Abstract
Professors Paul Frijters and Chris Krekel of the London School of Economics will explain Well-Being Years (WELLBY’s) cost-benefit analysis as recently adopted by the UK bureaucracy. They will cover a quick history of cost-benefit analyses in Western bureaucracies, including the main blind spots in what they undervalue: social life, the environment, and mental health. In contrast, WELLBY is based on the life-satisfaction question that gauges what individuals themselves reveal to be important about their life. The talk explains how WELLBY relates to the Quality Adjusted Life Years (QALY), how it is already used to do cost-benefit analyses in government, charities and large organisations, and what the main bottlenecks are in terms of wholesale replacement of traditional economic cost benefit analysis. Some examples will be given and the relationship with sustainable development goals will be discussed.
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Transcript
Struan Little (00:00:08):
[speaking in te reo Māori] Tēnā koutou, tēnā koutou, tēnā koutou, katoa
It's my genuine pleasure today to see the large turnout we've got, to hear two highly respected international speakers for us today. Recently our secretary Dr Caralee McLiesh outlined work programme, which will culminate in what we call our Wellbeing Report at the end of this year, Te Tai Waiora will be a report of the state of wellbeing in New Zealand and how that's changed, how it's distributed and the sustainability of our wellbeing.
This seminar series is part of our broader wellbeing work programme and our aim here is to bring in external ideas as a source of challenge and intellectual stimulation. We want to share that opportunity to learn with interested people across New Zealand. We will have a range of seminars over the remainder of this year and into 2023 with participation of international and New Zealand wellbeing experts. But today we're most fortunate to have two very distinguished speakers from the London School of Economics, who I briefly mentioned.
Firstly, Paul Frijters, who's currently Professor of Wellbeing Economics at LSE. He specialises in applied micro econometrics including labour, happiness and health economics. A prominent research economist published over 150 papers in various fields. And in 2009, he was voted Australia's best young economist under 40 by the Australian Economic Society. And also we are fortunate to have Christian Krekel, Assistant Professor in Behavioural Science in the Department of Psychological Behavioural Science at LSE, also a research associate at the Centre of Economic Performance, LSE and the Wellbeing Research Centre, University of Oxford.
Christian's research looks at how our environment affects our lives, specifically our behaviour, health and ultimately our wellbeing. He's a frequent advisor to national governments, the World Bank, OECD including how to use wellbeing data. And Chris has been awarded the Young Economist Award by the European Economic Association.
Today Paul and Chris will guide us on explaining around wellbeing years or the WELLBY concept as it's known to cost-benefit analysis as recently adopted by the UK administration. And this is highly relevant to New Zealand as we try to increase the use of our wellbeing analysis in our policy. Indeed, these two gentlemen have already been highly influential in our work. We last year adopted WELLBYs into our internal CBAx cost-benefit guidance as well.
Let me say no more because you're here to hear Chris and Paul, but I'm very much looking forward to hearing from them about how WELLBYs are being used by governments and large organisations in policy around the world. The format will be Chris and Paul will take us through about 45 minutes of slides and then as typically we'll open up to questions, which I'll moderate. Thank you, gentlemen, please.
Michelle Cornish (00:03:40):
Paul, you're on mute.
Christian Krekel (00:03:42):
Paul, you're on mute there.
Paul Frijters (00:03:46):
So welcome everybody. We've got the technology right. And it's great to be again in New Zealand, if only virtually. I hope to visit personally very soon, because it's such a beautiful place with many friends. I'm going to talk for the first 20, 25 minutes. Basically about the background framework set up and some of the results and then Christian is going to talk through some examples and we'll have questions at the end. So please keep them in mind.
So we're going to talk about principles and examples and it's handy to start with, as it were a quick reminder for those who don't know, and to be honest, 10 years ago, I had no idea about what economists were up to inside departments around western bureaucracies in the whole world when they were doing cost-benefit analysis. I mean, economists all get trained and around the ground and postgrad degree about the principles of cost-benefit analysis, but that has precious little to do with what actually happens in departments, right?
And it's because we're presented something sort of pristine and perfect in class, which to no degree exists in reality. So you have to take off the blinkers that you get put on and undergrad degrees and say, well, "What do they actually do?" So what do rich countries do? They do most benefit methods, right? They estimate how various outcomes Yk. So that's an outcome. And the Ks goes over a set of dimensions will change with some amount Delta Yk. So Delta Yk is the effect in some sense of a policy, right? That could be the number of crimes, the number of park visits, whatever it is. And then you try and translate those changes and outcomes to a bottom number. And you do that by putting a price on those outcomes. And you look for a dollar value, right?
And use agreed upon discount rates for changes in the future. So you have some notion of the population in which it affects now to infinity. And you have some notion of how much and various outcomes. And you try to put prices on that and try to put the future into the present. Now, preferably economists look for a market price. If they look at different outcomes and if they can't find the market price, they try to go for second best. And one of the second best things is some notion of willingness to pay. You add them up, and then you talk about the benefits.
So the benefits of the policies are effectively the sum of those changed outcomes, times the price that you've got for the outcomes. And you compare that with some notion of cost, that could be an upfront cost, but it could also be the future cost of less tax revenue, the future cost of higher health expenses or higher education expenses, higher prison expenses, whatever it is, right?
And you can work with those things. You can call them the cost-benefit ratio, cost effectiveness. You can also net present value. You can do all sorts of things for that. That's what you do. Now it's important to have some commentary on this. One is that we're not looking at an evil methodology, but more as some kind of attempt to be rational by bureaucracy, right?
It's some attempted accountability. It's saying, now look, this, this is the best we can come up with as to what these policies do. It's not perfect. It's more like leaking bucket, I think of it. But at least at some attempt to set up a methodology by which they can answer, well, why did you do this? And under what assumptions. And nearly, always when it concerns complex policy that affects a lot of people in a lot of different ways, you are looking at something that's glued together, right?
So the various estimated change in outcome don't come from a single model, which is what an economist would like to see a single model that explains everything in the world. That model does not exist. Nobody's ever seen one, it's impossible to think of one, far too complex. So, you're effectively a horses for course, kind of attitude in which lots of different models, which are strictly speaking, totally inconsistent with each other are used to estimate changes in different outcomes across time and across people.
And you glue them together. And that always has a bit of fudge in it, inevitably, because the only way you won't get fudge is if you do have the model of how the whole world works and no one has any chance of that. So you really are then relying on rules of farm stylized models, simplified alternative, lots of glueing assumptions and views of the world.
And every country has different methodology when it comes to cost-benefit analysis. And even every government department has them. And within every government department, you can even have different teams which have slightly different views of the world. And so, there's no such thing as a single view of how to do cost-benefit analysis.
But if you gloss over the many, many differences across those, I would say that it's the economic view of the 1980s and 1990s that dominates that world, at least until recently, if you think of the thing that they're trying to maximise, it looks a bit like economic surplus and willingness to pay. And I don't say there's so much as a critique as more a reflection of the times that was what they thought was a value and what they could have some handle on that they're trying to get to it right?
Now a typical example is the following, this came from the valuation by the UK airport commission, which was supposedly independent run by the department of transport, which was clearly a captured undertaking. They try to work out what a new runway would have in terms of cost and benefits. And so then they come up with a table like this and CT and CC has to do with carbon capture, but it doesn't really matter all that much. What matters is that they have a list of outcomes and you see them there produces surplus noise, air quality, and then you have other outcomes and they try and put numbers to them, right? And they put numbers in terms of, okay, consumer surplus is going to go up almost 55 billion. Where does that come from? Well, the notion is that the supply curve shifts out.
