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Posts Tagged ‘GDP’

Another New Welfare Metric

Charles Jones and Peter Klenow, two economists from Stanford, have an NBER paper on their new metric (ungated here, h/t DR), which is intended to capture welfare better than GDP (which we’ve talked about at length). From the abstract: 

This welfare metric combines data on consumption, leisure, inequality, and mortality. Although it is highly correlated with per capita GDP, deviations are often economically significant.  

They do acknowledge what jumped out to me as their measure’s biggest omission: 

We have neglected the natural environment more generally. The quality of the air, water, and so on provide utility for a given amount of market consumption and leisure and help sustain future consumption.

Some interesting results come from their metric:

 Average Western European living standards appear much closer to those in the United States when we take into account Europe’s longer life expectancy, additional leisure time, and lower levels of inequality…

Many developing countries — including much of sub-Saharan Africa, Latin America, southern Asia, and China—are poorer than incomes suggest because of a combination of shorter lives and extreme inequality…

Welfare growth averages 2.54% between 1980 and 2000, versus income growth of 1.80%. A large boost from growth in life expectancy, of over one percentage point per year, is partially offset by declining consumption shares and rising inequality.

I’m encouraged by research like this coming out of the NBER. Starting with the Stiglitz Commission, the mainstream is beginning to embrace the weaknesses of GDP. My guess is that more papers like this one will come out in future years, and they will hopefully only get better. The authors conclude by saying, 

Even more ambitious, but conceivable, would be to try to account for some of the many important factors we omitted entirely, such as morbidity, the quality of the natural environment, crime, political freedoms, and intergenerational altruism. We hope our simple measure proves to be a useful building block for work in this area. 

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I blogged last year about the Happy Planet Index, a seemingly promising way of measuring propserity. Here’s Nic Marks, who started the Centre for Well-Being at the New Economics Foundation, making an impassioned case for the metric in a TED talk:

Efforts like Marks’ remind us that other worlds are possible, but that our conception of prosperity affects our ability to get there. Most of his focus on the costs of well-being lies on CO2 and climate change. He does take some swipes at consumption-oriented society, but it seems that Marks’ aim is to move the mainstream.

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An impressive article in the New York Times by Jon Gertner called “The Rise and Fall of the GDP” is well worth a read. We gained a lot of information when the national income accounts began to be collected in the early 20th century, but of course GDP left much to be desired. In fact,  Gertner points out that obsessing over GDP may be dangerous, because it engenders growth-craving policies:

The G.D.P., according to arguments I heard from economists as far afield as Italy, France and Canada, has not only failed to capture the well-being of a 21st-century society but has also skewed global political objectives toward the single-minded pursuit of economic growth. “The economists messed everything up,” Alex Michalos, a former chancellor at the University of Northern British Columbia, told me recently when I was in Toronto to hear his presentation on the Canadian Index of Well-Being. The index is making its debut this year as a counterweight to the monolithic gross domestic product numbers. “The main barrier to getting progress has been that statistical agencies around the world are run by economists and statisticians,” Michalos said. “And they are not people who are comfortable with human beings.” The fundamental national measure they employ, he added, tells us a good deal about the economy but almost nothing about the specific things in our lives that really matter.

One exciting effort comes from State of the USA:

In the U.S., one challenge to the G.D.P. is coming not from a single new index, or even a dozen new measures, but from several hundred new measures — accessible free online for anyone to see, all updated regularly. Such a system of national measurements, known as State of the USA, will go live online this summer. Its arrival comes at an opportune moment, but it has been a long time in the works. In 2003, a government official named Chris Hoenig was working at the U.S. Government Accountability Office, the investigative arm of Congress, and running a group that was researching ways to evaluate national progress. Since 2007, when the project became independent and took the name State of the USA, Hoenig has been guided by the advice of the National Academy of Sciences, an all-star board from the academic and business worlds and a number of former leaders of federal statistical agencies. Some of the country’s elite philanthropies — including the Hewlett, MacArthur and Rockefeller foundations — have provided grants to help get the project started.

