How the Civic Exchange Works

The Civic Exchange is a mechanism by which we can separate the task of defining public goods from the funding of those goods, creating a system of performance-based public finance that can re-energize our democracy. It is the opposite of privatization, because it rewards citizens for creating long-term public value, not short-term private profit.

And while the program most easily applies to "earmarked" and special-interest programs (i.e., classic pork barrel projects), it can also apply to most discretionary, non-defense spending, including the large percentage of public services that are administered by contractors.

Here is how the Civic Exchange system would work:

In sum, citizens will have incentives to invest wisely, and to get involved in the creation of public goods instead of being alienated from "big government." Agencies will have to show citizens what they are doing that is worth investment, and will have incentives to innovate rather than featherbed. Legislators will be able to focus on performance goals rather instead of fighting over rhetoric and symbols, or rewarding favored constituencies—and even if they do not, market incentives will curb self-dealing.

Persuading citizens to adopt this system will require significant work. Political parties will likely resist the program until popular pressure compels them. The Civic Union will seek to educate the public about the virtues of the system, while the Exchange itself plans to develop a complete package of performance metrics, underwriters, and agencies, creation of a virtual trading market for demonstrative purposes, followed by an incremental roll-out in selected local governments.

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Key Advantages of the Civic Exchange

1. Citizens can directly support better ideas for achieving public goods, and can stay involved in the process by tracking their agencies' performance.

a. A market for financing public goods poses a direct threat to the patronage and cronyism that infects so many aspects of government work.

b. Inefficient programs are no longer sacred cows just because they seek to achieve a recognized good. If you have a better anti-drug program than DARE, you can implement it, and be rewarded based on how well you do, not who you know.

c. Citizens can be as involved as they want to be in tracking the performance of their investments - how well the agencies are actually doing - and in so doing they will become more informed about the goals that the legislature has defined.

2. Citizens can vote based on their values, but invest based on their analysis of what programs will work, or programs serving goals that they believe in.

a. It's easy to label prison social-service programs as "coddling criminals." But criminal recidivism costs society billions. "Sister Mary's Meditation Program" (a non-religious program) has a proven record of reducing recidivism, but cannot get public funding because it is too easy to ridicule. Using the Civic Exchange, you can vote for a legislator who is tough on crime, while also investing in Sister Mary's program, to reduce the cost of jailing the criminal again.

b. Americans are worried that much foreign aid is wasted. The Civic Exchange allows us to agree to "spend" taxpayer money only to the extent that a foreign aid program achieves a defined goal - e.g., if $1 million is authorized for vaccinating 1 million children, but an agency only succeeds in vaccinating 500,000 children, the program's investors only get credit for $500,000 worth of performance.

3. Public agencies can tap the capital markets to finance their work based on the nature of the goods at issue (i.e., long- or short-term, speculative or conservative), instead of being captive to the boom-and-bust cycle of the current public finance system.

4. Focusing on shared interested and intermediate goals, rather than fighting over ultimate positions, "increases the pie": Focusing on interests and concrete goals instead of fighting over funding permits "win-win" bargaining in the Legislature, instead of the zero-sum nature of most budget negotiations; it is also more conducive to democratic deliberation and persuasion, based on facts and results.

Market forces can counteract special-interest lobbying and pork-barrel authorizations: If a specific project (e.g., the Bridge to Nowhere in Alaska) fails to meet the relevant cost-benefit test, citizens won't invest in it, and it won't get built.

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How Taxpayers and Agencies Can Interact

Following is a simplified example of how the Civic Exchange works.

Inception: The legislature authorizes spending up to $200 for restaurant inspections in the coming year, and defines a limited set of performance goals for agencies who wish to provide inspection services - based essentially on the number of restaurants inspected.

Two agencies, Acme and Big, each seek investments to provide inspection services, and register with the Exchange to offer civic shares (civvies) to the public.

Two citizens, Ann and Bob, each have $100 of their taxes to invest in restaurant inspections.

Year One: Ann decides to invest $100 in Acme, and Bob invests $100 in Big. Each buys their shares at par, paying $100 for $100 face value of civvies, and paying $100 less in taxes as a result). After a year, audits show that Acme inspected 10% more restaurants than the benchmark, and Big inspected 10% fewer. Since that is the only performance benchmark, Ann's civvies' score is 0.1 and Big's civvies' score is -0.1. Amy gets a 10% dividend, or $10 credited to her account at the Exchange. Bob has to make a $10 supplemental payment to his account.

