The government has promised a ‘wellbeing budget’. No one seems to know what that means. We can set out some preliminary economic understandings.

There is a story of a little old lady who woke up after a close election and was told that the result was a ‘hung parliament’. She responded that she did not know what that meant, but it sounded like a good idea.

There are a lot of people saying the same thing about a ‘wellbeing budget’, although there are the cynics who think that it is yet another government slogan unattached to any fundamental change. We may know better on budget day, but my advice to little old ladies is not to hold your breath.

What I can say, is a bit about the economic background. We can start with the Fourth (Lange-Douglas) Labour Government of the 1980s, just as once we began our narratives with the First (Savage-Fraser) Labour Government of the 1930s and 1940s, although we should never forgot what had gone on before.

At the heart of the economic goal of the Fourth Government was to increase GDP. That they miserably failed to do so belongs to another narrative; this one is about ambitions.

The economic measure of GDP has a long history. It was systematised in the 1930s by Simon Kuznets. He was trying to track the market economy but said on day one that it was not a good measure of wellbeing. There is a long literature of economists elaborating the limitations and I was, for instance, taught them in my first year economics course in the 1960s.

(Critics keep rediscovering the limitations, pretending originality by ignoring fifty and more years of economic analysis. Typically they do not understand the limitations and often propose alternative measures which are equally subject to them.)

If I had to defend the Rogernomes of the 1980s – a task so difficult, they do not try to do it themselves – I might argue that economists cannot raise general welfare – we would make rotten marriage counsellors – but that we can contribute to increasing overall wellbeing by advocating and implementing policies which raise material wellbeing. That is not a dishonourable objective, albeit a humble one.

There is a paper written by Paul Samuelson in the 1940s in which he shows that under certain conditions, per capita GDP (actually National Income but I’ll spare you the differences which are unimportant for these purposes) is a reasonable measure of material wellbeing. So in principle the pursuit of higher GDP increases wellbeing.

But do those assumptions hold, or at least hold near enough to make policies to pursue GDP contribute to making New Zealand better off? They do not and you have to modify greatly the Rogernomics policies if you are concerned with wellbeing. (Saying this made me rather unpopular in my profession at the time.)

The outcome of the policies of both the Fourth Labour and the Fourth National (Bolger-Birch) Governments turned out largely as the theories I was using predicted. Moreover, a mass of empirical research, not available in the 1980s, confirmed the conclusions.

One key finding is that above a threshold, rising real income does not add much to one’s wellbeing. For instance a quality partnership with someone is much more valuable. Sometimes I use a heuristic rule for some of the research that the material standard of living is only about 10 percent of what makes us happy.

This led to a quandary for those responsible for advising the government. For a while it was push on with the past policies; little old ladies will tell you that a measure of stupidity is to keep repeating past behaviour in the belief it will be different next time. This was compounded by forgetting, ignoring the evidence of failure and any new evidence which might have modified their theories.

But such an approach could not go on forever. Slowly, the more thoughtful policy advisers began to look for alternatives. They did not want to abandon their discipline and pursue superficiality. But it requires a lot of understanding of the whole of economic theory to do this well.

Eventually Treasury invented what was known as the ‘pentagon’, a kind of checklist with which they evaluated a policy recommendations. The main criteria were economic growth, sustainability for the future, increasing equity, social infrastructure and managing risks.

More recently this evolved into the Living Standards Framework with its dashboard of four capitals: natural capital, social capital, human capital and financial capital.

To be frank, I am not sure how this framework connects to economic theory and I worry that the detachment means that the approach may not be robust under pressure. Yes, I am defending deep economic theory just as if I were a physicist, I would defend the laws of thermodynamics – you dont blame physics for engineers failing to make buildings robust to earthquakes. Similarly, I certainly do not defend the superficial application of economic theory, which often leads to the promotion of the equivalent of perpetual motion machines, usually without any understanding on the part of the advocate.

Observe that the Living Standards Framework approach has developed in Treasury over a couple of decades (and it is paralleled by developments overseas). Perhaps the apolitical point should be made that were Bill English still Minister of Finance, Treasury would still be using a framework like this.

Allow me a caution. The first responsibility of a Treasury is as the keeper of the monarch’s treasure. It is to ensure there is no corruption and that Crown overspending in the short term does not generate a fiscal crisis in the long term. The monarch also appreciates wise advice on how to tax and spend, but ultimately the keeper role will predominate and that will always place a wellbeing budget in a framework of whether it is prudent.

I am not sure how the Living Standards Framework will be portrayed in the 2019 budget. It could easily be an exercise in public relations designed to fool even little old ladies. But it may be an attempt to run the economy in a different manner from the past; one which takes into account actual human behaviour and does not ignore the unreality of the assumptions that Samuelson required to make GDP a valid measure of wellbeing.

Comments (0)

No comments yet.

Post new comment

You must be logged in to post a comment.