And so the price should drop. There should be more consumer benefit, but deepen the barrels of that report, you will find that they don't truly expect price to drop. They don't truly expect that consumer service to go up at all, but they use this as the headline number in order to get a big benefit in order to sell it to politicians. That's a meet deepen report. So, effectively this headline table, which shows up in their main conclusions is a lie.
But that's less interesting from our point of view than just how they do it. Right? So these all come from different models, noise comes from different models, carbon emissions come from different models and they add them up and they talk about net social benefit. They talk about NPV and then they've got other stuff in there, which they know is likely to change.
They're willing to say, well, green goes up, red goes down, but there's no number on it. And what do they end up with? Well, then they basically define everything with no number, as non-economic, even though the economic bit does have noise in it, biodiversity, whatever it is. But whatever is not a number is not economic effectively. And then they say bling bling bling, there is benefits for 69.1 million. And I hope you notice that's exactly what the table says in total benefits. So this really is the table that leads to the end conclusion. Well, that bit headline numbers are totally made up because it's based on the price they don't actually expect is bigger than the made up number of some other scheme. And so this is what we should do. And that's more or less how it goes. Now particularly that this really corresponds to the old economic saying that, "If you don't measure it doesn't count." Right?
Now what are some problems with this CBA as usual? One thing is that a lot of the staff that we humans care about are not things we pay for. So there's an obvious market price of willingness to pay. So for instance, we value our children and our partners, but we don't pay for them. And we'd be rather offended if you asked us, well how much are you willing to pay for your wife or your husband? I mean, we'd answer with a joke. "Well how much are you offering?" And people value their mental health, but they don't know what affects it. They don't know how to buy it, right? So they're ignorant of the production of mental health, but they do value it. They value public goods like the environment.
And we know that the problem is operated willingness to pay is hard to elicit for many environmental goods. People don't really know. They value friendship, but again would be offended if that were put in dollars. Almost the definition of a real friend is that you don't put a monetary value on it.
Then there are of course consumption externalities and limited awareness. Limited awareness of violations of rationality. But there are lots of things we don't know well, right? In the 1950s, we didn't know about passive smoking and there are many government departments predicated on the notion that the public does has limited understanding all sorts of things. It's their job to generate the information, like food standards.
But also there are negative consumption externalities. We know there's a status for instance, the neighbours get a bigger car, I'm jealous and I also want to buy a bigger car. And so that bigger car negatively affects me. Now that's not in a market price. It's not in willingness to pay, but it's definitely utility. It's definitely part of how I feel about things.
And so the essential problem is that money is not the ultimate measure of value. The ultimate measure of value is how we experience that. To become more scientific and inclusive of a social life in the environment, you must, as it were again, improve the leaky bucket and measure what's important. So this means that the dominant CBAs don't know how to value social life. They don't know how to value mental health and the environment.
And for analysts, this is not often a problem. It's more like a handy thing because if their boss asks them, "Look, make a CBA of this" and there's nothing sort of easily available for them, they go to the simplest heuristic possible, which is just presume, well, "Ah, we don't know how to value it. So let's just say it has a value of zero." Right?
So the usual solution by analysts, the problem that their mainstream models doesn't allow for them is to presume it doesn't exist or has no value. That makes it easy to calculate. You don't need a model. You don't need to predict changes in social life, mental health or the environment all that hard stuff, right?
So the brutal reality of this is that unless you explicitly adopt a measure of value that does easily relate to social life, mental health and environment, then CBA analysts up and down the world are going to continue to assume they have no value because that's far easier and far less contentious and requires far less work for them than presuming it does.
And note in that regard that the 17 Sustainable Development Goals, they relate to at least 900 odd individual and indicators in that sense are wholly useless, right? Because there are far too many of them and you then need the 900 dimensional causal structure in order to have any notion of how a change would affect all those 900 indicators. Many of which are very easy to game and are not robust statistically.
So, also sustainability advocates need something much, much simpler than the 17 Sustainable Development Goals, and it's 900-odd individual indicators, which are breeding more and more indicators every year in order to get anywhere within cost-benefit analysis labs. One needs something that's reasonably robust, doesn't have to be perfect, but at least captures a lot of the value in social life, mental health and the environment.
That's really where the idea of the WELLBY comes from. It’s the idea of the WELLBY that we want to help bureaucracies capture the value of some of the things they effect with a fairly robust tool of which we already know a lot. And so the idea is the WELLBY goes back to the Enlightenment, 17th or 18th century. One explicitly wants the government to maximise happy years lived. And within that framework, you can then value anything that makes life enjoyable.
So by that length lens, it's about the length of life and quality of life of a population. And the quality weight is crucial. The length of life is crucial. For the length of life we look for life expectancy, but a quality weight that we boiled down is how satisfied people themselves say they are with their life. And we consider that like a vote on what they have experienced. The democratic vote on a whole set of policies or whom they trust most.
But there's also information in how people say they've experienced life. We basically have more information on that. And so we see it as part of the social contract that this is roughly what a bureaucracy aims for with of course, the approval of the people and also partly with checks of the democratic system.
So, whereas then the UK life satisfaction question, there are various versions, but this is the one that since 2011 has been in all major UK data sets. We ask overall, how satisfied are you of your life nowadays. The zero would be not at all. And 10 is completely. And what is mainly important about this kind of question is that you ask something to do with overall, so that you remind people that it's about life as a whole. It's something to do about your own evaluation of your own life, so satisfied with your own life. And some notion is that we're not precise about the timing. That it has to do with nowadays, these days, the formulations vary. But that hence has this element in it of you looking on your life as kind of a trajectory that has past, present and future in it. And how do you think you're going?
And we define the WELLBY off this, right? So, one WELLBY is then one unit of this life satisfaction, so it changes from not to one is the same as a change from seven to eight on a zero to 10 scale for one person for one year. So we start to interpret this as a flow of utility, whereas it's not actually flow, but you can interpret it that way because you then define this as the object of maximisation.
And we know an awful lot about this, right? There is something like 200,000 studies since the 1930s on this thing. We know an awful lot about life satisfaction. Lots and lots of experiments, lots of bad studies as well, but there really is an awful lot of information. And for instance, we know that a normal level for somebody who's very healthy is roughly an eight. So somebody who says they're an excellent health, if they have average outcome through other stuff, they're about an eight on this scale.
And we also know something about when people are indifferent. We've known the methodology since at least 1999. I wrote about that in my PhD thesis, but other people thought similar things. We effectively ask people, "Look, if you were to live another 10 years, but it would have to be at a life satisfaction level of one, would you say, ‘well, rather not, I'd forego the pleasure of living in that kind of misery’ or would you say, ‘well, yeah, I'd prefer that over not living at all’. And round about two is the level at which over 50% start to say, ‘Well, no, not’.
So this indifference point, with life satisfaction between life and death, that's when you say, ‘Well, I don't actually want a life that is that miserable’. It’s the best estimate at the moment is around two, we'd like a better estimate. The UK Treasury has taken one, as it's saying, but this is very much an empirically live point. Now that is very powerful because that means that one year of good health is worth six to seven WELLBYs. And that would have to be one regular year of happy life.
And by saying that a regular year of life is worth six to seven WELLBYs, that means we can trade off length of life for anything else that we know affects life satisfaction. So that includes social goods. It includes the environment. So we can talk about how many months of life and marriage is worth. The answer is roughly two. We know how many years of life, the lack of a depression is worth. The answer is about half a year, right?
And so we can translate those 200,000 studies into what we know about life satisfaction into tradeoffs. And so the WELLBY captures almost everything that's important to people. And for instance, the main alternative with QALY is physical health. What they miss is joy, status and things that give fulfilment. So things that make life worthwhile, they're not really in QALYs. It's not really reflected in those questions, but they are in the WELLBY. And also the whole status thing. It's important.
