All Financial Wisdom

How Should GDP Be Measured in the New Economy? (part 2)

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Happiness is a fluid concept meaning different things to different people. Therefore, despite the heterogeneity of most definitions of happiness, we can assume that there are basic needs without which it is very difficult to be happy; fundamental needs such as having a decent home, having access to a proper diet, having a job that allows us to earn a salary, having access to health service that ensures minimum standards of quality of life, and having access to education.

Here we are already entering into a difficult terrain, since we are in complete conflict with the theme that there are certain imponderables in economics, and unfortunately also a desire for certain concealment. What exactly do I mean by imponderables and the concealment?It is very complex to find and depend on objective indicators for the subjective variables that affect the quality of life, welfare and happiness. For ratios and indicators that that sometimes having an extraordinary impact on the economy and society, they are often not easily measured. Let me give you an example of each.

The first example is about the imponderables of health and education. Here we find a series of variables that do admit their measurement, such as access to free healthcare, or an education that ensures minimum standards. But how do we truly measure the quality of care of public health? And a good education? There are certain notes of subjectivity and concealment that make it difficult for sound objective metrics that enable comparison with other economies.

The habitually measured “access to health” is only part of the quality of health, because the quality of care must also be measured. It is useless to have 10 million doctors, if the doctors themselves are horribly trained. How can you know for sure when a surgeon has made a mistake or made a correct diagnosis? An indicator of this style would be only one tip of the iceberg, since these cases often do not leave the mind of the same doctor, and even if that happens they do not usually leave the corresponding hospital service.

There are always going to be parameters that give us an orientation of whether things are going well or badly, for example the one that I would personally propose would be to measure the life expectancy gap between the poor and the rich, which yields data such that can be measured, as noted in this article by The Guardian.

And what about a good education? Again, there are indicators that can be measured. It is obvious that an international standardization of tests of mathematics, language, etc. is possible, and you can use them to measure the educational level of each country. But, what about other types of subjective teachings such as ethics, social responsibility, or proper behavior in society? Surely, part of our happiness comes from knowing that we live in a moderately fair and uncorrupted society where, for examples, the elderly and the pregnant are given seats on the bus.

How is all this reliably measured? It is part of our happiness and well-being, but the hard part is translating it into useful figures.

Concealment

The second issue is that of concealment in microeconomics. A few years ago, there were massive layoffs in the company of an acquaintance of mine. Surprisingly, most of them were called in a few days and rehired through a consultant and continued doing the same work. The salary was the same, plus the cost for the company of having to pay extra to the consultants, through which the new contract was produced. Where is the trick?

It’s simple. The main objective of the company was to increase productivity. All the bonuses of the managers were linked to improving it. And by dividing the turnover (which remained stable) between the number of heads (which had declined since they were re-contracted through a consultant), productivity as it was conceived during the end of the 90s improved, and all executives received their large bonuses. The indicators that by then would have made it possible to detect this situation in time were not exactly imponderable, they could be measured, there were visible costs after all, but they were deliberately hidden.

This is a clear example of concealment in the measurement of productivity that can serve as a reference when evaluating the extent to which macroeconomic figures such as GDP may be distorted by the factor of concealment. And don’t forget that the macroeconomic figures are the aggregation of microeconomic figures, so the previous example is more relevant than it might seem, given the generalization of certain practices. So, if this occurs with objectively measurable a priori indicators such as GDP or productivity, what would happen with more subjective indicators such as quality of life, well-being and happiness?

However, it must be said that certain sectors and economists are aware of this concern. For examples, then French President Sarkozy tried to solve the problem by internationally promoting the parameterization and use of happiness as an indicator of socioeconomic progress. To try to ensure the success of his proposal, he even enlisted several Nobel prize winners in economics to form a special commission.

One of the most well-known arguments used by this commission to justify its work was that, for example, traffic jams increase GDP, since they imply a greater consumption of gasoline, but nevertheless worsen the quality of life of citizens. Although this French initiative generated an excellent report prepared by the Stiglitz Commission, the initiative did not prosper as expected, partly due to difficulties similar to some of those described in the previous paragraphs.

Some will defend GDP simply because it is a more objective and measurable parameter, stressing that its reliability is much higher than that of other alternatives. Given the current nature and importance conferred to the GDP indicator, there are important implications on fundamental ratios ratios, namely debt ratios.

But I digress for now. I simply want you to rethink if the pursuit of eternal GDP growth is an appropriate economic policy. This does not conflict with the fact that we always preach that every society must be economically and socioeconomically viable. The hard truth is that our lives are currently governed by macroeconomic figures such as GDP, which do not necessarily translate into what we seek: quality of life, well-being and happiness. And what’s worse, there is neither consensus, will, nor even a current technical possibility that will enable change of the current model.

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