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Economist Brian Easton asks: How can we can make wellbeing at the centre of public policy if we don't measure it?

Economist Brian Easton asks: How can we can make wellbeing at the centre of public policy if we don't measure it?

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


When the Minister of Finance announced in the 2018 budget that in the future economic policy would focus more on wellbeing, many saw a glimmer of hope that we were moving away from the mechanical thinking which underpinned Rogernomics/neoliberalism. Thus far, the promise has been aspirational with little sign of a significant change to the policy framework.

Ironically, though, the government was confronted with the issue with arrival of the covid virus. Unlike many countries, it chose to emphasise wellbeing over the economy and with good management, attention to the science and a bit of luck, did much better than many others did, both in terms of dealing with the virus and, to the surprise of many, in terms of narrow economic performance.

You may recall that there were naysayers critical of the lockdown, which they evaluated by its impact on GDP. Many made assumptions which proved to be wildly wrong, but even had they been right, the naysayers were judging the policy by a quite different criterion from wellbeing or, as they might put it, they equated wellbeing with economic output.

The equation does not make sense. To clear away some debris, GDP measures output not income (which differs if there are changes in the terms of trade and border transaction costs). GDP measures gross output including capital depreciation. It measures output in a country, not the income of those in the country. (One ambiguity is to what extent temporary visitors and recent arrivals should be included. It is possible that all the output gains in the Key-English decade accrued to the recent arrivals.)

Adjust for these, and the relevant national accounting concept is National Income (NI). The naysayers are likely to say that GDP and NI follow the same track (but beware of the issues mentioned in the last sentence of the previous paragraph). What they really mean, but forgot to tell us, is that they think income equated to wellbeing.

Income is no longer a good measure of wellbeing. This is a recent research finding which has surprised the economics profession. Historically, economists assumed that higher income resulted in greater wellbeing. That no longer seems as true in affluent economies. Age, employment status, gender, health, marital status and (even) ethnicity are all more important.

Economic policy has little impact on most of these variables; perhaps that tells the profession it should be humble. However, the evidence is that employment status (such as being stressfully unemployed) is more important than income.

It is true that people with higher incomes than others report higher wellbeing (measured, say, by happiness) but not by much. However (and surprisingly), raising across-the-board incomes in an affluent economy does not raise across-the-board wellbeing.

What seems to have happened is that when the paradigm was being fashioned in the early nineteenth century with its were much lower levels of affluence, a rise in income did improve wellbeing; that remains true in poorer countries – much poorer than New Zealand. Which means that anyone who thinks GDP is an overall measure of wellbeing is stuck back in the nineteenth century.

It also seems from the research that there are significant immediate wellbeing gains from income increases for those on the lowest incomes in New Zealand. (There are likely to be other longer-term gains in health and education for children.)

Even if we stick to income, aggregates measured by GDP or NI are not equity-neutral but favour the rich. When economics tried to avoid interpersonal comparisons, it shifted to a ‘Pareto’ criterion that an increase in output was a good thing because the output could be allocated as the distribution authority saw fit. However, practically, we operate on the principle that any redistribution will reduce output because of the deadweight loss from taxation. Practically, redistribution is discouraged.

Amartya Sen pointed out that this approach assumes that a dollar to a rich person has the same social value as a dollar to a poor person. (That is an assumption which has been sneaked in, despite the alleged avoidance of interpersonal comparisons.) He suggests that a better assumption would be to treat a one percent increase in income to a rich person the same as a one percent increase in income to a poor person, and he proposed a measure which he called 'real national income'

I made an imperfect attempt to calculate changes in RNI. It suggests that real private incomes based on the dollar-is-a-dollar measure rose 1.2 percent p.a.  between 1982 and 2018. But because of the rise in inequality (which means incomes rose faster for the rich than the poor), on a percent-is-a-percent basis the annual increase was 1.0 percent, a sixth lower. We should not be surprised that a pro-rich distributional policy shows a lower increase in wellbeing than GDP according to the Sen measure.

There are other weaknesses from focusing upon GDP and its allies when we are assessing the economy. For instance, since wellbeing is substantially reduced by stressful unemployment (which is a different notion from the conventional unemployment measure and probably includes dire underemployment) the amount of stressful unemployment should be included in any aggregate measure of wellbeing.

