09 September 2017

I don't know: Climate Stability Bonds edition

Social Policy Bonds aren't always the best way of solving a social or environmental problem. When such a problem has a clearly identified (and universally acknowledged) cause, or set of causes, then direct action, usually done, or organised, by government, is probably the most efficient way of solving it. Much of the raison d'etre of government arises from its ability to raise revenue to solve our social problems. Dealing with military threats, providing basic sanitation and transport infrastructure, and elementary education are examples of solutions that are usually best funded via, and designed, by government.

Other problems are trickier: crime, for instance, or health and education beyond universally achieved basic levels. Or, at the global level, risks of nuclear conflict. Tried and tested approaches can help, and many dedicated, hard-working people follow these, with some, limited, success. But, in my view, these problems have so many causes, and the relationships between cause and effect can change so radically over time, and differ so widely between geographic areas, that the one-size-fits-all, top down, approaches that characterise government action just don't work. Especially when our goals are inescapably long term in nature, we need diverse, adaptive approaches that government does not do well. It is for these goals, I believe, that the Social Policy Bond concept can show the most marked advantage over any other approach.

I am not sure about climate change. A correspondent, who knows a lot more about the science than I do, tells me that it is now beyond doubt that the causes of climate change (or climate breakdown, as George Monbiot puts it) are anthropogenic greenhouse gas emissions. If this is the case, then perhaps my suggested solution of Climate Stabiity Bonds aimed at addressing the depredations caused by climate change to human, animal and plant life might not be optimal. The most efficient solution might be to target greenhouse gas emissions directly, either through a carbon tax, or cap and trade, or (possibly) by a Social Policy Bond issue targeting the composition of the atmosphere.

Theoretical efficiency, though, isn't the only criterion. I said 'univerally acknowledged', in my first para, above. And I've written many times here and on the SocialGoals.com website about the importance of buy-in. For dealing with climate change, which is going to require the expenditure of massive resources, upfront, for an uncertain and inherently long-term benefit, buy-in is as elusive as it is crucial. I don't know whether there will ever be enough buy-in globally to deal adequately with greenhouse gas emissions. The Climate Stability Bond approach might yet have presentational advantages and more palatable money flows than such elegant solutions as a carbon tax. Any presentational advantages would be due to people's more readily identifying with the direct targeting for reduction of the impacts of adverse climatic events, whether they be short term - and televisual - such as hurricanes, or long term and drawn out, such as desertification. The money flows would be more palatable because, essentially, payment is for results: Climate Stability Bonds would not be redeemed until all targeted goals had been achieved. Another possible advantage of the bond approach is that it could be more ambitious than simply trying to return our atmosphere to something like its pre-industrial state. With a much greater global population than (say) 150 years ago, climatic disasters on an appalling scale would still occur, even if that very remote goal were achieved and sustained. A bond approach could, amongst other goals, target those disasters for reduction.

Set against those possible advantages is the more practical one of the atmosphere's composition being much more readily measurable than the multiple goals of a Climate Stability Bond regime.  

I''ll conclude inconclusively, by suggesting that perhaps the best approach would be to target (1) atmospheric composition and (2) the impacts of adverse climatic events, independently. Social Policy Bonds could be used to achieve either goal, or both, or neither. Much depends on how willingly people will pay upfront for the abstract-sounding goal of aiming to reduce greeenhouse gases in the atmosphere to their pre-industrial levels.

25 August 2017

Climate change: humility recommended

The Economist, in a long article about the US state of Louisiana's coastal erosion problem (much of which is caused by factors other than climate change) says:
The state’s impressive coastal policy illustrates America’s ability to adapt to a natural disaster that is already upon it. It does not seem to have nudged the state, or the Republican Party, any closer to policies that might slow the warming that is contributing to that disaster. (My emphasis) Louisiana fights the sea, and loses, the 'Economist' 26 August
I approve of the tentativeness implied by 'might', and it's good to see others implicitly question whether stopping greenhouse gas emissions is the best way of achieving whatever are our goals concerning the climate. I would argue that the fundamental question we should be asking ourselves is:
Are we more concerned about climate change, or about the impacts of climate change on human, animal and plant life?
Accepting that there is a climate change problem, and that anthropogenic greenhouse gases are responsible (to an uncertain degree) for it, we need, I think, to challenge the pervasive assumption that the most efficient way of mitigating its negative impacts is to reduce those same greenhouse gas emissions. With the word 'might', the Economist would seem to agree.

