Tag Archives: GDP

Why economists should try to measure happiness

hen discussing media, the philosopher Marshall McLuhan once said, “We shape our tools and thereafter our tools shape us.” Much the same principle applies to economic indicators; once they have been developed they begin to shape our experience and perceptions in ways we rarely realize. Most of us accept numbers as devoid of ideology, as accurate and unbiased descriptions of the world we inhabit — this is their allure.

In his new book The Leading Indicators, the economist Zachary Karabell takes the opposite tack, arguing that “the world these statistics say we are living in and the world we are actually living in often diverge.” Like Freud, Karabell investigates the unconscious assumptions that permeate our lives, in his case focusing on our dependence on statistics.

Freud, in fact, makes a few appearances in the book. The varied economists who developed national indicators (Fisher, Mitchell, Burns, Kuznets), Karabell explains, suffered from “physics envy.” But economics is not physics. Indicators, rather than representing some objective view of reality, are injected with controversial assumptions.

Karabell writes, “The leading indicators are the products of a particular phase of Western history.” In this phase, economics was seen as a mechanism, rather than a human endeavor subject to what Keynes called the “animal spirits.” The economists therefore “invented statistics to measure material output. And if economies became unstable and unbalanced, it was because the wrong tools were being used or because the data and the statistics were faulty.”

In the years following World War II, national statistics took on a “utopian” bent. Karabell reminds us, if we ever knew, that the U.N. Declaration of Human Rights also included economic rights, which were “characterized at the time as human rights on par with freedom of religion and the rule of law, included the right to sufficient food, shelter, clothes, leisure, health care, and a safety net for unemployment, disability, disease, and old age.”

To ensure these goals were met, the U.N. created a committee to develop “National Income Statistics.” The Consumer Price Index was devised to ensure that wages and benefits kept up with higher prices. Its various iterations were often met with vehement disdain from workers and union organizers who called the Core CPI (which excludes more volatile energy and food prices) “inflation minus whatever gets more expensive.” Unemployment numbers essentially created the idea of unemployment — after all, farmers could be destitute, but they were not considered “unemployed” in the sense we think of now, because they hadn’t previously been paid by an employer.

Karabell tells the story of statistics vividly, illuminating the forgotten characters who shaped our numbers. Ethelbert Stewart, “what Mark Twain would have been had Twain been a statistician,” once threatened to burn Bureau of Labor Statistics data when Congress wanted the agency to analyze individual car manufacturers. Frances Perkins, who pushed for the creation of the unemployment rate, was the first woman to serve in a Cabinet-level position (in FDR’s administration), and was therefore the first woman in American history to be in line for the presidency.

There are also many cocktail party-ready anecdotes. In 1992, when the White House Council of Economic Advisers announced that economic growth would be slower in the second quarter than the first, George H.W. Bush said, “This is the worst news I’ve ever heard” — and then promptly lost the election. When Warren Harding first attempted to discern the unemployment rate in 1920, “there were such divergent opinions about the numbers that the attendees put the question to a vote,” Karabell writes. If anything were to disprove Carroll Wright’s maxim — “Statistics are the fitting and never-changing symbols…to tell the story of our present state” — it is certainly this anecdote.

The Leading Indicators doesn’t just tell the stories of the people behind the statistics; Karabell also describes how the statistics are compiled and kept. For instance, travel expenditures “come from airport surveys of travelers and tour groups. This is not rocket science.” Anyone who has filled out such forms on a whim may find their trust in these statistics diminished by this factoid.

The indicators have become so deeply embedded in the public consciousness that they influence markets, which means they must be closely protected. In an enlightening paragraph, Karabell describes the process:

Within the BLS, procedures are just as stringent. The staff members responsible for compiling the numbers encrypt their computers and store the data into secure locations every time they get up to use the bathroom. The janitors and custodial workers don’t even empty the trash in the week leading up to the release. Only the White House receives an early copy of the report, in a locked and guarded suitcase, Thursday evening, 12 hours before the report is issued to the public the following morning. [The Leading Indicators]

Although Karabell’s diagnosis is correct, his cure for the failure of statistics is ultimately unsatisfying. Betraying a truly 21st-century mindset, his solution is “tailored” indicators. He argues not for a broad measure of society, but rather “bespoke” indicators that “empower” individuals: “Our reliance on 20th-century leading indicators to craft a common narrative of ‘the economy’ is an obstacle.” One such “bespoke” indicator is the Office of Financial Research, established in 2011 to develop statistics that “might identify critical problems before they again threaten to bring down the global financial system.”

Such statistics are welcome, but they will still run into the same problems the old statistics did — simply identifying and measuring a problem will not solve it. Karabell’s palliative still faces the conundrum Freud observed in Civilization and Its Discontents, “It is impossible to escape the impression that people commonly use false standards of measurement — that they seek power, success, and wealth for themselves and admire them in others, and that they underestimate what is of true value in life.”

