Nobel Prize-winners in economics are among those who back the wellbeing of current and future citizens being embedded in policy-making, writes Victoria University’s Professor Arthur Grimes
Public policy should aim to increase the wellbeing of current and future citizens—whether they be citizens of New Zealand or citizens of the world.
Policy that focuses on wellbeing is consistent with Treasury’s Living Standards Framework (LSF), which aims to improve outcomes with respect to (i) economic growth; (ii) sustainability for the future; (iii) equity; (iv) social cohesion; and (v) managing risks.
However, the Government’s 2017 Budget Speech did not show much evidence that the LSF is influencing economic policy. Terms such as ‘living standards’, ‘wellbeing’, ‘welfare’, ‘fairness’, ‘sustainability’, ‘natural capital’ and ‘social capital’—which are at the heart of the LSF—were conspicuous by their absence.
While a wellbeing approach to policy may sound woolly, it has the backing of several Nobel Prize-winners in economics: Amartya Sen, Joseph Stiglitz, Daniel Kahneman and Angus Deaton have all called for greater emphasis on wellbeing as a guide for policy-making.
To put some flesh on the bones of the approach, let’s look at three New Zealand policy initiatives through a wellbeing lens.
Social investment approach
The social investment approach (SIA) is the centre-piece of the Government’s social policy strategy. It is designed to focus on programmes that will result in the biggest ‘bang-for-the-buck’ from current expenditures. In principle, this approach could be a great manifestation of the wellbeing approach to public policy.
However, the programme currently focuses on future fiscal savings when measuring benefits, rather than counting broader wellbeing benefits such as how people feel about their lives. If a policy were to reduce future fiscal outlays while making people feel worse about their lives, the SIA would claim the fiscal savings as a benefit. In contrast, a wellbeing approach would count the worsening life experiences as a cost. Thus quite different policy interventions could be championed by the two approaches.
Treasury’s own policies further undermine even the fiscal benefit approach by heavily discounting future benefits. Its standard approach to discounting the future means that, having already taken inflation into account, it values a $1 benefit today more than a $4 benefit in one generation’s (25 years’) time.
To explain what this means, imagine two hypothetical policies. The first policy will result in a reduction of 10 murders this year but no change to murders next generation. A second policy results in a reduction of 40 murders next generation but no change in murders today. Treasury’s approach would favour the first, short-term focused, policy. A wellbeing approach that values future generations would adopt a very different approach to discounting and would place much greater value on future generations.
International airlines policy
Let’s consider a second example. Treasury once argued that in calculating benefits from improved international airline services we should count as a cost the impact of more New Zealanders travelling abroad.
Of course, opening up the opportunities for cheaper international travel is of benefit to New Zealanders’ wellbeing—especially the chance to holiday in sunnier climates during winter! Why then did Treasury count these benefits as a cost? The reason is that it was concentrating on an economic aggregate (gross domestic product) and outward travel is an import that reduces GDP.
This was a classic example where concentration on an abstract economic aggregate was at odds with improving the wellbeing of ordinary people.
It is well accepted by macro-economists that monetary policy can have no long-run impact in reducing unemployment. Indeed, tasking a central bank with reducing unemployment can lead in the longer term to higher unemployment—as occurred during the stagflation (high inflation and high unemployment) period of the 1970s and 1980s. Recognition of this outcome means that since the late 1970s no advanced country has introduced a full employment target for its central bank.
Political parties often have short-term objectives (winning votes) that are not in keeping with the longer-term wellbeing of their citizens. The Labour Party’s intention to introduce a full employment target for the Reserve Bank is an example of such a short-term objective. If enacted, it would reduce the long-term wellbeing of New Zealanders by pushing up both the cost of living and—ironically—the unemployment rate, as a result of people losing faith in the integrity and consistency of the central bank.
By contrast, a longer-term wellbeing approach to public policy would highlight the importance of maintaining a consistent focus on keeping the cost of living under control (i.e. maintaining low inflation). This consistent focus has resulted in New Zealand maintaining both low inflation and one of the best employment records in the developed world.
Wellbeing as a guide
There are a number of tools that can be used to assess the contribution of public policy to wellbeing. Wellbeing measures encompass both objective indicators (such as health and material living standards) and subjective wellbeing. The latter, based on measures of how people feel about their lives, have been shown repeatedly to have validity as measures of people’s wellbeing. Maintaining a dashboard of wellbeing indicators is favoured by many leading thinkers in the area, including Stiglitz and Sen.
As newly-appointed Chair of Wellbeing and Public Policy at Victoria University of Wellington, my goal will be to see these new, exciting approaches become more embedded in New Zealand public policy-making.