May/June 2010

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Joseph E. Stiglitz, University Professor and the chair of Columbia’s Committee on Global Thought, received the 2001 Nobel Prize in economics. He has been chair of the Council on Economic Advisers and chief economist at the World Bank. Known to his peers as “an insanely great economist” (Paul Krugman), Stiglitz has made his influence known throughout his broad discipline. His work is cited by more economists than anyone else’s in the world, according to data compiled by the University of Connecticut.

In this excerpt from his latest book, Freefall: America, Free Markets, and the Sinking of the World Economy, Stiglitz argues for a concept that is currently gaining ground: the idea that GDP (gross domestic product), for so long the ne plus ultra of economic measurement, may in fact be a poor way to assess our standard of living. GDP, according to the Palgrave Macmillan Dictionary of Political Thought, is “a measure of the total flow of goods and services produced by the economy … over a specified period.” Too often, Stiglitz contends, GDP doesn’t measure the elements — tangible or intangible — that actually determine our quality of life. A more rounded sampling of data can better portray what Nic Marks, fellow at the New Economics Foundation, calls “the delivery of good lives rather than the delivery of more goods” (Time, January 30, 2010). Here, Stiglitz looks at the way that we measure American well-being.

Rose Kernochan ’82 Barnard

What You Measure Is What You Value, and Vice Versa

PHOTO: DAN DEITCHIn a performance-oriented society such as ours, we strive to do well — but what we do is affected by what we measure. If students are tested on reading, teachers will teach reading — but will spend less time developing broader cognitive skills. So too, politicians, policymakers, and economists all strive to understand what causes better performance as measured by GDP. But if GDP is a bad measure of societal well-being, then we are striving to achieve the wrong objective. Indeed, what we do may be counterproductive in terms of our true objectives.

Measuring GDP in the United States didn’t really give a good picture of what was going on before the bubble burst. America thought it was doing better than it was, and so did others. Bubble prices inflated the value of investments in real estate and inflated profits. Many strived to imitate America. Economists did sophisticated studies relating success to different policies — but because their measure of success was flawed, the inferences they drew from the studies were often flawed.

The crisis shows how badly distorted market prices can be — with the result that our measure of performance is itself badly distorted. Even without the crisis, the prices of all goods are distorted because we have treated our atmosphere (and, too often, clean water) as if it were free, when in fact it is scarce. The extent of price distortion for any particular good depends on the amount of “carbon” that is contained in its production (including in the production of all the components that go into its production).

Some of the debates that we have concerning trade-offs between the environment and economic growth are off the mark: if we correctly measured output, there would be no trade-off. Correctly measured output will be higher with good environmental policies — and the environment will be better as well. We would realize that the seeming profits from the gas-guzzlers, like the Hummer (which, in any case, turned out to be ephemeral), are false: they are at the expense of the well-being of the future.

Our economic growth has been based too on borrowing from the future: we have been living beyond our means. So too, some of the growth has been based on the depletion of natural resources and the degradation of the environment — a kind of borrowing from the future, more invidious because the debts we owe are not so obvious. We are leaving future generations poorer as a result, but our GDP indicator doesn’t reflect this.

There are other problems with our measure of well-being. GDP per capita (per person) measures what we spend on health care, not the output — the status of our health reflected, for instance, in life expectancy. The result is that as our health care system gets more inefficient, GDP may appear to increase, even though health outcomes become worse. America’s GDP per capita appears higher than that of France and the United Kingdom partly because our health care system is less efficient. We spend far more to get far worse health outcomes.

As a final example (there are many more) of the misleading nature of our standard measures, average GDP per capita can be going up even when most individuals in our society not only feel that they are worse off, but actually are worse off. This happens when societies become more unequal (which has been happening in most countries around the world). A larger pie doesn’t mean that everyone — or even most people — gets a larger slice. As I noted in chapter 1, in the United States, by 2008, the median household income was some 4 percent lower than it was in 2000, adjusted for inflation, even though GDP per capita (a measure of what was happening on average) had increased by 10 percent.

The objective of societal production is an increase in the well-being of the members of society, however that is defined. Our standard measure is not a good one. There are alternatives. No single measure can capture the complexity of what is going on in a modern society, but the GDP measure fails in critical ways. We need measures that focus on how the typical individual is doing (measures of median income do a lot better than measures of average income), on sustainability (measures that take account, for instance, of resource depletion and the worsening of the environment, as well as the increase of indebtedness), and on health and education. The United Nations Development Programme (UNDP) has devised a more comprehensive measure that includes education and health, as well as income. In these metrics, the Scandinavian countries do far better than the United States, which ranks thirteenth.

But even when economic measures are broadened to include health and education, they leave out much that affects our sense of well-being. Robert Putnam has emphasized the importance of our connectedness with others. In America, that sense of connectedness is weakening, and the way we have organized our economy may contribute.

The Himalayan Buddhist kingdom of Bhutan has attempted to carve out a different approach. It is trying to create a measure of GNH — gross national happiness. Happiness is only partly related to material goods. Some aspects, like spiritual values, can’t and probably shouldn’t be quantified. But there are others that can be (like social connectedness). Even without quantification, though, focusing on these values highlights some ways that we should be thinking about redirecting our economy and our society.