Year Two: Bob, upset that he had to pay more, reads the performance criteria and complains to his legislator that the number of inspections alone is not a proper measure of the good at issue. Legislators agree, and adopt more detailed goals - which also reflect lobbying by Big. Acme and  Big renew their offerings. Ann and Bob have the same tax bill, and make the same investment choices. Acme again outperforms Big, whose operating budget was hurt by its lobbying expenses. Bob pays another $10, and Ann receives another $10 dividend.

Year Three: After Big drops its lobbying, the legislature adopts better performance goals. Big, facing weak demand, offers its shares at a 10% discount (i.e., selling a $1 face value investment for $0.90). Big knows that it has to improve performance or risk losing funding completely next year, and makes up for this revenue shortfall by cutting the salary of senior management.

Ann and Bob make the same choices, but Bob has invested only $90 in Big and so has $10 left over. He bids for Acme's shares, paying a premium for them. Acme receives $110 for its par value $100 shares ($100 from Ann and $10 from Bob), effectively rewarding it for its superior performance to date. Unfortunately, its chief executive uses that money to increase managers' salaries without tying the reward to superior performance. This time, Big manages to score 10% better than the benchmark, and Acme 10% worse. Bob's $90 investment now earns a $10 dividend, while Ann and other Acme shareholders pay an additional $10 per share.

Future years: Ann and Bob trade shares through the Exchange based on their relative view of Acme's and Big's performance, making them more informed and involved, and ensuring market discipline on the agencies. The agencies use their track records to raise long-term capital, freeing them from the vagaries of the annual budget process. The agencies have an incentive to think creatively about the services they provide, to better define their actual goals, and to claim credit for related goods (e.g., grease trap inspection and garbage disposal) - creating competition across previously "separate" agencies that lowers costs while increasing public welfare.

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How it Works from the Agency's Perspective

Present Situation: The legislature votes money annually to fund a teen drug prevention program called Safe Kids. The program is run by a popular local civic leader and appears to be successful, based on the press coverage the program garners, though precisely how it measures success is unclear. Because the program is run by a non-profit under a contract from the state, as many such programs are, its internal finances and operations are not open to the public.

Problem: Jack is a teacher who has found that Safe Kids' program materials could be improved. Jill works for a non-profit and thinks its goals are ill-defined and short-term. Joe is a securities analyst who avoids politics and has a dim view of the effectiveness of government programs generally, but has some confidence in the Stop program.

Right now, Jack and Jill are limited to working with the program administrators to try to get them to define and improve their criteria. So far they have not had any success, perhaps because Jack is an active supporter of the political party that is out of power, Jill is known to be involved in other civic groups that are very unpopular, and Joe has no information that would lead him to be critical of the program, no way to learn about Jack or Jill's proposals, and no ability to do anything about them even if he did. Also, the legislature is uninterested in appearing to tinker with a popular, successful program.

Opportunity Created by the Civic Exchange: Adoption of the Civic Exchange system requires all social programs, and contractors such as Safe Kids, to publicize their performance goals and measurement criteria, and to report their finances.

Jack uses this information to prepare a memo specifying how Safe Kids's operations could be improved. Jill prepares a critique of the performance goals and a proposed set of criteria to track long-term performance. After reading press reports on the compensation paid to the program's director and the number of politically-connected persons it employs, Joe prepares an analysis of the program that points out the room for cost savings and for growth by providing related services in untapped potential markets.

Proposed New Entities: Jack, Jill, and Joe  learn  about each other's concerns through the Civic Union's website that compiles agency performance information. Combining their varying perspectives and working with a nonprofit "social venture capital fund", they develop a business plan for a new agency, Safe Homes, that will compete directly against Safe Kids and also providing other forms of family counseling. They also propose more detailed and longer-term proposed performance goals to the legislature.

Safe Kids now has to compete with Safer Kids for taxpayer funding, based on its ability to fulfill the existing performance criteria; it also has to take a public position on the merits of these more detailed performance goals, instead of ignoring Jack and Jill on political grounds and relying on the public's belief in the worthiness of "drug prevention" as a general policy goal.

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