Author: Mark Fabian, ANU
New Zealand recently released its first ‘well-being’ budget to much fanfare. Prime Minister Jacinda Ardern argues that her government is moving beyond a fixation on income growth to also consider sustainability, the distribution of wealth and social issues like mental health. Yet is far from clear that any government prioritises economic growth ahead of these things, or that an ‘economic’ approach to budgeting does not serve well-being.
It is a common mistake to say that economic indicators, notably gross domestic product (GDP), do not track well-being. The fundamental quantum of economics is utility, which is well-being broadly defined — not output, consumption or surplus. As any practitioner of cost-benefit analysis will tell you, a correct economic assessment of progress or policy will consider not just financial costs and benefits but also environmental and social ones, including distributional issues, because these things all bear on utility.
Against this background, it is important to understand why economists think GDP, or income and prices more broadly, is a reasonable, if limited, metric for studying well-being.
The central model of economics is that of the utility-maximising agent. They allocate their limited budget of time and money towards goods that bring them relatively more benefit at relatively lower cost. When this trading-off behaviour interacts with profit-maximising producers it gives rise to market prices, which reflect relative resource costs and utility benefits. Rising income or GDP reflects greater purchasing power and thus greater utility.
These relative prices are denominated in money, which, given certain arguably strong assumptions, makes money a universal medium of exchange that is worth a similar amount of utility to two average citizens. It is thus a unidimensional measure of well-being because it proxies, albeit crudely, utility in a way that is comparable across individuals.
This is helpful in the context of interpersonal welfare comparisons — analyses of who has more or less utility than others. Multidimensional measures like the sustainable development goals (SDGs) make interpersonal comparisons difficult because different dimensions need to be weighted.
Consider an individual who has good health but lives in a crime ridden neighbourhood versus someone who has poor health but lives in a safe neighbourhood — who is better off? We cannot adjudicate this question unless we make some decisions about whether health or environment is more important.
The nice thing about using income and prices for interpersonal welfare comparisons, as in cost–benefit analysis, is that prices already have society’s views of what is ‘more important’ built in because they emerge from the interaction of demand and supply. In the example above, we could look at real estate and health care prices and make a comparison that way, relatively straightforwardly. It is worth mentioning in this context that success in meeting the SDGs is tightly correlated with GDP, at around 0.8.
Income and prices are thus a liberal apparatus for thinking about welfare improvements, whereas other measures typically require some arbitrary value judgements. This is important in New Zealand’s case because the Labour leadership only won 37 per cent of the vote in the 2017 election — their preferences are not necessarily those of the public.
The situation is not comparable to Bhutan, the other famous case of well-being-centric policy. Bhutan’s ‘Gross National Happiness’ (GNH) indicator and policy evaluation tool bears some similarities to New Zealand’s well-being budget. But Bhutan is a small, monocultural society of less than a million people with broadly shared values and an unusually benevolent leadership. The GNH system, with its arbitrary weights and technocratic oversight, works quite well there. It is dubious whether a similar approach would function in a more raucous polity with more insidious politics.
A feature of well-being policy that attracts lots of fanfare is the use of measures of life satisfaction, such as 1–10 scales, with 10 being perfectly satisfied and 1 being miserable. These are measures of subjective well-being, unlike GDP or the SDGs, which measure objective indicators.
While the academic literature on life satisfaction is growing, it is treated with a great deal of scepticism. One of the main reasons is concerns around scale recalibration — people do not use the same scale to answer life satisfaction questions year on year, and so the responses are incomparable.
By way of a simple example, consider a young person who is 9/10 and then has a further improvement in their quality of life. They might foresee further improvements still, and so they do not want to say that they are 10/10 as this would be misleading. So they say 9/10 again, but this is also misleading because it suggests that their life has not gotten better. As with multidimensional measures of well-being, it is hard to make interpersonal welfare comparisons using life satisfaction metrics.
Yet interpersonal welfare comparisons are a critical part of budgeting, because we want to spend our resources in a way that maximises overall well-being. Far from obfuscating well-being, income comparisons make such welfare analysis easier than any other approach.
If we can’t make a good comparison, then we are ultimately left to allocate money wherever it suits our particular values. This is what democratic processes legitimise.
In New Zealand’s case, the government changed because of a narrow margin of victory. In this context, it is problematic to move to a ‘well-being’ budget and away from an approach grounded in diffuse preference satisfaction. The opposition is within its rights to argue that it too was concerned with well-being when in power, not just economic growth, and that the present government is engaging here in an expensive branding exercise rather than offering meaningful policy improvements.
Mark Fabian is an adjunct lecturer in economics at the Crawford School of Public Policy, Australian National University. He tweets at @markfabianANU.