Now. How does this work in CBAs at the conceptual level, you're maximising the expectation of this large beast of in equation, which is essentially the expected life satisfaction of the population. So you sum over time from now to infinity in principle, there is a discount rate that row thing, and they use some other set of individuals, which should be the population you have in mind, you can have social weights.
You shouldn't think of this as racism or discrimination, but for instance, more that somebody who has free passports and hasn't lived in New Zealand for 20 years might not count as much as somebody who's living there. Right? So that's the SWs weights. And then you basically count the life satisfaction over and above that zero point, which is hence one or two.
Now in calculations, you never actually calculate these things. Although there is a Spanish guy who actually has a whole website where he's calculated this thing for every country in the world, and even changes in the last two years due to various policies. You use predicted changes just as with CBA, you will never actually see the total welfare of the population. You predicted changes in the same by concentrating on the various groups you think you can say something about. And as I said, you've got 200,000 studies to work with. A lot of that is grey literature. A lot of that is government reports. And that gives you huge price list.
So we really know a lot more about the WELLBY then for instance, we know about the QALY or the GDP when that became like live. Now, if you don't think of those CBA calculations, what you do is not so different from what you did before, right? So it's the same procedure as otherwise. You'll still be having lots and lots of different models, which are strictly speaking inconsistent to come up with these changes in various outcomes.
So in that sense, you still need to do your best to say how the world works and what the important outcomes are. But you have two different things. One is that you now have a different idea as to what's important because life satisfaction literature gives you a different sense of what matters. Particularly social life suddenly becomes a lot more important than here the two accounted for. But also you can have price lists which are different. We're no longer thinking about willingness to pay or a market price for the relevant one. We're thinking about the wellbeing price of different outcomes Yk.
So your price list comes from somewhere else and you then decide on different policies on the base of how much WELLBY per unit of the public funds you're buying. And the weighting in the WELLBY of social life and the environment that is now an empirical question that now has to come from knowledge on life satisfaction. But we can already say that is far higher than it is in traditional CBAs. And so the thing that goes down in as it will WELLBY calculation versus traditional CBAs is things that only give you more material goods that becomes less important. So it's less about the size of the house. It's less about how many washing machines you can have. And it's more about whether you still have good friendships, whether you can see them, whether your mental health is good, and whether you have a pleasant, local and international environment.
So in practice, the goals of sustainability and social life are aligned with wellbeing CBA over a traditional economic CBA, mainly because the prices are different. Now, what does some wellbeing cost-effectiveness boiled down to where you play with two aspects of this issue. You think of the net benefits of some large policy change to the status quo, and you think of the public cost. And the net benefit is now in terms of WELLBYs. And the public cost is the whole of government net costs. So you think of now to the future, you think of all kinds of government departments. So it's a whole of government lookout.
And if the net benefits over the public costs are above some threshold, then you say, "Okay, we do this." And otherwise you say "We don't do this." So in our handbook, which came out last year and will soon be available for free on the Oxford University Press website, we generated the graph. Here we summarise 15 policies, quite a few are UK, but some of them are international.
So there's also Pakistani mental health intervention for women in villages in there. There's the Olympics in there, there's a homelessness programme, which is calibrated on Canadian data. There's Natural Lottery Wellbeing Programmes, particularly cooking programmes and community. That's about the most effective programme you can do there. But also some private stuff like problem solving, training for flight attendance, right?
And the dotted marginal line is what the NHS claims is their marginal productivity. So they say for every 2,500 pounds, they effectively produce one WELLBY. And because that captures about one quarter of all UK government expenditures, it's a natural benchmark if you like. So the natural benchmark that would come out of the NHS is if that you pay more than 2,500 pounds for a WELLBY, you shouldn't do it. If you pay less, you should, because you're then more efficient than the NHS. Now in practice, the UK Treasury has chosen a threshold of 10,000 largely for political purposes. They probably want to drive that price down over time.
Now then institutionalisation, which is very important because we're very much trying to help bureaucracies with this, right? We're trying to get this right. WELLBY is now adopted in the UK Green Book, part of the New Zealand CBA guidelines. But to grow this practice needs several elements, and there's a lot of work happening on those elements. One is a general price list maintained by the bureaucracy. So price list in terms of effects on wellbeing.
The second is that, well, you of course need to start put wellbeing models at the forefront of your departments. So in every major policy area where you are going to need frameworks and models maintained by the relevant departments and institutions. So cultural departments need to start to have models of frameworks whereby they work out how much wellbeing various things generate.
The same has to happen for transport. The same has to happen for media. The same has to happen for employment and social work. And that is just as it were a redoing a lot of the frameworks and models that they've made the last 50 years in traditional economic CBA. So there's just a huge task there that takes a lot of time.
There also need to be extensions to group, which are not easily capable of self-evaluation. So life satisfaction is a self-evaluation question, which requires you to be aware of yourself, to be able to judge yourself. Well a kid can't yet do that. Doesn't have a concept of how their life is going. And of course the demented have lost that capacity, which is why other people need to take care of them. So you need to figure out something to do with those groups and how to count them. And that is not so easy.
And people can reasonably differ on that. And the front runner is to have carers nominate how happy you're satisfied those under the care are. Of course you need training programmes to teach methods. So there is a training effort there, and the UK Treasury is doing that, the Wellbeing Centre is doing that. You need generalised information on this kind of wellbeing for the whole population, so that people can make their own choices based on wellbeing information.
And you need inquiries, work groups, and projects to deal with the many problems that there are as they come along. And so you also need an institutional setup to learn over time what works and it doesn't work well. Now we're moving ahead and we have moved ahead on this in the UK in many directions. So, this is for instance, an example of the price list. And we have things to do with finances, years of education. These come from the best sort of causal result literature that we have, but notice that this is the thing, bureaucracy will need a price list.
Academics hate these kind of price list because immediately a hundred alarm bells start ringing. "Ah, but what about uncertainty? What about that other thing? How did you define which group?" Right? Those are important questions and they're very relevant, but if you leave it to academics, they will never ever come up with a price list. So it has to be a bureaucracy that decides on that. Informed by academics, challenged by academics, fine. But don't ask academics to maintain one because all they'll do is come back with questions for more money as they're prevaricate.
They also need frameworks. This is one that we made for child education interventions for preschool. You don't need to look at it. But partly this is taken over by the UK Department of Education and the project they're doing, and this leads to a large micro simulation model. And it's an example of the sort of thing you have to do with generalised information. There's What Works Wellbeing, which brings out a lot of stuff with charities, businesses, organisations. There's also information just on people's workplaces, right? So all that kind of stuff is basically happening.
Then we can talk a little bit about the WELLBY and the QALY, but I think I will now hand over to Christian. So that we have enough time for questions. Thank you very much. Christian, take it away.
Christian Krekel (00:28:47):
Yeah. Thank you so much. I will take over the control now. Ooh. No, something has happened and I don't know where the presentation went, to be honest. Does anybody see the slide still?
Michelle Cornish (00:29:10):
We can still see the slides.
Christian Krekel (00:29:14):
Okay. I clicked maybe on spotlight. What is it? If I say exit spotlight, is that a good thing? Or am I exiting the entire application?
Michelle Cornish (00:29:22):
No, if you exit spotlight, it shows you a bit larger on the screen for the attending.
Christian Krekel (00:29:30):
All right. So, okay. One second, please. I do not see the slides at this point anymore. I see. I see. Yeah,
Michelle Cornish (00:29:50):
They may have dropped down your screen a little bit. So if you scroll down your screen, you might be able to see them.
