Things that Matter: Robert Kennedy Speech on Gross National Product

"Too much and too long, we seem to have surrendered community excellence and community values in the mere accumulation of material things. Our gross national product ... if we should judge America (replace by any country) by that - counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for those who break them. It counts the destruction of our redwoods and the loss of our natural wonder in chaotic sprawl. ... and the television programs which glorify violence in order to sell toys to our children.

"Yet the gross national product does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages; the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage; neither our wisdom nor our learning; neither our compassion nor our devotion to our country; it measures everything, in short, except that which makes life worthwhile. ...

Vision of development from a quality of life perspective

Poverty has proved to be one of the most difficult social problems to solve. Of course, there are many different approaches to address this issue that plague the progress of our society. Some people believe in, what I call, "the economic" approach. This way of thinking addresses poverty by using whatever ways to help the impoverished increase their income. The underlying assumption is that higher income will bring purchasing power and lift people out of poverty. Others believe in ,what I call, "the quality of life" approach. This way of thinking generally believes that it is important to focus on well-being as an outcome. As such, ways to address poverty may not necessarily emphasize on growing income. Solutions may include quality education, affordable health care, good career path, etc.

For example, Charles Kenny, a development economist argued in the recent article in the NY Times (link to article) that "the biggest success in development has not been making people richer but, rather, has been making the things that really matter — things like health and education — cheaper and more widely available."

GDP: A Misleading Measure of Prosperity

Here is a post from the NYTimes criticizing GDP as an inaccurate measure of well-being/prosperity. I am going to pick out a few interesting writings from this article. The full text of this article is available here:

This article raises several fundamental questions:

• Is growth and development the same thing?
• Is it valid to use GDP, a measure of economic output, to measure well-being?
• What are the best indicators beyond GDP?
• What is the goal of a society?
• How do we create measures on alteration of climate system, loss of species, consequences of man-made disasters (the recent oil spill in the gulf comes to mind)?
• How to measure social and emotional lives?
  

"The G.D.P. ... has not only failed to capture the well-being of a 21st-century society but has also skewed global political objectives toward the single-minded pursuit of economic growth"

"With easy access to national information, Hoenig told me optimistically, Americans might soon be able “to shift the debate from opinions to more evidence-based discussions to ideally a discussion about what solutions are and are not working.”

"Those involved with the self-defined indicators movement ... argue that achieving a sustainable economy, and a sustainable society, may prove impossible without new ways to evaluate national progress"

Another good question is where did GDP come from?

"G.D.P. — the antecedents of which were developed in the early 1930s by an economist named Simon Kuznets at the federal government’s request"

Do you want to be a high-GDP person or a low-GDP person? This is my adaptation from the article:

High-GDP person's life:

• Has a long commute to work
• Drives an automobile that gets poor gas mileage, forcing her to spend a lot on fuel.
  
• Replaces her car every few years due to the morning traffic and its stresses
  
• Has problems with her cardiovascular health due to stress. She treats the conditions with expensive pharmaceuticals and medical procedures
• Gets in shape by joining a member-only gym club
  
• Overall, high-GDP person works hard and spends money. She loves going to bars and restaurants, likes her flat-screen televisions and adores her big house, which she keeps at 71 degrees year round and protects with a state-of-the-art security system. High-GDP family pays for a sitter (for their kids) and a nursing home (for their aging parents).
  
• Employs a full-time housekeeper because they do not have much time

Low-GDP person's life:

• Busy with cooking, cleaning, and home care
• Walks to work
  
• Grows vegetable in the garden instead of buying pre-wash salad mix from a grocery store
• Read books borrowed from a public library instead of buying them
• Gets in shape by running in the neighborhood

So from an economic point of view, a high-GDP person is more valuable to a country's economy. But the important question is "Does she have a better life?"

Stiglitz, a Nobel laureate in Economics said "Americans would have had a much clearer picture of our progress over the past decade if we had focused on median income rather than G.D.P. per capita, which is distorted by top earners and corporate profits. When you have increasing inequality, median and average behave differently. Real median household income has actually dipped since 2000. But G.D.P. per capita, he noted, has gone up."

"Stiglitz and his fellow academics ultimately concluded that assessing a population’s quality of life will require metrics from at least seven categories: health, education, environment, employment, material well-being, interpersonal connectedness and political engagement. They also decided that any nation that was serious about progress should start measuring its equity — that is, the distribution of material wealth and other social goods — as well as its economic and environmental sustainability."

“You might say, If we have unemployment, don’t worry, we’ll just compensate the person. But that doesn’t fully compensate them. Stiglitz pointed to the work of the Harvard professor Robert Putnam, who served on the Stiglitz-Sen-Fitoussi commission, which suggests that losing a job can have repercussions that affect a person’s social connections (one main driver of human happiness, regardless of country) for many years afterward."

Putnam from Princeton said “damage to this country’s social fabric from this economic crisis must have been huge, huge, huge. And yet, he noted, we have plenty of numbers about the economic consequences but none of the numbers about the social consequences.”

Here is his argument that is very interesting: “People will get sick and die, because they don’t know their neighbors,” Putnam told me. “And the health effects of social isolation are of the same magnitude as people smoking. If we can care about people smoking, because that reduces their life expectancy, then why not think about social isolation too?”

Here is a list of new measures proposed in various countries:

• Canadian index of well-being
• State of the USA
• United Nations' Human Development Index
  

Here is a list of people who have been working/supporting new measures of well-being:

• Alex Michalos, Canada
• Chris Hoenig, State of the USA
• Commission on the Measurement of Economic Performance and Social Progress (a.k.a. The Stiglitz-Sen-Fitoussi commision)
• Daniel Kahneman on Emotional well-being
• Angus Deaton, collaborative work with Kahneman

Here is a short list of articles by Deaton and Kahneman:

• Income, aging, health and well being around the world: Evidence from the Gallup World Poll
  

What is wealth?

While I was pondering on the question of "How should we think of wealth?", I came across writings by Professor Uwe E. Reinhardt from Princeton. Very interesting arguments. Here are a few that resonate with me.

"Human happiness or well being are the manifestation of wealth."

"Financial measures of wealth are always, at best, a very crude approximation of what we really try to measure."

"Measuring the economic welfare produced by a nation's economy in a given year simply by the one-dimensional index GDP is about as sensible as picking a mate from a group of candidates merely after seeing their feet. There is some information there, but not a whole lot."

"Properly defined, wealth is a summary of the future human happiness that a nation should be able to derived from the collection of land, structures, accumulated knowledge and human capital within its borders."

"The foundation of our nation's wealth turns out to be--you might never have guessed it--our mothers, our teachers in elementary and high school, and our government. ..... All of them play such an important (but uncelebrated) role in the formation of the nations' human capital--the ultimate source of any modern nation's wealth. Your Princeton (replace Princeton with any name of higher educational institution, my word) professors, for example, merely help you build some more on this human capital. We are not its chief creators."

Prof. Uwe E. Reinhart.
His writing is available on his web site