Does it matter? We could construct a better measure of wellbeing but – well – doing that has not been a priority. The consequences is that public discussion inevitably defaults to another measure – GDP, which is a very poor measure of wellbeing. Most users will forget – if they ever knew – its limitations.

This is not really a prediction. It already happens. And whatever the aspirations of this government – which need not be followed by a successor government – that is how it will happen until we introduce a superior measure of aggregate wellbeing and place it firmly in the centre of macroeconomic policy and discussion.

Addendum: Any measure of the current state of wellbeing for macroeconomic policy purposes applies at a point in time. Trying to include sustainability in it will destroy any meaning. Instead, two supplementary indicators are needed.

First, there is a need for a measure of financial sustainability, more robust than the government-debt-to-GDP ratio. (You don't really think that the credit rating agencies arrive here, check the ratio has been calculate correctly and go home. They do a thorough review of the entire financial situation.)

Second, there is a need for an indicator of environmental sustainability, especially as reducing carbon emissions impacts on macroeconomic policy. This is quite different from the (usually uninformed) attempts to extend GDP to cover the environment. (The trick which determines the measure’s outcome is how the environment is valued. If the value is high, then the indicator goes down, if it is low the indicator rises - funny that.)


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.

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27 Comments

Brain surprises and disappoints in the article. He starts the let down with this comment "Income is no longer a good measure of well being." and goes on to discus this, but utterly ignores "disposable income", you know - that bit left over after paying living costs to enable one to actually have a life. In other words work-life balance. Under the 'free market' economic system the middle and lower classes have been economically ravaged, to the point that there is little if any 'disposable income' available. And worse - our Government has done NOTHING to address this, despite their pretty words.

It is good however of Brian to note that the ever increasing costs are plainly evident at the supermarket, despite what the Government would tell us through the CPI.

Well well. There is a difference between GDP and incomes. Who knew ?
Is that lack of knowledge why we have chased a greater GDP. As folk got poorer.
Why do we promote GDP, an acronym, and ignore how much cash New Zealanders have in their pockets?
(acknowledging Murray at 9.33)

Was it Peter Drucker who used to say "That which is measured will be improved"?

Regarding "money can't buy happiness" there is new research that's worth reviewing from Matthew Killingsworth at the a Wharton School of Business. Turns out...

its pretty simple really
What we need is more resources per person to trash ("wealth" streams)
this lifts living standards

unfortunately the petri dish is getting crowded

edit turned into a DP.

Agreed. But this is as close as Easton has come; maybe he'll join the last dots.

"Second, there is a need for an indicator of environmental sustainability, especially as reducing carbon emissions impacts on macroeconomic policy."
Carbon represents energy expended, thus it measures, murkily, work-done. If we're going to reduce it, we're going to reduce both GDP and average wellbeing. As you say, this is 'per head', so sustainable wellbeing requires ever-less heads until equilibrium is reached.

Easton has to go from 'the environment' to 'resources, energy, wastes and entropy'. Then he'll be there.

Or just depopulate. This could be a lovely planet for a hundred million people.

Don't expect any miracles from a government that wrongly believes that taxation and borrowing finance its spending. Every time that I hear Grant Robertson speak I can imagine the word neo-liberal tattooed across his forehead.

Everyone - from Easton to Douglas and back again, believed in the economic jargon. It was just like religion, with people believing there was a heaven and a hell and a choice for eternity, and that we were he reason the planet was created 4,000 years ago.

These folk believed Adam Smith (writing pre fossil-energy) and confused flows with stocks, energy efficiencies with 'productivity', real stuff they conflated with virtual, and back again (totally misunderstanding that oil may be bought, lace hankies may be bought, but that you can't stuff lace hankies into your tank and drive..... They also - being blind to stocks and sinks - conjured up a system of back-casting to project, and a dubious price-point and 'substitution' theory, which works until it doesn't (just as my believing the mole on my left cheek keeps cancer away, works until it doesn't, but is underlyingly false).

