GDP and distribution

The current Economist (dated 30 April) features Gross Domestic Product and its inadequacies, here and here. It doesn't seem to mention distribution of income, which is important as many governments use GDP as a de facto target. I argue though that rises in GDP don't do much for welfare if they are increasingly concentrated in the hands of the top one percent or so. If we are trying to do something to improve welfare, we need to target an array of measures.

Raising GDP (or GDP per capita) has become the default goal for governments because they are unwilling or unable to target for improvement an array of broad outcomes that are meaningful to ordinary people: such as better health, universal literacy, full employment etc. The vague, slippery, and ever-revisable GDP metric is a handy smokescreen that allows government not to commit itself to improving the welfare of ordinary citizens. A Social Policy Bond regime would be a stark contrast: it would target for improvement explicit, meaningful and verifiable metrics that are inextricably linked to the welfare of ordinary people.

Economic growth and inequality

One of the less obvious advantages of a Social Policy Bond regime is that it insists on defining our goals; transparently and explicitly. And perhaps the least laudable feature of the current regime is that there are few explicit goals, and those that are stated have little to do with society's well-being. The goal that is usually invoked to justify some policy or other is economic growth, expressed most often as Gross Domestic Product per person. I've blogged about the flaws in the targeting of GDP before (here and here, for instance). It needs restating, though, that economic growth, however measured, does not inevitably benefit everybody. Most people in the US, for instance, feel this, but work by Professor John Komlos tries to quantify it. His main conclusion?

The major consistent findings are what in the colloquial is referred to as the “hollowing out” of the middle class as well as the tremendous increase in the income of the top 1%. The income of the latter relative to the 1st [poorest] quintile increased from a factor of 21 in 1979 to 51 in 2011. Growth of income and welfare in the U.S, (pdf) 1979-2011, John Komlos, Professor Emeritus, University of Munich

In a column, Professor Komlos shows that US census data shows that:

[T]he bottom 20 percent of U.S. households is underwater with an average net worth of -$32,000, that is, the debts of about 60 million people are greater than all their assets combined. If you combine the first and second quintiles of the wealth distribution, it’s apparent that 120 million people’s average net wealth is still below zero at minus $11,000. These facts about inequality can’t be whitewashed, 21 December 2015

The essential lesson from all this is one that bears repetition: economic growth is not an end in itself. In our increasingly complex world we cannot rely on trickle-down economics to achieve our social goals. More explicit targeting of broad social and environmental outcomes is necessary. Social Policy Bonds are one way of setting such targets and ensuring that they are achieved efficiently.

War and peace, and GDP

Readers interested in a meta-solution to the conflicts in the Middle East could do worse than read my short piece on Peace Bonds. Defining peace in terms robust enough for our purposes might not be easy, but the necessary thinking will help clarify exactly what we want to achieve. As in many other policy areas, there are plenty of statistics already being gathered and with some verification and supplementation a combination of them could be targeted by a Peace Bond regime. See, for instance, this site, for some indicators that we could target. 

On another note, David Pilling asks: has GDP outgrown its use? As I have repeatedly posted (here, for instance), the answer is an unqualified yes.

Targeting human devastation

I've posted before about the flawed nature of what has become, by default, society's de facto indicators of success: Gross Domestic Product (or GDP per capita) and its rate of growth. In the absence of any targets that are actually correlated with societal well-being, GDP has been enshrined as the target, par excellence, by which our governments measure their progress. It's highly misleading at best, for reasons I've outlined previously, so it comes as no great surprise that on 22 May:

Istat, Italy’s statistical body ... will from October ..include drug trafficking, prostitution, and alcohol-and-tobacco smuggling in its economic-output numbers.... In fact, then as now, Italy was merely one of the first countries to announce its compliance with international accounting standards. Reporting illegal economically productive activity in which all parties take part voluntarily is required under EU rules known as the European System of Accounts.... Sex, drugs and GDP, 'the Economist', 31 May

Well why not? It's no more illogical than doing what we have been doing for decades: assuming that economic activity generates societal well-being - an assumption that is increasingly at odds with reality. 

We urgently need to target explicitly things that we actually want to achieve: universal literacy, for instance, world peace, or even the survival of the human race. In the absence of such targets, the vaccuum is filled by that grotesque proxy for success: Gross Domestic Product. It's a shambles.

