27 September 2016

Policymaking is incomprehensible to outsiders

Lee Drutman writes:
The organizations that are most likely to be the winners in the modern policymaking process are those that:
•  are able to lobby on multiple issues over multiple years;
•  can pay the increasingly high price of entry necessary for effective participation; and
•  gain from policy complexity, both because it gives them more opportunities to insert narrow provisions with limited public scrutiny and because they are more capable of supplying expertise to overworked staffers.
More and more, the only organizations that are capable of marshaling the resources to do all these effectively are business organizations,—both individual companies and the associations that represent them. The business of America is lobbying, Lee Drutman, 2016
I've long railed against the increased complexity of policymaking in western countries. It is now too complicated for ordinary people to follow. So, on the one hand we have government and big business in a mutually enabling relationship, and on the other we have ordinary people and small enterprises. The gap is widening and so we see rising and potentially dangerous levels of alienation and cynicism.

Social Policy Bonds could narrow that gap. Ordinary people understand broad national or global goals, such as better health, a cleaner environment, or world peace. Governments could target these goals by issuing Social Policy Bonds. The current system is arcane, long-winded and incomprehensible to outsiders - presumably by accident rather than design. It's focussed on process and decisions about funding and organizational composition and structure. It rewards activity, rather than outcomes.

Achieving goals such as better health or world peace would in most cases mean that governments relinquish control over those organizations that are currently charged with achieving these goals. Governments, naturally, are not keen to do so willingly, so perhaps the first issuers of Social Policy Bonds will be philanthropists, non-governmental organizations or members of the public: or some coalition of all three, who would put up the funds necessary to redeem the bonds. I discuss the transition to a Social Policy Bond regime here and in chapter 4 of my book.

24 September 2016

Polluter Pays Principle: Social Policy Bonds as a meta-system

The Polluter Pays Principle (PPP) says simply that those who pollute the environment must pay for the damage they have caused. The idea originated in the 1970s when members of OECD countries sought a means by which pollution control costs would be financed by the polluters rather than the public in general. Its principal defect is that it does not guarantee efficiency of pollution control and environmental protection.

The PPP assigns environmental rights to those who benefit from environmental improvement, so polluters pay. The Beneficiary Pays Principle (BPP), on the other hand, says that whoever benefits from a cleaner environment should bear the costs of pollution control. 

Especially for diffuse sources of pollution, it's not always obvious who should pay: the polluter or the beneficiary. One of the virtues of a Social Policy Bond regime is that it would leave it to holders of Environmental Policy Bonds to decide how to allocate the costs of a cleanup. They would do so not according to the the subjective and possibly divisive criterion of 'fairness', but on the basis of which principle will be more efficient at ensuring the maximum reduction in pollution per dollar spent. 
Social Policy Bonds are versatile in that respect; they also scale up. So: assume that we want to target global levels of air pollutants, according to their lethality. A global fund, backed by contributions from governments and possibly non-governmental organization, could be set up to reward bondholders once a targeted reduction in global air pollution levels has been achieved and sustained. No single approach - PPP or BPP or any other - will work best over the entire planet for a period of (say) decades. Instead, a mosaic of approaches, varying with time and space, will maximise the pollution reduction per dollar spent by our global fund. There will be some circumstances, especially when polluters can be clearly identified, where the PPP will work best. But even under very similar circumstances, politics might make that approach unacceptable.

The crucial points are that the Social Policy Bond principle:
  1. is versatile enough to encompass both the PPP and the BPP, or any combination; and
  2. maximises efficiency, expressed as maximum reduction in pollution per dollar spent.
Social Policy Bonds are, then, a meta-system. They do not dictate how goals shall be achieved, nor who shall achieve them. They do require some source of funding, but raising funds for widely agreed environmental outcomes is likely to be less contentious than the current system, whereby contributors and beneficiaries have to be identified in advance of projects that for the most part reward activity rather than success.

