Measuring GDP is easy, there is a formula:
GDP = Consumption + Government Spending + Investment + (Exports – Imports)
Every since Amartya Sen realized that GDP is not a good measure of development, however, there have been attempts to quantify a better indicator of well-being. One interesting one is called the Genuine Progress Indicator (GPI). The formula looks like this:
GPI = (Per capita consumption adjusted for inequality)* + (Services from domestic labor)** + (Services from consumer durables)*** + (Services from streets and highways) + (Public expenditure on health and education) – (defensive private expenditures on health and education)**** – (costs of commuting) – (costs of personal pollution control) – (costs of automobile accidents) – (costs of water, air, and noise pollution) – (loss of natural habitats) – (loss of farmlands) – (depletion of non renewable resources) – (costs of climate change) – (costs of ozone depletion) + (investment) – (foreign debt) + (change in international position)
*reflects the fact that an equivalent increase in income means more to someone below the poverty line than it does to a millionaire
**includes unpaid childcare and domestic services from family members since feminist economists made the point that if a man marries his domestic servant, GDP goes down
***reflects the durability of consumer goods. If a product lasts 10 years for the same price that is better than if it lasts for 1 year from a waste perspective
****reflects that private consumption to make up for shortfalls in public health or education services does not increase wellfare
The cool thing about this is that it takes GDP as its starting point and then adds or subtracts based on various externalities that are all bundled together in GDP. The fact that it is per capita means it accounts for population growth. It accounts for government expenditures that increase well being, but not prison or military build-up which would be the result of negative externalities. It is possible to come up with a number for each input and punch them in and come out with a number for GPI! Although I am sympathetic with those who would argue against quantifying every aspect of life, it is an improvement from GDP, and it is interesting to see what is behind the so called quality of life indices.
In the 12 years that Michael Bloomberg was mayor of New York, he largely pursued policies encouraging economic growth, believing that the increases in consumption and activity would benefit all New Yorkers. By many measures, including per capita income, the city has done extraordinarily well under his management, attracting unprecedented numbers of billionaires as new developments and luxury apartments pop up across the city.
‘A rising tide lifts all boats’, is the cliche for those who would say policy must target growth. We measure the success of politicians by the changes in GDP under their tenure. We assume that all growth is good growth. But to what extent do people at the bottom of the economic pyramid benefit from rising GDP?
The answer is complicated. GDP usually correlates quite closely with employment. In some circumstances, however, growth creates fewer jobs. This is common in high tech sectors, whereas manufacturing tends to create a lot of jobs. As the US has transitioned to a service economy, the middle class that relied on manufacturing jobs has hollowed out.
Depending on the sectoral composition of the economy, growth may have little to no effect on reducing poverty rates. New York has attracted many transplants over the last 12 years who have flocked to neighborhoods that were once run down and unsafe. New businesses boom in Brooklyn and Harlem, but they usually hire and cater to the transplants rather than the people who used to live in these neighborhoods. Wall Street is doing better than ever, but the poverty rate hasn’t changed at all during Bloomberg’s mayoralty. His successor, Bill de Blasio, ran on a campaign of ‘inclusive’ economic opportunity and won in a landslide largely because of these inequities.
So what type of jobs and policies can create more inclusive growth in the modern US service economy? Education is important, and the role of community colleges and vocational training can be invaluable. Elderly care is one field that provides a ladder out of poverty for many people. Government jobs also have strong anti-poverty effects.
Nationally, as the US pulls out of the financial crisis real wages have in fact declined and the poverty rate has risen. This results in the rising numbers of working poor, people who have full time employment yet still live below the poverty line. These phenomena are reflected in the rising inequality that the US is currently witnessing. Growth and anti-poverty can go hand in hand, but in times like ours, its important to remember that they might not.
“Everybody is a genius. But if you judge a fish by its ability to climb a tree, it will live its whole life believing it is stupid.”
Einstein’s quote is interesting to consider in the context of an economic system that puts a price on certain forms of labor but not others. As the global economy continues to innovate and grow, certain types of knowledge become worthless and others become more highly valued. It is no longer necessary to one’s survival to know how to track a deer, but it is necessary to know how to write a cover letter.
