31 October 2008

Powerpoint presentation

I'm preparing a powerpoint presentation about Social Policy Bonds. A draft is here, complete with speaking notes. Its intention is to introduce the bond concept to new audiences. If you have any comments or suggestions, I'd be pleased to see them.

27 October 2008

Personal grooming costs versus outcomes

It's not surprising that the US election debates and commentary centre on questions of character, judgement, image and spin. The correlation between what candidates say and what they do is almost nil. Does anybody now remember the current President's talk of 'compassionate conservatism'? So people decide for whom to vote on the basis of factors that should be extraneous: past associations, church membership, personal grooming expenses, and the rest. Politics itself has diverged: on the one hand the rhetoric is simple-minded, bite-sized and calculated in every respect. On the other, actual policymaking is arcane, obscure and incomprehensible to outsiders.

In the middle of all this are ordinary people, voters, our children, the environment, and other aspects of the commons. Our politics doesn't address really speak to such interests, and it's becoming systemically less capable of doing so.

One solution, and the one I advocate, is to express policy goals in terms of outcomes that are meaningful to ordinary people. Not simply the sound-bites intended for public consumption, as under the current system; but policies themselves. Rather than, for instance, allow our leaders to invade countries on grounds that turn out to be spurious, we should target such goals as absence of use of weapons of mass destruction, or the elimination of terrorism directly. Under a Social Policy Bond regime, these goals could then be contracted out to the market, which would have incentives to achieve and sustain them at minimum cost. Similarly, we should see assistance to particular sectors, whether they be agriculture or banking as what they are - subsidies to rich corporations. Under a bond regime, it would still be possible to divert scarce resources from the poor to the rich, but we'd do it with our eyes open. Expressing policy in terms of goals means that we should have explicitly to vote for such policies before they can be implemented.
--Sales of my book have been minimal. If you have any suggestions as to how the Social Policy Bond idea, or the broader Policy as if Outcomes Mattered concept can be promulgated I'd be grateful to have them.

    22 October 2008

    Who cares about the space race?

    What [President Eisenhower] hadn't seen was the way his enemies and vested interests within the aerospace industry and military would be able to use Sputnik as a stick to beat him with. Throughout the Cold War, fear of communism had been exploited less by governments than by self-serving minor politicians and bureaucrats like Senator Joseph McCarthy and the Machiavellian FBI director J. Edgar Hoover.... Moon Dust, Andrew Smith (page 130)
    It's all too easy for events to be used and abused to derail governments - under the current system. Whether the fear of the USSR or communism was genuine or not, it provided a pretext for the diversion of prodigious quantities of US government funding into its space programme. And whatever one thinks of the value of that programme, there's little doubt that the US people were not consulted about the reallocation of scarce resources:
    It is sometimes argued that concealing the development of high tech industry under the cover of "defense" has been a valuable contribution to society. Those who do not share that contempt for democracy might ask what decisions the population would have made if they had been informed of the real options and allowed to choose among them. Perhaps they might have preferred more social spending for health, education, decent housing, a sustainable environment for future generations...as polls regularly show. Failed States: The Abuse of Power and the Assault on Democracy, Noam Chomsky
    Space exploration became an end in itself - for the US Government. One huge advantage of Social Policy Bonds over the current system is the clarity it demands about ends and means. Another is the stability of those ends over long periods of time. Under a bond regime, if there were consensus that, say, the eradication of poverty had a higher priority than moonshots, then fears of losing the 'space race' would miss out, at least when it came to public sector funding. The continual chopping and changing of government means and ends, with their different and ever-changing priorities, is one reason why, in the richest societies that have ever existed, poverty, illiteracy, crime and homeless remain.

