Economic Policy and Social Welfare

Objective Social Welfare

• GDP limitations: GDP is a poor indicator of social welfare, failing to assess dimensions that determine social welfare and individual wellbeing.
• Alternative indicators: Initiatives have been launched to propose alternative indicators, such as the OECD's "Better Life Initiative" and the United Nations Development Programme's Human Development Index (HDI).

Dashboard Approaches

• Multidimensional perspective: Dashboard approaches consider various dimensions of wellbeing, such as income, health, and education.
• Non-monetary approach: Dashboard approaches do not use pricing strategies to assess dimensions.
• Separate treatment of dimensions: Each dimension is treated separately, with no substitution between them.

Composite Indices

• Aggregation of dimensional measures: Composite indices aggregate multiple dimensional measures into a single index, such as the HDI.
• Transformations and weights: Different transformations and weights can be applied to indicators, leading to varying measures.
• Inequality-adjusted indices: Inequality-adjusted indices, such as the Inequality-Adjusted Human Development Index (IHDI), account for inequality within a country.

Monetary Approaches

• Correcting GDP: Monetary approaches aim to correct GDP by subtracting non-welfare-enhancing activities and adding non-monetary values.
• Measure of Economic Welfare (MEW) and Index of Sustainable Economic Welfare (ISEW): These measures add leisure time, unpaid work, and environmental values to GDP.
• Criticisms: Monetary approaches lack microeconomic foundations, have inconsistent measurement strategies, and are sensitive to parameter choices.

Subjective Wellbeing

• Gross National Happiness: Bhutan has used Gross National Happiness as an alternative to GDP since 1972.
• Happiness and life satisfaction: Surveys measure happiness and life satisfaction, but the relationship between income and happiness is complex.
• Easterlin Paradox: Despite income growth, reported happiness levels have not increased in Western countries.

The Easterlin Paradox

• Relative income: The Easterlin Paradox can be explained by considering relative income, where individuals assess their situation compared to others.
• Adaptation: Adaptation also plays a role, as changes in income have only transitory effects on happiness.

From Declared to Revealed Preferences

• Challenges: Happiness data must be validated by considering revealed preferences, as individuals may value other aspects of wellbeing, such as power or admiration.
• Actions: Only actions, such as "buying happiness," can confirm that happiness is relevant to the individual.### Determinants of Life-Satisfaction and Happiness
• There are various determinants of life-satisfaction and happiness, including years of schooling, recent negative changes in circumstances, rank in the income distribution or in one's peer group, temperament, and personality.
• Personal traits seem to be an important predictor of happiness, as identical twins separated immediately after birth show the same concordance on happiness as on other traits for which a genetic basis is well established, like height.

Experimental Methods

• A problem with surveys is the lack of control of some dimensions that can affect the responses, such as context, immediate mood, or the hour of the day the individual fills out the questionnaire.
• Two experimental methods have been proposed to avoid such biases: the Experimental Sampling Method (ESM) and the Day Reconstruction Method (DRM).

Experimental Sampling Method (ESM)

• In the Experimental Sampling Method, several times a day, participants:
  • Indicate their physical location, the activities in which they were engaged just before being prompted, and the people with whom they were interacting.
  • Report their current subjective experience by indicating the extent to which they feel the presence or absence of various feelings (angry, happy, tired, impatient, etc.).
  • Have physiological measures taken in the same intervals, such as hormone concentration, skin conductivity, or blood pressure.

Day Reconstruction Method (DRM)

• The Day Reconstruction Method is easier to implement as it does not require following the individual during the whole day.
• The steps of the DRM are:
  • Respondents fill out a diary summarizing episodes that occurred in the preceding day.
  • They describe each episode by indicating when the episode began and ended, what they were doing, where they were, and with whom they were interacting.
  • They report how they felt during each episode in regards to selected affective dimensions.

Objective Social Welfare

• Dashboard Approaches, Composite Indices, and Monetary Approaches are used to measure objective social welfare.

Subjective Wellbeing

• Happiness measures can be associated with the original notion of utility, as introduced by Jeremy Bentham in the 18th century.
• There are debates about the relevance of happiness data and its use in policy-making.

Philosophical Debate on Welfarism

• Some authors argue that happiness is the ultimate goal, and everything else that is desired is only a means to this end.
• Others argue that hedonic adaptation suggests that psychological interventions or researching a happiness drug may be more efficient than most changes in objective living conditions.
• There are also criticisms against utilitarianism raised by Dworkin (1981), Rawls (1982), and Sen (1985), among others.

Methodological Issues

• There are methodological issues with the questionnaires used, mostly based on scoring approaches.
• Three problems related to the individual's responses are:
  • The scope problem: the ambiguity of the question makes it unclear whether one should think of the whole life, the past life, or the current period.
  • The ranking problem: the cognitive complexity of the exercise may induce respondents to focus on some salient aspects of their situation and forget many relevant dimensions of their life.
  • The calibration problem: the scale offered in questionnaires is closed, which can be misperceived and/or based on personal life experience.