Archive for September 14th, 2010

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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