National income accounting distills a nation's economy into a single number: gross domestic product. GDP has been critiqued many times for its neglect of household production, environmental degradation, income distribution, and so on. Many alternatives have been proposed, such as genuine progress indicators, happiness measures, the Human Development Index, the Better Life Index, well-being indexes, or prosperity indexes. Yet none have dethroned GDP as the king of economic indicators.
GDP's prominence is partly due to history - once a measure is widely accepted and understood, it is costly to switch. Moreover, GDP has generally been a good enough measure of the economy. It has a reasonably straightforward interpretation, and is a fairly good indicator of the economic things that matter: people's incomes, their ability to command goods and services, and whether the overall level of economic activity is expanding or contracting.
Yet structural and technological changes threaten to undermine the usefulness of GDP. The link between GDP growth and the typical person's standard of living is weakened by increased income inequality, which allows the rich to capture a disproportionate share of any increases in GDP. Technological change weakens the link between GDP and consumer welfare. GDP measures the value of a good or service by considering its cost of production. But in a digital economy, the marginal costs of production for many goods and services are close to zero. Thus there is a gap between the amount that an app or game or youtube video contributes to GDP, and its contribution to consumers' well-being or satisfaction. Technological change also complicates national income accounting. For example, if Toronto company hires a freelancer in Delhi through the Tel Aviv-based website fiverr.com, how is each country's GDP affected? (HT to Armine Yalnizyan for many of these points).
Last, but by no means least, population aging could cause Canada to "turn Japanese" and enter an era of low- to no- GDP growth. In this case, governments will not wish to be judged by their GDP performance. Indeed, New Zealand, Scotland, Iceland, and now Canada have committed incorporating quality of life measurements into government decision-making and budgeting.
But what does a quality of life measure actually look like? To illustrate, here is a screenshot of the OECD Better Life Index:
The first point to note is that, unlike GDP, a quality of life index has no intrinsic meaning. It is just a rating on a 1 to 10 or 1 to 100 scale. The same is true for the individual components of the index, such as housing or civic engagement. On the OECD Better Life Index, for example, Canada's income score is 5.4. O.k., but so what?
The unit-free nature of indices has two key implications. First, the index will be interpreted solely in terms of "best place in the world to live" or "Canada slips five places" type headlines. Absolute scores, and improvements thereto, will be ignored, because they have no meaning. Second, technical details will matter. For example, the UN takes the natural log of a country's Gross National Income when calculating the Human Development Index, and ignores any improvements in GNI above $75,000 per year (download source), so it responds little to variations in income among rich countries. The OECD, however, bases its income component on household net adjusted disposable income and household net wealth without taking logs or imposing caps (IIUC the income and wealth numbers are normalized by dividing by the maximum value in the data set). Hence the OECD measure is much more sensitive to income and wealth variations among rich countries than the UN measure. The technocratic nature of indexes reduces their transparency.
Another key observation to make about quality of life and similar indices is that they require more data than GDP measures. A typical quality of life index will be based on GDP plus, that is, GDP plus indicators of health (e.g. life expectancy), education (e.g. enrollment, attainment, literacy), life satisfaction, and so on. This data can take years to collect and compile. Indeed, when one digs into life quality indices, one sometimes finds that they are based on extremely dated data. For example, The OECD Better Life housing measure is based, in part, on the number of dwellings without basic facilities, such as toilets. The last time Canada collected this data was in the 2001 Census - so that twenty-year-old data is what goes into the OECD index. , The data- and time-intensive nature of quality of life indexes means they cannot be used for, say, day-to-day macroeconomic decision-making.
A final feature of any quality of life index is that its value depends crucially on how the various components of the index are weighted. Focus on housing, income and jobs, and the US ranks number one in the OECD Better Life Index, as shown in the first picture below; focus on health, education and work-life balance, and Canada's ranking soars while the US ranking plummets.
