Crime and other urban environmental problems - Social Policy Bonds

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Crime and other urban environmental problems

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This is a slightly edited version of the essay that was one of the final three competing for the US$25000 St Andrews Prize, run by Conoco and St Andrews University, UK, in May 1999. It is 1250 words in length

Deregulation of western economies and the freer operation of self-interest in
the private sector have made many individuals very wealthy indeed, but the
effects on the environment are more ambiguous. Some would argue that a larger role for market forces must inevitably worsen our environment, but this essay suggests a means by which market forces can be channelled into solving
environmental problems.

I believe that many environmental problems persist because they are tackled in
ways that do not stimulate or reward self-interest. This is particularly the
case in the urban environment, where many people are concentrated in small
areas, and problems created by those indulging in any form of antisocial activity - crime, vandalism and all forms of pollution - affect many others, and are difficult to trace back to their source. Local or central government
programmes designed to cope with some of these problems suffer, in my view, from a fatal flaw that almost guarantees they will be ineffectual and expensive: they reward people for undertaking activities, rather than for delivering desired
outcomes.

Social Policy Bonds

My proposal is that a new financial instrument be created that rewards people
only when they actually improve the urban environment. Social Policy
Bonds would be issued by local or national government and auctioned to
the highest bidder. Government would undertake to redeem these bonds for a fixed sum only when a specified environmental objective has been achieved. The bonds would be freely tradeable after issue, and their market value would rise and
fall. With an uncertain redemption date, and because they would not bear interest, Social Policy Bonds would be quite different from conventional government bonds. What sort of urban environmental problems could Social Policy Bonds solve? In principle, any that can be reliably defined and quantified. Examples could fall in these areas:

  • Crime

  • Air, water or noise pollution

  • Road accidents

  • Long commuting times

  • Substance abuse

  • Litter


The way the bonds work is to create a group of people, bondholders, who would
have a strong interest in achieving the environmental objective efficiently, or
in paying others to do so. Consider an example. Assume that an urban authority
is prepared to spend a maximum of say £10 million to reduce the crime rate
within its borders by 50%. It issues one million bonds that become worth £10
when the crime rate falls below 50% of current levels for a sustained period -
say one year. Because the market is likely to see this objective as unlikely to
be achieved in the near future, it may value the bonds when they are floated at
as little as £1.00. (This sum would be used by the authority to partially offset
the cost of future redemption of the bonds.) Now, the purchasers of the bonds
hold an asset that could appreciate in value by 900% if a sustained
halving of the crime rate is achieved.

Who would buy the bonds?

Many people would purchase these bonds with the idea of holding on to them until
they could sell them at a profit. These passive investors would have no
intention of doing anything to reduce crime. They would want to become
'free-riders', hoping to benefit from any increase in the bond price without
actually participating in any crime-reducing projects. But the way markets work
would limit the opportunities for these passive investors. The more bonds they
collectively own, the more remote the targeted objective becomes, the lower the
market price of their bonds will fall, and the more they stand to lose as the
aggregate value of their bond holdings falls. At some point, then, it would
become worthwhile for passive investors either to become, or to sell their bonds
to, active investors. These people, or institutions, would use their own
capital, or borrow on the strength of the redemption value of their bonds, to
initiate or facilitate crime-reduction programmes. Active bondholders would have
an incentive to cooperate with each other to help reduce crime, and to do so as
cost-effectively as possible.

Rewarding success

Consider some of the measures that bondholders could put into operation:

  • encouraging neighbourhood watch schemes;

  • encouraging parents to monitor their children’s activity more closely;

  • subsidising recruitment of unemployed workers;

  • subsidising the employment of unemployed young men.

       
If air pollution in cities is targeted, the targeted indicator could be calculated
as an average of reading as measured at many urban sites around the country. It
is also important that progress toward the attainment of the environmental
objective be regularly and reliably assessed by trusted bodies.

Once an objective is close to achievement, government or urban authority can
issue a new set of Social Policy Bonds aimed at maintaining or further improving
the already improved urban environment. The cost of a new bond issue to the
issuing body is likely to be lower because, during the lifetime of the first issue,
people would have probably developed more efficient methods and systems for
solving targeted environmental problems.

Advantages of a Social Policy Bond regime

The main advantage of Social Policy Bonds is that, by injecting
self-interest into all stages necessary for improving the urban environment,
they are more cost-effective than current, activity-based programmes. For the
same government expenditure, therefore, more can be achieved.
Social Policy Bonds also make policy objectives more transparent. By focusing
on outcomes, rather than activities, environmental objectives are explicitly identified,
while indirect, as well as direct, means of achieving them are encouraged—but
only if bondholders think them more efficient. Focusing on identifiable outcomes
would also mean that measures taken to achieve them would be more likely to
attract public support.

Because Social Policy Bonds focus on outcomes, which can be broad, they have
informational advantages that make it easier to consider tackling problems that would otherwise be addressed only on an ad hoc basis. Air pollution in cities, for
example, results from many sources and from many different processes. Immense
quantities of information would be needed to establish and monitor a
comprehensive system of pollution. Even worse, some programmes have perverse incentives: if a police force, for example, is too successful at cutting crime one year, it may find its
budget cut the following year. Or at least, the possibility that that might
happen could have some effect on performance.

Social Policy Bonds, on the other hand, are focused on outcomes. As such,
they would command wider political support than activity-based programmes. And
because they inject incentives into all stages necessary for solving
environmental problems, they will be more efficient than current efforts. Many social and environmental problems are too complex to be solved by a top-down, one-size-fits-all approach, which is the approach that government does best. Rather, they would be best tackled with a combination of diverse, adaptive solutions, applied over a long time.

Resources are always going to be limited and Social Policy Bonds will not
change that. Priorities and choices will always have to be made: under the EPB
principle, governments will still decide on which problems to solve, and on the
sums allocated to their solution. But democratic governments are good at
representing and articulating their people's wishes, and many goals would be
focused on achieving minimal environmental standards for all. As such they would
be politically popular. Where government is not so successful is in working out
the most efficient ways of achieving these goals - especially goals that are long term in nature and likely to require a range of diverse, adaptive approaches. This achievement is really a
matter of allocating scarce resources. In economic theory, and on all the
evidence, markets are the best way of allocating scarce resources to achieve
prescribed ends. Social Policy Bonds would allow both governments and
markets to do what each is best at doing - respectively: prescribing ends, and
allocating resources to meet these ends.


In the long run the widespread acceptance of the fact that self-interest can be

channelled into solving urban environmental problems could have more
far-reaching implications. National or even global environmental problems, such
as marine pollution or global warming, could be made the targets of future bond
issues. However, the surrendering of policy instruments to the private sector,
even with the aim of achieving goals as uncontroversial as lower crime rates or
less pollution, may be politically difficult, and must be a gradual process. But
the potential benefits should not be ignored. Urban environmental problems are a
large and growing burden. I believe that Social Policy Bonds, by injecting self-
interest into their solution, would be the most effective way of improving the
urban environment, to the benefit of all who live in cities, and society in general.


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