Saturday, December 22, 2012

GDP to the rescue?

Brad DeLong sends us (without comment) to Nicholas Oulton in defense of GDP as a measure of welfare.

On Oulton's piece, the LIMEW data are really interesting. I haven't thought about those data and maybe someone who knows them well would have an objection to the way they're used here, but I don't see a way that Oulton's point is obviously wrong.
I think he's on shakier ground with his critique of the idea that GDP growth doesn't make people happier.

"First, if people care mainly about their relative position, why has there been so much fuss about the financial crisis? After all, for most people in the UK, the drop in income has been (on this view) trivially small, no more than 8% – and at least initially, it fell disproportionately on the rich."

That's trivially easy. The same sorts of surveys report that people care not only about their position relative to others, but the change in their own position over time. If everyone goes down 8%, then nobody's worse off relative to anyone else, but everyone is worse off relative to their 2007 selves.

And of course it's not everyone going down 8%. There's nothing in the Easterlin Paradox to suggest that people won't be unhappy about being unemployed or becoming homeless or going from a 6-figure income to a mid-5-figure income. And the business about the 8% drop falling (initially) disproportionately on the rich is, well, rich. It's true in terms of average impacts at different income levels, but if we were to look at rates of immiseration at different initial income levels, I think we would find much higher rates at low incomes than at high.

"Second, if people care about their relative position, why does this have to be expressed in terms of annual income? After all, most workers today can work part-time if they want. So why can’t A boast that his daily rate of pay is higher than B’s even if B’s annual earnings are higher and this is because smart A works only three days a week while poor dumb B, a slave to the rat race, works five?"

Well sure, people _could_ care about relative hourly earnings, but does Oulton have any evidence that we _do_? The phrase "keeping up with the Joneses" has never been about matching their wage rate; it's always about what you can buy.

"Yet surveys of part-time workers regularly show that many would like to work longer hours if only they could. And while it is true that some leisure activities like skiing require a lot of complementary expenditure on stuff, many other activities – watching TV, surfing the internet, chatting with friends in pubs or cafés or avoiding Betjeman’s regret – do not."

Do those surveys control for income? If I were working part-time and pulling down $12,000 per year, I'm pretty sure I'd prefer full-time work. On the other hand, at my college there are two couples where both people are professors and they have chosen to share a 1.5 appointment, where each partner has a 0.75 position. We're by no means poor, but our salaries aren't lavish by academic standards, so you don't have to be very rich to be willing to give up money for time. Other survey evidence suggests that many more people above the poverty line would be interested in this tradeoff, if their employers were to allow it.

There's also the small matter of health insurance. In the U.S., if you're fortunate enough to have employer-provided insurance, it's usually conditional on full-time employment. It would be interesting to know how many people would be interested in working part-time if that didn't mean losing coverage.

Oulton finishes with a discussion of the effect of new goods on stimulating people to work harder so that they can afford those goods. It's an interesting point, and I'm certainly not volunteering to go back to a world without, say, this laptop I'm working on. But at some level it also begs the question. One of the arguments against GDP is that marketing and social pressures induce us to work and consume more than we might otherwise. And Oulton is arguing that new goods induce us to work and consume more than we otherwise would. It may or may not make us happier--he doesn't provide any evidence either way.

There's a lot more in objections to GDP than Oulton acknowledges.


  1. I wish I knew more about the data Oulton uses. I agree with your points but, after reading the Oulton piece, I also am left wondering about a few things.

    My initial reaction to the LIMEW data is that they are still essentially per capita measurements, are they not? In which case they remain misleading in the same way that measures of per capita GDP are misleading (i.e., five people in a room are going to have a very high per capita income level if one of them is Warren Buffet). I would expect that additional measures included in the LIMEW data, such as employee benefits (health insurance costs started rising precipitously in the 1980s, while a lot of people started losing theirs during the same period, as I recall) and property income (which, I assume is different from property value but would it include, say, equity-based borrowing?), would also do quite a bit to blur the income distribution caveat but said caveat still doesn't go away.

    As for the happiness surveys he discusses, I seem to remember reading in something by Bill McGibbon (_Deep Economy_, I think) about survey findings in which happiness was correlated with increasing income *up to a certain income level* and, beyond that income level, more money didn't add up to more contentment or happiness. It does not appear to me that Oulton looked at those surveys. He also talks about workers and their relative salaries but, earlier, he notes that the Easterlin Paradox only purportedly works *above a certain level of income*. Perhaps the behavior he finds so puzzling cannot be explained by the Easterlin Paradox if the workers to which he refers fall below that income level?

  2. Hi Dawn,

    My (ill-informed) sense of the LIMEW data are that they aren't strictly per-capita--that is, they look at strata. If the strata are too crude, they don't tell you all that much, but even, say, five groups can tell you a lot.