    19 October 2008

    Climate change and long-term planning

    .... Franco Frattini, the Italian foreign minister and former European commissioner, called for "flexibility" over the EU's ambitious plans to reduce planet-warming emissions by 20 percent by 2020, pointing out that such measures would cost 1.14 percent of his country's gross national product. Speaking in Rome, Frattini called for the proposals to be accompanied by an "impact study on the real economy," .... Germany is arguing for protection against foreign competition for sectors like steel, cement and aluminum, and Poland says it should have to shoulder less of the burden of combating global warming. Huge fight looms in EU over climate change 'International Herald Tribune', 14 October
    One of the advantages of targeting outcomes, rather than the supposed means of achieving them, is that outcomes are more stable over time. So long-term objectives, like climate stability, can be targeted. Consider the likely reaction of investors to the debate reported on above. Added to all the daunting scientific uncertainties about solutions to climate change now comes a policy uncertainty: will governments continue to give climate change the priority they gave it when the economy was in a better state? Any long-term planning becomes fraught with difficulties in such a policy environment. But long-term investment is exactly what is needed if climate change is indeed occurring.

    A Social Policy Bond regime would have many advantages over the current policymaking framework; efficiency, transparency and greater buy-in, to name some of the most important. But, from the standpoint of potential investors in bonds targeting remote objectives, another huge advantage is stability. A global consortium issuing Climate Stability Bonds would be declaring its intention to reward the achievement of climate stability regardless of what happens in other policy areas. Events, such as a banking crisis, could assume a higher priority for policymakers, but as far as would-be investors in the bonds were concerned, that would not affect their investment decisions. Policy goals are much more stable over time than the supposed or best means of achieving them and much more stable than the views or indeed the composition of governments.

    The Social Policy Bond principle enlarges the scope of policy goals that we can effectively target to embrace a range of very long-term objectives, including not only climate stability, but the eradication of world poverty and the ending of violent political conflict. Even if they take decades to achieve, bondholders would not be deterred from doing their best to help bring them about by the sort of uncertainty about policy that plagues today's decision-making environment.

    16 October 2008

    Food policy is not health policy

    Michael Pollan writes:
    Much like a see-saw, when government successfully achieves a narrow social or environmental goal, another problem asserts itself. Sadly, our level of aggregation is now so high and our interconnectedness so pervasive that we cannot target social and environmental problems in the usual way, which involves trying to tackle the supposed causes. Society is just too complicated; the relationships between cause and effect are too obscure, the time lags too long, and the number and impact of unanticipated factors so huge that only the broadest social and environmental goals should be explicitly targeted.

    And the most meaningful. Raising food production is not a meaningful objective, nor is reducing the price of food. These are bureaucratic or corporate goals, unrelated to the wellbeing of ordinary people. What would make a meaningful is the physical wellbeing of people: more difficult to quantify, granted, but not impossible. It is that goal that an enlightened government-backed Social Policy Bond regime would target, inter alia, law and order, the eradication of poverty, and basic levels of education and housing for all. Governments issuing Social Policy Bonds would focus on ends, rather than means, so that the tragic outcomes of government intervention in agriculture (for example) could be avoided and instead rewards would flow inevitably to those who help achieve social outcomes rather than, as at present, those who can best game the system.

    14 October 2008

    Incentives to avoid catastrophe

    In an earlier post and in my recent book, I talk about using Social Policy Bonds as a means of insuring against the possibility of catastrophe. As George Monbiot points out, we are no more capable of avoiding an environmental calamity than we were the financial calamity that we seem now to have narrowly avoided, or perhaps merely postponed. There have been dire warnings about both sorts of disaster, but all our incentives encourage us to ignore them, or hope that any serious problems can be kicked forward to be faced by future generations. It's in our nature to react rationally to incentives, and rather than bemoan our short-termism and our unwillingness to anticipate worst-case scenarios, we could rejig the incentives we face so as to encourage maintenance of the positive features of the status quo.

    Under a Social Policy Bond regime, these need not be specified precisely - which would be a difficult task. We need only target the broad stability of the major determinants of our wellbeing. This is one huge advantage of targeting outcomes, rather than the alleged means of achieving them. It is their impacts on natural persons (and the animal and plant world) that we target rather than each of their myriad causes. So, for instance, rather than try to cut back on greenhouse gas emissions, with all the bureaucratic nonsense that that entails, we target climate stability. Rather than specify how a banking system should operate, we target the physical and financial health of ordinary people.

