Policy for the post-truth era - Social Policy Bonds

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Policy for the post-truth era


US President Barack Obama talks about post-truth politics:

An explanation of climate change from a Nobel Prize-winning physicist looks exactly the same on your Facebook page as the denial of climate change by somebody on the Koch brothers’ payroll. .... Ideally, in a democracy, everybody would agree that climate change is the consequence of man-made behavior, because that’s what 99 per cent of scientists tell us. And then we would have a debate about how to fix it. That’s how, in the seventies, eighties, and nineties, you had Republicans supporting the Clean Air Act and you had a market-based fix for acid rain rather than a command-and-control approach. So you’d argue about means, but there was a baseline of facts that we could all work off of. And now we just don’t have that. It happened here, David Remnick, New Yorker, 28 November 2016

But science isn't a consensual process though, so even if the majority of scientists agree on something, whether it's CO2 emissions causing climate change, or saturated fats causing heart disease, that should carry no more weight than the collective wisdom of experts in other fields, such as economists or opinion pollsters. There is a genuine problem here and it goes beyond climate change: how should we make policy when the relationship between cause and effect in our ever more complex societies is impossible to identify? We cannot simply follow the opinions of existing bodies, which often are backed by vested interests, but nor should we reflexively ignore them: they might after all be right as well as self interested. Nor should we simply identify a problem then mindlessly dole out funds to organizations whose stated objective is to solve it, but whose over-arching objective - in common with all organizations - is invariably self-perpetuation.

We should instead recognize that resolving complex social and environmental problems, cannot wait for our definitive information about causal relationships, but nor can we afford to delay making decisions until such information becomes available - it might never happen. Take climate change: it's likely that, by the time we know for certain the effects of man's greenhouse gas emissions on the climate, it will be too late to do anything to avoid or reverse their catastrophic effects on the environment. The current way of addressing the problem seems inadequate: extravagant gestures that might lead to some reductions in emissions that we think contribute to climate change, which might lead to some tiny, almost imperceptible (but unverifiable) effect on the climate some decades hence.

I think we can do better than this. Some years ago, I came up with the idea of Social Policy Bonds; a new financial instrument that rewards the achievement of a targeted social or environmental goal without specifying who shall achieve it or how it shall be achieved. A non-tradeable variant – usually known as Social Impact Bonds – is now being issued in about 15 countries to help solve a range of social problems. Making the bonds tradeable would greatly enhance the significance of the problems they could solve.

How Social Policy Bonds work

We could use the Social Policy Bond idea, first to identify exactly what we want to achieve; and second to channel the market's incentives and efficiencies into achieving it. With climate change, we need to clarify whether we are more concerned about the climate, or about the impacts of climate change on human, animal and plant life. In other words, we define the outcomes that we wish to achieve, then let the market decide how best to go about achieving them. Most social and environmental goals will embody an array of conditions that have to be satisfied for the goal to have been deemed met and the Social Policy Bonds redeemed. Our climate change goal should embody measures of physical, biological, social and financial variables that shall have to fall within a targeted range for a sustained period before the redemption of the Social Policy Bonds that target climate change.

Assume that collectively governments, philanthropists and ordinary members of the public contribute to a global climate change fund of $1 trillion. These funds are put into escrow, to be paid out to the holders of bonds only when our climate change goal has been reached. It then issues one million bonds that each will be worth £1 million on redemption. 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 $100,000 each. (This sum would be used by the authority partially to 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 percent once our climate change goal has been achieved.

This does not mean that investors in the bonds have to hold them to maturity to see their holding appreciate in value. As people work toward achieving the targeted goal, the bonds will become more valuable Because the bonds would be tradeable, they can do their bit to achieve the targeted goal, and sell their bonds to people who, because they will be more efficient at taking the goal-achievement forward, will offer them more than they are worth to the current holders.

Advantages over current policy

The bonds inject the market’s incentives and efficiencies into the achievement of our social and environmental goals: they create a coalition of interests, whose structure and composition will be constantly changing, but whose goals are exactly congruent with those of society.

This leads to several major advantages over the way current policy is made:
Nothing is paid out until the result has been achieved.
Bondholders have incentives to achieve the goal as efficiently as possible
Bondholders have incentives to explore and undertake or finance diverse, adaptive solutions to problems about which our scientific knowledge is constantly expanding.

Under a Social Policy Bond regime governments – national or supranational – could still do what they are best at: articulating society’s goals and raising the funds necessary to achieve them. But they would in effect be contracting out the actual achievement of these goals to the private sector, which in economic theory and on all the evidence, it does much more efficiently than any government.

And as with climate change so with other major, complex challenges: crime, for instance, or war. Importantly, the Social Policy Bond principle works even when the facts about what causes these problems are disputed. As such, Social Policy Bonds are the perfect policy instrument in today's post-truth politics.

Ronnie Horesh, December 2016

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