Yet because every country wants to rank highly on a particular index - as noted earlier, rankings are the only salient feature of these index numbers - countries will not agree on what should go into a quality of life index, or how the components should be weighted.
The politics of rankings, together with all of the other issues above, mean that GDP will never be replaced by a single, internationally accepted, quality of life index. Yet this does not mean that the search for alternatives to GDP is futile. The points raised so far have questioned the feasibility of quality of life indices not quality of life measurement.
Life quality can be measured. It shows up in life expectancy statistics and suicide rates. Measures of air pollution and access to green spaces. Homelessness and housing prices. Time spent commuting; time for rest and sleep. The search for a single quality of life index is, in essence, a quest for a simple rule that says how all of these different components of quality of life should be aggregated. Yet there is no such rule. No technocrat can say how much disposable income Canadians are willing to sacrifice to get better air quality. A quality of life index does not relieve policy makers of hard choices: whether to spend tax dollars, on the margin, on mental health services, or fighting homelessness, or on better public transportation.
The answer to the question "how to measure life quality?" is to forget the quest for a single number, and focus on multiple measures. The recognition that there is no number, only numbers, can be extraordinarily liberating. There's no need to agonize overly about which life quality measures to choose - New Zealand is using literally dozens of indicators in its Living Standards Framework. So just pick a couple of dozen that fit with the government's priorities - it's always possible to add or drop indicators at a later date.
The hard and necessary work begins when it comes time to use quality of life thinking in government decision-making. Take, for example, trade policy. The case for free trade agreements, such as the original Canada-US Free Trade Agreement, has often been made on the basis of free trade's impact on GDP. Yet aggregate-level forecasts of the impact of trade on growth ignored the very real disruption in people's livelihoods that would take place as a result of these trade agreements. There were winners, there were losers, and the winners did not, for the most part, compensate the losers. A more nuanced discussion, that incorporated numbers instead of a single number, might have revealed the complex changes free trade would bring, and resulted in somewhat different policy choices.
Postmodernism is sometimes associated with a belief that everything is relative, that the search for truth is futile. That is not the argument I want to make here. There are better policies and worse policies. There are policies that benefit some people, and improve some aspects of life, and there are policies that benefit other people, and other aspects of life. Better quality of life statistics can help illuminate the hard choices that have to be made, and determine priorities for action. But quality of life measurement is a means to, not a substitute for, thoughtful policy making.
Just throwing things out here, but measuring total income for the bottom 90% of the income distribution could be a more honest GDP-like measure. It's less of a radical departure from traditional economic statistics than other quality of life indexes--and might be an easier sell to economists and policy wonks because of it--but is considerably less vulnerable to skew from income inequality than GDP.
Most of the income gains in the past 40 years have accrued to the very top of the income distribution, so simply cutting these people out of economic statistics would give a much more accurate picture of how the average person is doing.
Another possible approach for comparing countries of reasonably similar development would be to measure how much free time people have after they've dealt with the essentials of life (work, commuting, shopping, cooking, interactions with government and business bureaucracy). This would capture a currently hidden impact of neoliberalism: theft of time through travel distances, long working hours, and the fact that resolving any problem with bureaucracy involves many, many hours wasted with "customer" "service."
Posted by: nobody | March 12, 2020 at 12:17 PM
nobody, yes, the bottom 90% is a good measure. other possibilities are measuring median incomes, or the percentage of people earning less than 1/2 the median income. Time use is another good quality of life measure, though there are a lot of measurement issues. The challenge is figuring out how to base policy on multiple numbers, like the ones you've suggested, rather than a single number e.g. GDP.
Posted by: Frances Woolley | March 12, 2020 at 12:57 PM
I agree it would be worthwhile trying to measure the bottom 90%, trying to collect good numbers would require cooperation. I can't see that happening. As for the 'quality of life' measurement it would be good for morale of a country as long as it doesn't become a measure of condescension or 'economies of contempt'.
