How could the OECD's well-being indicators be improved?

This is the third post in a series on the OECD’s better life index. In the first post I played with the index to see how different weighting systems might affect the ranking of OECD countries. My conclusion was that different weights have some effect, but Australia comes out fairly well whatever weights you use. In my second post I derived a weighting system which gives higher weight to indicators that are highly correlated with each other. The countries ranked most highly on this basis tended to have a higher probability of exceptionally good performance on most of the indicators and lowly ranked countries tended to have a higher probability of exceptionally poor performance. My conclusion was that well-being indicators tend to tell similar stories.


In this post I consider how the OECD’s well-being indicators could be improved and how much difference the improvements I suggest make to the outcomes derived using the same methodology as in my second post.

In considering how the OECD’s well-being indicators could be improved I think it is important to try to specify what the indicators should be trying to measure. I think the main reason why such indicators are of interest is to provide information about the probability that the ‘average person’ (some person chosen at random) in different countries might have relatively high or relatively low levels of well-being. All the factors that affect individual human well-being – economic and psychological, basic needs and higher needs, individual goods and collective goods, objective factors and subjective factors – are potentially relevant.

People are interested in international comparisons of well-being for a variety of reasons, not just to monitor the effectiveness of government policies. In fact, well-being indicators are not necessarily closely related to government policies. For example, health indicators may be more closely related to cultural influences affecting smoking, alcohol consumption, obesity, exercise etc. than to public health policies. The impact of well-being comparisons on decisions of individuals and community groups might actually be more important than their impact on decisions made by governments.

However, that is no excuse for the OECD to exclude from its well-being indicators one of the most important factors affecting individual well-being that is subject to the influence of government – namely, individual freedom. The importance of perceptions of freedom to well-being has been established in several studies, including those by Paolo Verme (using a large data set drawn from the World and European Values Surveys, ‘Happiness, Freedom and Control’, 2007) and John Helliwell, Christopher Barrington-Leigh, Anthony Harris and Haifang Huang ‘International Evidence on the Social Context of Well-being’, Working paper 14720, NBER, 2009). There is data available from the Gallup World Poll on the variable used by Helliwell et al, the proportion of the population who are satisfied with their freedom to choose what they do with their lives.

The OECD includes a measure of governance, another factor that is strongly subject to the influence of government. However, the OECD’s indicator reflects only two factors: voter turnout at elections and consultation on rule making. Important factors omitted include corruption and the quality of public administration. I have modified the OECD’s governance indicator by incorporating the World Bank’s governance indicators (with relative weights determined by average correlation with other OECD indicators).

The OECD’s measure of the effect of the environment on well-being includes only one indicator – a measure of air pollution by tiny particulate matter small enough to be inhaled into the deepest part of the lung (PM10). I have modified the OECD’s indicator by incorporating subjective data on ‘satisfaction with efforts to preserve the environment’ from the Gallup World Poll (again with relative weights determined by average correlation with other OECD indicators).

So, how much do these modifications change the overall well-being index? Not much. If you focus on rankings you might get the impression that the change is substantial. For the most part, however, as shown in the chart below, there is little change in well-being levels.

Was the exercise of modifying the indicators worth doing? I think so. I got some satisfaction from confirmation that the freedom indicator is highly correlated with housing, community, life satisfaction and income. It was also pleasing that the modifications to the governance and environment indicators made them more highly correlated with the other indicators. The exercise makes me a little more confident that it is appropriate to view well-being as analogous to a syndrome, with various indicators corresponding to symptoms.

The table with information for each of the modified indexes is shown below. As in the table in my second post, the various indicators are ranked from left to right in terms of the extent that each is correlated with the other well-being indicators. Exceptionally good performance (highlighted in green) is more than one standard deviation above the mean and exceptionally poor performance (highlighted in pink) is more than one standard deviation below the mean.

Hint: Click on the table for a clearer image.

Do well-being indicators all tend to tell similar stories about OECD countries?

