Benje Patterson on looking beyond GDP, being pro-wellbeing and pro GDP growth, measuring things in a brave new world, the woolly wellbeing Budget and wellbeing budgeting coming to a council near you!

This week’s Top 5 comes from economist Benje Patterson.

As always, we welcome your additions in the comments below or via email to david.chaston@interest.co.nz.

And if you're interested in contributing the occasional Top 5 yourself, contact gareth.vaughan@interest.co.nz.

The buzzword wellbeing is being bandied about left, right and centre. Politicians have woken up to society’s demand to measure economic progress in a more socially inclusive and sustainable manner. But what is often overlooked in the well-intentioned political hype, is how do we put this new theory into practice and what will it mean for our regions. This Top 5 explores why wellbeing matters, and how you can use wellbeing ideals in an applied policy setting.

1. Why we need to look beyond GDP for inclusively measuring progress?

Gross Domestic Product (GDP) is often misused as a headline measure of the wellbeing of people in New Zealand and around the globe, even though such conclusions go beyond what GDP was originally designed for.

The modern concept of GDP was a by-product of the Great Depression, when people wanted a yardstick for valuing how much an economy could produce. Because what is produced can be sold or traded, GDP is often also thought of as an income flow that is able to fund consumption and investment.

It is from this logic that some people then make the heroic assumption that GDP can be used as a proxy of wellbeing in a region, presumably on the basis that a higher level of consumption indicates more people satisfying their lifestyle demands. At face value, this logic may make sense, but if we back up a couple of steps, it’s not hard to unpick some shortcomings in this approach.

Here are some limitations of GDP:

“GDP does not include non-market transactions (like when you dogsit for your neighbour), and it does not count the benefit of leisure (because simple pleasures like enjoying relaxing in front of the fire are not a market transaction). In a similar vein, factors such as how content people are feeling and their physical state of health can also not be captured using market transactions.

Another limitation of GDP is that it only considers a one-time flow of activity over a fixed time period, and does not take a broader look at the underlying wealth and resources at an area’s disposal.  Surely any assessment of how well off an area is must look at the land, capital, labour, and other accumulations of resources that can be used to generate future economic activity, support healthy lifestyles, and provide for the next generation.

GDP also does not distinguish between how the activity has been funded and where productive capacity is being targeted.  This matters as failing to consider debt financing and what it is being used to produce, invest in, or consume is asking for trouble.  If you have any doubt, consider all the money Greece borrowed for frivolous consumption and where that got them.

Also even if GDP goes up, that doesn’t mean everyone will benefit. The capital owners may be the ones that have benefited from growth, with very little flowing through into the back pockets of workers. A lack of awareness of this issue is what led to the Occupy Wall Street movement.”

2. You can be pro-wellbeing and pro-GDP growth.

The World Economic Forum (WEF) released a report back in 2015 that considered inclusive growth (wellbeing) and development across the world. One of the key findings of the report was that incorporating wellbeing into decision-making is also good for business. You can be a top performing economy and care about people as well:

“There is no inherent trade-off in economic policymaking between the promotion of social inclusion and that of economic growth and competitiveness; it is possible to be pro-equity and pro-growth at the same time. Several of the strongest performers in the Forum’s Global Competitiveness Index (GCI) also have a relatively strong inclusive growth and development profile.”

Gemma Corrigan, an economist at the WEF, pushed the point even stronger in an article penned for the Huffpost around the same time:

“The realization among business and political leaders that economic growth is only sustainable if it is inclusive, and not restricted to a small elite, may have taken too long, but at last the message is being received loud and clear: you can be pro-growth and pro-equity — and you must be pro-equity to be pro-growth.”