Wondering if anyone has figured out what the total cost will be for not enforcing poaching and money laundering? Just roughly doing the numbers and well.....That whole money is worth more today than tomorrow argument just doesn't work with the inflation & GDP numbers.
Dee
Posted by: Dee | March 15, 2020 at 12:37 PM
GDP was adopted, in the US at least, as a way of measuring the impact of and recovery from the Great Depression in the 1930s. It served its purpose fairly well. We have new economic problems now, so it is time to dredge up some metrics that address them. I was in Bhutan last year where they are adopting "gross national happiness" as their metric. The country is small and relatively undeveloped. They seem to be doing a decent job of getting electricity (hydro) to even minor towns, building roads to connect their valleys, distributing medical care and so on within constraints of their situation. Bhutan has a population of about 750,000, a popular king and a geopolitically important location between China (via Tibet) and India, so I doubt their model could apply elsewhere. Still, it was nice to see a kingdom where the emphasis was on rural electrification rather than building magnificent palaces.
Posted by: Kaleberg | March 16, 2020 at 11:30 PM
There is also a gap apps contribute to Q-of-L as we can consciously and subconsciously see inferior resolution/immersion/field-of-View. I suggest a Q-of-L metric during a mild pandemic must incorporate mental health/excellence but must be measured against the spread of disease; sometimes immediate spread is economically justified (workers don't want to be bored all pandemic long).
I suggest an immediate stimulus encompass: utility system construction, especially copper sanitary sewers. Fruit and vegetable production ideally with long shelf-life and storage equipment. Ventilation, heating, AC, refrigeration manufacturing. Farm, lawn, and garden machinery manufacturing and services; an edible garden is better but I do believe we have a subconscious desire to see nature. Novel catastrophic insurance products that reward a healthy supply chain and anti-microbial workplaces. Video game production ideally for Xmas release. Antimicrobial protective films and coatings. Antimicrobial, bleach cleanable, UV resistant textiles and indoor surfaces. Outdoor activities where socially distanced. Perhaps cabin construction where not high-density is included. For the winter the latter two don't apply, perhaps immune/vaccinated film technical crews can be identified.
Much of the computer media economy requires more immersive scenarios (I love google maps for letting me take a tour of my past walks in other cities). The subconscious can be addressed by good psych professionals but I don't know if people will trust pros remotely. Many of our resilience hangups are subconscious, there is a subconscious economy that is as just as uncosted now as is the app gap.
Posted by: Phillip Huggan | March 17, 2020 at 05:51 PM
Dee: "As for the 'quality of life' measurement it would be good for morale of a country" - unless it showed quality of life was going down, as in fact it might! It's very likely the case that quality of life is harder/slower to increase than GDP.
Kaleberg - I think the kinds of considerations you mention are very much behind this government's present commitment to quality of life measurement.
Phillip - interesting suggestions.
Posted by: Frances Woolley | March 19, 2020 at 09:49 AM
We are going to need spare parts for a variety of future disasters, including a potential mutation. Power transformers. A way to effectively decontaminate different surfaces needs to be researchers using virus in human fluid secretions as well as airborne. Airport hangars, airplanes and trucks can be decontaminated and power transformers are light weight enough to transport easily. When a mining community is already afflicted, workers can reopen a mine. A mini-wave will follow cessation of SD-ing. It shouldn't be 18 months as this will result in a winter wave. It should end next May at latest. Certain supply chains can be decontaminated and function. Watyer utilities where there are lighter parts that can fit in a trucks; these parts should be made. Climate controls parts housings should be made, perhaps with a copper coating. Essentail elderly staffers for such should train a younger replacement. Our WW2 veterans should be givens vaccines and every opportunity to tell their lifes tales now using tele-media. We will need winter decontaminated indoor places and summer parks to wait out the heat waves. A tent coffee shop anti-viral should be ready ASAP with markings 10 meters apart on the ground. Cleaners can be trained to disinfect COVID.
Posted by: Phillip Huggan | March 24, 2020 at 02:35 AM