Isn’t it Well Being That We Want to Improve? - The Metric of Evaluation Lars Osberg - Department of Economics, Dalhousie University - Institute for Social.

Isn’t it Well Being That We Want to Improve?

- The Metric of Evaluation

Lars Osberg- Department of Economics,

Dalhousie University

- Institute for Social and Economic Research

University of Essex

Macro Indices & Micro evaluation

Under what conditions would a series of “good” project decisions add up to an increase in aggregate well-being ?– What project information is needed for a

“good” decision ? Macro well being index Micro criteria GDP per capita Benefit/Cost > 1

So what if GDP is increasing ? If Project Benefits > Costs in current $ Income,

adoption implies GDP increase What is the connection between GDP &

Economic Well-being ?• GDP excludes leisure, environment & much more

Potential compensation not good enough Do we care about

– Accumulation for future generations ?– Distribution of Income ?– Insecurity ?

Can we all agree on “adjustments” to $ income ??

Outline of Paper Alternative Index of Economic Well Being

– Is it possible ?– Is it plausible ?– Does it make any difference ?

Index of Economic Well Being– Consumption flows– Stocks of wealth– Distribution: inequality & poverty– Economic Insecurity

Compare trends in the index and its components to GDP per capita trends

Implications for project evaluation

GDP per capita

GDP rigorously standardized across countries (SNA)

Strong Implicit assumptions when used as measure of economic well-being– aggregate share of income devoted to accumulation (including

value of unpriced environmental assets) automatically optimal– poverty, inequality & economic insecurity do not matter– changes in leisure time, length of life, household size, costs of

commuting, pollution & crime - all irrelevant poor match to popular perceptions of trends in

economic well-being• "Are you better off today than you were four years ago?"

– 1980 Ronald Reagan – 1976-80 actual increase = 8.8%

ECONOMIC WELL-BEING= a1 [ CONSUMPTION]+ a2 [TOTAL WEALTH]+ a3 [ DISTRIBUTION]+ a4 [INSECURITY]

DIFFERENT VALUES WILL IMPLY DIFFERENT WEIGHTS

Setting weight equal to Zero is a (strong) value choice

Model

Consumption flows

Stocks of wealth

Economic equality

Economic security

EconomicWell-Being

Human Well-being

Economic Well-being

Economic Well-being

Well-being and GDP

GDP

Economic Well-being

GDP

“Social regrettables”

GDP

Economic Well-being

GDP

“Social regrettables”

Average Consumption Flows $ Marketed real consumption per capita Adjustments

– value of increased longevity– reduced economies of scale in household consumption– changes in working hours – @ marginal net wage– Government services

Data Non-Availability precludes– “Regrettable Necessities”– Underground Economy

Why might such adjustments matter?– E.g.- BIG differences in hours worked 1997

• Germany 981.9 France 980.6, • USA 1428.5

Figure 1

Annual Number of Hours Worked per Person Aged 15-64 1

600

800

1000

1200

1400

1600

1800

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

year

annual hours

Canada

France

Germany

Sweden

United Kingdom

United States

1 = Average hours worked per employed person *(Employment / pop. age 15-64) Source: OECD Health Data 98 CDROM, "A Comparative Analysis of 29 Countries".

Wealth Stocks, Sustainability and Intergenerational Bequest $

Physical capital stock Research and development capital stock Value of natural resource stocks

– price + quantity change Stocks of human capital (@ cost education) Net foreign indebtedness (-) State of environment and national heritage

(degradation -) NOTE: GDP is flow of market output

Distribution Same average income if all get $500 or if ½ get

$999 & ½ get $1 – but well-being differs How to summarize “Distribution”?

– Simplicity desirable if index to be used– Poverty & Inequality differ, but both matter

Inequality– Gini coefficient

• After-tax & transfer household income• Equivalence scale =

Poverty– Sen-Shorrocks-Thon measure

• Rate (Poverty Line = ½ Median)• Average poverty gap ratio• Intensity = rate x gap

familysize

Economic Security.

