Choosing Your Benchmark

Choosing Your Benchmark

 

On Saturday my wife and I went to a play at the Great Canadian Theatre Company in Ottawa entitled “Proud.” It is a rather clever and funny satire on the current Prime Minister with lots of topical references to recent federal politics.

For those who plan on seeing the play at some point I will try not to give away too much of the plot. One scene in the play, however, jarred the nerdy policy wonk side of me. The Prime Minister is explaining to one of his new MPs that his real ultimate goal is to “right size” the role of government in society. He then goes on to say that he will know he has achieved the goal when the ratio of the net federal debt to Gross Domestic Product (GDP) has shrunk from 30% to around 22% and mechanisms have been put in place to ensure that it does not rise from that level in the future.

But reducing the ratio of the net debt to GDP would not necessarily require any shrinkage in the size of the federal government relative to the overall economy. It could be done by raising tax revenue as a share of GDP while maintaining or even increasing federal government spending as a share of GDP.  In fact the role of government regulation in the economy could be increased or decreased with only a small impact on either revenues or expenditures as a share of GDP, not to mention the net debt to GDP ratio.

The moral of all this is to match your statistical benchmark to your real goal. If your goal is to improve the health of Canadians don’t use as your benchmark an input such as how much you spend on health, use indicators of improvement in actual health outcomes such as health-adjusted life expectancy. If you want to improve the cognitive skills of Canadians don’t use as your measure of success the share of people who have graduated from high school or university which can be manipulated by lowering standards, use the level of achievement on tests which measure how well people read and use math in everyday life situations in the adult population. In accounting terms do a bottom-line analysis, not a middle-line analysis.