Measuring Wellbeing

I have a column today in the SMH on the new Lateral Economics/Herald Wellbeing Index.
Putting a figure on inequality adds to strength of statistical spotlight, Sydney Morning Herald, 9 December 2011

New numbers are to the press as shiny bottle caps are to magpies. Statistics have the power to shape a debate or provide oxygen to an issue. From a major bank's survey of consumer confidence to a political party's targeted release of ''internal polling'', numbers are often used to bring publicity to a company or a cause. When even condom manufacturers use surveys to get publicity, you know what the new maxim must be: statistics sell.

With the Herald/Lateral Economics Wellbeing Index, Fairfax has shone a statistical spotlight onto the issue of wellbeing. This is good. As all economics students learn on their first day of class, economics is about maximising utility, not money.

Yet it turns out that while national income is the wrong measure of wellbeing, it tracks the ''right measures'' extremely well. For example, country rankings on the United Nations Human Development Index create a splash whenever they're released. What the commentators won't tell you is that rankings of HDI and gross domestic product are almost perfectly correlated.
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When it comes to happiness, things get more controversial. In 1974, University of Southern California professor Richard Easterlin suggested that when incomes rise above a certain threshold, more GDP doesn't buy more happiness. Yet Easterlin's conclusions were based on data from fewer than 15 countries. More recently, University of Pennsylvania duo Betsey Stevenson and Justin Wolfers have analysed happiness surveys conducted in 132 countries. Stevenson and Wolfers show that far from fading out, the impact of economic growth on happiness continues right across the income distribution. There is no Easterlin paradox.

For example, on a 0-to-10 life satisfaction scale, respondents in Mali and Ethiopia place themselves between 3 and 4; residents of Egypt, South Africa and Portugal put themselves between 5 and 6; and people in Australia, the US and most other developed countries place themselves between 7 and 8. A 10 per cent increase in GDP buys as much additional happiness in a rich country as a poor one.

Strikingly, the relationship also holds for other metrics of wellbeing. People in countries with higher incomes are more likely to experience enjoyment and love, and less likely to experience pain and boredom. That's right, Paul McCartney, money can buy love - at least on average.

But just because GDP is a reasonable measure of aggregate wellbeing, that shouldn't stop us from looking at other measures of national wellbeing. One aspect of the Wellbeing Index that I particularly like is its inclusion of inequality. While the methods remain controversial, few would quibble with the basic proposition that another dollar brings more happiness to a pauper than to a millionaire. And a discussion of inequality also reminds us that a growing gulf between rich and poor risks splitting us into ''two Australias'', occupying fundamentally different realms, and rarely coming into contact with one another.

Another important part of the index is that it uses a measure of real incomes, thereby accounting for inflation. In an environment in which mischievous politicians sometimes claim that the cost of living is skyrocketing it helps to look at the figures. Inflation over the past year has been modest by historical standards. Indeed, prices have fallen for bread, milk, shoes, appliances, pharmaceuticals, cars, computers and toys.

What's missing? Given that an average Sydneysider with a full-time job spends the equivalent of 13 days each year commuting, a measure of travel time would be good - particularly one encompassing the enormous social harm of traffic congestion. As Lateral Economics notes, the available travel time estimates aren't great, but it would be worth including them nonetheless.

When measuring incomes, it would be better to have per-person measures, which account for population growth. In the educational arena, the measures seem surprisingly volatile. On the health side, I'd like to see the index take better account of disability - a yardstick by which we can judge initiatives such as the national disability insurance scheme. And in terms of social capital, I think the authors undervalue the importance of community groups and civic trust.

It is an old policy maxim that you shouldn't try to target more variables than you have policy levers. For example, since the Reserve Bank controls one big thing (interest rates), we shouldn't hope that it can achieve a dozen policy goals. But in this case, the opposite principle applies. There are a plethora of ways that governments can affect the Wellbeing Index. So I hope that Fairfax will avoid the temptation to put too much emphasis on the speedometer, and keep telling us about all the different things that are going on under the bonnet. In this instance, the sum of the parts really is more than the whole.

Andrew Leigh is the federal member for Fraser (ACT). His most recent book, Disconnected, looks at how community connectedness has changed over past decades.

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Cnr Gungahlin Pl and Efkarpidis Street, Gungahlin ACT 2912 | 02 6247 4396 | [email protected] | Authorised by A. Leigh MP, Australian Labor Party (ACT Branch), Canberra.