In my last post about the OECD’s ‘better life index’ I suggested that although all well-being indicators tend to tell similar stories when wealthy countries are compared with poor countries, they may tell different stories when wealthy countries are compared to each other. If we think of the OECD as a rich nations club we might expect a great deal of variation in the stories conveyed by different well-being indicators. For example, some countries might be expected to put emphasis on health and leisure, and others to put emphasis on income and housing. However, the view of the OECD as a rich nations club is actually difficult to sustain - there is a substantial amount of variation in wealth among the countries that are now members of the OECD. So, do all well-being indicators tend to tell similar stories in OECD countries too?


My first step in looking at this question was to look at the correlation between the various ‘better life’ indicators in the OECD. In the following table the various indicators are ranked from left to right in terms of the extent to which each is correlated with the other well-being indicators. The correlation between housing, community, life satisfaction and income tends to be higher than for the other indicators.

The ranking of countries in the table reflects the performance of each country in terms of a weighted average of indicators, with weights being derived from the average correlation of each indicator with the other indicators. (Anyone requiring further explanation of the methodology is welcome to contact me.)

Does the weighting system used to rank countries in the table have any greater validity than the range of weighting systems that I looked at in my last post? I’m not making strong claims. My attempt to derive weights without making explicit value judgements might have some merit if we view well-being as analogous to a syndrome with various indicators corresponding to symptoms. If an indicator is not highly correlated with the other indicators it may not be an important component of the well-being syndrome. Alternatively, it is possible that indicators that are not correlated with other indicators might not be well constructed. For example, the OECD’s governance indicator seems somewhat lacking by comparison with the World Bank’s governance indicators. The OECD’s governance indicator does not seem to include measures of levels of corruption or quality of public administration.

After ranking countries, the next step was to highlight countries that have exceptionally good or exceptionally poor performance in terms of particular well-being indicators. For the purposes of the table, exceptionally good performance (highlighted in green) is more than one standard deviation above the mean and exceptionally poor performance (highlighted in pink) is more than one standard deviation below the mean.

Hint: Click on the table for a clearer picture.

It is clear that the countries ranked highly in the table tend to have a higher probability of exceptionally good performance on most of the indicators and that countries that are ranked towards the bottom tend to have a higher probability of exceptionally poor performance. Well-being indicators do tend to tell similar stories in OECD countries.

One of the stories that the table doesn’t tell us directly is the difference in past history of the countries with relatively high and relatively low well-being ranking. The incomes of some of the countries with relatively high rankings are not particularly high, but good housing is presumably indicative of their past history of relatively high incomes. This seems to highlight the importance of the distinction between stocks and flows. Current well-being seems to be more closely related to stocks – wealth, human capital, social capital and environmental capital – than to income flows. However, we should not neglect the important role that income (economic growth) plays in the accumulation of wealth and human capital and the important role that stocks of social capital (particularly interpersonal trust) along with institutional capital (economic freedom) play in promoting conditions for ongoing economic and social progress.

Who should read 'The Case for Rational Optimism'?

After I finished reading ‘The Case for Rational Optimism’ by Frank S Robinson, my first thought was that I would not have any problem recommending this book. The next thought was: Who would I recommend should read it? The answer will emerge after I describe the book.

The first point I should make is that Frank Robinson’s book should not be confused with ‘The Rational Optimist’ by Matt Ridley. It is not difficult to confuse the two books because they cover some similar ground and contain similar views.

One of the distinguishing characteristics of Robinson’s book is the breadth of topics it covers. These include: human nature and virtue, the good life, happiness, free will, science and technology, freedom from fear, sex, individualism, the problem of government, America, capitalism, globalization, war and peace, and global warming. That list should be long enough.

Each topic is covered in a chapter of about 10-12 pages and each chapter is more or less self-contained. That seems to me to be both a strength and a weakness. It is a strength because it is possible to read a chapter or two in one sitting and then put the book aside for a few days without fear of losing the thread. It is a weakness because it may be easy to put the book aside for longer than a few days (as I did). While reading it I didn’t get the feeling that the book was building towards a strong conclusion. It is the kind of book I would normally tend to dip into rather than read from cover to cover.

The most valuable characteristic of Robinson’s book is its heavy reliance on leading thinkers in a wide range of areas. I consider myself to have read fairly widely, but Frank Robinson seems to have read every book in the library. And he is adept at explaining and discussing the views expressed in the many books he has read.

