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.