We call the process of increasing technological progress ‘development’. It is closely linked to our material well-being, and certain measures of quality of life including life expectancy and infant mortality. However this process of development renders some human beings ‘worthless’ in that they are unable to live off of their knowledge.
When we divide countries into developed and less developed, and quantify development indicators, we imply that development is linear. Countries must progress through certain stages of industrialization. Certain types of education become highly valued and other forms of knowledge are lost. Look at this beautiful photography exhibit featuring indigenous tribes around the world on the verge of extinction. These people have an incomprehensibly complex knowledge of how to survive and relate to the landscapes that they live in. If they were to move to an urban environment to participate in the modern economy, they would be considered ‘unskilled’ workers.
I don’t want to romanticize their lifestyles, which are often incredibly difficult and insecure, sometimes highly patriarchal and/or violent. To determine, however, that they need to progress, become more like modern consumers in industrialized democratic countries does not follow. The challenge then becomes how to define and measure non-linear development. How to learn from and value many different types of knowledge and lifestyle. Development becomes a two-way street, to teach and to learn.
I got to play with the Reinhart and Rogoff data in statistics class today. These guys were respected Harvard economists who published a paper arguing that high levels of government debt caused a massive drop off in economic growth. Several politicians in the pro-austerity movement, including Paul Ryan, cited this paper as reasons to cut government spending…until a Umass grad student found that their data was full of silly errors and omissions.
Certain establisment institutions in economics research spend most of their resources trying to answer big, formal theory based questions about the efficiency of private markets vs government intervention. Does government debt lead to slower growth? Does free trade lead to economic convergence? Does industrial policy hamper the market? These questions all come from attempts to validate the mathematical models that are taught in Econ 101.
Some studies seem to favor interventionism (China, South Korea, and Singapore all pursued policies involving a large role for government in the economy), and others seem to suggest governments make matters worse. There are convincing theoretical explanations for both sides, and empirical research tends to simply confirm the biases of the researcher. Perhaps unsurprisingly, to the non-economist, the models are so abstracted in the assumptions that they entertain and the ones that they don’t, that confirming or rejecting them seems to be difficult.
That hasn’t stopped policy makers from trying to fit the world to their models however. Part of the problem is the desire to find ‘silver bullets’ that encourage growth and alleviate poverty using the minimum amount of resources, and policies from across the political spectrum are guilty of this. If its not trade liberalization that will lift up the poor, then its democratic governance, or micro-finance, or education, or corporate responsibility, or soccer balls that power light bulbs.
This search for easy to implement policy seems hypocritical to me. When I reflect on my upbringing, it is hard to know what had a bigger influence on my success: my access to quality public education, my family’s ability to get finance to buy our house, my ability to get student loans, my social networks that connected me to college and job opportunities, the infrastructure in my town, my ability to participate in the political process, or my access to consumer goods in a free market. The point is we (I) have had every advantage, and a lot of people around the world have none. Intervening tepidly in one dimension is not going to dramatically change the lopsided playing field.
In some areas, there has been a shift in the development world to ‘evidence based policy’ (imagine that!). Evidence based policy attempts to look at what works in specific contexts and to prioritize results over theory based interventions. The questions become less about whether the government or private sector is more efficient, but rather, why are some governments more efficient than others, or how can we create public private partnerships that align the interests of society and finance? I learned about Social Impact Bonds this week which seem to be an interesting mechanism to do this. Read about their work on incentivizing prison rehabilitation on the Social Finance website. I’m learning to use links…aren’t you proud?
Had my first dissertation meeting today, so I’m taking suggestions for topics!
One of the things I love and hate about studying econ is the way it works itself into my everyday life. Its important not to view relationships as transactional. A few days ago I was walking out of a supermarket when I made eye contact with a homeless man on the street. He offered to sell me a magazine, and I gave him a pound for it, more out of pity than interest in his home produced zine. The cover photo was a man whose brains were turning into melted cheese. There was no title or explanation. When I took it home, however, I found it filled with fascinating quotations on the role of banking in religion and several thoughtful articles on the way that money acts as a medium of exchange for goods or services that are not exchangeable. Right up my alley.
I felt bad that I gave the man money out of pity and not genuine interest in his labor of love.
Who is a better innovator, the private sector or the state? Sorry the clip of the video makes her look like Lenin. Worth a watch though