Christian Krekel (00:29:58):
No, I don't. I see Stuart quite large now, but that's footage.
Michelle Cornish (00:30:08):
What you might have done is you might have clicked on Struan and made him larger. So the slides have now just become a little, little square slide, [inaudible 00:30:20]
Christian Krekel (00:30:28):
Exit spotlight. Yeah, that's a bit weird. I can't see the slides at this point. Look for PowerPoint button in the bottom right. Person's chat, reactions, apps, further, camera microphones share. I do not see any PowerPoint button.
Michelle Cornish (00:31:00):
How about, Chris? I take their control and,
Christian Krekel (00:31:04):
That would be fantastic. Thank you so much.
Michelle Cornish (00:31:06):
Just say next slide. And I'll go from there.
Christian Krekel (00:31:09):
Brilliant. Thank you so much.
Michelle Cornish (00:31:11):
That's all right.
Christian Krekel (00:31:15):
Okay, great. Thanks. I can essentially... If I say like take control, would that work? You think?
Michelle Cornish (00:31:23):
Yeah. If you try now.
Christian Krekel (00:31:26):
Okay. Yeah, I think we’re back. Perfect. Thank you so much. Okay, great. I'm going to talk about some examples now, how we used the WELLBY for evaluating policies and programmes in the UK primarily. And one example is coming from Wales, which we also talk about at length in our handbook. And another example comes from recent research, which we've conducted during COVID-19.
So the first example, as I said, comes from our handbook. It's about a Welsh Government Youth Traineeship Programme, which ran between 2015 and 2019. There was a programme which targeted young job seekers, age 16 to 18, which were referred to this traineeship programme by Careers Wales. And overall, there was an intake of around 16,000 trainees until December 2018. And what the benefit of the programme was according to the evaluation programme, evaluation report, which was done by consultancy was that there was a 10% point increase in job finding after completing this youth trainership programme and the total costs of the programme, which was not continued after 2019 was around 18 million pounds.
So what I'm going to show you now is primarily a traditional cost-benefit analysis. As we basically are all familiar with it, where we basically look at primarily consumption benefits and also costs of the programme. I'm looking here, it's a very simplified cost-benefit analysis. I'm looking only at three time periods. I'm looking at benefits here, which come from an increase in total individual income per person, which can be broken down into a higher personal consumption and higher taxes.
What we're also including here are cost savings to the public purse. We take them from the Public Health England social return on an investment tool, which are crime cost savings and healthcare cost savings. And we basically break down these benefits into these different time periods, resume slightly lesser benefit in the first time period and slightly stronger benefits in the second and the third time period.
And then we have also here our programme costs per participant. So we basically take the total cost divided by the number of participants. And we get a cost of 1,145 pounds. That's the programme cost. If we sum up all the benefits, so higher personal consumption taxes, the savings in terms of crime costs and healthcare costs, we get all benefits, total benefits. If we take the difference, we see it's a programme that is indeed, according to this very traditional cost-benefit analysis worthwhile because benefits minus costs are positive. And there's a total benefit generated here per person by 3,362 pounds.
So that's a very simplified traditional cost-benefit analysis. But we know from the wellbeing literature, which you're probably also very well acquainted with, from Paul has talked at length of that. There's a huge evidence base already. We know that if you're basically out of work the better this benefits or the misery goes much beyond just not having a certain level of consumption, but of course we know from the life satisfaction, that would be that there are very few life events that cause more misery than being out of work.
You do not really adapt to that hedonically over time. Basically there is very little consolation if you live in an area of high unemployment rate and so on and so forth. So it's really, really bad. And it goes importantly beyond simply not having income, right? So this misery that goes beyond that, and that is essentially left out of this traditional cost-benefit analysis.
So what we can do is if we want to account for this misery, we can conduct which we call the wellbeing-augmented cost-benefit analysis. So we can essentially look at the life satisfaction literature, and they are good cause estimates now of the effect of unemployment on life satisfaction. Take for example, from plant closures, which are, seem to be exogenous. We know that a life satisfaction effect of unemployment is minus 0.46 points on a zero to ten scale.
We take this from the literature simply, and then if we assume symmetry of the effect. So basically gaining employment simply turns this around. And if we assume that essentially job finding rate is 10% in the first year, and then according to the report, to the evaluation report of the Welsh Traineeship Programmes, 20% in the second and the third year, we basically multiply this year by minus one. And then by 0.1 and by 0.2 here, and then we get the life satisfaction effect of reduced unemployment. We can importantly always monetize that satisfaction effects. We know the effect of lock income and life satisfaction. So we can basically calculate margin rates of substitution.
And then we can basically calculate something which we call the willingness to pay for reduced unemployment. And that is to take simply by multiplying this number by the monetary value of one WELLBY. So one unit of life satisfaction for one person one year, which we estimate would be 9,000 pounds. And then we get these numbers here. And what we also do is we, first of all, add all of these up over the years, we get sort of the misery, the monetarized misery, which would be omitted in traditional cost-benefit analysis.
But we also know from the life satisfaction literature, that misery of unemployment is not a singular affair. Misery of unemployment is also shared within the households. There are social mights, there is something which we call a social multiplier. We just take here, a social multiplier of two. So we simply assume that your partner will be also experiencing the joys of not being unemployed. So basically that is passed on.
How does social multiplier, how big that essentially is, is an ultimately an improver question. I mean, we take a simplified value of two. I think Paul has a study, I think Mervin and Frijters just 2014, estimated to be around 1.5 for inter households below us, we simply take two here. So we take this 2070 times two, and then we basically have the absence of misery that comes from being re-employed or being employed for these young people, which then of course can be added because it's a monetized value, which can be added on the benefit side actually shows that if you do account for the avoided misery from actually bringing young people into work, that actually tells the traditional cost-benefit analysis here in this WELLBY-augmented cost-benefit analysis model, so the positives actually makes this programme even more worthwile.
What we can also do in that the long-term stage, but definitely something which we recommend is what we call a wellbeing cost-effectiveness analysis. The idea behind a wellbeing cost-effectiveness analysis is that we simply sum up all the benefits of a policy in terms of WELLBYs, in terms of life satisfaction points, overall individuals over all time periods and simply divide them by the costs to get what we call a wellbeing cost-effectiveness ratio.
Which we then compare as Paul has already said. Which we then compare with a certain threshold ratio. And if it's above the threshold ratio, if you remember in the previous figure that Paul shared was the horizontal line, which was labelled NHS marginal. If it's above this threshold, then you know the policy is worthwhile to implement. And if it's below that, it should not be implemented.
So that's the long-term perspective of where we can use wellbeing data and wellbeing data for policy analysis and evaluation. And if we apply it this way to our traineeship programme, what does that actually mean? Well, what we can look at here at the effect of higher personal consumption, which is simply taken from the previous slides, we can convert this in life satisfaction points. So we know the life satisfaction effect of lock any household income. So we can essentially calculate the life satisfaction effect of higher consumption from this, essentially basically transforming this monetary value back into a life satisfaction value.
And then what we do also here, in this particular example, we know that private consumptions of course, subject to status externalities. So private, negative consumption externalities. So people might be jealous of each other and so on and so forth. There's lots of evidence in behavioural economics literature that something like whether you attain a job price or income rise, basically people in your immediate comparison group actually in simple terms get unhappier from that because they're jealous.
So some of this increase in private consumption or these life satisfaction points, they come from this increase in private consumption should be discounted. In our book we introduced something which we call an Easterlin Discount. So essentially we basically say that, okay, where we need to discount some of this increase in life satisfaction points and we basically suggest an Easterlin Discount of 75%, right? So that only 25% actually do account for does actually account in life satisfaction increase. And that's the benefit in terms of higher personal consumption in life satisfaction points.