3. How you can measure things in a brave new world?

Ever since the Government decided to release its Wellbeing Budget, the Treasury has had a fire under their bum to create an evidence-base from which policymakers can make decisions. The result has been the Treasury’s Living Standards Framework (LSF) Dashboard and a cost benefit analysis tool that splices wellbeing ideals together with traditional economics. The work itself is rather pioneering in an applied setting, and the Treasury has absolved itself of some responsibility with disclaimers such as:

“It is important to note that neither the LSF nor the LSF Dashboard report on the performance of Government. Nor do they prioritise Government spending on wellbeing outcomes – the Government makes those decisions, informed by advice from the Treasury.”

I realise that Treasury is an advisor, rather than a decision-maker, but I still find this position a cop-out. More concerningly, the Treasury provides only broad guidance, rather than more prescriptive criteria for choosing to focus on certain areas of wellbeing over others in decision-making. Such standardised guidance is pretty important given their wellbeing cost benefit analysis tool allows for you to measure anything from the value of a new qualification (Bachelor’s degree to postgraduate degree is worth $13,033) to how much a new friendship is worth ($592). NZ Initiative’s Chief Economist Eric Crampton fears:

“…they introduce "woolly thinking" into government departments deciding on policies and expenditure.

"My worry is that the large number of indicators gives analysts in government departments the freedom to choose the ones they prefer and ignore robust cost benefit analyses," Crampton said.”

4. Wellbeing Budget was a black box.

Woolly thinking was apparent to me in the Wellbeing Budget. At face value, the Budget looked great – borrow a little more, spend it on the vulnerable, and don’t worry about the books because strong forecasted growth will keep taxes growing and surpluses entrenched. By all accounts an inclusive and balanced budget.

But frankly these details were secondary to me while reading the Budget. I was more interested to learn about how the Government weighted various aspects of wellbeing in its decision-making processes. These details were missing, and I was left with the feeling that Wellbeing Budgets year-to-year will be left to the “vibe” in the room, rather than a replicable, standardised process. In a recent article, I wrote that my concern is:

“The actual decision as to which policies ultimately make the cut, and which policies are out, is then left to horse-trading between Ministers. Apparently this process is more collaborative than in the past – though it is not immediately obvious what collaboration means in practice beyond trying to break down silos across government.

The real frustration for me surrounding this part of the process lies with the lack of structured guidance regarding how Ministers objectively compared the different potential policies around the Cabinet table. 

A magic wand was waved, and the Budget merely states that consideration was given to impacts assessed by the Living Standards Framework.

…

This part of the process is a black box and the absence of a clear framework for weighing up policy options leaves too much room for subjectivity.

And this level of subjectivity scares me because it removes an element of transparency and could ultimately lead to inconsistent assessments of policy options.

When allocating scarce resources, you need to be consistent, and remove temptations to cherry pick pet projects. Otherwise you perversely run the risk of undermining efforts to improve wellbeing.”

5. Wellbeing budgeting coming to a council near you!

Incorporating wellbeing into decision-making is not only for central government. The Local Government Act was recently amended to force local councils to consider the social, economic, environmental and cultural wellbeing implications of what they do. The upshot is that local authorities’ next Long Term Plans will be the local government equivalent of the Wellbeing Budget.

Local Government has been given no real guidance as to how they should implement this statutory requirement to consider wellbeing in decision-making processes. At least though, this all is a case of dejavu as wellbeing used to be in the Local Government Act until it was removed in 2012.

To get a headstart on what to think about, I have been advising councils to take a look at their 2009 Long Term Plans – as those were the last time they had to comprehensively think about wellbeing when making decisions. These historic frameworks can then be adapted to ensure that they are consistent with the current state of thinking by central government.

This view is consistent with the Minister of Local Government Hon Nanaia Mahuta, who recently said:

“This legislation aligns with the Government’s wider wellbeing agenda and is a critical step in enabling councils and communities to make decisions about the services and facilities that will enhance their sense of place and the quality of their lives.

“We are determined to work alongside local government to empower communities and give them a stronger voice and role in lifting their own well-being,’’ says Hon Nanaia Mahuta.