Robinson’s politics could probably be described as conservative-libertarian. His views on foreign policy are conservative. His libertarian views are evident in his support for free markets and an attitude of live and let live. He even supports gay marriage. I would have liked to have had the benefit of Robinson’s views on the war on drugs, but unfortunately that is one topic that he does not seem to have covered in this book.

Whatever topic Frank Robinson discusses, he always seems to be able to find a rational case for optimism. In reading the chapter discussing the problems of government, however, I thought for a moment that his optimism might be about to waver. He discusses the problems of holding government accountable, information problems, the law of unintended consequences, bureaucratization, special interest politics and the trend toward bigger and bossier government. Yet he manages to end the chapter on an optimistic note by pointing out that, despite its imperfections, democracy ensures that nothing important can be done against the will of ‘we the people’.

The next chapter, ‘America the Beautiful’, is the one I liked most. Since I am not an American and am actually strongly opposed to American exceptionalism, I have some difficulty explaining my positive response. I found it refreshing to see crazy anti-American views being challenged in a thoughtful manner. But that is only part of the story. Robinson makes it clear that he thinks America is ‘the most noble, most idealistic, most generous nation ever’. That message is not everyone’s cup of tea – and I’m not entirely persuaded that it is actually correct. My normal response to such views is to stop listening, or reading. However, I found Robinson’s non-chauvinistic presentation interesting and persuasive. I don’t think I have seen a stronger case made anywhere else that America still stands for high ideals.

When I reached the end of the book I found that my feeling that it was not building towards a strong conclusion was not entirely accurate. This passage close to the end seems to me to capture the theme of the book:

‘Progress is not some mystical force pushing us forward. What does drive it is our own efforts in gaining knowledge. That is not cyclical or random, but cumulative: it builds upon itself. It is no coincidence that modernity has seen explosive growth in human understanding, and at the same time huge improvements in the human condition. War and violence have been receding while freedom and human rights are spreading. Society grows not only richer, but more open, tolerant, humane, and fair.’ (p.313).

In my view the people who have most to gain from reading the book will be open to the possibility that such views are accurate, but not yet persuaded that they are accurate. They will be open to the possibility that it is still rational to be optimistic and interested to see whether it is possible to make a strong case in favour of optimism.

Postscript:

Frank Robinson has given me his permission to post this response:

'Winton! Thanks!!

I am really extremely gratified that you read my book and took the trouble to post a generally favorable review.

Regarding your question about the "war on drugs," I had a chapter about that in a previous book (Life, Liberty, and Happiness) that was a precursor of sorts to Optimism, which does actually borrow a lot from it. As you might guess, I think the war on drugs is a totally misguided disaster.

That previous book also had a much more extensive critique of government and statism, which was boiled down into the single chapter of Optimism because I didn't think the topic could be avoided. I'm not sure my optimistic conclusion to that chapter was strong enough. But it was not insincere. I can get pretty cynical about democratic politics. But, heck, look at the alternative -- which humanity had to endure through most of history! I do get misty-eyed when I go to vote.

I particularly appreciate your prefacing your review with a quote from J.S. Mill -- my favorite philosopher. And a right-on quote it is.'

Will NZ Treasury's living standards framework achieve its goals?

Last week the New Zealand Treasury released a paper providing a ‘living standards framework’. Treasury describes it as ‘a descriptive framework of the factors that it considers are essential to national well-being’.


In launching the framework the Treasury Secretary, John Whitehead, certainly did not try to hide the fact that an important objective of the exercise, as he sees it, is to bring about a shift in the way NZ Treasury is perceived externally. He said:

‘Misperceptions of the role Treasury has played since the 1980s have limited our ability to be persuasive when talking about what matters most for living standards. Some have never got beyond believing that we are the root of all New Zealand’s economic evils. Others see us as little more than the defenders of fiscal virtue …’.

I find that baffling. In the 1980s the NZ Treasury played an important role in saving that country from economic ruin. Why is that not more widely understood and appreciated in New Zealand? That is something about New Zealand that may be beyond my understanding. So I think I should confine myself here to looking at the living standards framework in its own terms.

