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 – actual increase = 8.8%

ECONOMIC WELL-BEING= a 1 [ CONSUMPTION] + a 2 [TOTAL WEALTH] + a 3 [ DISTRIBUTION] + a 4 [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 Economic Well-Being

Human 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 France 980.6, USA

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

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

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 –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 GDP EWB

Physical Investment Natural Capital Produced Capital GDP EWB

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