Joe Stiglitz addresses ‘the movement’ on well-being v GDP

October 29, 2009

     By Duncan Green     

I’m still surrounded by the world’s statisticians (not as bad as it sounds) at the stiglitzOECD Measuring the Progress of Societies conference in South Korea, where yesterday Joe Stiglitz gave a great presentation. Rather than simply rehearse the findings of his commission’s report to President Sarkozy, he reflected on why criticisms of GDP, which have been around for almost as long as GDP itself, have recently gone mainstream (see previous blog) – quite striking hearing him address a room full of besuited number crunchers as ‘this movement’.

First and most obviously, is the crisis (‘crisis is the mother of statistics’ as Korea’s rep to the OECD observed earlier in the conference): booming GDP numbers in 2005-7 were based largely on the escalating profits of the financial sector, which were ‘fictitious – a mirage’. Ditto counting as genuine profits from the real estate bubble.

GDP ignores the growing concerns over financial sustainability, i.e. the level of debt (one of the more innovative features of the Stiglitz Commission’s report is the way it calls for the inclusion in our metrics of different aspects of sustainability, not just environmental.)

Climate change has highlighted how distorted prices become when you effectively put a zero price on carbon. This has led to a ‘carbon bubble’, which must now burst through including carbon prices in economic decision making.

Globalization makes GDP seem rather parochial, because it measures output according to place, rather than who benefits. In Stiglitz’s words: ‘if a foreign transnational opens a mine, takes away the minerals, pollutes the environment, damages people’s health and pays no taxes, if you focus on GDP would say the mine’s a good thing.’ Using Gross National Product instead would help correct this bias.

The growing share of government in the economy is misread by GDP, which ignores productivity improvements because it measures government inputs (eg health spending) not outputs. So US health spending of 17% of GDP v 11% in France does not reflect the fact that the health system is actually better in France. Correcting this single anomaly removes a third of the GDP difference between the two countries, questioning whether the US is doing ‘better’ than France in any real sense.

GDP growth is increasingly based on improvements in quality (rather than quantity) of products. Imputing values to improvements in quality is much less reliable, and so introduces more questionmarks.

Politicians like Sarkozy are keenly aware that the metrics are not consistent with what people feel. That leads to a ‘dangerous distrust of government’. A number of speakers have echoed this sentiment – statisticians worry about the political impact of their work on the ‘social contract’ between citizen and state.

Rising inequality means that the boom in wealth of a tiny proportion of the richest people raises the average, while most people see no benefit (in the language of the conference, medians and averages diverge).

On the positive side, improvements in research and our understanding and measurement of well-being provides more robust alternatives to GDP.

What are the implications?

Political impact: Stiglitz pointed to what amounts to pre-crisis GDP envy– Europeans admiring deceptive US GDP numbers and so calling for a shift to the anglosaxon model of deregulation.

Moreover, a better measure of economic performance would remove many of the false choices that bedevil public debate – eg protect the environment v maximise GDP growth. If GDP includes environmental degradation, you can get over the current polarization of the ‘limits to growth’ discussion.

Economic impact: The economics profession runs endless regressions to determine what factors lead to GDP growth. But if GDP is misleading, so will be the policy conclusions from such regressions, eg because of the faulty measurement of public sector activity, regressions usually find that a smaller public sector is good for growth.

Interesting stuff. Everyone here shares the view that we have reached some kind of tipping point on the need to measure well-being. And these are hard-boiled chief statisticians, not tree huggers. Whether they can do so in a way that actually gets the attention of the politicians is a different issue, and a subject for tomorrow’s blog. Off to listen to Richard Layard now.

3 minute conference youtube including interview with Stiglitz below

October 29, 2009
Duncan Green