Brian Easton questions whether people are too focused on material consumption at the expense of wellbeing

This is a re-post of an article originally published on pundit.co.nz. It is here with permission.

Gross domestic product (GDP) is a measure of market activity and was originally developed to understand what was happening to the market economy, especially the rise in unemployment during the Great Depression. It was never intended to summarise all human economic activity. For more than two-thirds of the history of the New Zealand economy and before the arrival of the European economy, there was economic activity but no markets or money.

One of the biggest changes since the arrival of the European has been the shift from non-market activity to market activity. That happened to Māori, but it also happened to many women who re-entered the labour force after their mothers and grandmothers had worked at home. The shift from nonmarket to market activity means today’s GDP measure overestimates the growth of all economic activity. The environment and natural resources are another area where there has been a shift from the nonmarket to the market.

Economic activity can also be transferred from the market to the nonmarket, not just at the environmental interface. Businesses often push costs onto consumers. Same amount of activity, but households are doing more of it outside the market.

Many ignore these limitations, uncritically assuming that the pursuit of higher GDP is always a good thing. ‘GDP fetishism’ is the assumption that the higher material income, as measured by GDP per capita, the greater individual wellbeing.

Are they right? Ask people how they subjectively rate their life satisfaction. Surveys from many affluent countries find similar patterns of life satisfaction by social variables such as age, gender, marital status, ethnicity, income and work status. However, they find material income levels among the affluent have little impact on life satisfaction. The social variables swamp the economic variables, except unemployment – that really reduces life satisfaction.

Yes, those on higher incomes are likely to say they feel better off, but generally not by much. For example, doubling individual income increases life satisfaction by as much as being married. This result applies only among the affluent. The exception is that those with incomes in the bottom fifth of the population get a significant increase in life satisfaction with higher income. That means that by reducing poverty we can increase total happiness.

The general finding also applies between affluent economies. Those with the GDP fetishism assume that a higher GDP per capita means the country has greater life satisfaction. The evidence is that it does not. Country X may have a higher GDP per capita than country Y, but the inhabitants of country Y are likely to report as much life satisfaction as those in country X.

An even more puzzling research finding comes from long-time surveys of US attitudes. Despite US material incomes almost trebling in the last 80 years, survey respondents today report average levels of life satisfaction similar to the levels reported in the 1940s.

So does higher material income make us better off than our ancestors? The American experience suggests probably not. Where we differ from past generations is that, on average, we have more opportunities, more years of healthy living and more life choices.

This is even more true for women than men, but paradoxically, while women report higher life satisfaction than men, over the 80 years of American data the margin between the genders has narrowed. Men are slightly happier than their fathers; women are less happy than their mothers, which is surprising given the health gains women have had and their greater life choices.

The paradoxes from the life satisfaction surveys are so troubling that they have been barely incorporated into our thinking. How might we revise our thinking and redirect the economy?

First, I emphasise that any new directions should not be a denial of economic analysis. There will still be the need to manage the economy and, in particular, to deal with the external pressures which shape it.

The first redirection is to pay more attention to nonmarket economic (and social) activity. A particular issue is to stop undermining the future, be it by environmental depletion or by running down the capital of the nation by the Government borrowing for consumption. One word which captures this is ‘sustainability’. The way I think about sustainability is that I want to leave my descendants as good a life as I have. Since I don’t know what they might choose, I am reluctant to limit their choice by squandering.

The second redirection is to focus on the nation’s wellbeing in a wider sense than just material consumption. Some of the wellbeing issues can be approached in the current policy frame. We can raise aggregate life satisfaction by redistributing income to the poor. We can pay more attention to minimising the stress of unemployment by keeping it low and short. We can pursue the objective of a healthy nation.

More fundamentally, we need to abandon the GDP fetishism of equating material consumption, as measured by per capita GDP, with wellbeing. Instead, we need to redirect policy to recognise the two are not the same and instead manage material production to promote wider wellbeing, especially longevity, security and choice. That would reverse the framework so that sectors like the arts, culture, education, the environment, healthcare, heritage, recreation and science ask about the extent to which the economy is supporting them – not the other way around.

That approach has numerous implications. To focus on just taxation: unlike the dominant conventional wisdom – very much driven by neoliberal thinking and the associated GDP fetishism – I do not advocate lower taxation. I do not particularly advocate higher taxation. My concern is purposeful taxation – that taxes should be sufficient to fund the activities necessary for wellbeing and, where appropriate, to deal with market distortions. I also reject the need for a government debt target. I support public borrowing, provided it goes into quality investment rather than today’s borrowing, which is for consumption.

This is certainly not the way the current Government thinks. (Witness Shane Jones’ fast-track think big, David Seymour’s Ministry of Regulation or the Coalition Government’s reluctance to raise taxation.) It focuses on raising GDP, which it thinks involves reductions in regulation, increased environmental and heritage depletion, and lower taxation.

I am not sure what the Opposition thinks. I was encouraged that when he was Minister of Finance, Labour’s Grant Robertson said he was prioritising wellbeing. The analysis was clunky, but it was a start. However, Labour did not mention wellbeing in its last election campaign nor has it while in opposition. It has promoted policies which would improve wellbeing – the Government could make the same claim – but it has done so in the GDP fetishism framework. It, too, seems to be stuck in the past.

* Note: After this piece was first posted on Pundit, Labour announced it would restore the requirement that the Treasury would regularly publish a wellbeing report. So, it is now turning its attention to the issue. If it is elected to government, it will be instructive to see how much it has thought through the issues involved.

*Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.