Again, the rest is pretty much the same. What we have here, we basically take the life satisfaction effect of avoided misery, take the social multiplier times two, and basically sum this up. And you can see here that actually, if you look at, look at this Welsh Traineeship Programme from a wellbeing cost-effectiveness analysis perspective, you can see that most of the benefits of the programme actually do not come from increased private consumption, but actually come from avoided misery of that individual, which actually goes beyond simply income losses. That's life satisfaction points, we add them all up. We do have also cost savings in terms of crime as before healthcare cost savings as before, and also higher taxes. We do have these as savings to the public purse. At the same time we have programme costs. What we then calculate is net public costs.
So we do basically subject the cost savings from the programme costs. And then we get net public costs here. Take the life satisfaction benefits, divide them by the costs. We get a threshold that threshold here is our wellbeing cost-effectiveness ratio, 0.009795. That is actually higher than the NHS margin, which is one divided by 2,500, which is 0.0004. So this is according to this calculation, a very worthwhile programme.
So in the end, probably if we do have a government that only cares about WELLBYs, about life satisfaction points, then essentially we can evaluate all policies only in terms of wellbeing cost-effectiveness analysis. The benefit here is we do not really have to translate life satisfaction points into money. Which makes certain assumptions, right? We need to have a good estimate of the effect of income, a good cost estimate of the effect of income and life satisfaction. We avoid this if we do a wellbeing cost-effectiveness analysis. And ideally a social planner who cares about WELLBYs and wellbeing and wants to maximise WELLBYs in society essentially then basically calculates wellbeing cost-effectiveness ratios for every policy, ranks these policies from the highest cost-effectiveness to the lowest cost-effective in terms of wellbeing.
And then simply executes this list, runs this list until the budget runs out and then essentially you get to the threshold value, which you want to use. And also the shadow price of wellbeing in society. That's one example which we have from our book, you can see that the bottom line is that traditional CBA, wellbeing-augmented CBA, and this long-run vision of wellbeing cost-effectiveness analysis, they all suggest that this is a very worthwhile endeavour and way worthwhile policy. But if you can see that the mechanisms and the story behind why this is a worthwhile policy actually does change.
Whereas in traditional cost-benefit analysis, it's mainly due to private individual consumption. If we move more towards wellbeing-augmented CBA and also wellbeing CEA, we can see it's actually more about avoided misery of unemployment for the individual who was affected by unemployment, but also for the social network of that individual. So particularly significant others will live within the same household.
I would like to use the last 10 minutes to give you one example about volunteering. An example where we used, where we studied a policy during COVID-19. So in the UK, we basically had a huge increase in volunteering during COVID-19, which was partly run by the Royal Voluntary Service and the NHS. And they run a programme which was called NHS Volunteer Responders. And at the beginning of the first lockdown in 2020, so in March 2020, there was a call for volunteers to help people who were shielding and couldn't leave house to get medical supplies and basic groceries, to help them essentially run their errands and run their shopping and get medical supplies and so on and so forth.
And there was a huge nationwide call. And within 24 hours around 750,000 people stepped forward to actually help. That's more than 1% of the English population stepped forward. They wanted to get 250,000 initially. But you know, this programme was so heavily oversubscribed within 24 hours, so many people stepped forward. So it's really great to see that and what we do at, what we did in our research, we studied the cause and the effect of volunteering in this programme. The NHS Volunteer Responders and volunteers’ life satisfaction. And we did this in a causal way and a causal design framework by simply exploiting the over subscription to the programme, comparing those individuals who actually got to volunteer with those individuals who stepped forward and wanted to volunteer, but didn't get to volunteer because there was not enough work for them. Right? Because there were too many volunteers.
So by comparing them, we basically found out that volunteers basically benefited greatly from helping other people. Their life satisfaction really increased in a very strong manner. And we basically can use these estimates, so this life satisfaction increase to compare the benefits of the programme with the costs. And these are some of the recruitment aspects, the photos here. So, the programme was basically app-based. So if somebody needed help, it could ask or put a request into an app. And volunteers basically were alarmed about a request in their surroundings. And then basically could fulfil this request, for example, doing shopping for, for elderly people who couldn't leave the house because of the danger of contracting the virus.
So we did a wellbeing cost-benefit analysis of this programme. And just to give you some preliminary background about the costs. I mean the programme is still running, but essentially our observation period is from April to July 2020, so during the first lockdown in the UK. The cost of running this NHS Volunteer Responders, because it was pretty much app based was very, very low. So cost is only about 3.1 million pounds. 2.7 million were direct costs incurred by the NHS, so the National Health Service in England, and about 350,000 were developed cost of like adapting the smartphone app to the current pandemic.
And so what we asked ourselves was, were the benefits of running the programme worth the costs? And basically what we did is we did two types of analysis. We did a wellbeing cost-benefit analysis and the wellbeing cost-effectiveness analysis to answer this question and to show you quickly how this actually worked.
So focusing first on the wellbeing cost-benefit analysis, we found that using our causal design framework in which we compared volunteers who got the task with volunteers who didn't get the task. And we found that volunteering benefited the volunteers who got a task very much increased the overall life satisfaction on a zero to 10 scale of around 0.17 points. That's the first thing we need to know. And then we need to know that 1% change in log annual gross household income increases over life satisfaction by around 0.007 points. Take this estimate here, by Sacks et al 2010, so that's a rather large estimate. In the book actually, we suggest a lower estimate. I'm taking here a larger estimate because that's more conservative. At the same time we basically also know that the median and gross household income in England in 2019 was about 29,600. Or if I break this down to the months under observation, that's around 7,400 pounds during the period of April to July 2020. So we are now doing as a next step, we're calculating the margin rate of substitution between volunteering and income and weigh it by the mean income which was generated during that period under observation.
And if we do this, we basically find that volunteers would have to be compensated with on average, around 1,800 pounds to reach the same I shouldn't say utility level, to reach the same life satisfaction level in the counterfactual case, in which they had not taken part in the programme. So it's actually quite, they generated quite a lot of wellbeing benefit from actually helping other people. We monetize it and that's around 1,800 pounds per volunteer.
Since there were around 250,000 volunteers who actively participated, we basically take this number times 250,000, we get a total benefit, monetised benefited 445 million, and then the net benefit essentially reducing or subtracting these 3.1 million of running the programme we get a total net benefit of the programme, according to our wellbeing cost-benefit analysis of 442 million, which was generated for volunteers only during these three months.
Probably a lower bound doesn't account at all, for the wellbeing benefits to the recipients of volunteering. It doesn't account for knock-on effects or intra-households spill over, as we've seen in our other examples. These are, as we know from empiric evidence, these probably matter quite a lot. So yeah, so essentially that's a huge benefit and probably a lower bound. What we can also do is we can look at the same thing because you can see here from this wellbeing cost-benefit analysis, if we calculate this marginal rate of substitution, we essentially rely on the cause estimate of income on life satisfaction. And that's sort of like still a little bit contested. We need to have good estimates there. There are lottery studies, which try to bypass that. There are also like minimum income examples, which are universal basic income examples, which are coming up where we probably also get better estimates. But again, it relies crucial on this, on this estimate.
And we've seen from the previous example that if we run a wellbeing cost-effectiveness analysis, essentially we can bypass this problem. So we simply sum all the benefits of life satisfaction divided by the costs. If we do this here and calculate this wellbeing cost-effectiveness ratio of the programme, we basically take our individual life satisfaction benefits, 0.17 WELLBYs times 250,000 individuals who profited, who volunteered, divided by 3.1 million. We get a benefit ratio 0.0137.