Robertson is a believer (or gives the appearance of being so) in said mantra. Some are coming away slowly; wellbeing is the first step in a long journey. I just think they're running out of time.....

pdk,

'I think they are just running out of time'. In a very recent post-which i now can't find-you suggested that I look at a model. I think 2060 was a significant date. As the statistician George Box said; "All models are wrong, some are useful". The conclusion depends on the variables used. By how much will that model be wrong?
I have been reading a paper which might interest you; Trends in Scientific Literature on Energy return ratio of renewable Energy Sources for Supporting Policymakers-www.mdpi.com/journal/admsci
part of one sentence in the introduction is this; "whereas solar photovoltaic(PV) and wind energy have reached mature and advanced levels of technology".
I have said before that I am prepared to accept that I may be wrong to have any optimism, but not once have I seen you accept even the slightest possibility that your conclusion of a cataclysmic societal collapse in the near future may not come to pass. No true believer in the scientific method would express such certainty.

Grant Robertson is a worry

Ardern and Robertson are taking advice ... from whom

Coralie McLeish (Treasury), Adrian Orr (RBNZ), and the latest, Ganesh Nana (Productivity Commission) are all Robertson appointees. All 3 are macro-economists. Robertson and Ardern are trapped in a corner with nowhere to go. Robertson has 2 options. (It will be Robertson's job to be the triggerman) Go softly, or go for the big hit.

There is a danger they will panic and go for the "big hit" with complicated schemes that will set off a series of unwanted reactions. If they go for the soft solution, nothing will change

Kiwis voted them in.. not much can be done about that. Hopefully the suffering Labour causes results in electors voting better - unfortunately Labour voters are pretty brain-washed.

Zack
Would you rather we had voted in ACTion Mouse and Miss Piggy?

Robertson makes a rod for his own back by always harking on about the governments debt, he should just shut up about it. In times past nobody could give a fig about the governments budget except if smokes and booze were going to go up. Rob Muldoon proclaimed that people wouldn't recognise a deficit if they fell over it but now everyone thinks that they are an expert on government finances but all that we are told about it is nonsense.

Other than human nature, housing is the root cause of much disfunction in NZ. Unfortunately Labour believe their half-baked schemes like KiwiBuild, Progressive Home Ownership, etc will make a difference.

Who in their right mind believes giving States Houses (often taken from the private market) to unemployed, anti-social people is helping? Who believes Progressive Home Ownership - helping unsuitable people compete against debt-free, deposit able, full-time workers is a good idea?

And the tragic central-planning crowd, those whom are responsible for infrastructure planning (or lack-there-of), expanding the RMA, etc.. their crony mates will eventually end up on the next 'working group'. MORE WASTED money for the next gas-lighting, time grab. Roll out Mr Palmer again LMFAO. He's desperate for a gilded back-scratcher. Sorry Palmer, you're tared with the hopeless lot now.

These people are so divorced from reality I'm surprised a portal hasn't opened and sucked them into the multi-verse. Labour acolytes don't seem to understand common-sense let alone BASIC Financial Principles. It's a s**t show!

I've commented enough on the backing system over the years - in short; lending and it's near sole focus on housing and MAYBE agriculture is a pathetic way to allocate capital. Labour's Ministers refuse questions/interview-requests.. Jacinda's fish-head must be rotting. Again, it's a s**t show!

.

I do wonder if banks and speculators are deliberately being given their heads and given so much rope, eventually the govt will be forced to completely 'take over' for 'our own good' everyone will be given a little state house. How else can we explain the lack of action and deflecting to RB to cool housing market. People forget Jacinda's strong ideologies but how she will get us there is anyone's guess https://www.youtube.com/watch?v=g9rsxFaq6Ig

Iconoclast a further point to concern you; those three will be formally educated in the conventional wisdoms of their education. thus their thinking will be constrained in several ways, first by the discipline conventions, secondly by the need for proven studies to give licence to deviate from the aforesaid conventions, and thirdly by the politics of the government who appointed them.

The first one is bad enough, the second will mean they must wait for a failure to occur, then there must be a study to confirm it was a failure, figure out the reasons for it, apportion the blame and identify what should have been done instead, and then all this must be political acceptable for the Government of the day, which likely means the blame must be able to be laid at the feet of the 'other' Governments. This will take some time to accomplish of course, say 30 - 50 years or so.

10
up

In NZ we're budgeting for the well being of property investors (and very little else).

We know how to "roughly" measure marginal changes in total welfare through social cost benefit analysis.

Treasury has a framework for it to be applied, the issue is getting central government to use it and central government requiring local government to do the same.