…The State of the USA intends to ultimately post around 300 indicators on issues like crime, energy, infrastructure, housing, health, education, environment and the economy. All areas of measurement will be chosen by members of the National Academy; all will be reviewed for rigor and accuracy by a panel of accomplished experts. With easy access to national information, Hoenig told me optimistically, Americans might soon be able “to shift the debate from opinions to more evidence-based discussions to ideally a discussion about what solutions are and are not working.”

Those involved with the self-defined indicators movement — people like Hoenig, as well as supporters around the world who would like to dethrone G.D.P. — argue that achieving a sustainable economy, and a sustainable society, may prove impossible without new ways to evaluate national progress.

Perhaps these efforts will challenge economists and the rest of society to think about human purpose. Pursue economic growth, but for what end? Our end purpose cannot be to make loads of money and then spend all day on the golf course. We need to be able to think about how to make our lives more fulfilling, and GDP hardly comes close to measuring that.

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More on that GDP Report

I meant to write about this report upon its release last week, but recent events have gotten in the way (and apparently the New York Times is a week late as well). In the article, Stiglitz states the over-arching problem as well as anyone could:

If you don’t measure the right thing, you don’t do the right thing.

Of course, the report is lacking in solutions, and if its authors have been paying attention to more heterodox fields like ecological economics, it doesn’t really add much new.

The report is more critique than prescription. It elucidates in general terms why leaning exclusively on growth as an economic philosophy may yield unhappiness, and it suggests that the incomes of typical people should be weighed more heavily than the gross production of whole societies. But it sidesteps the thorny details of slapping a cost on a ton of pollution or a waylaid career, leaving a great mass of policy choices for others to resolve…

Indeed, the difficulty comes in turning these general principles into new means of measurement. The report notes that its authors concur on the big picture, but diverge on the methodologies to be employed when it comes to factoring in the value of a better education and cleaner skies.

My guess is that they would make much better headway if they would collaborate with those outside the mainstream, like Herman Daly, for instance, who have been thinking about these issues for decades.

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In an NYT Op-Ed today, Eric Zencey argues that GDP should be subjected to “creative destruction.” He writes,

Creative destruction can apply to economic concepts as well. And this downturn offers an excellent opportunity to get rid of one that has long outlived its usefulness: gross domestic product. G.D.P. is one measure of national income, of how much wealth Americans make, and it’s a deeply foolish indicator of how the economy is doing…

To begin with, gross domestic product excludes a great deal of production that has economic value. Neither volunteer work nor unpaid domestic services (housework, child rearing, do-it-yourself home improvement) make it into the accounts, and our standard of living, our general level of economic well-being, benefits mightily from both. Nor does it include the huge economic benefit that we get directly, outside of any market, from nature…

In general, the replacement of natural-capital services (like sun-drying clothes, or the propagation of fish, or flood control and water purification) with built-capital services (like those from a clothes dryer, or an industrial fish farm, or from levees, dams and treatment plants) is a bad trade — built capital is costly, doesn’t maintain itself, and in many cases provides an inferior, less-certain service. But in gross domestic product, every instance of replacement of a natural-capital service with a built-capital service shows up as a good thing, an increase in national economic activity. Is it any wonder that we now face a global crisis in the form of a pressing scarcity of natural-capital services of all kinds?