A Social Policy Bond regime would specify very clearly what we want to achieve. We would express our policy goal as a combination of physical, social, biological and financial measures that must fall within specified ranges for a sustained period. Only then would holders of Climate Stability Bonds be paid out. These bonds would, in effect, contract out the achievement of our multiple climate goals to the private sector, leaving it to respond to our ever-expanding scientific and technical knowledge. Current policy is rigid and arrogant, in that it is based entirely on current science and assumptions about future trends. It cannot adapt to new knowledge. We shall need a multitude of diverse, adaptive approaches to achieving our goals relating to climate change and its impacts - many of which will have nothing to do with greenhouse gas emissions. Climate Stability Bonds would encourage them. Current policy, as well as being politically divisive and imposing extremely high upfront costs, will not.

21 August 2017

What exactly is the problem?

'When greenbacks are on offer, American schoolchildren seem to try harder': the Economist discusses how financial incentives can change test results:
[R]esearchers conducted an experiment in secondary schools in Shanghai and America. In each place pupils were split into two groups. The first answered 25 maths questions that had appeared in PISA. The second took the same test, but before the pupils did so, they were presented with an envelope with 25 dollar bills or the equivalent in yuan. The teens were told that for every wrong answer they would be docked a dollar. [The researchers] found that the ploy boosted scores among American students relative to their compatriots without a cash incentive, but not among the Chinese ones. Effort, not ability, may explain the gap between American and Chinese pupils, 'the Economist', 19 August. PISA is the Programme for International Student Assessment
The boost was significant: 'According to some rough calculations, if extrapolated to the main PISA test, the improvement in performance would have moved America from 36th to 19th in the ranking [of 69 countries], in which Shanghai came top.' It's an interesting result, and one that should make us question what the tests are trying to measure, and whether there are wider policy implications.

Test scores will most likely continue to play a big role in determining policy and the allocation of resources in education. That would be true whether or not we issue Social Policy Bonds that aim to achieve, say, universal literacy. So, in the light of the research results summarised above, should we offer cash incentives to pupils about to take literacy tests?

I'm inclined to think not, at least when it comes to measuring basic literacy. One reason is that motivation, or the lack of it, are significant in themselves. If children of school age find a basic reading test too burdensome to pass without a financial incentive, then that in itself can  be seen as a problem that needs to be solved. The nature of that problem might be a general cultural one, or one that's specific to certain classes of pupil. We might even interpret the difference between performance with a financial incentive and without as a social problem; and aim to narrow it.

There's no definitive answer though. Much depends on how we're going to use test scores, and whether there are other indicators that can usefully be targeted at the same time. As a society, we do need to think carefully about what we are trying to achieve. 'Teaching to the test' is problematic in itself and, while I do think universal literacy and numeracy are valid goals in themselves, and not very susceptible to the effects described above, we might do better to target for reduction as well as, or instead of, illiteracy, the social problems of unemployment and poverty.

13 August 2017

Incentives and health

Dr James DiNicolantonio writes about the influence of the sugar industry on nutritional guidelines:
Throughout the years, the effects of conflicts of interest with the sugar industry were never quantified, until a recent systematic review of systematic reviews was published in 2013 in the journal PLOS Medicine. The review found that in studies with a conflict of interest with the food industry, 83.3 percent found no evidence linking sugar-sweetened beverages with weight gain/obesity. In contrast, when only studies without conflicts of interest with the food industry were analyzed, the same percentage (83.3 percent) found a positive association—that sugar-sweetened beverages have a definitive connection with weight gain and obesity. This one study provides just a small glimpse of how much science has likely been affected by these types of influences. The Salt Fix: Why the Experts Got it All Wrong and How Eating More Might Save Your Life, Dr. James DiNicolantonio, June 2017
Nothing particularly new, but we do need reminding of the importance of incentives even on hard-working, well-meaning, highly talented members of the medical profession. Of course, financial incentives can reinforce public health as well as degrade it. The Social Policy Bond concept, as applied to health, would align our national health goals with rewards to those who are efficient at achieving them. It's unfortunate that, under our current healthcare systems, there is little to encourage people to seek out those ways of improving our health at least cost. Medical specialists, expert in their field, advocate effectively for their share of limited resources, but the overall health of the nation isn't effectively targeted. Few people have any financial incentive to consider it, and especially not to question the current ways in which funding is allocated.