Mickey Mouse targets: gargantuan impact

From The Economist:

Like almost every other local government in China, Xianghe’s has an urbanisation target: 60% by 2017, up from around 50% today and ahead of the national target of 60% by 2020. Since the global financial crisis in 2008, governments have been hardening such objectives as a way of stimulating growth, and have been borrowing heavily to meet them. Emerging from the shadows, 'The Economist', 19 April

Targets such as these, including especially the universal (apart from perhaps in Bhutan) and much-revered de facto target of governments everywhere, Gross Domestic Product, are Mickey Mouse in conception and in their relationship to ordinary people's well-being, but not, unfortunately, in the impact they have on us all. They are top-down targets, favoured by the political caste and their functionaries. They become the sole focus of bureaucrats' attention to the exclusion of anything else. When it comes to urbanisation in China, the impacts are socially and environmentally disastrous: local governments scramble to meet the targets by throwing peasants off the land they and their families have been farming for generations. One result, The Economist continues, is...

 ...the rampant urban sprawl encouraged by local governments’ ability to seize rural land at will. Such unrestrained expansion may work in parts of America where there is plenty of empty land (albeit at a cost to the environment and often to the quality of life). In China, where urbanisation has forced around 40m farmers off their land over the past three decades, usually with little or no compensation, it will not.

There's a stark contrast between the ad hoc, spurious, almost random nature of targets like urbanisation rates, and the serious negative impacts they have on everyone other than the people who dream them up. 

People who make policy for large societies need to rely on some sorts of numerical indicators of society's goals and how quickly we are reaching them. But indicators and targets should be well thought out and as consensual as possible. They should be in themselves, or be inextricably linked to, things that we actually want to achieve. In other words, they should not merely have (perhaps) been associated with social well-being in the past. They should be outcomes that are meaningful to ordinary people, because that's what matters most and that is what will encourage people's engagement with policymaking and hence buy-in to policies that affect us. Mickey Mouse indicators like urbanisation, or GDP are just not good enough. They speak of a growing and dangerous alienation of rulers from ruled.

GDP and war

Theordore Dalrymple puts it succinctly:

An increased GDP, however distributed, is perfectly compatible with a deteriorated, even much deteriorated, way of life: and, presumably, a lowering of GDP is compatible with an improved, even a much improved, way of life. Of GDP and happiness, 'Library of Law and Liberty', 2 January

Unfortunately, in the absence of any coherent other targets, increasing Gross Domestic Product (or GDP per capita) become the de facto objective of most democratic governments.  But, as an end in itself, GDP has numerous flaws. Its targeting institutionalises our confusion between ends and means. Economic growth should not be end in itself. At best, it is a means towards certain ends. Growth in GDP implies only a growth in economic activity. It does not distinguish between helpful and harmful economic activity. It puts no value on any activity that bypasses the monetary economy. So it ignores leisure time, the environment, crime, health, and other contributors to well-being that are meaningful, or even essential, to natural persons.

We urgently need goals that are far less randomly tied to human and environmental well-being. I make some tentative suggestions in my book and on SocialGoals.com. Hand-in-hand with meaningful targets goes a sensible way of achieving them. Our current systems are failing in both respects, and the failures are becoming too spectacular to ignore for much longer. In these increasingly dire circumstances, Social Policy Bonds could be an answer. Under a bond regime, policymaking would be something with which ordinary people could engage. The bonds would target meaningful goals, with which we could all identify. These goals would be ends - targets inextricably linked to well-being - rather than real or supposed means towards achieving them. The bonds would inject the market's incentives and efficiencies into the achievement of our goals. And because they reward the achievement of our goals, rather than activities, they do not rely on our knowing how our ends are to be achieved or who will achieve them. This means that we can target problems, like war, that we have no idea (yet) how to solve.

One thing seems certain: however remote a World Peace Bond regime seems now, a world without war within our current, corrupt, haphazard system, is even less likely.

Targeting well-being

Unfortunately the industry that has mushroomed around type 2 diabetes measures success in approvals for new drugs,  revenue earned, and money raised, not in suffering avoided or lives saved. Sugar Nation, Jeff O'Connell, 2011

It's the same at the level of national and international government. In the absence of coherent, explicit, policy goals that have been debated openly and bought into, we have accepted that corporate goals and a motley array of vague indicators, such as GDP per capita, or economic 'growth' as our default objectives. There might have been a strong correlation between the aggregation of such goals and societal well-being in the past, the society was less interlinked, the negative impacts of economic activity were less significant, less well known, or easier to escape. But for today? It's not good enough.