21 September 2016

Industry concentration discredits market forces

The 'Economist' writes about the direction in which our economies appear to be heading: briefly, the concentration of business into fewer big companies:
The share of GDP generated by America’s 100 biggest companies rose from about 33% in 1994 to 46% in 2013. The five largest banks account for 45% of banking assets, up from 25% in 2000. In the home of the entrepreneur, the number of startups is lower than it has been at any time since the 1970s. More firms are dying than being born. A giant problem, the 'Economist', 17 September
The dangers of such concentration extend beyond the 'too big to fail' paradigm that in the past few years has brought about a massive transfer of wealth from the poor and middle class to banks and wealthy investors. It's the usual scenario: government and big business on the one side, ordinary people and small enterprises on the other. I have two objections to increasing industry concentration: first, that it widens the gap between governments and the people they are supposed to represent. This results in a public disengaged from policymaking, which can lead to flawed policymaking or, just as bad, the creation of otherwise good policies that have no buy-in.

My other objection is simply that industry concentration discredits our economic systems in general and markets in particular. The 'Economist' identifies technology and globalisation as two of its causes. But, as the journal points out, some of the consolidation of business represents the triumph of the anti-market approach. Big business is adept at taking advantage of and manipulating trade rules and other important parts of the regulatory environment to stifle competition:
Regulation inevitably imposes a disproportionate burden on smaller companies because compliance has a high fixed cost. ... The complexity of the American system also serves to penalise small firms. The country’s tax code runs to more than 3.4m words. The Dodd-Frank bill was 2,319 pages long. Big organisations can afford to employ experts who can work their way through these mountains of legislation; indeed, Dodd-Frank was quickly dubbed the “Lawyers’ and Consultants’ Full-Employment act”. General Electric has 900 people working in its tax division. Why giants thrive, the 'Economist', 17 September
Society needs some guidance. Not, heaven forbid, central planning, but some sense of direction over where both market and anti-market forces are taking us. We're now on a path that is taking western countries into a world of entrenched wealth and class differences and widespread, growing alienation. It's not a healthy outlook.

Which is where Social Policy Bonds could enter the picture. A bond regime wouldn't randomly allow influential players to throw their weight around with the government (if we're lucky) coming in to deal with the adverse consequences or (if we're unlucky) being co-opted to join with big business in stifling competition and extracting funds from taxpayers. In contrast, Social Policy Bonds would reward people who achieve universally wished for social and environmental outcomes. They would do so in ways that inject the market's incentives and efficiencies into the achievement of social goals. The skills and energies of, for instance, those 900 tax experts working for General Electric, would be channelled into socially useful projects. Incentives matter and we need to give big business and its pals in government incentives to work for all citizens, and not just for their own narrow short-term interests. 

15 September 2016

New world disorder

Walter Russel Mead writes about the world we actually live in:
The problem isn’t that the goals of the liberal internationalists are bad goals. They are excellent goals: no war, the spread of democracy and human rights, limits on weapons of mass destruction, strong institutions. The world they dream of is a much better world than the one we have now. And the liberal internationalists are also right that the world can’t afford to go on in the old way. Given 21st century technology and the vulnerability of our large urban populations to anything that disrupts the intricate networks on which we all depend, old-fashioned great-power politics with its precarious balance of power shored up by recurring wars is a recipe for utter disaster and, maybe, the annihilation of the human race. But the difficulty that over and over sinks hopeful efforts by liberal internationalists is this: Liberal internationalist methods won’t achieve liberal internationalist goals. It’s Kim Jong-un’s World; We’re Just Living In It, Walter Russell Mead, 'The American interest', 9 September (my emphasis)
It's not an optimistic view, but it's one that I mostly share. A world in which North Korea and other small, poor countries acquire nuclear weapons is not going to be safe for the liberal values under which most of us, mainly in the west, are lucky enough to live. We can see the pessimistic scenarios as a clash of civilizations, or a clash of values, or shifts in geopolitical power, but I choose to see it as a problem of perverse incentives.

To be simplistic, but not wholly inaccurate: for most of the people in politics, more power is an end in itself. Solution of social problems can be a means to that end but, for example, whipping up nationalistic fervour at the expense of improving your citizens' well being can work just as well, with Kim Jong-un being today's exemplar par excellence. Our political systems reward the acquisition of power and on the international stage as currently set up is strongly correlated with the acquisition of nuclear weapons.

