically from its float price to its redemption value. It would be justifiable, as well as efficient, if bondholders could hedge against consequent falls in the value of their assets. People who do not hold bonds might want to participate in markets for derivatives of bonds, some of which would rise in value as the targeted goal became more remote. This in turn means that speculators and short sellers could certainly profit from short-term bond price falls, and the question is whether these people would then take steps to impede progress towards any targeted goal.

There are two main reasons why they would probably not. The first is that, in the long term, the weight of money would be against them. Provided sufficient funds were allocated to achieving the targeted objective, there would be a net positive sum of money payable if the targeted objective were to be achieved, and a net zero sum paid as long as the goal were not achieved. All the long-term incentive would be to achieve the targeted objective. Those who, for whatever reason, would suffer from achievement of the objective could be compensated by bondholders, or bribed to change their ideas. Note also that for every buyer of a ‘put’ option there would be a seller, and that for every futures contract bought on the expectation that the bond price would fall, there would be an equivalent futures contract sold on that basis, so that the net incentive generated by derivatives would be in line with the incentive created by the underlying financial instrument, the Social Policy Bond: in the long run, this would favour achievement of the targeted objective.

The other reason that short sellers, or holders of ‘put’ options, in Social Policy Bonds might not take actions aimed at interfering with achievement of the goal is that such actions might well already be illegal or, again given the incentives that the bonds would generate, be made illegal – or have their provenance more enthusiastically investigated – once the bonds had been issued. Some miscreants might be tempted to sell bonds targeting water pollution short (or buy ‘put’ options) then dump a million tons of manure into Chesapeake Bay. But they would know that such an act is illegal – and that there will be people at the other end of their transactions who will be highly motivated to see the law enforced to its fullest extent.

Environmental Policy Bonds would not obviate the need for governmental regulators to monitor pollution levels and abatement activities of individual firms. Just like financial market need accountants, auditors and regulations to ensure Enron-like episodes remain an exception rather than the norm, Environmental Policy Bond markets will require similar oversight. The costs of this would reduce the efficiency of the bonds.

Government would need to monitor aggregate pollution levels under a bond regime, as these would be the measures targeted by the bonds. They would not need to monitor the pollution or abatement activities of individual firms. Bondholders would have incentives to monitor the activities of the largest polluters and either bring them to the attention of the authorities if they are breaking the law, or to find ways in which they would reduce their polluting activities. Bondholders would act as efficient enforcers of the government’s regulations by bringing the worst cases to the government’s attention.