We need not only to target explicitly, broad indicators that are inextricably linked to social and environmental well-being; we need also to discuss them, and to engage the public with them so that, while we might not all agree on society's priorities, we can buy into them, and attempt to change them within a coherent and inclusive policymaking environment.

In short, we need to target outcomes; outcomes that are meaningful to ordinary people. That's where Social Policy Bonds can enter the picture. Yes, they channel market forces into the achievement of social outcomes - which makes them efficient. But as important is that they focus our boundless human ingenuity on things that matter: all the broad components that make up social and environmental well-being. We can do better nowadays than to hope that 'success' will appear as a by-product of the targets pursued by a motley array of corporations, politicians and other interest groups.

I've been updating the SocialGoals.com website. Comments or suggestions, on this or any other aspect of Social Policy Bonds, are welcomed.

Economic growth is not a valid goal

In April the British Government's new Chief Scientific Adviser, Sir Mark Walport, set out his priorities his first major public speech since taking office. His 'five key themes' for scientific advice in government are:

1. Ensuring that scientific knowledge translates to economic growth;
2. Strengthening infrastructure resilience for the engineered world of transport, energy, the built environment and telecommunications and also the natural world;
3. Underpinning policy with evidence;
4. Harnessing science for emergencies; and
5. Providing advocacy and leadership for science. Source

It's the first that causes me most concern (as it does George Monbiot). It reflects and amplifies the widespread view that economic growth is an end in itself. But economic growth, especially as measured by Gross Domestic Product (or GDP per capita), is not an end in itself. It is an indicator of economic activity. As a measure of well-being it is deeply flawed. It does not distinguish between helpful and harmful economic activity. It puts no value on any activity that bypasses the monetary economy. So it ignores leisure time, the environment, crime, health, and other things that are meaningful to natural persons. Crucially too, it ignores how the economic output it purports to measure is distributed within society.

The more than minimal fraud is in measuring social progress all but exclusively by the volume of producer-influenced production, the increase in GDP. J K Galbraith, 'The Economics of Innocent Fraud', Penguin Books, 2004.

This identification of societal well-being has permeated the thinking of our politicians, officials and now, it seems, our top scientists. We are just not in the habit of formulating policy goals in terms of outcomes that are meaningful to ordinary people. So, by default (or by conscious fraud), GDP per capita has become the de facto indicator of social well-being. We need to think urgently about changing this.
 

Targeting GNP: the logical conclusion

Gross National Product, in the absence of any other explicit indicator, is often targeted implicitly; as if GNP, or GNP per head, indicate anything meaningful to ordinary people. This is one example of what happens when governments insist on targeting GNP.

Lessons from the gym

If we’re not careful we become obsessive about a single particular quantifiable measure – to the exclusion of things that really matter but that are less quantifiable. It could be the exchange rate for foreign currency, our weight, or the number of kilos we can bench press. The effects can be pernicious: witness the large numbers of adolescents with eating disorders, or the athletes who sacrifice their health to win.

Does this happen for the same reason that our minds are, by default, not in the here-and-now but are apparently set to daydream? Perhaps our education is so totally verbal that we cannot handle the complexity of the present, but not being able to switch off, we focus on something simple, measurable that we can do something about.

Well, enough speculation about the why. The fact is, as individuals we do have this tendency, though it can be, thankfully, checked by our intuition, intelligence and insight.

I’m not so sure, though, about when that same focus on a single indicator bedevils the policymaking process. Government agencies, for instance, that focus on narrow numerical targets often miss seeing the wood for the trees. At the national level, the consequences can be dire. Generally there is no systematic use of indicators that reliably correlate with social wellbeing. But what fills the vacuum? Anecdotes, image, spin and inertia. Combined with the non-explicit targeting of, most usually, Gross Domestic Product, or GDP per capita – which is terrible as an indicator of social welfare.

As I see it, there are two remedies.

• Downsize the policymaking remit. By which I mean, devolve policymaking as far as possible to a level at which normal people can tell what’s going on without depending exclusively on quantifiable indicators. Or:

• Choose broad social and environmental indicators, that correlate accurately with social and environmental wellbeing; as against the Mickey Mouse micro-targets that characterise current policymaking. That is the principle underlying Social Policy Bonds, which apart from being more efficient at raising welfare than the current setup, would focus on outcomes. Which means that ordinary people could participate in defining them; an end in itself as well as bringing about more buy-in into social affairs.

Jonathan Rowe puts our predicament well:

The Atlantic this month cites a recent study by economists that purports to show that the suburbs actually are bastions of social cohesion,based on membership in civic groups. It is a classic case of confusing available data with reality.