Security and Rights

One important dimension of societal well-being is security. Most Americans’ standards of living, their sense of well-being, have declined more than the national income statistics (“median household income”) might suggest, partly because of the increase in insecurity. They feel less secure about their job, knowing that if they lose their job they will also lose their health insurance. With soaring tuition costs, they feel less secure that they will be able to provide their children with an education that will enable them to fulfill their aspirations. With retirement accounts diminished, they feel less secure that they will spend their old age in comfort. Today, a large fraction of Americans are also worried about whether they will be able to keep their home. The cushion of home equity, the difference between the value of the home and the mortgage, has disappeared. Some 15 million homes, representing about one-third of all mortgages nationwide, carry mortgages that exceed the value of the property. In this recession, 2.4 million people have lost their health insurance because they lost their job. For these Americans, life is on a precipice.

Greater security can even have an indirect effect of promoting growth: it allows individuals to undertake greater risk, knowing that if things don’t work out as hoped, there is some level of social protection. Programs that assist people in moving from one job to another help ensure that one of our most important resources — our human talent — is better used. These kinds of social protection also have a political dimension: if workers feel more secure, there will be fewer demands for protectionism. Social protection without protectionism can thus contribute to a more dynamic society. And a more dynamic economy and society — with the appropriate degree of social protection — can provide greater satisfaction for both workers and consumers.

Average GDP per capita can be going up even when most individuals in our society not only feel that they are worse off, but actually are worse off. … A larger pie doesn’t mean that everyone — or even most people — gets a larger slice.

Of course, there can be excessive job protection — with no discipline for bad performance, there can be too little incentive for good performance. But again, ironically, we have worried more about these moral hazard/incentive effects among individuals than among corporations, and this has vastly distorted responses to the current crisis. It hampered the willingness of the Bush administration to respond to the millions of Americans losing their homes or jobs. The administration didn’t want to seem to be “rewarding” those who had engaged in irresponsible borrowing. It didn’t want to increase unemployment insurance because that would diminish incentives to look for a job. It should have worried less about these problems and more about the perverse incentives of the newly established corporate safety net.

Well-off American corporations also talk about the importance of security. They emphasize the importance of security of property rights, and how without such security, they won’t undertake investment. They — like ordinary Americans — are “risk averse.” Public policy, especially among the Right, has paid a great deal of attention to these concerns about security of property. But ironically, many have argued that individual security should be reduced, cutting back Social Security and job security for ordinary citizens. It is a curious contradiction, and it is paralleled by recent discussions of human rights.

For decades after the beginning of the Cold War, the United States and the Soviet Union were engaged in a battle over human rights. The Universal Declaration of Human Rights listed both basic economic and political rights. The United States only wanted to talk about political rights, the Soviet Union about economic rights. Many of those in the Third World, while noting the importance of political rights, gave greater weight to economic rights: What good does the right to vote mean to a person starving to death? They questioned whether someone without any education could meaningfully exercise the right to vote when there are complex issues in dispute.

Finally, under the Bush administration, the United States began to recognize the importance of economic rights — but the recognition was lopsided: it recognized the right of capital to move freely in and out of countries, capital market liberalization. Intellectual property rights and property rights more generally are other economic rights that have been emphasized. But why should these economic rights — rights of corporations — have precedence over the more basic economic rights of individuals, such as the rights of access to health care or to housing or to education? Or the right to a certain minimal level of security?

These are basic issues that all societies have to face. A full discussion of the issues would take us beyond the scope of this short book. What should be clear, however, is that these matters of rights are not God-given. They are social constructs. We can think of them as part of the social contract that governs how we live together as a community.

Leisure and Sustainability

Nearly 4,000 people lined up for jobs outside the renovated Roosevelt Hotel in New York, providing a visual example of how a rising GDP may not accurately reflect economic conditions in American society. PHOTO: © JAMES LEYNSE/CORBISThere are other values that are not captured well in our standard measure of GDP: we value leisure, whether we use it for relaxation, for time with family, for culture, or for sports. Leisure can be particularly important for the millions whose jobs provide limited immediate satisfaction, those who work to live rather than who live to work.

Seventy-five years ago, [British economist John Maynard] Keynes celebrated the fact that mankind was, for the first time in its history, about to be freed from the “economic problem.” For all human history, man had devoted most of his energies to finding food, shelter, and clothing. But advances in science and technology meant that these basic needs could be provided with only a few hours of work a week. For instance, less than 2 percent of the American labor force produces all the food that even an overconsuming and rapidly becoming obese country can eat — with enough left over for our nation to be a major exporter of wheat, corn, and soybeans. Keynes wondered what we would do with the fruits of these advances. Looking at how England’s upper classes spent their time, he quite rightly had grounds for worry.

He did not anticipate fully what has happened, especially in the last third of a century. America and Europe have seemingly responded differently. Contrary to Keynes’s prediction, America, as a whole, has not enjoyed more leisure. The number of hours worked per household has actually gone up (by some 26 percent over the past thirty years). We have become a consumer/materialistic society: two cars in every garage, iPods in every ear, and clothes without limit. We buy and dispose. Europe took a very different tack. A five-week vacation is the norm — Europeans shudder at our two-week standard. France’s output per hour is higher than that in the United States, but the typical Frenchman works fewer hours a year and so has a lower income.

The differences are not genetic. They represent different evolutions of our societies. Most Frenchmen would not trade places with most Americans; and most Americans would not trade places with most Frenchmen. The evolution both in America and in Europe has come without any premeditation. We should ask ourselves if it is a course that we would have chosen. And as social scientists, we can try to explain why each chose the course it did.

We may not be able to say which lifestyle is better. But the U.S. lifestyle is not sustainable. Others may be more so. If those in the developing countries try to imitate America’s lifestyle, the planet is doomed. There are not enough natural resources, and the impact on global warming would be intolerable. America will have to change — and it will have to change quickly.

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