Saturday, December 10, 2011

What factors should be taken into account in assessing short term changes in well-being?

This is one of the questions I have been pondering as I have been reading about the Herald/Age - Lateral Economics (HALE) index of the well-being of Australians.

The aim of the Fairfax organization in sponsoring the development of this new index seems to have been to publish a broad indicatorof social progress in the hope that this will help people to avoid viewing GDP as ‘the supreme indicator of our wellbeing’.

The timing of publication – a few days after quarterly GDP data are published – is clearly intended to invite comparison with quarterly GDP data. Indeed, a report in the Sydney Morning Herald makes such a comparison:
‘Wellbeing grew twice as fast as GDP in the September quarter thanks to a big rise in national income from the boom in commodity prices and cheaper imports’.

The HALE index rose by 2.2% in the September quarter primarily because net national income (NNI) is the starting point for calculation of the index and NNI reflects terms of trade movements. I don’t have any problem at all with the idea that well-being is more closely related to NNI than to GDP, but I can’t help thinking that the relationship between well-being and short term fluctuations in the terms of trade must be tenuous, at best.

Perhaps the terms of trade improvement in the September quarter raised the well-being of some people by enabling them to enjoy an overseas holiday that they might not otherwise have been able to afford. People who purchased imported consumer durables might also have benefited. In general, however, it isn’t obvious to me that changes in the terms of trade have much effect on living standards unless they are sustained over several years. It is even possible that short term improvements in the terms of trade could have a negative impact on well-being by adding to uncertainty in the context of concerns about possible effects of increased import competition on jobs in some industries. Such impacts might, of course, be offset by optimism about improved employment prospects elsewhere in the economy.

It seems to me that uncertainty is a factor that should be taken into account in assessing short term changes in well-being. Research based on surveys data relating to subjective well-being suggests that increased uncertainty can have a substantial short-term impact on well-being. For example, Carol Graham has reported that average life satisfaction in the US fell by 11% during the 08-09 financial crisis, mirroring a larger fall in the stock market. However, life satisfaction bounced back to previous levels once the immediate crisis was over, even though the stock market remained relatively depressed (‘The Pursuit of Happiness’, pp 88-89). A fall of 11% in life satisfaction is a very large change in a statistic that is normally very stable over time.

In an earlier post I noted that there was even a blip in life satisfaction data for Australia at the onset of the global financial crisis. A much larger decline in consumer confidence occurred at that time reflecting, amongst other things, increased pessimism about the economic outlook for the next five years. Pessimism about the economic outlook hasincreased again over the last year or so and now stands at levels almost comparable to those during 08-09.

If the HALE index is intended to be taken seriously as an indicator of short term changes in well-being it seems to me that it would be desirable for it to reflect changes in uncertainty about the economic outlook.

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