    Current policymaking is obsessively short term. But a Social Policy Bond regime would reward people for making progress toward long-term goals, in a way that the current system does not. And broad, long-term goals, such as stability of climate or our financial system, don't vary very much, and enjoy a wider consensus than the day-to-day management type objectives that define our current politics and obscure the longer-term trends and threats. Of course there are people who care about our long-term prospects, but the incentive systems in place ensure that their voices are rarely heard, and still less commonly heeded.

    If Social Policy Bonds are issued with long-term stability as a goal, investors in the bonds benefit by ensuring that no disaster occurs during the time they hold the bonds. That need not be very long - the value of the bonds would probably rise as investors did what they could to avoid disaster. They could then sell their bonds, benefiting from the rise in their market value. It sounds quite mercenary; and it probably is. But then, society at large seems to be engaged in a form of mass suicide because of the systemic incentives that encourage, for instance, the destruction of environment. Countervailing incentives are desperately needed.

    12 October 2008

    Locking us into monoculture; as in agriculture so in banking

    As in agriculture, so in banking. Government wades in to rescue something abstract: a sector, a system. In doing so it amplifies the trend towards aggregation and monoculture. More, it locks us into that oligopolistic monoculture, and makes us still more vulnerable to the highly improbable - the 'black swans' of Nassim Taleb. In time, government finds it almost impossible to withdraw from the sector, which now has its highly paid teams of lobbyists whose sole function is to keep the subsidies or subsidy equivalents going.

    If government had a clearer idea about what should be its proper focus, this disastrous sequence of events would never get started. Government is not an investment company or a racing syndicate, whose goal is to pick winners, or maximise returns on taxpayer funds. Its role is not to target on abstract economic variables, financial indicators nor to rescue corporations nor even entire sectors. Government should instead be looking after the basic interests of ordinary people and all its activities should be subordinate to that over-arching goal. Or at least, that should be the starting point. Transferring billions of dollars from the poor to the rich is not only socially inequitable; it's bad for all of us, from the risk management point of view. We'll end up in banking, as in agriculture, with a highly specialised, highly concentrated finance industry, overly dependent on government favours, and we'll find it very difficult to get back to a sector whose size, structure and outputs are decided by the undistorted market, which is to say: ordinary people.

    10 October 2008

    The experts aren't in control

    There are worrying parallels between the world's financial situation and the global environment. Both are complex systems that are deregulated in the sense that people can do what they want to them with few real controls, and everyone has to live with the consequences because (1) there are so many of us and (2) their failure affects everyone. Traditional management systems that took centuries to evolve and were based on trust, loyalty, and morality have all gone out of the window. The current sentiment is to do what you can for yourself, try to stay within the law, and externalise the negative impacts. That mentality has always been around, but in the past the damage it could do was more limited.

    03 October 2008

    What is government for?

    The current turmoil in the financial markets and the reaction of our ruling politicians to it reveal something about the way we make policy. Simply: it’s haphazard. There’s little sense of where we should be going. The United States Government didn’t set out to bail out reckless lenders, but that is what it is going to do. Its rescue package is another, and probably the most disastrous, in the long line of perverse subsidies that have done so much to waste scarce resources, divert taxpayer and consumer funds from the poor to the rich, and devastate the social and physical environment. From agriculture to fisheries, road transport to energy, these perverse subsidies invariably favour the large and global at the expense of the small and local; and corporations and abstract economic variables at the expense of ordinary people.

    How does it come about that government ends up subsidising the forces that have done so much to make live miserable for the average citizen? Its interventions start out as well intended, and even apparently necessary. Take agriculture: after the Second World War, food availability was critical and governments – disastrously - identified that with local food production. So government intervened: imposing trade barriers, price controls, and giving open-ended guarantees to farmers. That logic led to structural surpluses to be dumped onto the third world, undermining developing countries' own food production. It also bid up the price of farmland at home, intensifying agriculture at great cost to the environment and animal welfare, and making it difficult for ordinary people to enter farming, unless they were lucky enough to inherit land.

