By James McCusker
The arrival of the new year is a time for making resolutions. Some will involve small things, like giving up morning munchies, and some will be big things, like re-engineering a nation’s economy. Jacinda Adern and Katrin Jakobsdottir have been thinking big; and they want us to think big, too.
Adern is Prime Minister of New Zealand and Jakobsdottir is Prime Minister of Iceland. Each is taking steps to reshape her nation’s economy and both want the rest of the countries of the world to set aside economic growth and focus instead on the well-being of their populations.
The prime minister of New Zealand says that economic growth reflects neither people’s living standards nor the distribution of income and wealth. Katrin Jakobsdottir, the prime minister of Iceland, says that countries should shape their goals and budgets not based on GDP (Gross Domestic Product) but instead look to, “an alternative future based on well-being and inclusive growth.” And Jakobsdottir has made similar statements about the ill-effects of focusing on GDP growth as a goal.
It is quite possible that both prime ministers would be surprised that their words echoed those of Simon Kuznets, who was awarded the Nobel Memorial Prize in Economics in 1971 for his work on an “empirical view of economic growth,” i.e. GDP. What he had said was, “The welfare of a nation can scarcely be inferred from a measurement of national income as defined by the GDP.” GDP was his concept, but he was realistic about its limitations.
Building our National Accounts System, which includes the familiar GDP (Gross Domestic Product) was a team project, but Simon Kuznets was really its conceptual leader and his research provided the initial operational model. It was indeed his baby.
It also was, and is, an accounting system, and just as a financial statement doesn’t tell us everything about a company, the National Accounts System’s GDP doesn’t tell us everything about a country or its people.
His use of the term “welfare” is one of the ways that economics sometimes confounds people, especially in the United States, where “welfare” usually is taken to mean some sort of payment or benefit provided by the government to those who are down and out. What we now know as welfare used to be referred to as “the dole,” but that gradually died out as efforts were made to avoid any stigma attached to welfare benefits so that individuals and families could more readily meld into the economy, workforce, and society.
Recently, there has been a movement to replace “welfare” with “well-being” but it has been slow going, quite possibly because well-being has an happy talk, navel contemplation air to it that is apparently difficult to shake.
One of the principal difficulties that Kuznets faced when he confronted a blank sheet of paper at the beginning of his research was how should we measure economic growth? Unemployment numbers only reflect it; they do not define it or, more importantly, help us understand it.
His model answered these questions with an accounting system, essentially the income statement portion of a financial statement for the nation. It was all new and pretty exciting stuff when he started it. And it revealed enough about the workings of our economy and industrial capabilities that it was kept secret during World War II so that the Axis powers couldn’t read it.
Accounting systems have limitations, though, as both CEOs and investors sometimes find out the hard way. By itself a corporate financial statement tells us nothing about turnover in labor or management, for example. It tells us nothing about customer satisfaction, or loyalty. Most often it requires some digging to unearth the relevant information. By comparison, the financial statement is clear, unambiguous, and straightforward to obtain.
Proponents of refocusing from GDP to wellness should bear that difference in data in mind. It is one thing to focus on GDP’s limitations, it is quite another to reshape our economies by reallocating economic policy and public funds away from economic growth and toward things like vaguely measured and indifferently managed health care, education, and housing.
The well-being resolution should be taken seriously, but until another Simon Kuznitz comes along, we lack both the conceptual model and the tools to make well-being work as a national policy. The litany of management problems with well-meaning welfare projects is long and unpleasant to contemplate. And there is also a philosophical conflict with an economy like ours, where the theory is that if we grow economically, people will figure out their well-being on their own. They don’t need government to wellify them.
Our New Year’s resolution, then, should be to give the well-being movement and its obstacles some serious, non-political. thought. It couldn’t hurt.