Health Bonds would be different. They would target our broad health goals, probably in the form of a range of indicators such as longevity and Quality Adjusted Life Years. For the bonds to be redeemed, each indicator would have to fall into a specified range, representing an improvement over the current level. Significant improvements in a nation's health will probably take decades to achieve, but Health Bonds would be tradeable, meaning that any coalition of interests who improve our health, however marginally, can profit from their doing so by virtue of the increased value of their bondholding. By backing and issuing Health Bonds, a government could effectively maximise the health gains per tax dollar spent without having to specify how such gains shall be achieved, nor who shall achieve them. Opportunities for the sort of corruption (whether deliberate or not) hinted at by Dr DiNicolantonio and the authors of the paper he cites, would disappear, to be replaced by a healthcare system in which the interests of practitioners and population would be entirely congruent.

04 August 2017

Health: too important to be left to the healthcare industry

Brian Nelson writes: 
That our payment incentives have had the unintended consequence of often harming patients has been recognized by payers (government included) and efforts are underway to change. Can we devise a system that pays for outcomes rather than paying for services regardless of effectiveness? Unless we do, I fear things will not change. A review by Brian W Nelson (orthopaedic surgeon), of Crooked: Outwitting the Back Pain Industry and Getting on the Road to Recovery, 21 May
There's an idea: pay for favourable health outcomes, rather than activities or institutions purporting to deliver those outcomes, but at least as concerned for their own well-being as those of the people they are supposed to be helping. We see this not only in orthopaedics, but in other areas of physical and mental health. There's nothing particularly startling about this: practitioners have their own families to support, and are reacting perfectly rationally to the incentives on offer. And those incentives encourage over-screening and over-treatment, and the neglect of commercially nonnviable preventive interventions. As the British Medical Association puts it, in a recent paper:
Despite the clear acknowledgement across the UK of the need to prioritise ill-health prevention and public health activities, the data analysed in this briefing show this is not matched by funding commitments. Funding for ill-health prevention and public health in the UK (pdf), British Medical Association, 2017
It's the same, or worse, in the US:
Almost 1.3 million people went to U.S. emergency rooms due to adverse drug effects in 2014, and about 124,000 people died from those events. [R]research suggests that up to half of those events were preventable. ... An estimated $200 billion per year is spent in the U.S. on the unnecessary and improper use of medication, for the drugs themselves and related medical costs.... Too many meds?, Teresa Carr, 'Consumers Reports', dated September 2017

It's time for a new approach. My suggestion is that rather than policymakers' focusing on the means by which they think good health can be achieved, they instead focus on targets for good physical and mental health, and provide incentives for people to achieve those targets. The Social Policy Bond concept, applied to health, would do this, and more: it would inject the market's incentives and efficiencies into all the processes necessary to improve a nation's health. Health Bonds would channel our scarce resources into the most efficient means of improving our health, including those currently neglected or not even considered by our current healthcare bodies, most of which have little incentive or capacity to consider broad health outcomes that fall outside their increasingly specialised remit.

Health Bonds wouldn't stipulate how our health goals shall be achieved, nor who shall achieve them. This allows a broader approach. For example: our current compartmentalised accountancy-driven policy approach would not take into consideration the adverse health impacts of subsidising advanced courses for young drivers of motorbikes or cars. But holders of Health Bonds would look at such measures, investigate their possible health impacts, and make an informed decision as to whether any improvement they might bring to the nation's health is worthwhile, compared to other possible interventions.

31 July 2017

A successful Social Impact Bond

A flurry of reporting on the success of the world's first Social Impact Bond. The goal was to reduce reoffending rates of short-sentence ex-prisoners in the English city of Peterborough by at least 7.5 percent. The result was a 9.0 percent reduction:
The conclusion of the world's first social impact bond (SIB) will return all of the investment as well as a one off payment described by Social Finance as "just over 3% interest per annum" over five years go to 17 social investors after outcomes were achieved. All of the investors were charities or charitable foundations. Peterborough social impact bond investors see 3% interest, Lee Mannion, 'Pioneers Post, 27 July
Social Impact Bonds are the non-tradeable variant of Social Policy Bonds. I've had no direct involvement in any of the 89 SIBs in 19 countries which have now been issued. I'm ambivalent about SIBs and their non-tradeability - see here and here. But I think they can be helpful where the alternatives are neglect or poor policy. They might also serve as a handy stepping-stone to the full Social Policy Bond model. For current news about SIBs there is a database and relevant links, here.

30 July 2017

Nappies, LCAs, and the environment

From an article in a recent New Scientist:
Greenhouse gas emissions from the production of various materials reveal that recycling is always greener than using virgin resources Throwaway culture: the truth about recycling, Bob Holmes, 'New Scientist', 22 July
This is problematic for two reasons. First: I think it's a mistake to define 'greener' as 'generating a lower level of greenhouse gas emissions'. Why? Because production inevitably entails numerous other environmental impacts. Second: because 'always' is anyway too definitive.

