Beyond GDP under Covid-19: some advice for governments

10 Jul 2020

What sort of ‘normality’ might we expect when the Covid crisis has passed? Here Paul Anand1 explores the ‘wellbeing’ agenda and its relevance to a post-Covid world.

For a long time, academic economists have emphasised the limits of GDP, particularly as a measure of human wellbeing, environmental sustainability and now increasingly the digital economy. As a result, the OECD and UN have developed alternative measures, namely the Better Life Index and the Human Development Index which complement traditional national income monitoring by providing dashboards of indicators that track human wellbeing directly. These multi-dimensional indicators are particularly valuable at this time because policy makers and societies more broadly wish to protect utility and human development directly, need to understand what the losses and gains to human wellbeing are and who is likely to bear the brunt, and must make decisions ahead of national income data becoming available. There are two frameworks for doing this in economics, one developed by Sen and others and now the basis for the sustainable goals and the other focussing on understanding subjective wellbeing variables.

These approaches have different philosophical underpinnings but in policy settings actually share common interests and can be used produce complementary and reinforcing results by helping to understand key drivers of wellbeing. Some of the stylised facts or insights that emerge from this work include the following. Income is an input to wellbeing not a final outcome. There are often correlations with wellbeing but sometimes relations are non-linear and for some activities or dimensions of wellbeing relations are weak or negative. Secondly individuals are heterogenous in their abilities to make use of income. A classic example concerns the case of disability where it has been estimated that a person may need between 25 per cent to 40 per cent additional income on average to give them the same level of satisfaction with income as a person without a disability.

Thirdly, social resources do matter and in various ways. This can be monitored by looking at the social ties a person enjoys (individual social capital) or the collective aspects of social capital such as the levels of trust that exist within society. Both can impact subjective aspects of utility directly and by impacting the costs of financial transactions. Fourthly, there is growing concern both within and outside economics in the rise of inequality in society. Angus Deaton has helped the Institute for Fiscal Studies2 and the EU plans to monitor the multiple dimensions of inequality from next year. Lastly, there is particularly in the World Bank a recognition of the need for community and public deliberation about social priorities — what we refer to as the social welfare function. As a result, most international economic organisations have had the addressing of inequalities related to gender, race, income and health on their agenda for some time and use the term ‘inclusive growth’ to reference it.

Against this academic and policy background, some governments also have adopted aspects of the wellbeing agenda into their work (UK, France, Australia, New Zealand, Bhutan being notable examples) and it is natural that such governments should ask what the implications are for their economic recovery planning. The Scottish Government has created an advisory group to help it come up with such a plan and sent invitations to consider what policies might be pursued and a group of us (Anand et al (2020) responded to this invitation with a series of recommendations which are discussed and summarised below.

The labour market

One set of priorities derives from the evidence that in recessions, first time labour market entrants suffer long term negative consequences in terms of spells of unemployment and worse health over the life course. Furthermore, when unemployment levels are high, employment rates take a long time to recover and active labour market policies appear less effective according to some studies. As a result, large numbers might expect to be a risk of scarring or become discouraged — that is wanting work but not actively looking for it. Looking to address underlying shortages in the workforce is one way to go — for example by addressing  shortages in STEM subjects or of digital skills through training. At the other end of the age scale, it is likely that some workers will be forced to exit the labour market earlier than planned and there may be issues of isolation as well as lower pensions that such workers face.

Here there may be value in considering non-conventional policies, perhaps working with charities, to help such workers find ways to continue using their skills and form other social networks to replace those related to work that may be lost. Job sharing is possible in many jobs though not widespread — at least for a period of time government might encourage and/or incentive this as a way of keeping employees with low opportunity costs connected to work. There is also a growing recognition of mental health issues as a source both of poor wellbeing and low productivity and from this perspective stay at home orders have served to exacerbate the rise of mental health problems that may emerge both in the near and distant futures.

Some companies are already offering training for managers in this area which demonstrates a belief in value though it is plausible that positive spillovers to home life are not taken into account. In that case there could be an argument for further government support based on the positive externalities of mental health training.

Gender equity

If workers and their employers are to be supported, then it may be that governments would wish to tie support to contributions to other closely relevant social priorities. Many countries espouse gender equality in the workplace but find that progress in practice, particularly in the more senior roles is slow. It would not be unreasonable, as a result, to ask companies to make more progress on gender equity, say, as a condition of receiving further public funds. Beyond this, there is a spectre of large scale homelessness when unemployment rises dramatically. The normal formulation of rental agreements which assumes fixed payments, may in current circumstances be less optimal than a general provision which allows for rents to be adjusted down temporarily for those on low income.

Supply chains and globalisation

A second set of issues concerns the economic environment in which people live. It is likely that value chains for some goods may shorten and that countries will seek to be more self-sufficient with respect to some strategic goods and services. In the UK, agricultural policy effectively promoted production for some decades for such reasons and similar questions are now being asked particularly with respect to the health and digital sectors. Should, for example, countries depend on IT infrastructures or core emergency medical supplies supplied substantially by companies located outside their boarders? If the answer is negative, then there are implications both for business support and labour markets.

In addition, some have argued for a new Marshall style plan for Europe and one major priority here concerns the shift to low carbon economies. Accelerating the shift could be a way to justify an expansion of major projects and provide some additional employment. In some cases, such as the production of energy-efficient social housing, policies may address environmental and (fuel) poverty goals at the same time. There are also important issues of taxation which serve to finance the provision of public and publicly provided goods and services. From that perspective there is an argument that taxes should be remitted to the relevant jurisdictions in which consumers and employees live though increasingly for the large digital corporations this is not happening. There is currently an OECD project looking into this but the growth of digital business during the lockdown provides additional impetus for resolving this particular disconnect.

The role of ‘experts’

We also made some observations about the decision-making process. Some economists, for example and those in the World Bank, advocate community and public deliberation as a a way of identifying economic and social priorities. The experience of Covid 19 has raised the level of direct and immediate interaction between politicians and citizens and this could in the long-term help identify more accurately the social welfare function. That said, there are also some important insights from behaviour economics that should not be ignored. It is possible to point to several candidate examples of anchoring and adjustment — the tendency to anchor on a position and underestimate the need for change. Did the UK lockdown too late and not hard enough when it did for example?

There are also questions about the choice of relevant expertise for advisory committees. Would a broad based approach including economics and other disciplines beyond public health help to minimise the inevitable problems of blindspots? Other approaches used in science may also be of interest to economists in future. For example a group at Cambridge University recently employed environmental scanning to identify some 275 ways in which transmission of Covid 19 might be disrupted. At the time of writing, debate about fiscal policy seems to be recognising a need to develop policies that address directly a range of human needs associated with employment, health, education and housing. In doing so, it contributes to the ‘Beyond GDP’ agenda which highlights the need to focus on the ultimate human outcomes, from inequality to wellbeing, that arise from, and drive, economic activity.

Notes:

1. The author is a professor at The Open University and research associate at London School of Economics.

2. See Newsletter no. 187, October 2019, p.10

Reference:

Anand P, Blanchflower D, Bovens L, De Neve J E, Graham C, Krekel C, Nolan B, Thoma J, (2020) Post-Covid 19 Economic Development and Policy. London. LSE Wellbeing and Human Development Project,http://www.lse.ac.uk/cpnss/assets/documents/wellbeing-and-human-development/Post-Covid-19-Advice-.pdf (Accessed 15 June 2020)