Leigh’s lessons for policymakers

Andrew Leigh delivered a great speech to the Economic Society of Australia in Canberra last week (alas I was not in attendance), in which he outlined his ‘Ten Lessons for Economic Policymakers’ in detail.

Most were excellent, but he missed the mark on two of them by making a common mistake.

Lesson one: focus on wellbeing, not just dollars

Leigh is correct that GDP per capita is not how economists measure the wellbeing of a society – many politicians might (look at China with its growth targets), but economists certainly don’t. GDP per capita correlates with wellbeing, but it’s not a measure of it.

Leigh’s mistake is when he then claims that in a comparison between policies that would give people either “a decade’s more healthy life or the doubling of per capita incomes”, the answer is “the extra decade of life”.

Economists would not be so quick to jump to that conclusion. For instance, many people might want to live just as long as they’re currently expecting to, but with some combination of twice as much income or twice as much leisure during those years. Maybe they’d want to live just five years longer but with 50% more income or leisure; we can’t know.

Fortunately, economists use (admittedly imperfect) tools such as the value of statistical life to try and put a dollar value on trade-offs such as these. Not taking this step means Leigh is imparting his personal utility curve – what he considers ‘wellbeing’ – on the population writ large. And that’s often a recipe for bad policy.

Lesson nine: remember equity

Leigh again slips up on the subject of utility in this lesson, when he claims that to believe “redistribution can raise overall happiness”:

“…you need to simply believe that another dollar buys less happiness for a billionaire than for somebody who’s sleeping rough. If you believe that, then it follows that redistribution can raise overall happiness.”

Not true, and certainly not believed by “most economists” – Economics 101 acknowledges that interpersonal utility comparisons are not possible, even with money, because utility is ordinal, not cardinal. In other words, people’s preferences can be ranked but they can’t be measured. And if you can’t measure them, you can’t compare differences in the marginal utility of money between people.

Overall, I would give Leigh an 8/10 – an excellent score for a politician, and certainly better than what his colleague, Treasurer Jim Chalmers, would receive. But he needs to brush up on his welfare economics!