Measuring what Matters

You can’t eat Gross Domestic Product (GDP), yet it is the indicator that economists pay closest attention to.

GDP gained currency during WWII as a way of keeping track of war production, and has since remained the dominant measure of economic output. More than that, it has become a byword for living standards.

Looking across countries, economic output per person, or per capita, adjusted for price differences is still a reasonable proxy for average material living standards. At least up to a point. It is not necessarily a good indicator of individual happiness, or of societal wellbeing, however.

The main problem isn’t with measuring GDP per se, but that maximizing it has become the over-riding target for economic policymakers. They have lost sight of the fact that increasing economic output should be a means to an end, not an end in itself. The over-riding priority should be to maximize the welfare and happiness of the greatest number or people while ensuring everyone has a basic, decent standard of living. Unfortunately, there is no consensus around how these should be measured.

Among others, the OECD has for years been pushing a wellbeing agenda, exploring how best to measure it. They emphasize non-economic factors that ordinary people really care about, like personal security and work-life balance, as well as how these differ across population groups, and how sustainable they are.

Together with Joseph Stiglitz and Jean-Paul Fitoussi, pathbreakers in this field of research, the OECD’s Chief Statistician, Martine Durand, has since 2013 chaired a High-Level Expert Group to drive this ‘Beyond GDP’ agenda. They aim to develop and highlight better measures for well-being, making for more enlightened policymaking.

A good example is life expectancy. Usually, we look at how long people can expect to live, at birth or at a later age, differentiated by gender. The OECD Experts go a step further. They find that life expectancy also differs by education level. In every country. And the difference is bigger for those aged 25 than for those aged 65. This means the gap is growing over time. In every country.

65-year-olds with the equivalent of a junior cert education in the U.S. can expect to live about three years less than those with a third-level degree. For 25-year-olds, this ‘longevity gap’ is nearly eight years! But in Italy, the same gaps are only two and four years, respectively. So, the fact that GDP per capita is higher and growing faster in the U.S. doesn’t mean that people are living longer or better than in Italy. In fact, the increased incidence of what Nobel-prize winning economist – and member of the OECD Expert Group – Angus Deaton calls ‘deaths of despair’, particularly among the white working class, have been so dramatic that overall U.S. life expectancy has actually been falling for three years running. Across vast swathes of ‘Trump country’, suicides, drug overdoses and alcohol-related liver disease are ravaging communities that the economic recovery, as measured by GDP, has completely left behind.

We all know Denmark is a relatively equal country, but it is also proof positive that narrower gaps between rungs of the social ladder make it easier to climb. OECD research shows that someone born into a family in the poorest 10% of Denmark’s population can be expected to need two generations to earn an average income. The same child born in Ireland would need five generations!

These are just some examples of what’s emerging from this important research agenda. And, policymakers are starting to pay attention. Last month, New Zealand’s Labour-led government ushered in the world’s first wellbeing budget, focused on tackling child poverty and mental illness.

Wouldn’t it be great if when Pascal Donohue announces Budget 2020 in October it had been fully equality-proofed, tackling our housing and health crises, and making citizens’ wellbeing its over-riding priority?

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