An economy is for producing well-being, not GDP or tax revenue

I’m normally a big fan of TD Economics and its various newsletters and publications, which you can get sent to you free. A well-known bank economist once told me the purpose of bank economics departments is not to help with actual bank decision-making but rather to burnish the bank’s brand by impressing customers with smart analysis. If so, TD Economics almost always succeeds.

But their most recent report, An introduction to gender-based budgeting, strikes me as an exception to their usual rule. Gender-based budgeting isn’t TD’s idea, of course. It’s the cornerstone, theme, meme, background, foreground, text, subtext and virtually every other line of the federal government’s recent budget.

To explain why gender-based budgeting is important, TD offers the following example, echoing the budget (which in fact relied on a Royal Bank study):

An illustrative example of potential benefits: were Canada able to halve the current labour force participation rate gap between women and men, the resulting impact on economic growth would likely be sufficient to counteract the drag of an aging population on the economy.

To my mind, that commits a cardinal error in economics. We don’t have an economy to produce GDP or GDP growth. We have an economy to produce well-being. We want people to make the choices that make them as best-off as possible. We don’t want them making choices that reduce their well-being for the purpose of increasing GDP or even GDP growth.

How do people—in this case women—decide whether to participate in the formal labour market or instead work at home? They compare, on one hand, how much they can earn (net of their costs) by entering the labour market and working for money with, on the other hand, the value—often the implicit value—of their time spent working in the home.

One cost of entering paid work is that they may have to buy child care instead of performing it themselves at home, which is what they may have been doing. That cost is a real cost of their decision to go into the formal labour market. If they don’t take care of their kids, someone else has to. Like all costs, it should be taken into account when the decision is made.

In many cases, no doubt, women decide that, given the cost of child care, it just doesn’t pay to enter the formal labour market. So they don’t. GDP suffers as a result. GDP growth suffers, too, if only temporarily, because GDP doesn’t get the onetime unrepeated bump from women giving up home work, which isn’t counted as GDP, and starting paid work, which is. There also isn’t the bump to paid daycare, because that would have increased, too, if a mom started paying someone else to take care of her kids rather than doing it herself.

So we get less GDP when moms stay home. But do we get less well-being? No, just the opposite.

We almost certainly get more well-being. The mom has compared the full benefits and costs of staying home with the full benefits and costs of entering the work force and has chosen what’s best for her. That’s what we want in economics: decision-makers weighing all benefits and costs of their decisions. (That’s the main argument for carbon taxes: to get decision-makers to recognize the full costs of their actions.) That’s what mothers deciding for themselves whether or not to enter the labour force almost certainly do. (Of course, if another mom weighs all the costs and benefits and decides that for her it’s worth it to go into the labour market, then that’s the welfare-maximizing decision, and right for that reason, regardless of the increase in GDP it causes. To be clear, I’m not recommending one decision over the other—it’s 2018!)

An argument you hear a lot these days is that if the state picked-up daycare costs, then more mothers would enter the workforce (and GDP would rise and maybe GDP growth rates, too, as well as government tax revenues and so on). That’s almost certainly true. But what’s going on when that happens? Mothers are being invited to ignore a very real cost resulting from their decision to enter the formal labour force. It’s not surprising that when they are relieved of a major cost of their decision they make a different decision. But that’s no longer going to be the decision that maximizes well-being, given all the costs and benefits following from it.

There’s a lot of economic research these days centring on whether people are rational in their decision-making, as well as increased skepticism that they are. I’m not sure mothers know best when it comes to deciding whether to do paid work in the formal market or unpaid work at home. But I’m reasonably sure they know better than anyone else who might presume to make the decision for them.