Professor Robert MacCulloch: Labour's Former Head of Health NZ, Rob Campbell, lectures us (incorrectly)

Labour's Former Head of Health NZ, Rob Campbell, lectures us (incorrectly) about Economics & the Pointlessness of National's Social Investment Method

The former Head of Health NZ, Rob Campbell, has written a treatise on the new Coalition's "Social Investment" approach, labelling it merely a political "slogan". Newsroom, by the way, is partly funded by the Universities of Otago, Victoria, and Auckland, as well as the likes of Bell Gully law firm, to enhance public understanding of important issues. Let's see how Mr. Campbell's explanations of how the new Coalition's Social Investment approach to deciding whether public money is being well spent fulfills that aim. He says that:

"The limitations of the slogan [social investment] will become apparent as it is rolled out. The core issue is that this is an accounting-derived concept. It looks quite mechanistically at quantified, indeed monetized, sets of inputs against quantified & monetized outputs .. Projecting an outcome which is precise & monetized – “for every $1 invested you get $5.23 back” - lends a false accuracy & certainty to proposals. This may seem like economics to some, but it is not. Economics is about options, choices, uncertainty. Opportunity costs, sunk costs, marginal costs more than accounting average costs. Certainly economists build and test theories with models, often quite simplistic ones. But they do not believe that the model is real. Only politicians do that".

Gosh, where to start? First, arguing National's Social investment Approach bears no relation to economics and is purely an "accounting derived concept" is incorrect. Quantifying costs & benefits (which Social Investment does) goes under the name of Cost Benefit Analysis (CBA) in economics and is widely respected across the world as a tool to help ensure there is a discipline on government spending on projects & regulations that affect business. CBA has been endorsed by Presidents Reagan, Obama, Bush, Clinton, to name a few, in the US - both Democrat and Republican - as a vital tool to ensure responsible government. The main difference between Social investment and CBA is that the former focuses mainly on fiscal costs & benefits of a proposed plan, whereas the latter includes all costs and benefits.

Second, as for Mr. Cambell's claim that Social Investment (and CBA) are about "Projecting an outcome which is precise & monetized", that is not the case. Of course uncertainty exists when trying to quantify the impact of government spending and regulation. That is why the figures are typically reported as lying within a range of values. When uncertainty is big, the range of values will be large, rendering this tool weak. In other cases, the range of estimates may be quite tight - it just depends on the particular issue being studied.

Third, the idea that, "Certainly economists build and test theories with models, often quite simplistic ones. But they do not believe that the model is real. Only politicians do that" is also incorrect. Economists do not test theories with models. A model is a theory. Wikipedia defines an economic model as a "theoretical construct representing economic processes by a set of variables and a set of logical and/or quantitative relationships between them". So again, I have no idea what Mr. Campbell is on about.

Fourth, Mr Campbell argues economics is about, "Opportunity costs, sunk costs, marginal costs more than accounting average costs". Sunk costs are irrelevant to accountants & economists in terms of making decisions about the future using objective tools like Net Present Value & CBA. Again, what is Mr. Campbell is on about?

The ethos behind the Social Investment Approach is vital to society. That ethos is about how an early intervention made when a child is young and is on the road to ruin - although it may cost a lot now - may end up saving society ten times that amount in terms of future costs which the child, when grown up, will incur. Those future costs may come in terms of prison time, poor health outcomes, hurting others & hurting themselves. Trying to get estimates of such costs to see how eye-watering large they may be - in order to justify even an expensive intervention now to avoid them, is a worthy role for government. Campbell is wrong to label such an ethos a "slogan". After six years of out-control government spending that has done nothing to quell crime, improve education, reduce homelessness or improve almost any social outcome in NZ, such partisan sniping is empty. Labour should adopt Cost Benefit and Social Investment approaches to spending & regulation, should it wish to regain credibility. As for Newsroom, my view is that the organizations funding it should consider defunding it, since it looks increasingly partisan to me.

Sources:
https://newsroom.co.nz/2024/06/17/dont-be-fooled-by-what-social-investment-slogan-means/

Professor Robert MacCulloch holds the Matthew S. Abel Chair of Macroeconomics at Auckland University. He has previously worked at the Reserve Bank, Oxford University, and the London School of Economics. He runs the blog Down to Earth Kiwi from where this article was sourced.