So it's again very high. Again, we can compare this with our basic threshold, either 0.004. So divide 10,500 or I'm taking even a more conservative one. So to be a hundred percent conservative here in this analysis, which is 0.005. Again, we can see that it's much greater than that, so we can see that very likely again, even if we look at that from a wellbeing cost-effectiveness analysis’ perspective, it's quite likely that running this NHS Volunteer Responders programme was actually worth the costs.
And I think this is probably the point where I would leave it and where I think we would open the floor for questions. And thank you so much for your attention and for coming. And so we're looking forward to your questions. I've seen there are already quite a lot of in the chat.
Struan Little (00:52:13):
Thanks Christian. Thanks Paul. Let me moderate questions, but happy to put more questions in the chat. And there's been a very vigorous conversation in the chat as we've gone. But at least a couple. Might start off with a couple of the thoughts. I mean, there was a vigorous part of the chat on - is your methodology affected by cross-cultural events. In other words, does this apply for different cultures and other, other than England?
Christian Krekel (00:52:44):
Yeah, so that's actually really, really interesting. There are cultural differences, I think between, for example, Western countries and East Asian countries. I'm not a super expert in that, but there's the value that people put on happen seems to be slightly different in East Asian cultures. Although not fundamentally, but there's some permission element in terms of, should I be allowed to be happy? Is this something that is worth striving for, should I feel eventually guilty if I'm happy and so on and so forth?
So it's, most of our evidence that has to be said comes really from, we call it WEIRD countries. So mostly Western countries, industrialised countries, high education context, highly economically developed, and so on and so forth. So that's where the evidence comes from. There are cultural differences. I think that actually we need to do some more research actually to dig into this more deeper. But I think Paul has also the firm opinion on that.
Paul Frijters (00:53:39):
Yes, I do. I mean the cultural aspect of wellbeing has been discussed for a long, long time. And psychologists have been at this for about 50 to 60 years. I mean, from my point of view, I think the news has been good in the last 50 years and that cultural differences have been exaggerated in many ways. So as John Helliwell said, "One of the rules of fun that comes out anywhere you want to look in the world is of the extreme importance of good social relations".
Now that's true for Papua New Guinea, and it's true for Costa Rica and it's true for the Inuit Indians and it's true for the South Africans and it's true for the Russians. And you wouldn't find that in traditional economic CBA analysis. Also as with the idea that government is there for wellbeing is not really a very controversial one, even in East Asia. So Hong Kong has these kind of indices. South Korea is busy with that. The Chinese are quite comfortable with the idea that, "Okay, maybe that's what we should do." In Latin America, it's a fourth. The north Americans have this in the preamble to their constitution.
So, that thought too is in many different cultures. And so we've not really found huge areas of life in which, as where the degree to which they're valued across cultures is all that different, but it is true that you have to boil it down to what matters. And so if you say, for instance, well, is marriage worth the same in each culture, you will get very different answers. Because the difference in marriage and cohabiting is almost zero in Australia, New Zealand, Germany, and the Netherlands, but is very big in the US. Very big in China. There it's a sign of social status.
And so, if you need look for what is the cultural value of marriage that all differ tremendously over cultures. But if you ask, well, how important is it to have a good warm social relationship? Well, that's the saying, right? So you've got to boil it down to things that are, as it were speak to the fundamental human condition, right? And you've got to boil it down into what is high status? What is low status? And that can be culturally specific. The high status - low status things. But that status is important. That's true. Well, wherever you look right. So you're going to look at the right set of goods that's fairly universal.
Struan Little (00:56:08):
Thanks. The there's a long thread here too about, I think, capability starting up. What do you think the capability in countries are, say in New Zealand, the ability to the sophistication of your methodology. Do you think that the capability could be there or should be there?
Paul Frijters (00:56:27):
Yeah, I have an opinion on that. Which is that this is where the capability determines where the low hanging fruit is. So for a place like Bhutan which has nowhere near the analytical capacity of New Zealand Treasury, or of its departments. This kind of wellbeing cost-effective methodology is totally and utterly useless. It's just far too complex. They wouldn't know how to deal with the price list. They've only got 500,000 people in the country. What they are helped with is more these rules of thumb as to, okay, what is something that is very important, what is not so important. You know, that national pride versus national consumption.
That kind of simple price list is probably the most powerful for a country that just doesn't have a very sophisticated bureaucracy yet, and is not really in this experimental mindset, which has a lot of data sets ongoing, which knows how to read international literature. That just takes an awful lot of investment. They have a bureaucracy to do that.
So yeah, there's a little bit of horses for courses as to where the low hanging fruit in the WELLBY wellbeing literature is for different countries. But New Zealand is part of the sophisticated bureaucracy countries and how it can do this kind of optimization on the basis of experiments, and we try this in that region and then we update our ideas and we've got running frameworks. I mean, you can do that, but many countries in the world can't.
Struan Little (00:57:55):
And probably a question for you Christian. Can you think of an example where the calculation of WELLBYs has made a project look less attractive? The examples you gave us made the projects look more attractive, but in your experience, have you seen that?
Christian Krekel (00:58:12):
That's a very good question. Actually. I am not 100% sure whether I come up with a good example right now. That's a really good question. Paul, can you come up with a good example?
Paul Frijters (00:58:25):
Yes, but of course, as soon as that happens, departments don't want to tell you about it. So the Department of Transport and Housing was very interested in making sure that houses became bigger. Because they thought it was a problem that people lived in cheap housing, so wanted to get them to richer housing. Now it's a little bit murky as to why they wanted that. But they wanted to value these as it were bigger and more expensive houses by their market price. But of course housing is largely a status good, and so the bigger house of the neighbour will make everybody else more jealous. So, the net benefit of all these bigger houses on wellbeing is virtually zero. And they didn't like that particular thing. So you won't hear much about it.
Christian Krekel (00:59:06):
I could imagine large infrastructure projects. I mean, not that I've evaluated any of those, but like HS2 for example, in the UK, which basically promised reduced commuting to a certain extent. And I mean, the effect of, the cause effect of commuting on wellbeing is not at all clear, because people like substitute commuting time also than with working and then also commuting alone, basically.
I think that it's probably overstated how bad commuting really is, but these kind of things where you basically, I could imagine like large infrastructure projects, also the heat for runway expansion probably it depends on how big the intrusion is into natural environments and displacement of homes, for example. Which I think basically in this table that Paul showed was just like, didn't even get any quantification, monetary quantification, but simply like traffic lights. Right? Because it was difficult to quantify. So that's these are maybe the suspicious cases where actually, yeah.
Struan Little (01:00:08):
Another question is that the specification of social weights seems quite an important step in the process. So could you comment on how public servants might approach this issue given that reasonable people can and do disagree about the right way to deal with questions of distributed justice?
Christian Krekel (01:00:27):
Yeah. So I think distributed justice essentially, I mean that is the methodology is basically free of any ideology. I mean, you can basically apply social weights as this team fit, right? I mean, what we essentially want to do, ideally we want to prioritise people who are at the lower end of the wellbeing distribution. So particularly those people, which we call are in misery. I think also most policy makers would naturally agree that... Although they don't necessarily agree that happiness should be the goal, but most policy makers do agree that misery prevention alleviation should be the goal.
So, people particularly in the ranges of zero to four life satisfaction points, what we consider in misery, because there we have correlations with substance abuse, depression, homelessness, and so on and so forth. Everything that is on face value quite bad, and putting more value onto those people particularly, I think that's something which the methodology can easily do.
Paul Frijters (01:01:27):
Yeah. I would like to give a slightly different answer. Some people have said that misery should count extra, though, for me, that is less important. But this notion of how much people with different passports should count, but also people who are not yet born should count. That's a really difficult one within this methodology because we care about the idea of a next generation.