In the same way that companies are subject to financial and regulatory constraints central and local government should be subject to the constraints of improving marginal welfare per capita.

Well I'm sure if we increased the minimum wage by at least 20% and up the dole by a similar amount there would be an increase in well being in that section of the population. The flip side is a decrease in the middle class well being having their taxed increased to pay for the increase in well being of the others. Now if we weighted the well being of the two sections we might come out with an overall increase in the well being of the country but of course depending on the weighting factor there might just be a decrease.
No doubt we could improve the well being of the psychiatric/ psychologist class by having more patients to study well being and feed their output to the economists.
My feeling is leave off the stuff verging on psycho mumbo jumbo, ie well being.

Nice article Brian. In fifty years time, historians will look back on this period with disgust asking: ‘how did those generations think success was appropriately measured by the rich getting richer, the poor working harder for less, and millions sitting on the dole queue as conscripts in the war against inflation? An unequal and dying world will be the legacy of the era of the neoliberal economists. I hope we don’t have to wait for them to die before we can move on.

Well being means everything and nothing. It is therefore the perfect thing for the government to measure itself on.

"Many never know the importance of access until it is removed"

In NZ the medical model of disability is used more where people with different ability levels due to medical conditions are characterized as disabled. In addition the policy to aid community participation for individuals and families with disabilities is largely set by health agencies. Where community support primarily covers bare medical needs (where daily food preparation and bathing is not considered a medical need and often gets left out on many days), simple education aids, and minimum levels of community access, with more limited access to employment opportunities. Indeed even income is vastly different starting from a limited level that often does not cover basic living costs equivalent to their peers (many receiving no income support at all), to insurance based cover which supports an income level based on the income or wage at the point of disability, to retirement based cover which is meant to supplement an investment income (which many younger disabled people from the ages 18-65 have significant impediments to investment due to income levels not even sufficient to maintain life hence many die prematurely not of their condition but from utter destitution and degrading living environments). This unfortunately creates more than a disparately of social access but also a disparately in quality of life. As even those under insurance cover can face a rapid barrier in maintaining career opportunities that without disabilities they could obtain to improve their living standard.

This limits the lives not only those disabled but their families as well. It also reduces the economic engagement with local businesses which would benefit from increased customer base and more dedicated local employees. Families who have limited access to community facilities and activities, whether through direct physical barriers or economic ones also experience worsening wellness outcomes. Charitable support services have long tried to reduce the disparity between disabled and non disabled people in education, employment and access outcomes in NZ communities but as these organizations rely on limited donations the barriers placed in the community towards disabled people are still present. This is clear in employment, private housing access, financial, social access, community participation and wellness statistics. With the government often being the most discriminatory barrier denying disabled people even equal access to public services.

Clearly to maintain the ideals of the United Nations Committee on the Rights of Persons with Disabilities and the Human Rights Commission to ensure an equality of access in our communities free of discriminatory barriers more needs to be done on both a structural and procedural level. To aid in this the existing wellness gap needs to be measured to scale plans, the reasons for the access barriers need to be researched, plans put in place to remove them, and the progress monitored. However given the existing access barriers there also exists difficulty for agencies to connect and measure statistics around more socially isolated members. This can range from lack of access to suitable survey aids to differing access around housing arrangements. In many cases it can also be because the economic opportunity of persons and families with disabilities is based on their current level of access to economic and social engagement. Not the potential they could have if the social and economic barriers were removed. So many cannot even be statistics to be counted yet because they are not even being considered as part of the population at all to be included in research and design of public services and infrastructure. Much like a hospital without mobility parking or even any parking available for specialist appointments.

Yes, another option being elaborated.. a further massive future QE for NZ, 'well being' budget stimulus boost.

Wellbeing is Newspeak for anything labour want to introduce that they'd prefer the sheep think is good for wellbeing

WELLBEING PLAN

Lock down NZ'S largest city umpteen times
Lock down the first home buyers
Lock down the travel to and from Australia
Lock down the hospitality and tourism industry which has been the engine of our economy
Lock down the vulnerable elderly in their rest homes (no outings even under Level 2)
Lock down the economy and get everyone in debt under the pretense of wealth effect

Frown, bob and and flap hands

Flood NZ with propoganda that this is all for everyone's wellbeing

Enjoy