    You're right about the Easterlin paradox (which is the same stuff McKibben is talking about), that increases in wealth do matter when you're going from very poor to less poor, but that the effect tends to plateau. And as I said in the post, there were significant numbers of people experiencing losses much greater than 8%.

    There are two related phenomena. One is that (again, above some minimal level of material well-being) it's common to care more about relative income than absolute income: asked if they'd rather have: (A) $50,000/yr in a society where the average is $25,000; or (B) $100,000/yr in a society where the average is $200,000, people often choose (A).

    The other thing is that people seem to have psychological set-points, to which they tend to revert, with the result that we tend to overestimate the extent to which some good or bad event will make us feel happier or sadder, and how long we'll feel that way. Something great happens, and we do indeed feel better ... but we relatively quickly get acclimated to our new reality and make our way back to our normal mental state.

    But if you were making in the high 5 figures--that is, noticeably better than average--and then you lose your job and eventually find employment in the low-mid 5 figures--somewhere around, or perhaps below, average--that is likely to be a continuing source of unhappiness, not something to which you acclimate. Unless, that is, you have an internal change of values and find some source of happiness to _replace_ whatever utility you were getting from the $45,000 per year that have gone missing from your life.

  3. Thanks for answering my questions ... but of course, now I have another question.

    About the first phenomenon you mention: does anybody know *why* people often choose (A)? My first impulse is to say that people would rather make double the average (even if it is half the other choice in absolute dollars) because if the average is $25K then presumably their $50K will go much farther in terms of purchasing power than the other choice, where they'd feel poor even on a six figure salary if the CPI is predicated on the kind of budget constraint you get to work with if you're making $200K per year. In other words, given these two scenarios, do people really care about relative incomes because of what they can deduce about the societal cost of living from that information or do that they care about those relative income levels for their own sake?

    For that matter, one might respond to Oulton's point about part time workers wanting more hours in much the same way. He assumes that the reason for that is because people want to make money but that is not necessarily the case. People also invest all kinds of ego and identity in their work; hour for hour, it is what most adults spend the bulk of their lives doing. There is potentially a lot more there than 'wanna work more so's I can buy more stuff' and, once again, Oulton does not provide any evidence either way.

    I hope that made sense.

    Your second point makes a lot of sense. As a general matter, people remember negative stuff before they remember positive stuff. I believe it has to do with self-preservation and natural selection (e.g., it was more important for your survival to remember that time you almost got killed by that critter you and your mates were hunting on the savannah than it was to remember how good it felt last time you got laid, so the better you were neurologically hard-wired to remember the trauma, the better your chances of surviving to reproduce). And I'm thinking, as I type this, that those changes of values to which you refer get back to my question above about why people choose to want the things they want and how they attach meaning to those choices.

    No doubt I'm simply re-saying what you already said ... sorry!

  4. That's a good question about what people are thinking when they answer the question about which salary situation they'd rather be in. It would be important to design the experiment to try to exclude the phenomenon you describe: people may be assuming that these two societies are roughly equal in wealth, so knowing where I stand relative to the average is the same as knowing where I stand in an absolute sense. Perhaps you could get around it by describing it as two different countries, and giving examples of what can be bought for each salary you ask someone to consider, but I don't know if it was worked that way.

    Assuming there's still something real there, and it's not just people making reasonable adjustments for apparent cost-of-living differences, I think there are two things going on. One has to do with "positional goods." There's a relatively open-ended supply of large houses on large lots, because we can always move further out from the city and build more of them. But there's a strictly limited supply of large houses on large lots not too far from downtown. One person buying such a house necessarily means some other person can't. Similarly, we could theoretically have "good" schools for all our kids to attend, but slots in the "best" schools are, by definition, limited. If you care about the big house in the inner-ring suburb, or your kid's attendance at the "best" school, then your absolute income matters a whole lot less than your relative income. Fred Hirsch wrote about this 35 years ago in "Social limits to growth," and argued that these positional goods would take on greater importance as the satisfaction of physical needs became near universal.

    Another type of positional good is a bit like the "best" school, and has to do with our status-consciousness. I may get enjoyment from my house because of its attributes, but I may also get enjoyment out of it because it's generally perceived as "nicer" or "more desirable" than yours. The same goes for my car. Or my spouse. Within any group, only one person can have the "best" house, or car, or spouse, and so again what will matter will be relative income rather than absolute. (And yes, a certain amount of cynicism is required to extend the argument to "spouse," but I'm not the one who coined the term "trophy wife.")

    This category shades into my last point, which is sheer cussedness. It seems to me that most people--to greatly varying degrees--like being "better" than others. Income is a pretty objective fact, and while it's easy to dispute the relevance of those numbers to your worth as a person, it's pretty pointless to dispute the numbers themselves. The ability to have servants, or more generally to boss people around, is pretty closely linked to relative income. So there are ... comprehensible reasons for the observed preferences.