This points to the larger, deeper flaw in using a measurement of national income as an indicator of economic well-being. In summing all economic activity in the economy, gross domestic product makes no distinction between items that are costs and items that are benefits. If you get into a fender-bender and have your car fixed, G.D.P. goes up…

The basic problem is that gross domestic product measures activity, not benefit…

BECAUSE we use such a flawed measure of economic well-being, it’s foolish to pursue policies whose primary purpose is to raise it. Doing so is an instance of the fallacy of misplaced concreteness — mistaking the map for the terrain, or treating an instrument reading as though it were the reality rather than a representation…

Several alternatives to gross domestic product have been proposed, and each tackles the central problem of placing a value on goods and services that never had a dollar price. The alternatives are controversial, because that kind of valuation creates room for subjectivity — for the expression of personal values, of ideology and political belief…

Common sense tells us that if we want an accurate accounting of change in our level of economic well-being we need to subtract costs from benefits and count all costs, including those of ecosystem services when they are lost to development…

Given the fundamental problems with G.D.P. as a leading economic indicator, and our habit of taking it as a measurement of economic welfare, we should drop it altogether. We could keep the actual number, but rename it to make clearer what it represents; let’s call it gross domestic transactions. Few people would mistake a measurement of gross transactions for a measurement of general welfare…

We’re in an economic hole, and as we climb out, what we need is not simply a measurement of how much money passes through our hands each quarter, but an indicator that will tell us if we are really and truly gaining ground in the perennial struggle to improve the material conditions of our lives.

The “recession” will officially end sometime around Q3 2009, primarily because GDP is the arbiter of recessions. Meanwhile, headline unemployment will continue rising until December, and U6 could well past that. Metrics are not neutral; they have consequences. When I posted about the Happy Planet Index a month back, I soon realized that it had been much ballyhooed in the blogosphere. But, at least they are thinking of alternatives. GDP, on the other hand, is taken as a given.

For some previous discussion here of the inadequacy of GDP, read these posts.

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The New Economics Foundation, a self-described “think-and-do tank,” has released its report (pdf) of the Happy Planet Index 2.0, which endeavors to measure the ecological efficiency with which countries achieve long and happy lives. Professor Herman Daly, a renowned ecological economist, writes in the foreword,

Economists like the concept of efficiency, and the Happy Planet Index is the ultimate efficiency ratio – the final valuable output divided by the original scarce input. I hope economics faculties in universities will put some of their energy toward refining the measurement and application of this ratio, in the service of living well for a long future on a single planet.

The numerator in this ratio is something called “happy life years,” or happiness-adjusted life expectancy. Happiness is measured with a simple question that has been replicated in a number of surveys, and which the authors of the report claim has proved to be a meaningful and proven measure:

All things considered, how satisfied are you with your life as a whole
these days?

The authors argue,

Furthermore, responses to this question correlate well with other attempts to
assess well-being. People who say they are satisfied with their life tend also to
make other positive assessments, such as reporting more frequent good moods,
are described by their loved ones as being satisfied, are observed to smile more
often, and are less likely to commit suicide later on in life. Importantly,
reported life satisfaction also correlates with all the complex aspects of well-
being described earlier, such as feeling autonomous and being resilient.

As for the motivation for the denominator, the authors write,

No moral framework would accept high well-being if it was at the
expense of others living today and/or future generations. Such considerations
are particularly relevant where limited resources are required to support well-
being. And the most finite limited resources that we currently rely on are natural
ones.

It’s good to see that such and index is unafraid of its normative aspects, which are often shunned in mainstream economic circles. Acknowledging that their measure is morally motivated, and forcing people to choose whether they accept the morality prior or not can put this measure in a strong position.

The ecological meaure itself is,

a measure of the amount of land required to provide for all their resource requirements plus the amount of vegetated land required to sequester (absorb) all their CO2 emissions and the CO2 emissions embodied in the products they consume. This figure is expressed in units of ‘global hectares’. The advantage of this approach is that it is possible to estimate the total amount of productive hectares available on the planet. Dividing this by the world’s total population, we can calculate a global per capita figure on the basis that everyone is entitled to the same amount of the planet’s natural resources. Using the latest footprint methodology – and it should be noted that this is a developing methodology – the figure is 2.1 global hectares.

The report also takes a swipe at economic growth.

