I have constantly harped on the theme that GDP is a highly imperfect indicator of welfare, although I am hardly unique in this respect. For instance, the Easterlin paradox highlights how gains in material standards of living --especially in the West--have not been accompanied by concomitant gains in perceived happiness. Once basic needs are accommodated, Easterlin observes that increased opulence does little to improve the human lot. Now, French President Nicolas Sarkozy has hired Nobel laureates Joseph Stiglitz and Amartya Sen to come up with yet another measure which surpasses GDP. Hiring Sen is a very interesting move since he is, after all, the originator of the capabilities approach which I think very highly of as an alternative benchmark of human well-being. From the International Herald Tribune:9/15/2009 UPDATE: The report is finally out and I excerpt the recommendations.Nicolas Sarkozy, the French president, recently appointed a commission to come up with a better measure for France, chaired by two Nobel laureates, Amartya Sen at Harvard and Joseph Stiglitz at Columbia. While Sarkozy's goal is to showcase a "quality of life" at odds with the country's more modest GDP gains, the high-profile effort might yield dividends elsewhere as well.
For years now, analysts have been seeking ways to improve the statistic. Instead of capturing only output, like cars rolling off an assembly line, why not also try to capture - in an expanded GDP or some parallel indicator - things like educational attainment or successful child rearing or life expectancy? A half-dozen research groups in the United States are also tackling the question. In good times, none of this effort gets much attention, but in times like these, when well-being and the economic indicator are so plainly out of sync, there's plenty of talk of repair.
"We may be in the early stages in the United States of recognizing that the gross domestic product is very misleading and something must be done to get better measures of well-being," Sen said.
The gross domestic product was invented in the United States during the Depression to measure just how much and how quickly the economy was shrinking and whether President Franklin Roosevelt's New Deal efforts at revival were working. The invention was a success, and other countries gradually adopted the new system.
To this day, the GDP accurately calculates the cash value that is created, for example, when workers put together steel, wires, rubber and upholstery to make an automobile. The car's value, which is the profit as well as the sum of the labor and the parts, is incorporated into the total. Similarly, a dry cleaner adds value when he cleans and presses a pair of pants. That value, which includes the profit to the dry cleaner as well as the cost of cleaning and pressing, is part of the overall calculation - and so on across tens of thousands of activities and transactions.
In the United States, the Bureau of Economic Analysis adds them up four times a year and announces, as it did last week, whether the GDP has risen, or fallen, signaling hard times.
The U.S. gross domestic product grew robustly in the post-World War II years. Family incomes also went up, and a rising GDP came to signal well-being as well as expanding economic activity. But these days, while the value added in making cars goes into the total, same as always, the gain can be distributed in stock dividends or profits or multimillion-dollar chief executive pay more than in raises for workers. The GDP does not reflect the shift in distribution.
And over the past 15 years there has been just such a shift. While the GDP has continued to rise, wages have stagnated, pensions have shrunk or disappeared and income inequality has increased. Health care is measured by the money spent, not by improvements in people's health. Obesity is on the rise, undermining health, but that is not subtracted.
"There are numerous attempts these days to measure happiness and quality of life," said Enrico Giovannini, chief statistician at the Organization for Economic Cooperation and Development, who is responsible for recent, well-attended conferences in Europe and the Middle East where the delegates explored measures of well-being that might be incorporated into the GDP, or used to supplement it.
Taking into account these factors could also increase the GDP. Incorporate unpaid work, like raising children, and the total goes up. Women caring for their children are investing in future skills and productivity. Assign a dollar value to each hour spent in this unpaid child care - $10 an hour, to take one of the amounts the Bureau of Economic Analysis is currently considering - and a new line would exist in the GDP accounts for measuring, in cash, a key industry, parenting.
Within the U.S. government, an annual "time use" survey, started in 2003, is emerging as an important source of raw material for an altered GDP. The Bureau of Labor Statistics has been asking 14,000 people a year how they spend each hour of a designated day. From such data, time spent with children can be tabulated, given a dollar value and inserted into the gross domestic product.
"If you just want to know what is going to happen next in the business cycle, then GDP as it exists today is enough," said Katherine Abraham, a former bureau commissioner, now a University of Maryland economist. "But if you are trying to figure out where we are headed as a society, then this sort of data is a must."
