Friday, November 28, 2014

Gross Domestic Wellbeing

LONDON – During a 2008 discussion of the global financial crisis at the London School of Economics, Queen Elizabeth II famously floored a room full of financial heavyweights by asking, “Why did no one see it coming?” That question has been haunting economists ever since, as the recognition has slowly taken hold that, in the supposed “golden age” preceding the crisis, they were blind not only to the potential consequences of failure – but also to the true cost of “success.”

That period was, in many people’s view, tarnished by greed, with rapid GDP growth accompanied by increasing inequality of income and wellbeing.

Leaders in Germany, France, the United Kingdom, and the United States seem to understand this, as they call for a new, more comprehensive policy target to replace national output. And such a target can be established. Indeed, a group of economists (including me) concluded in a report commissioned by the Legatum Institute that, despite its apparent subjectivity, “wellbeing” – or life satisfaction – can be measured robustly, compared internationally, and used to set policies and judge their success. The task for governments is to commit to putting this focus on wellbeing into practice.

A few key insights should inform that process. First, governments would be better served by focusing on stability, even if it means sacrificing some output. As Kenneth Rogoff and Carmen Reinhart have shown, financial crises are costly because recoveries from them are slow. 

But wellbeing research yields a sharper insight: even if we could bounce back from a crash, the cost would be high. Boom-and-bust destroy wellbeing, which is diminished far more by a fall in GDP than it is enhanced by an equal and opposite GDP increase.

Second, wellbeing – unlike GDP – is boosted more by increases in income among the poorer segments of the population than by increases among the wealthy. That is why the richer European economies tend to have large automatic stabilizers built into their public finances. However, the absence of redistributive mechanisms across countries within the eurozone clearly exacerbated the tensions during the recent crisis.

Third, the implementation of a wellbeing metric to guide policies would have the most rapid – and radical – effect at the national level. As a measure of policy success, GDP is particularly poorly suited to countries with large public sectors. The crude output measures that are used, such as the number of medical procedures carried out or the number of fires extinguished, miss a crucial point: while responding to the need for such services is a good thing, reducing the need for them would be better. And more efficient health services might spend less on hospitals and doctors and more on encouraging healthy lifestyles.

Societies would be better served by a policy focus on factors that have been shown to be critical to life satisfaction: relationships, community, security, and physical and mental health. For example, while mental health is a key determinant of how people feel about their lives, it remains a low priority in most countries. In the US, there were more suicides than road deaths last year, and there are three times more suicides than road deaths in Germany and the UK. In the UK, the vast majority of people diagnosed with mental illness go untreated, at a huge cost not only in wellbeing, but also in disability benefits and lost earning power. Targeted policies aimed at raising awareness of mental-health issues and improving access to treatment would help to kick-start a recovery in wellbeing.

Of course, specific priorities vary by country. For example, in aging societies, loneliness and long-term health become particularly important.

The fourth key insight is that indicators of wellbeing interact. Volunteering does not only enhance the lives of those who are served; it also boosts the life satisfaction of the volunteers. Likewise, given that unemployment diminishes both wellbeing and national income, effective back-to-work policies score two goals, as do policies aimed at augmenting citizens’ life skills through improved parenting and education.

This has positive implications for funding wellbeing-enhancing programs. After all, the goal is not to inflate budgets, but to reallocate resources in ways that will ultimately boost citizens’ satisfaction and prosperity.

Finally, reliable data will be critical to guiding efforts and evaluating progress. Fortunately, most developed countries – and an increasing number of developing countries – recognize the importance of collecting data on wellbeing. Add to that the parameters for measurement set by the OECD, and international comparisons of wellbeing become possible.

The world is ready for a new, comprehensive metric for national and global progress and prosperity, one that tells us whether people really are better off – and how to ensure that they are.

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    1. CommentedClyde Israel

      They saw it coming:

    2. CommentedClyde Israel

      They saw it coming - British sarcasm, explained in the second paragraph - is greed an accident and does it happen by chance?
      National Well Being - a pipe dream and centuries away, as an example, renewables contribute to 'well being', however the industry is driven by profit - make it a global non-profit organisation, drive CO2 reduction and perhaps people will take notice of ambitions for National Well being, i.e. governments should show their commitment and put our money where there mouths are.
      Stability...mmmm, back to greed - the markets are tailored to encourage inequality, thus they should be changed: re. more non-profit type renewable scenario.
      Redistributive mechanisms - embrace them! Why set targets for CO2 emissions, to ensure well being, but, where are the targets for these redistributive mechanisms, to ensure well being?
      People are hesitant to accept a wellbeing metric when inequality is rampant, our current system breeds intolerance - encouraging healthy lifestyles should not come at the expensive of 'quality of life' as in the modern perception of wealth - your suggestions require foundational and structural changes to the world we live in, in order to encourage healthy lifestyles requires equality.
      Mental health - ties into well being and stable societies, again linked to equality, and my thoughts go to the 'modern' protocol of addressing mental health issues - take a pill, it will make you feel better, and the drug companies make a profit..... the system is a little flawed.
      Yes, relationships, community, security, and physical and mental health - wise words: we know this agenda makes us better, however, driving these targets seems to be very slow. Why, again, is climate change at the fore of ensuring the fate of mankind, with accompanying targets and goals, with relationships, community, security, and physical and mental health seemingly a secondary goal? Should these policies not get equal standing, better yet, better standing, as equality and the consequence thereof will drive sustainable living.
      Why are the aged lonely when there is work to be done? Capitalising on old wisdom and utilising aged strength will serve everyone - why are the aged not given an opportunity to contribute? Teachers are required in many parts of the developing one example.
      Ah, yes, augmenting citizens life skills....
      The last four paragraphs are yummy! More info please.