Social Policy Bonds can drastically re-orientate the operating incentives and reward the proliferation not of nuclear weapons but of what Mr Russell Mead calls liberal internationalist values. I would assign a high priority to ensuring sustained nuclear peace, but we could also strive for 'the spread of democracy and human rights'. Social Policy Bonds with sufficient backing and a long-term focus could give incentives for people to focus on achieving these goals. The current system will always be vulnerable to people like Kim Jong-un (or worse) because it does not encourage people to find ways of stopping those who are psychopathically hungry for power from ascending into influential positions. There's very little upside to seeking to depose Mr Kim. We need to change that. Nuclear Peace Bonds could help to do this. Mr Russell Mead continues his article saying that '[p]ower, not communiqu├ęs, is what makes the world go round.' But money correlates strongly with power. And while it's nice that our cats and dogs have a huge range of foods to choose from, I'd like to think that, given the choice, they'd rather see some of that human ingenuity channelled into making the world safe from nuclear apocalypse. 
The first cross-border Social Impact Bond has been issued. I have no involvement in this project, and I have written about my reservations about SIBs here and here. However, I have always hoped that the bonds would be used on a level higher than the national level, as in my post above. It might be that these first cross-border SIBs are a necessary first step toward internationally-backed tradeable Social Policy Bonds. 

08 September 2016

Health: better late than never

The Economist looks at the UK's National Health Service
A better model [than the NHS]would be to give health providers a budget based on the population they serve, and pay them according to their ability to meet targets of better public health. This would increase the incentives to use new technology that would give patients more responsibility for their own health. If private outfits can do this with a profit margin to spare, good for them. Bitter Pills, the 'Economist', dated 10 September
Quite right. The current system is staffed by dedicated, well-intentioned, hard-working people, but its goals, explicit or implicit, have little to do with raising the general health of the population. In this the NHS is like many other social services: it began at a time when (1) relationships between cause and effect were easier to identify and (2) resources and expectations were constrained, so that only the most urgent and obvious challenges could be met. Times have changed. Society is more complex, time lags more important, and expectations are higher.

Targeting broad, general, health outcomes, and injecting market incentives into doing so, would greatly improve society's well being, as the Economist (belatedly), suggests. My 2013 essay on applying the Social Policy Bond principle to health goes into more detail.

03 September 2016

Impediments to a radical transformation

My 27 August post pointed out the advantages of making Social Impact Bonds tradeable. In other words, of issuing Social Policy Bonds rather than SIBs. Why then have Social Policy Bonds, to my knowledge, not yet been issued?

One reason is that Social Policy Bonds work best on a large scale and over long time periods during which resources can most readily find their optimal deployment. I've pointed out the necessarily narrow scope of Social Impact Bonds here and here. Because SIBs cannot be traded, their ownership is restricted to a specified (small) number of service providers with an inescapably short time horizon as compared with the long time usually needed to solve important social and environmental problems. But SIBs' restricted scope acts as reassurance to policymakers in general, and the bonds' issuers in particular: it gives them control over who shall undertake the activities that help achieve the targeted goal. Yes, the bonds do reward more efficient performance, but only for specified service providers.

Social Policy Bonds, in contrast, work best when service providers are subject to creative destruction: the impetus that rewards successful firms and winnows out failures. It's a discipline rarely seen in the provision of social services which, being very often government agencies, are immune from penalty for poor performance (and often, if too successful, will face a reduction in funding, or even dissolution). The time period required for the solution of most major social problems will necessarily be long; longer in most cases than the planning horizon of existing service providers and probably, in the case of very remote goals (world peace, for instance) longer than most people's life expectancy. The creative destruction that will be a necessary byproduct of efforts to solve these large-scale problems discourages existing service providers, be they government or non-governmental organisations of any type, from advocating for, or themselves issuing Social Policy Bonds. Existing bodies, in this view, are impeding the achievement of some of humanity's most urgent goals, not so much through any active lobbying on their part, but because of an understandable wish not to jeopardise their survival.

It is the interests of existing organisations, public- and private-sector, and their wish either to control who shall achieve social goals or to survive that, I think, are impediments to the radical transformation of humanity's prospects to which Social Policy Bonds could give rise.