But as soon as you say, the unborn is important, you get the unpalatable corollary that maybe we should spend a lot more resources on making sure we have more children, right? And lots of people don't like that, but they do like the idea that the future generation matters. So there is a natural tension there. But for us, as Christian said, we, the methodology doesn't take a point on that. But one way to do that is to see this as essentially a definition of who us is, us of the calculation is right? Economists traditionally come from a kind of a world utilitarian background. But in reality, the world is more organised in terms of nation states and bureaucracies of nation states have a democratic duty to care about their population and not that of the whole world.
And so there is this notion of, who's the demos? Who's us? Who are we supposed to care for? And in principle, you can either take your answer from politics, which means whoever voted last time, which is also a bit unpalatable, or you can run surveys and ask people, well, you know, okay. "What weight do you think the unborn children should have relative to you? Or look at this hypothetical New Zealander. He hasn't been here for 12 years. He might not even live in New Zealand, but has a right to that. Right? Should he calculate? Should we care about him? Should we divert resources away from you to him, if that would help? And you can put hypotheticals there. So I'm sort enamored of the idea that you can just ask people in New Zealand of “who is us“ and give them weights. That's one way to go.
Struan Little (01:03:24):
Thank you. There's a specific question, but there’s more generic too, cause there's a lively debate in the chat. And the question is, does or could the WELLBY approach take the wellbeing of one's family into account. But further up the chat too, there was a vigorous debate about going on about what that family was and some of the externalities both positive and negative in that.
Paul Frijters (01:03:47):
Yeah. well, I mean, I like the quote of Adam Smith who said, look, "Philosophers effectively worry about the happiness of the whole world and mankind from now to affinity and effectively, that's rather useless. People should stick to what they're better at, which is looking after their own happiness, that, of their family, that, of their community and maybe their country." Right? And I like that kind of more practical approach. Let's worry about the happiness of the people we know best.
And of course, part of the nation state bureaucracy, the Treasury and the Department, well, that's their job to worry about the wellbeing of all New Zealanders, but for individuals, yeah, there is also a responsibility for their own and that of their family. And that goes again to the question within a family, well, who is us? And how much do we care about other people's family in a direct sense. And I think that as moral actors, these are kind of questions we struggle with daily.
And in that sense my family first is something that I would practice as well. Right? I advocate WELLBY for society as a whole choice, but of course in daily decision making, I count my own family larger than anybody else's family. And I think that's natural and everybody else probably does the same, but as a system to govern all of us that we want the bureaucracy to care about all of us equally.
Struan Little (01:05:07):
Thank you. And then another one is, does the WELLBY approach for CBA link back to general equilibrium theory like price-based CBA does? I'm thinking about double counting risks as the impacts ripple through related markets, and about budget constraints. In particular, can the WTP values exceed people’s ability to pay. And that echoes an earlier comment in the chat too, about, I think from Cath Wallace saying, well, "The story lies on incomes and wealth at some point."
Paul Frijters (01:05:42):
Maybe I can answer that. Yes. In principle, I like the idea of general equilibrium thinking, which is often that a choice for one means a choice against others I want to have to live within one's means. And of course the whole idea of status has an equilibrium in it as well. But that's a question of which frameworks one adopts, right?
So how the world works, if you like, has an equilibrium notion in it. And at that sense, we're totally pragmatic. I mean, we come from an economic tradition, so we are generally equilibrium thinkers. But that will differ department by department. And that's a fight between departments and organisations within a country, as to whether or not they should be equilibrium thinkers.
And we don't want to get into that fight. But definitely that's something you want to do to avoid double counting. And we talk a lot about that. Right? And this is indeed a question of, yeah. A good example of double counting is that you shouldn't end count the wellbeing effect and then try to account the health effects as well. Because they're already in wellbeing effect. When you've got an ultimate measure, stick with it, don't count something else with the same people as well. And that's a matter of, yeah, practice of analysis if you like.
Struan Little (01:06:55):
Yeah.
Paul Frijters (01:06:57):
Christian?
Christian Krekel (01:06:58):
Yeah. No, I agree with that. I think we do have a chapter in the book actually, that deals with that particularly. So I remember when in doubt leave out.
Struan Little (01:07:08):
Another-
Christian Krekel (01:07:09):
That's for the benefits, for the cost that when in doubt put in.
Struan Little (01:07:14):
…way a bit provocative, but I think it's getting at something important too, which is using your methodology about time consistency. In other words, in applying this methodology, isn't subject to repeat games. So the comment is, suppose the NHS had caused to run the programme again, and it were oversubscribed. And suppose the NHS had read the paper and told potential volunteers- we know from the best social science, the participation in this programme provides wellbeing worth at least a thousand pounds. And we don't have room for everyone. So we're charging you 200 pounds to participate.
Christian Krekel (01:07:47):
This would be such an interesting experiment, I have to say. It would be fantastic. I think what I like about the NHS example is that actually they're thinking to run this a normal times as like a nationwide thing. So I think it would be fantastic and interesting to see what would happen if, I mean, rationally, as a rational agent, you would, of course then select into it. I think it would, however, of course, the term, most people who are pro socially motivated and would probably crowd out intrinsic motivation to actually give time, but it would be a fantastic experiment to do.
Paul Frijters (01:08:19):
Yeah. I can comment a bit more on that. Within the general methodologies you saw, we have a discounted stream of wellbeing in there and because it's a standard discounting stream, normally speaking, you don't run into timing consistency problems with that, right? Because as we're from the point of view of tomorrow, how much you care about it tomorrow is indeed what you'd have cared about it today already.
But of course the reality of election cycles is always that there's a timing consistency problem in lots of things, but to take the specific example of the NHS, you do have to worry about, you have to have a slight change of mindset there, because as soon as you ask money of volunteers to become volunteers. You're changing the nature of that relationship. They're no longer volunteers to a certain extent they're suddenly consumers who are paying for their own entertainment, like going to the theatre and that comes with a totally different mindset.
So one should be mindful of the fact that explicitly introducing money around volunteering changes what it actually is. No longer is volunteering and hence changes the psychic properties of it. And I think that economists don't think that way they. They don't think that money changes the nature of relationship, but they intuitively do recognise it.
So if I, for instance asked you, "Would it make sense to give your friend $20, if you enjoyed his meal, just to show your appreciation, even an economist will recognise that's ridiculous. And that is an insult to your friend, right? Because we'd like to make dinner for you. But as an economist, one should then also not go to work and then nevertheless have that mindset when it comes to asking volunteers to pay for the privilege of volunteering. You should realise that's like paying a friend $20 because of delicious dinner he shared with you. Right?
So once you basically have an expansive notion of how people really are when it comes to that kind of asking money for something that was previously not measured or valued in that monetary realm.
Christian Krekel (01:10:26):
Yeah. It's also like to just add to that, even if you would leave out the 200 payment, even if we just like present people with information, well, this is the monetized wellbeing benefit to generate from volunteering. Very unclear whether people would still select into that because I mean, there's all this literature on failures and hedonic forecasting and essentially volunteering is an experience good. Right?
I mean, you basically don't believe that you generate so much wellbeing.. benefits from before you actually volunteer. Only if you have done it, actually, you basically see that. So volunteers then also keep it up because they have this positive feedback. But it's difficult to like get people into volunteering, but just presenting them with the benefits, then just need to try it out. Just need to nudge into that in other ways, probably.