The myth of economic growth as progress has held sway for over half a
century. But now, stimulated by the ongoing economic crisis and impending
environmental and resource crises, alternative visions of progress, such as that
represented by the HPI, are gaining popularity. They are still not the dominant
view, but the tipping point may not be far off…economic growth is just one
strategy to achieve well-being and, in terms of natural resources, a demonstrably inefficient one…The notion of GDP growth almost seems to have a halo around it. It has reached the status of motherhood and apple pie…This growing momentum makes it quite clear that GDP’s days as our sole indicator of progress are numbered. The stage is set for the HPI.

And, some results of the index…

The planet as a whole earns a score of 49 out of 100.

Latin America comes out very well. Africa does the worst. Developed countries fall somewhere in the middle, while the US earns 30.7, 114th out of 143 countries.

There’s a lot more in the report. I hope this index gains some traction so that it will be honed and tweaked; it’s obviously imperfect, and I’m particularly concerned with the use of happiness surveys. Nevertheless, it deserves a place in a number of discussions in and around economics.

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Nate Silver (of election projection fame) has an excellent post demonstrating the shortsightedness of harping on GDP numbers, in this case with regards to climate change. He takes to task Jim Manzi, whose argument is that even pessimistic assumptions point to a 5% reduction in GDP from global warming down the road. Silver endeavors to demonstrate that a 5% reduction in GDP can have extraordinary human costs, by taking low-GDP countries off the map. He manages to wipe out 43% of the Earth’s population.

I think Silver’s point provides a much needed dose of realism in looking at economic data. If someone told you upfront that global warming will kill upwards of 2 billion people, rather than reduce GDP by 5%, they would be much more apt to take action. Or, if we relied on a measure like Green GDP in our national accounts, and learned that GGDP would actually decrease by, say, 30% if we didn’t act on climate change, then again, we would be more ready for action.

GDP seems like a nice idea as an all-encompassing (and seemingly neutral) means of measuring the value of all the goods and services that people buy. However, when it comes to climate change, informal economies, and a host of other issues, GDP comes up woefully short.

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Nancy Folbre, an economist at UMass Amherst who specializes in feminist economics, has a post at Economix that discusses the lack of home productio in GDP statistics in light of the economic crisis.

Home construction is way down in the United States, but home production — work to produce goods and services for own consumption — is way up. As people forgo expensive restaurant meals, they spend more time cooking at home. A Time Magazine poll reports that individuals are doing more housework and home repairs. Many Americans, famously including Michelle Obama, are planting vegetable gardens. Even some urbanites are raising chickens in their backyards.

The issue becomes most poignant when doing cross-country comparisons:

Average time devoted to home production in the United States is lower than in many other countries partly because female participation in paid employment is particularly high here. As a result, estimates of gross domestic product, based on market transactions, overstate our relative well-being. Research by economists Rick Freeman and Ronald Schettkatt, for instance, shows that the value of mothers’ unpaid work in Germany is even greater than it is here. Adding an estimate of the market value of this work to G.D.P. in both countries would increase measures of German living standards more than ours.

Household dynamics may change as a result of the recession, but GDP could miss it entirely:

Men in the United States have increased the average amount of time they devote to housework and child care since 1975. Unemployed husbands who depend on their wives’ paychecks have incentives to develop their skills in this department. They seem rather reluctant to do so.

But that may change as bouts of unemployment grow longer, as they have during the current recession. When data from the 2008 and 2009 American Time Use Surveys become available, it should be possible to estimate the amount and value of increased unpaid work by both women and men. In hard times, even a few dollars a day can make a difference.

Sometimes I debate whether GDP is a good enough measure to be worth fixing. However, so long as it remains the primary indicator of economic well-being, I would obviously prefer that it be as holistic as possible. Of course, we then get into the throny issues of how to value household production. In any case, it could be that the recession provides incentives to reevaluate our economic statistics.

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