Treasury states what the framework is intended for as follows:

‘The Framework is intended to help Treasury consistently provide Ministers robust, theoretically-grounded and evidenced-based advice that aims to improve the lives of all New Zealanders.’

Yeah, OK, but what is the intended purpose of the framework? Treasury sets the general context by stating its overall goal as being to work for higher living standards for all New Zealanders. Seen in that context the purpose of the framework must be to monitor progress toward higher living standards of New Zealanders. However, I can’t find the purpose stated in such terms in the document. In fact, as I discuss a little later, the concept of progress doesn’t get much attention in the document.

What factors should Treasury look at in monitoring progress toward higher living standards of New Zealanders? The answer given by the framework is to look at a broad range of material and non-material determinants of living standards, including: conventional measures of income and wealth; freedoms, rights and capabilities; and self-assessed subjective measures of wellbeing (as a cross-check). The other two factors to be looked at are: the distribution of living standards across different groups in society; and the sustainability of living standards over time.

It seems to me that the use of sustainability as a major heading puts a rather negative focus on the whole exercise – assuming that I am correct in suggesting that the intended purpose is to monitor progress toward higher living standards. An analyst who is asked to assess whether current living standards are sustainable will consider some important issues, but is unlikely to give much attention to the question of whether living standards are improving to the same extent of those in comparable countries and if not, why not. I can understand that a lot of people in New Zealand would respond favourably to the word ‘sustainability’, but it should be possible to accommodate their legitimate interests within a discussion of factors affecting progress toward higher living standards.

The Treasury’s emphasis on sustainability rather than progress is relevant to concerns I raised in my last post, which was about the OECD’s ‘better life index’. In that post I expressed concern that if well-being indicators suggest that people in a country like New Zealand tend to enjoy living standards substantially higher than other countries with comparable per capita GDP levels, there may be a tendency for the government concerned to become complacent about establishing conditions more favourable to further improvement of living standards. The Treasury’s living standards framework does not dispel that concern.

I don’t have any great concerns about the other factors that the Treasury is planning to monitor. However, there are a couple of omissions that seem to me to be significant. First, in considering subjective well-being, in my view attention should be given to perceived improvements in life over the last five years, which can be calculated from Gallup World Poll data. The concept is discussed briefly in an earlier post on this blog. During the first decade of this century the perception of improvement in life of both New Zealanders and Australians seems to have been somewhat greater than was usual for people in other countries with comparable economic growth rates.

Second, it would be hard to find a better indicator of relative living standards as perceived by New Zealanders and Australians than net emigration to Australia. Net emigration to Australia seems to me to be a highly reliable indicator because the preferences that people show about where they live must be heavily based on their assessments of living standards. Figure 1.2 in the second report of the 2025 Taskforce (p. 16) shows net emigration to Australia has increased broadly in line with the growing income gap between the two countries since the 1970s.

Before finishing I want to comment on the capital stocks and flows approach adopted in the paper. It seems to me that this approach provides an extremely useful framework for considering relevant issues. My overall view is that, despite some shortcomings, NZ Treasury’s living standards framework is generally OK and most of the background material is informative and well-written.

Postscript:
John Whitehead has given his permission for me to publish the following response:

‘I appreciated your article. For the record, I wasn’t saying that many of the attitudes about what we (I definitely include myself) did I the 1980s were necessary correct, just that they existed. (In fact I made the point in a television interview the same week that I thought the steps we took were broadly the right ones, although we certainly learned from both errors and successes on the way through. ) My point – missed in a lot of commentary – is that Treasury has for a long time taken a broader view of living standards than we are usually credited with: the stocks and flows framework etc was an attempt to describe this more explicitly. The media of course has largely ignored this point, claiming instead that it is some kind of (dramatic) shift.’

I had intended to publish that response without comment, but I want to note for the record that on the basis of my own personal experience I support John’s claim that NZ Treasury has for a long time taken a broad view of living standards. When I worked there as an advisor in the early 1990s one of the issues I was asked to work on was factors affecting social cohesion, including widespread opportunity, security and respect for institutions. That work led, indirectly, to my interest in some of the topics that I pursue on this blog.