Struan Little (01:11:11):
There's just a supplementary comment on too. It's worth just noting, I think, but a comment that desirably wherever possible we should check some of these willingness to pay that's consistent with the assessed valuation. And I think there's quite sense in that. Just take you back to a supplementary on another question too, which is.. now I've lost it, I was doing a brilliant job, I thought. There was… Back to the discussion we had on the risks of double counting. And there's a comment about, does a multiplier for the family risk double counting? How do you think about that?
Paul Frijters (01:11:53):
Well, the multiplier for the family, this goes back to the unemployment multiplier, right? That social multiplier. I mean, empirically speaking that multiplier is largely the whole social surrounding. So we know that unemployed people are less friendly towards the friends that they have. They become more depressed, they become isolated. And so part of the loss is, loss of motivation and depression in the rest of the family. And that is there, right?
But also in the rest of the community. So Andrew Clark had a nice paper on that a while back who suggested that the whole community loses at least double what the individual loses, but there are some evidence that goes against that. But I once commissioned 20 papers as part of the world econometrics challenge of various teams around the world. And they all came on a multiplier of two, as well as their best estimate, using all kinds of data based on changes in unemployment in regions around the world and around time.
So it's that number comes a little bit from the community effect. And it's not really double counting because this is the actual life satisfaction effect in the country as a whole of changes in unemployment. That's what it relates to. But of course, if you include that multiplier, then you got to be very careful if you start also including the effect of the money stream differences with unemployment.
Right, now, frankly speaking, they're so small relative to the misery of unemployment, you might as well not count them. Right? Because the misery just far outweighs any monetary effect on that. But yeah, you've got to then be careful as with the other stuff you count. And so it's good to have rules of thumb in one's own mind, which is often that, yeah, economic recessions are important because of government debt and unemployment and the rest almost doesn't matter for the WELLBY methodology. The rest is very, very small.
Christian Krekel (01:13:46):
Yeah. I think that I don't see any risk of double counting in terms of this social multiplier parameter, because the web is the net welfare measure and you would start double counting if you would then also include, okay, the health effects of your significant others and things like that. But essentially you look at sort of... I wouldn't say the utility, but you would look at the net welfare measure in end of these other people.
And the parameter where this thing comes from. I mean this is now estimated to be two, but it might also be changing over time. So essentially we might want to give it a sub subscript of T, right? We want to commission research, new research every five years saying that just testing whether this parameter does actually change as social relationships and households change over time.
Struan Little (01:14:36):
Thanks. We're getting towards the end too. It's been vigorous, but I'll ask you another question and then just anybody out there, if there's got a burning question, they want to pop it in the chat and I'll make sure we have a chance for that. But another question going back a bit was - does the WELLBY approach value effects on environment and animals based on their impact on happiness of people? Or is it something more intrinsic?
Paul Frijters (01:15:00):
Happiness of people. That's pretty much, it's very anthropomorphic at the moment. One can in principle extend it, but it's definitely seeing us humans first. One can in principle put animals in there? Yes. The implicit thinking is though that we're helping nation stage bureaucracy figure out that democratic duty and within our systems animals don't vote in parliament. They have no power other than the power of humans protecting them.
So there's also an element there to which is our kind of methodoly in thinking respects the reality of power. And the reality is of power is that humans have power and animals don't. And one can say, "Well, we don't want it that way, but who's the we? It's we humans don't want it that way. So that's just another way of saying, yeah, we decide for animals anyway, and we can internally disagree, but it's still us that matters.
Christian Krekel (01:15:57):
Yeah, that's true. But I like about methodologies that is actually quite flexible and you could essentially include animal welfare. So, that's something you can actually do. It would be difficult to assess that, but there are studies, I think Andrew Oswald has worked on that, on looking at the midlife crisis in chimpanzees and basically having their wellbeing assessed by their caregivers. And so actually the methodology would be flexible, whether you want to put it in I think that's something as Paul, said probably more than negative, but I mean, it's also like if a democracy decides on that something we care about, then we can put it in.
Struan Little (01:16:32):
Fantastic. Look, I might draw us to a conclusion then, but just in closing one, I just want to thank you both for the sacrifice you're making and getting up at some ridiculous hour in the morning, let alone the stresses and strains of trying to do a significant presentation like this over the net as well. But I felt absolutely fascinating because the problem is really fundamental. It's how you take the benefits and the rigour of something like cost-benefit analysis, but make it much more real and recognise the areas that actually matter to people's livings and their wellbeing. And that's quite fundamental.
And what I like about what you're doing is to try and make that really practical, to take these really, really difficult issues and actually put them into a practical basis. And I'm certainly hearing about what you're saying about that cost of the tables being owned by the bureaucracy, because that's where a lot of these decisions get made.
And for me, it's just so important. I'm so thankful that you've both taken the time to not just part your wisdom, but actually help us think about how we are going in the work we do here as well. So I just like... And I'm certain that colleagues will be enjoying, well enjoying.. huge turnout 150 odd people here to talk to you today. So that's pretty impressive. And thank you for your open and candid and really thoughtful and amusing at times, replies to some of the questions in the chat. I have to say it was beyond vigorous. I mean, in terms of the questions, the comments and things like that. So thank you very, very much indeed for that. And then just closing, I'd say,
[speaking in te reo Māori] Piki te kaha. Piki te Ora. Piki te Wairua. Mauri ora ē
And thank you very much for participating everybody. And thank you, Paul and Christian.
Christian Krekel (01:18:23):
Thank you so much. Take care.
About the presenters
Paul Frijters is a Professor of Wellbeing Economics at the London School of Economics: from 2016-Nov 2019 at the Center for Economic Performance, thereafter at the Department of Social Policy.
He completed his Masters in Econometrics at the University of Groningen, including a seven-month stay in Durban, South Africa before completing a PhD through the University of Amsterdam. He has also engaged in teaching and research at the University of Melbourne, the Australian National University, QUT, UQ, and now the LSE.
Professor Fritjers specializes in applied micro-econometrics, including labor, happiness, and health economics, though he has also worked on pure theoretical topics in macro and micro fields. His main area of interest is in analysing how socio-economic variables affect the human life experience and the "unanswerable" economic mysteries in life.
Professor Frijters is a prominent research economist and has published over 150 papers in fields including unemployment policy, discrimination and economic development.
He was the Research Director of the Rumici Project, a project sponsored by the Australian Ministry of Foreign Aid (AusAid), and is also a co-editor of the journal, Economic Record. In 2009 he was voted Australia's best young economist under 40 by the Australian Economic Society. He joined IZA as a Research Fellow in April 2010.
Christian Krekel is an Assistant Professor in Behavioural Science in the Department of Psychological and Behavioural Science, London School of Economics. He is also a Research Associate at the Centre for Economic Performance, London School of Economics, and at the Wellbeing Research Centre, University of Oxford.
Christian is an applied economist: his research fields are behavioural economics and wellbeing, policy and programme evaluation, and applied panel and spatial analysis. He obtained his PhD in Economics from the Paris School of Economics.
Christian's research looks at how our environment affects our lives – specifically our behaviour, health, and (ultimately) our wellbeing. He is also interested in using nudges to increase pro-environmental behaviour. His work is aimed at improving evidence-based policy on how to improve these outcomes in a cost-effective manner. He is a frequent advisor to international organisations such as the World Bank or the Organisation for Economic Co-operation and Development (OECD). He also advises national governments, for example, on how to use wellbeing data for policy analysis and appraisal.
For his work, he has been awarded the Young Economist Award (FEEM Award) by the European Economic Association.
Wellbeing Report seminar series
At Te Tai Ōhanga – The Treasury, we are developing the first Wellbeing Report - Te Tai Waiora that will be published in November 2022.
This online seminar is part of a Wellbeing Report programme of Guest lectures running in 2022 and 2023.