30 August 2016

Social Policy Bonds as a meta-system

I haven't read The Moral Economy: Why good incentives are no substitute for good citizens, by Samuel Bowles, but I have read reviews. Mr Bowles points out that, in some circumstances, monetary incentives alone cannot make people behave as we should wish and can even encourage perverse behaviour. This echoes the work of Professor Bruno Frey who found that monetary incentives can undermine our willingness to do the right things for ethical and moral reasons. People perform valuable social or environmental services not only for monetary gain, but also because they enjoy doing them for their own sake, because they believe them to be the morally right things to do, or because they believe that their actions will advance some cause to which they are committed. These ‘intrinsic’ motives are qualitatively different from external, monetary incentives, and offering monetary rewards might ‘crowd out’ or undermine these less mercenary and more civic-minded motivations. Crowding out internal motivation can occur, writes Prof Frey, because, monetary incentives can undermine people’s feelings of self-determination and self-esteem. Also, when external incentives are supplied, the ‘person acting on the basis of his or her intrinsic motivation is deprived of the chance to exhibit this intrinsic motivation to other persons.’

Not mentioned by Frey, but also plausible is that financial incentives can undermine the cognitive outlook that sees socially and environmentally beneficial services as worthwhile in their own right, rather than as a cost for which compensation and payments must be paid by taxpayers.

What do these findings mean for Social Policy Bonds, which at first sight seem to be entirely dependent on monetary incentives that will encourage achievement of socially desirable goals? First, it's important to note that, as Frey points out, the crowding-out effects are not always significant. In markets, which are based on relationships amongst essentially self-interested strangers, financial incentives as exhibited through the price effect do work as classical economics predicts. That is, they work to increase supply. And when (as they would be under a Social Policy Bond regime) external rewards are seen as correlated with civic duty rather than an attempt to ‘buy’ one’s civic performance, they may well support, rather than undermine, moral and other intrinsic motivations. This would be especially true if, partly because of the role that a bond regime could play in raising taxes on less socially valuable forms of wealth accumulation.

Second: Social Policy Bonds are not merely a system by which monetary incentives are funneled into the most efficient providers of public goods and services, but a 'meta-system' that motivates bondholders to find the best ways of encouraging socially beneficial behaviour - whether these be monetary or not. A bond regime could give bondholders incentives to explore further the insights of Mr Bowles and Prof Frey, looking in detail at the relationships between financial incentives and civic performance. They could use this knowledge to minimise the costs of achieving targeted objectives by, for example, finding out when monetary incentives are least likely to supplant the intrinsic motivations of people who help achieve objectives, and concentrating their use in those circumstances.

Social Policy Bonds, then, are not a relatively crude financial instrument that rewards payment for performance in a narrow sense (that would be Social Impact Bonds), but rather a way of rewarding people for encouraging socially beneficial behaviour, however they do so.

27 August 2016

Make them tradeable

Quite a bit going on with Social Impact Bonds, as is apparent from their Wikipedia page and the almost daily Social Impact Bond newsletter; one recent issue highlighting Japan's interest in the concept. I do have reservations about SIBs, which I have written about here and here, though they do seem to have been inspired by my early work on Social Policy Bonds. One weakness, in my view, is that because they are not tradeable, SIBs are more subject to gaming and manipulation than Social Policy Bonds. This could become a bigger problem if the SIB concept becomes so widely adopted that they avoid public scrutiny. There is a long and sorry history of (presumably) well-intentioned measures, ostensibly taken to boost efficiency in the public sector, ending up as subsidies to the already wealthy and powerful. See, for instance, this piece about the UK's Private Finance Initiative. This is corporate welfare wearing a thin disguise.

So, given my doubts about SIBs, do I have anything positive to say about them? Yes:

First, is that they aim to reward better performance in the provision of social services. True, their lack of tradeability drastically narrows the range of such services and severely restricts their applicability over space and, especially, time. Still, they do give incentives to service providers to do a better job, given such limitations: something that is more revolutionary than it should be, but nevertheless a definite step forward.

Second, whatever their weaknesses, SIBs might be an improvement in policy areas that are particularly poorly served by existing interventions. Such unglamorous policy areas as, for instance, provision of services to the mentally unwell or to newly-released prisoners to help prevent them from recidivism.

And third, of course, SIBs might serve as a helpful or necessary transitional step toward Social Policy Bonds. SIBs allow the bonds' issuers, whether public- or private-sector a greater degree of control than Social Policy Bonds over who shall go about achieving the bonds' objectives and (less directly) how they shall do so. Government and other backers of bonds are, understandably, reluctant to relinquish their control over these levers of power. But Social Policy Bonds could be introduced gradually, and government agencies - if they are truly efficient - need not fear their introduction. Exposure to competition from others motivated to achieve society's goals, as targeted by a Social Policy Bond regime, would stimulate the exploration and implementation of diverse, adaptive solutions to national and even global problems. If it takes a decade or two's experimentation with SIBs to get there, it's a worthwhile journey. My hope is that SIBs' weaknesses and the greater scope they give for manipulation do not falsely discredit the Social Policy Bond idea in the eyes of the public.  

