The HALE index of wellbeing – one year on

Fairfax asked for an op ed on the Herald/Age Lateral Economics Index of Wellbeing (the HALE) one year on from its launch and that’s what appears below and, in a slightly edited form in the SMH.

There’s plenty wrong with GDP as a measure of national wellbeing. As Bobby Kennedy said, it measures everything in life – except what’s most important! It measures the dollar value of all transactions in the marketplace. So if your TV is stolen and you buy another, install a burglar alarm and vote for more cops on the beat, GDP goes up at every turn.

And if we dig resources out of the ground, or otherwise degrade our environment, GDP is blind to the way we are running down our natural capital, but registers the dollar value of the resources we take to market.

So is there a better indicator? Our Bureau of Statistics (ABS) is unconvinced and, and as a result, its Measures of Australia’s Progress (MAP) project assembles numerous indicators over numerous social, economic and environmental domains but pointedly refuses to aggregate them into one index.

If you were building a single index of wellbeing and social wellbeing seemed to be improving whilst environmental wellbeing was deteriorating how would you decide which mattered more?

Where the ABS are scrupulous about avoiding such value judgements, plenty of attempts to measure national wellbeing content themselves with quite superficial judgements. This is almost invariably the case with ‘composite’ indexes, which compile diverse indicators over broad domains and then aggregate them almost frivolously into a single indicator.

Bhutan’s famous ‘Gross National Happiness’ index weights its nine different domains of wellbeing equally “to avoid bias”. But that doesn’t avoid bias so much as ensure it by default, rather than design. To take an example from Bhutan’s GNH, wouldn’t extreme poverty or illiteracy (domains 6 and 8) be a worse fate than an extremely bad work-life imbalance (domain 2)?

The OECD Better Life Index was released with much fanfare last year, but it’s not much better. It identifies eleven domains. But it gives little thought to how they might be interrelated – for instance we spend much of our income on housing so its two domains ‘housing’ and ‘income’ are not independent but closely interrelated. Like Bhutan’s GNH, all the OECD’s eleven domains are weighted equally by default. Visitors to its website can dial up or down the relative significance of any domain. This seems like the soul of reason. But with the OECD offering little guidance on performing the difficult labour of understanding and justifying alternative choices, the feature contributes more to entertainment than enlightenment.

The final alternative – which we took to build the Herald Age Lateral Economics (HALE) index – is to start with the national accounts and then try to adjust them for all their inadequacies. That entails Herculean assumptions but at least they force one to deal with the difficulty of one’s task which is to somehow account for like and unlike things in order to weigh them all in some single measure of wellbeing.

We adjust the accounts to reflect resource depletion and the risk of global warming and changes to ‘human capital’ or knowhow. We also adjust wellbeing for major improvements in our health – for instance increased life expectancy – and for difficulties which are widespread and which have clear and measurable impacts on wellbeing such as increasing rates of mental illness, obesity, long term unemployment, overwork and inequality.

And after a year, there’s a clear payoff. Where the OECD Better Life Index often does little more than echo back its users’ self identified priorities, the HALE identifies two other major issues. Because our measure starts with national income rather than national production, terms of trade declines have figured prominently in the HALE reporting since December last year – before they became a pundit’s talking point.

But the really big news in the HALE is the significance of human capital or the knowhow of our population which dwarfs all other capital – the houses and factories we’ve built and any reduction in our national capital from resource depletion (which turns out to have been negligible). And ‘human capital’ has been surging, as we’ve been schooling the baby ‘boomlet’ of the mid 2000s, and increasing the size and knowhow of our workforce with skilled migration and higher retention rates.

None of this will end the volatility of the business cycle. The very recent precipitate fall in iron ore prices could easily portend trouble ahead. But at least for our medium term outlook it’s a very reassuring message. At a time when the national conversation briefly turned to education last week, the HALE bids us to consider it much more than the economic pundits tend to.

As for the rest, so far the HALE hasn’t set off any alarms, not because its adjustments to GDP aren’t important, but because no large change in them has occurred. But if and when they do – if long term unemployment surges during a recession, or the chances of avoiding severe climate change slip away, or if income distribution becomes much more unequal – the HALE will remind us what we all know, but our economic reporting sometimes forgets: That such things matter just as much to our wellbeing as dollars in our pocket.