    3. CommentedStamatis Kavvadias

      We would have thought so without this article.

      There is not anyone that would argue against these things, exactly because they are always so abstractly stated!

      There is no contribution in this article.

        CommentedStamatis Kavvadias

        In fact, initially, I thought that the link to the report of the Legatum Institute was interesting, but now I believe that if this front person, for the report's work, knows so little that he cannot motivate any interest (even to people like me, preconditioned to be interested in the subject), it is really unlikely that there are any significant findings in the report...

    4. CommentedJohn McDonald

      The devil's in the details. I cannot any measure of well being that would not be highly political (and very probably favoring liberal politicians).

    5. CommentedOrlando Somera

      "Leaders in Germany, France, the United Kingdom, and the United States seem to understand this, as they call for a new, more comprehensive policy target to replace national output."
      Leaders? You mean isolated, non-mainstream economists? To my knowledge if there's been pressure it's been against a change; GDP is too important a tool for masking inequalities.

    6. CommentedJason Gower

      I haven't read the author's study but was hoping he would mention at least one sentence about how well-being can be measured in a way that would allow it to replace GDP.

    7. CommentedZsolt Hermann

      The modern man forgot who we are, that we are emotional and social creatures.
      Today we measure everything in terms of "quantitative growth", hoarding unnecessary and many times harmful physical goods and pleasures, building artificial and excessive bubbles, losing connection with anything "humane".
      There is no surprise why we are "not well", why people are empty, depressed, why families brake up and the youth has lost interest in anything except virtual reality and substance use. We struggle with social inequality, unemployment, intolerable debt burden.
      "Constant quantitative growth" is unnatural and unsustainable, and in truth the deepening and unstoppable global crisis will remove it from our lives, but in terms of well-being and happiness we need to return the focus on our emotional well-being and social connections.
      National and global progress and prosperity has to be qualitative not quantitative, and it will be measured by the number of positive, mutual interconnections we build with each other as we finally start adapting to the global, integral world we evolved into.

    8. CommentedJose araujo

      Gini coefficient and GDP would be a good measure.No need for new mertrics, just put the old ones to good use.

        CommentedTobias R. Moeller

        A similar approach is practiced by UNDP and it's "Inequality-adjusted Human Development Index (IHDI)". It would be great to see similar efforts for the GDP.

    9. CommentedStepan February

      A beautiful ode to post-capitalism. Dare I say that well-being focused society rather than production focused one is the best way of understanding what Marx meant by communism?
      The key appeal of GDP is its correlation with military strength. Organizations that take their focus off security, disintegrate.
      How would well-being improve security policy?

    10. CommentedChristos Kissas

      Well, the answer to Her Majesty's question is that we were many to see it coming, but had no regulatory power over the US markets. As for wellbeing, it is obviously an interesting indicator, but it cannot be accepted as a replacement to GDP before the current financial crisis is over. People would just be too suspicious.

    11. CommentedTim Chambers

      What policymakers measure shows what they really care about. Measuring output tells them how well their backers are doing. Measuring well being would probably just embarrass them. But it would be a useful measure to help focus the voters' minds and lead us to make better decisions at the polls. But one can imagine the politicians quaking in their Gucci shoes.

    12. CommentedProcyon Mukherjee

      The per capita GDP (if that is what we use to determine the state of well-being) then it is like crossing a river on foot with an average depth of 3 feet, where all that you need is a few deep pockets of 20 feet voids to drown you if you cannot swim. Or it is like calculating the mean income of a small town with Bill Gates as a resident, the problem is that the average would be an income that no one is remotely close to earning.

      But in our small towns the number of Bill Gates might be growing by ones and twos, while the lesser earners are soaring by the thousands, that is where the statistic needs to shift to other measures; the use of central tendency itself has quite a limited use (as with median wage, we have seen it is hardly moving anything but sideways). On matters of savings, consumption, which are so vital to well being, what change would it make in such a scenario?

        CommentedTobias R. Moeller

        Consumption and savings are mistakenly perceived as criteria for well-being. Satisfaction is vital for well-being and cannot be achieved sustainably through consumption. That is where the vicious circle starts. That is where change is needed. A GDW might help to shift the focus.