[25] “Everyone has the right to a standard of living adequate for the health and well being of himself and of his family, including food, clothing, housing and medical care and necessary social services, and the right to security in the event of unemployment, sickness, disability, widowhood, old age or other lack of livelihood in circumstances beyond his control.”

• Universal Declaration of Human Rights – United Nations: 1948

“Economic Security” Risk income loss due to unemployment

– changes in employment rate x UI coverage x UI replacement rate

Risk of illness– Unreimbursed private medical expenses as share of

disposable income

Risk of single parent poverty– poverty rate & gap for single women with children– divorce rate of legally married couples

Risk of poverty in old age– chance x depth of elderly poverty

Australia

0.95

1.05

1.15

1.25

1.35

1.45

1.55

Index of Wellbeing, Equal Weighting (0.25+0.25+0.25+0.25)

Index of Wellbeing, Alternative Weighting (0.7+0.1+0.1+0.1)

GDP per capita Index

Canada

0.95

1.05

1.15

1.25

1.35

1.45

1.55

Index of Wellbeing, Equal Weighting (0.25+0.25+0.25+0.25)

Index of Wellbeing, Alternative Weighting (0.7+0.1+0.1+0.1)

GDP per capita Index

United Kingdom

0.80

0.90

1.00

1.10

1.20

1.30

1.40

1.50

1.60

Index of Wellbeing, Equal Weighting (0.25+0.25+0.25+0.25)

Index of Wellbeing, Alternative Weighting (0.7+0.1+0.1+0.1)

GDP per capita Index

United States

0.95

1.05

1.15

1.25

1.35

1.45

1.55

Index of Wellbeing, Equal Weighting (0.25+0.25+0.25+0.25)

Index of Wellbeing, Alternative Weighting (0.7+0.1+0.1+0.1)

GDP per capita Index

Sweden

0.85

0.95

1.05

1.15

1.25

1.35

1.45

1.55

Index of Wellbeing, Equal Weighting (0.25+0.25+0.25+0.25)

Index of Wellbeing, Alternative Weighting (0.7+0.1+0.1+0.1)

GDP per capita Index

Caveats

Trend – NOT level – comparisons– Statistical sources differ less over time within

countries than across countries– Avoid valuation of Infra-Marginal Endowments (e.g.

security value of NHS, environment) A Cardinal Representation of an Ordinal

Magnitude– Defensible only as a Local Approximation to Trend

• if valid - only over observed range

Operationalization Matters And many more

Implications ? Much less gain in economic well-being than in

real GDP per capita 1970-99– Somewhat sensitive to weighting of change in

consumption relative to inequality & insecurity – Reducing Inequality & Insecurity was originally the

major objective of social programs – de-emphasized in recent years

• Especially USA & UK – has well being stagnated ?

Perhaps Policy Design should aim at increasing Well-Being

Useful to know project impacts on:– Accumulation– Distribution– Insecurity

The role of the natural environment

Natural Capital

GDPEWB

Physical Investment

Natural Capital

Produced Capital

GDPEWB

Human and Social Capabilities

Natural Capital

GDP

Human and Social Capabilities

Produced capital

EWB

The role of knowledge/skills

Natural Capital

GDP

Human and Social Capabilities

Human capital

Produced capital

EWB

The role of networks/social norms

Natural Capital

GDP

Human and Social Capabilities

Human capital

Produced capital

EWB

Social capital

A DIGRESSION

Human Capital

“The knowledge, skills, competencies and

attributes embodied in individuals which

facilitate the creation of personal, social

and economic well-being”

Social Capital

“Networks together with shared norms,

values and understandings which

facilitate co-operation within or among

groups”

Close ties between human and social capital

Natural Capital

GDP

Human and Social Capabilities

Human capital

Produced capital

EWB Social

capital

The role of institutions

Natural Capital

GDP

Human and Social Capabilities

Human capital

Produced capital

EWB Social

capital

Political, institutional and legal arrangements

Natural Capital

GDP

Human and Social Capabilities

Human capital

Produced capital

EWB Social

capital

Political, institutional and legal arrangements

Natural Capital

GDP

Human and Social Capabilities

Human capital

Produced capital

EWB Social

capital

Political, institutional and legal arrangements