Life Cycle Analyses (LCAs) are not a simple exercise, but one conducted by the UK's Environment Agency compared the environmental impacts of disposable nappies (diapers) against home- and commercially-laundered cloth nappies. The conclusion:
For the three nappy systems studied, there was no significant difference between any of the environmental impacts – that is, overall no system clearly had a better or worse environmental performance, although the life cycle stages that are the main source for these impacts are different for each system. Life Cycle Assessment of Disposable and Reusable Nappies in the UK (pdf), Environment Agency, 2005
This LCA considered a wide array of environmental impacts: 'resource depletion; climate change; ozone depletion; human toxicity; acidification; fresh-water aquatic toxicity; terrestrial toxicity; photochemical oxidant formation (low level smog) and nutrification of fresh water (eutrophication).' Climate change, note, is just one of these impacts. This study was published 12 years ago, and its conclusion might have changed since then - which is my second point: that even if we can say now that recycling aluminium, say, is currently 'greener' than producing from the virgin resource, it might not always be so. Weighting environmental impacts, apart from being largely subjective, can never be definitive: our scientific knowledge about these impacts changes, as do the technologies of extraction and recycling and numerous other relevant variables. Our current policymaking system, as applied most spectacularly to climate change, relies on our trying to identify the source of a problem and then basing policy instruments for decades ahead on that - ossified - knowledge of scientific relationships. As well as failing to account for our rapidly expanding scientific knowledge, it necessarily ignores potentially massive changes in social, financial or biological variables.

My suggestion is that policymakers or environmental campaigners stop focusing on how things are done and instead target environmental outcomes, measured in terms of human, animal and plant health. Environmental Policy Bonds could target quite ambitious goals at the national or even global level. Just choosing their target could force policymakers and the rest of us into clarifying what we really want to achieve. For example: do we primarily want to influence the climate, or are we more concerned about the adverse effects of the climate on human, animal and plant life? The difference is subtle, but it might be that doing the former is not the most efficient, nor even a feasible, way of mitigating the latter.

Clarification of goals is one crucial advantage of the Environmental Policy Bond concept. Another is that the bonds, being tradeable, could target ambitious, long-term goals that will probably require the lifetime of multiple democratic government administrations to achieve. A bond regime would not dictate how our goals shall be achieved, nor who shall achieve them. At any one time the bonds will be held by that coalition of interests who are - or who think they are - the people who will be most efficient at achieving the next step on way to the bonds' redemption.

In all, then, the Social Policy Bond concept, as applied to the environment, would motivate bondholders to explore and implement diverse, adaptive initiatives that will efficiently achieve our environmental goals. This is something that our current policymaking system, based as it is on the use of fossilised science and heavily influenced by vested interests, simply cannot do.

21 July 2017

Social Policy Bonds and free riders

Let’s say that the bonds have been floated, and that a high proportion of them have been sold to people or bodies have no intention of doing anything to achieve our targeted goal. These are would-be free riders, hoping to benefit from other bondholders’ efforts to achieve the goal, or a drift toward the goal that happens regardless of anybody’s efforts. (An example of this would be a holder of Climate Stability Bonds benefiting from new scientific evidence showing that the climate isn’t changing as quickly as the market thought it was when the bonds were issued.)

If too many Social Policy Bonds were held by would-be free riders who had no intention of doing anything to help achieve the targeted social objective, then the value of all the bonds would fall. At that point it becomes worthwhile for active bondholders to buy those bonds that are traded, do something to achieve the goal, and see the value of their bonds rise. This would benefit any remaining free riders of course, but not as much as the new bondholders, because these new bondholders would have paid less for their bonds. Most likely, we'd see aggregation of bond holdings as it becomes worthwhile for passive bondholders to sell their bonds. The resulting small group of large bondholders would then have incentives to cooperate with each other. This would mean, amongst other things, that they would all benefit by agreeing on how the specified social problem could best be targeted. One element of the optimal strategy will be to decide who will be responsible for what activities, and how they shall be compensated. Major bondholders will certainly have incentives to share information with each other. Many of the bonds would be traded between bondholders.

If the proportion of bonds held by free riders is small, then their passivity would have little effect on the market value of the bonds, and they might benefit by hanging on to their holdings if active bondholders are successful in their efforts to move towards the goal’s achievement. Such behaviour would, to a limited degree, undermine the Social Policy Bond concept, but keep in mind that:
  • The true standard of comparison is not perfection: just something significantly better than any alternative, and

  • Our goal is to achieve social goals as efficiently and quickly as possible; not to ensure that everyone is rewarded strictly in accordance with their efforts.
There is more about Social Policy Bonds and free riding in my book, chapter 4.