For more about a transition to a Social Policy Bond regime, see chapter 3 of my book.

22 August 2016

Alternative data and metrics for a bond regime

The Economist writes about 'alternative data':
The growth of small, low-cost satellites and machine learning means companies can quickly and cheaply parse millions of satellite images a day. A common trick is to analyse photos of car parks outside big-box retailers such as Walmart to get a sense of daily revenues. A Chicago-based data firm, RS Metrics, sells estimates on the productivity of factories by tracking the number of lorries parked outside. The watchers, the 'Economist', 20 August
Mindful of Campbell's Law, I've always thought that each Social Policy Bond issue should target a set of metrics, each of which has to fall within a specified range before the bonds can be redeemed. Also, that, if we target a broad national goal (universal literacy, say) the bond's issuers could stipulate that the bonds would be redeemed on the basis of data from a random sample of people of the country, so as to minimize the risks of manipulation. Alternative data could contribute to robust combinations of metrics for the purposes of a bond regime, especially those covering countries where official data is scarce or unreliable. As the article says: "Investors are particularly keen for firms to study pictures that yield rare data on, say, steel production in China or Russia, where official data can be patchy." It's not difficult to imagine scenarios in which alternative data could play a possibly indispensable role in the monitoring of progress toward environmental goals, or goals such as disaster prevention or conflict reduction.

20 August 2016

Poverty: the need for diverse, adaptive approaches

The Economist writes about US President Clinton's 1996 welfare reform package. Under the sub-head Blockheads:
Challenged to reduce the number of people receiving welfare, many states merely shifted people onto disability insurance instead, declared victory and sent the bill to Congress.... How might the reform be reformed? Most vitally, by concentrating attention and resources on those 1.5m families at the very bottom. Since this is the hardest group to reach, the federal government should use its money to encourage states to find new ways to help them. A patchy record at 20, the 'Economist', 20 August
Quite so. Clarity about aims is an essential and inescapable first step in implementing a Social Policy Bond regime. Unfortunately, policymakers under the current system can get away - or get rewarded for - with shifting people from 'receiving welfare' to receiving 'disability insurance'.

The article continues:
A useful model is “Race to the Top”, an education initiative from the Obama administration which rewards states that achieve improvements with extra money, in the hope that others will copy their success. There are plenty of policies worth experimenting with: expanding tax credits for those without children, extra government help with finding a job and even public make-work schemes. But this must be experimentation with the right purpose—helping the poorest into work rather than simply cutting welfare rolls.
True: the aim is not to cut the number of people on welfare. But I question whether raising the number of poor people in work is exactly what we want to achieve. I would think our over-arching goal is to eradicate poverty over a sustained period. Increasing employment among those currently poor may be one way of doing that, but we should not assume that it is the most efficient way. Nor the most compassionate: it's not difficult to think of people for whom employment would be less helpful than other interventions. For instance, a struggling single parent of several small children could benefit more from, for instance, help with childcare. Society as a whole would benefit more, in the long term, by improving the children's education and healthcare or their physical and social environment, or improving the parent's access to information about how best to nurture children. If parents were compelled to work, the benefits of a higher household income could be outweighed by the negative effects on the children.

As Barbara Ehrenreich put it:
The "working poor" ...  neglect their own children so that the children of others will be cared for; they live in substandard housing so that other homes will be shiny and perfect; they endure privation so that inflation will be low and stock prices high. To be a member of the working poor is to be an anonymous donor, a nameless benefactor, to everyone. Source
Social Policy Bonds targeting poverty could encourage the exploration and implementation of whichever approaches would best suit the varied and ever-changing circumstances of a population. Every one of those 1.5 million worst-off families referred to in the first excerpt above will face different challenges. Employment will be a solution for some, but not all. Social Policy Bonds would motivate people to find the diverse, adapative solutions that extreme poverty and many other social and environmental problems require if they are to be solved, rather than merely disguised.