    Worse, the bidding up of asset values made it very difficult for government to contemplate withdrawing its support. Like a drug habit, subsidies were easy to start, difficult to end. And of course, the subsidies created a whole new set of lobbyists whose entire raison d'etre is to oppose their withdrawal.It's a similar story with the other sectors. Government begins its intervention for well-intentioned but short-term reasons. The sector becomes dependent on government for its survival, and ends up, in effect, a nationalised industry. When the sector is small, the financial burden is perhaps bearable, though its subsidies still represent a diversion of scarce resources from things that are valuable - education, health care etc - into things that are worse than useless: massively overcapitalized farming and fishing, and grotesque overinvestment in road transport – all of which, note, entrench an absolute dependence on fossil fuels.

    But the latest perverse subsidy - to the financial sector - is bigger than all of these. How it will play out is difficult to foresee. But it seems that institutions that were 'too big to fail' are to be replaced by even bigger institutions. And if the history of previous perverse subsidies is anything to go by, the US financial sector will become another ward of state for a long, long time.

    The root cause of this tragic misallocation of resources is the lack of clarity at the highest levels about what government is actually for. It's not there to prop up ailing sectors. It's not there to save particular corporations. And it's not there to bolster asset values or abstract economic variables like the rate of growth or GDP per capita. Government's purpose is to supply public goods and services, and beyond that to provide a basic minimum level of health, education and welfare for all. Once it starts trying to work out how to achieve these things it goes awry. Government is a centralized, top-down decision-making body. It does not and cannot do adaptation or diversity - and it is precisely adaptation and diversity that a vibrant, prosperous market economy needs. With its massive intervention and bailout of the finance sector the US will throttle its creativity, institutionalize the corrupt incentives that led to the crisis in the first place, and deny disadvantaged Americans the help they need.

    What the US Government should do is to work on the basis that:

  • Our financial and economic systems are means not ends.

  • The ends, for government, are law and order, minimal standards of good health for all, basic health and education, a decent social and physical environment, and the provision of a tightly woven safety net for everyone.

  • The health or otherwise of any particular sector are of interest to the government only insofar as they affect the ends.

    Instead of spending taxpayer funds on avoiding a catastrophe it should have clearly and unambiguously channelled society’s scarce resources into avoiding the consequences of that catastrophe on those who most need help. Government targets should be inextricably linked to the well-being of ordinary people – as distinct from government agencies, economists or corporations. Its failure to realize this wouldn’t matter if government were small, and diversity and adaptation could flourish outside its restricted confines. But of course government isn’t small at all.

    The US Government cannot now back away from supporting the finance sector any more than western governments can suddenly withdraw support from its other wards of state. But it can put a definite time limit on such support. More generally, governments must clarify what their goals are. They have a crucial role to play in limiting the impacts of any sort of catastrophe on ordinary people – but not to foresee and try to prevent the catastrophe itself. There must be no expectation that government will bail out any sector for any reason. Our governments should do something they should have done a long time ago: realign their policy to serve ordinary citizens. All their policies and interventions should be subordinated to the provision of public goods and services, the maintenance of a decent social and physical environment, and help to those who most need it. Sadly, the bailout of the finance sector, like the persisting perverse subsidies in other policy areas, looks like taking our governments further away from those guiding principles.
  • ■ George Monbiot writes about US subsidies to big business here.

    02 October 2008

    Complexity: a reason to target outcomes

    Writing about the current financial turmoil, James G Rickards says:
    But beyond chaos lies complexity that truly is unpredictable and cannot be modeled with even the most powerful computers. Capital markets are an example of such complex dynamic systems. A Mountain, Overlooked: How Risk Models Failed Wall St. and Washington
    A more technical explanation of the same phenomenon, by Nassim Taleb appears here. Confronted with such systems, how should we make policy? I suggest: target outcomes rather than the supposed means of reaching them. Our failure to do so assumes that government knows or can always identify cause and effect - a feat whose impossibility when applied to social and environmental systems is obscured by the ever-increasing quantities of data and information about them.

    The Social Policy Bond approach contracts out the responsibility for achieving targeted outcomes to the private sector. It gives investors in the bonds incentives to adopt diverse, adaptive projects and to terminate the ones that fail. It recognises our epistemological limitations by substituting adaptability and evolution for central planning and over- our under- regulation.