20 July 2017

Targeting long-term goals

James Hansen talks about climate change:
You’re talking about a system that responds on the timescale of decades to centuries — that’s a different time constant than the political constant.” James Hansen talking to David Wallace-Wells in The Uninhabitable Earth: Annotated Edition (reference 12)
It's not only climate change for which our current politics is inadequate. Any crisis building now, but whose effects will be felt only by future generations or, even more scarily, future administrations, is going to to be neglected within our current system. Our politicians face few incentives to consider future generations, and plenty of incentives to ignore them completely. We see this in the amassing of grotesquely inflated debt levels, badly thought-out immigration policies, under-investment in critical infrastructure, and environmental behaviours including, but by no means limited to, those that affect the climate. The narrow, short-term interests of powerful interests, public- and private-sector, win out every time. As for future generations: our politicians are expert at kicking the can down the road.

Social Policy Bonds could remedy this neglect of long-term consequences. They would create a coalition of interests in favour of achieving social and environmental goals that are currently too remote to receive much attention - though plenty by dystopian fiction writers. The way the bonds work would be to reward the achievement of our long-term goals at every stage of the process.

Social Policy Bonds (unlike Social Impact Bonds) are radeable, which means that bondholders don't have to hold them until redemption to see their value rise and realise a profit.. This allows the bonds to target effectively such remote goals as climate stability, universal literacy and world peace. The bonds would begin their work as soon as they were issued: those who buy the bonds would be motivated to begin the explore measures that would immediately raise the chances that the targeted goal will be achieved quickly. For most long-term goals, a large array of diverse measures will need to be proposed, implemented on a small scale, then either terminated or implemented more widely. No government can effectively oversee such a range of projects, nor can any single, conventional organisation. In particular, terminating failed approaches in favour of more efficient ideas does not come easily to government. But under a Social Policy Bond regime there would be every incentive to focus only on those approaches that will achieve our targeted goal most efficiently. And, crucially, the optimum mix of approaches will change over time - especially over the long time period that remote goals will require for their achievement. The bonds would give rise to a new type of organisation; ones whose composition and structure would change, perhaps radically, over the lifetime of the bonds, in response to changing circumstances and improving knowledge. Again, such adaptiveness is not a characteristic of government action, but it is an essential element of any attempts to solve our long-term problems.

Social Policy Bonds would represent a radical change from today's politics. But, as long-term problems threaten to overwhelm humanity (click on the source excerpted at the top of this post, for one example) it's clear that business as usual is not working. Targeting long-term goals and injecting market incentives into their achievement would seem to be our best hope. Social Policy Bonds, uniquely amongst policy instruments, would do both.

I've written about why I believe tradeability is important here, and why I am ambivalent about Social Impact Bonds here.

14 July 2017

Climate change: means and ends

A leader in the current 'Economist,' referring to public- and private-sector commitments to run their operations on 100 percent renewable energy is titled: Better to target zero emissions than 100% renewable energy:
Most important, a 100% renewables target confuses means with ends. The priority for the planet is to stop net emissions of greenhouse gases, especially carbon dioxide. Putting too much emphasis on wind, solar and other renewables may block off better carbon-reduction paths. 'The Economist', dated 15 July
No. The real ends of policy have to do with the problems caused by climate change. Whether, and by how much, greenhouse gas (ghg) emissions contribute to those problems is still an open question. And, whatever the answer to that question, still more important to policymakers is whether reducing ghg emissions is the best way of dealing with climate change. For that, we need to go beyond the cant about renewables and beyond the Economist's - and almost everyone else's - focus on greenhouse gases to ask whether we are more concerned about climate change, or about the impacts of climate change on human, animal and plant life?

A Social Policy Bond regime would not assume that reducing ghgs is the best way of achieving our goals. Instead it would specify very clearly what our goal actually is. Most likely, we would express our policy goal as a combination of physical, social, biological and financial measures that must fall within specified ranges for a sustained period. We'd then issue Climate Stability Bonds that would be redeemed only when that had occurred.

Unfortunately an entire bureaucracy has grown around ghg emissions. It seems to me that the existence and activities of this bureaucracy embody the assumption that our trying (and most probably failing, though we'd never know either way) to influence the climate is the most efficient way of dealing with problems caused by unfavourable changes in the climate. I think that assumption needs to be challenged. Clarity about what actually we want to achieve, of the sort that a Social Policy Bond approach would necessitate, is the only feasible starting point.