A better path is not to seek precise, fitted, individualistic metrics, but rather a more holistic vision of society. The small kingdom of Bhutan, squeezed between India and China, used to try to quantify Gross National Happiness (GNH). Its former prime minister explained in 2008, “We distinguish between the happiness in GNH from the fleeting, pleasurable feel-good moods so often associated with that term. We know that true happiness cannot exist while other suffer, and comes only from serving others, living in harmony with nature, and realizing our innate wisdom and the true and brilliant nature of our own minds.”

This is not just happy talk, and the recognition that indicators are failing is not limited to small, mountainous kingdoms. In France, then-President Nicolas Sarkozy asked Joseph E. Stiglitz, Amartya Sen, Jean-Paul Fitoussi to investigate the limits of GDP. In 2010 they produced a short book, Mismeasuring Our Lives, in which Sarkozy notes in the foreword, “Our world, our society, and our economy have changed, and the measures have not kept pace.” As a result of his efforts, Insee, the French statistics agency, has begun incorporating new measures into its accounting process, and released numerous reports on inequalityquality of life, and sustainability. The European Union, the Organization for Economic Cooperation and Development, and the U.N. have all been developing new measures based on the Stiglitz commission’s recommendations.

In Britain, Prime Minister David Cameron, a Tory, launched a similar well-being inquiry with the intention of supplementing GDP with General Well-Being (GWB). So far, the Office of National Statistics has released two national reports (based on interviews with some 150,000 British citizens) that have generated many insights and much discussion.

In the United States, Daniel Kahneman and Alan Krueger have developed the “U-Index,” a “numerical representation of how much time people spend doing things they find unpleasing, such as commuting to work in heavy traffic, doing the laundry, shopping for food, or taking care of young children.” Across the country, states like Vermont, Maryland, and Oregon are implementing the Genuine Progress Indicator, which takes into account 26 indicators of progress, to better measure the environmental and social impacts of growth, as well as its distribution.

Still, in an era when governments pursued massive austerity programs on little more than an Excel spreadsheet error, Karabell’s investigation into the motives and misuses of statistics is all the more important. Ultimately, the shift from national statistics that measure production to those that measure well-being will be a shift toward a humanistic economy.

Originally published at The Week.

Interviews with the governors and economists working on the GPI

Lew Daly and I have a new piece on The New Republic examining states implementing the Genuine Progress Indicator. Because the piece is meant for a broad audience, some of the finer points had to be brushed over. This piece explains some of the more wonky questions about GPI.

1. Why not GDP?

A lot of people argue that “GDP is a bad indicator.” It’s not; it’s a very incomplete indicator. Think of baseball statistics. A player’s batting average tells you an important fact about a player—what percentage of the time at bat he gets a hit. That’s important to know. But it’s not the only thing to know. A power hitter may have a low batting average, but he may drive in a lot of runs, so it’s important to consider RBI (Runs Batted In). If a player gets a lot of walks, his batting average won’t reflect that, you need to look at her OBP (On Base Percentage). A player may get a lot of doubles and triples, but her batting average won’t consider those any differently than a single. For that we would need the player’s slugging percentage.

Any coach who judged his players purely on their batting average would be at a competitive disadvantage to a coach who judged players on a wider collection of metrics. GDP is like a batting average, it tells you something very specific and very important, but it fails to capture the full performance of an economy.

2. Okay, so what is the Genuine Progress Indicator?

The Genuine Progress Indicator (GPI) includes 26 indicators to give a broader picture of the sustainability of growth.

When the GDP is compared with the GPI, we discover that much of the “progress” over the past several decades is illusory:

3. Why?

It varies by state. So far, the states that have implemented GPI have discovered that much of their economic growth came at the expense of the other components of GPI. Their workers have longer commutes, they have depleted natural resources, volunteerism and free time have declined and income gains have been unequal. It’s like discovering that a star player has a high batting average, but rarely advances runners and frequently strikes out in key situations. Maryland, for instance, has seen its economic component increase dramatically, while social and environmental indicators have remained flat or declined.

4. What should we do about it?

I spoke with policymakers and economists to get their thoughts on implementing GPI.

Anthony Pollina, who crafted the legislation to develop Vermont’s GPI in 2012 discussed why legislatures need to take interest:

“We make policies the same way every year and we make the same mistakes every year. We cut programs and deny the fact that we are hurting people and undermining their well-being. The GPI can put a halt to that… The GPI is a brand new concept for most people and it’s a brand new way of making policy and looking at policy. We tend to make policy the same way every year and we make the same mistakes, cutting programs and undermining well-being… What the GPI is going to do, for instance looking at the environmental impacts, it’s going to force policymakers to recognize problems with the way they’ve been doing things. A lot of policymakers choose not to recognize problems because when you recognize a problem you have to start to fix things.”

Cylvia Hayes, First Lady of Oregon told me why she decided to push for GPI:

“You can’t effectively govern a state in a two-year biennial budget cycle… As a person in the sustainable development field you have two problems. One is, we’re measuring the wrong thing, and two, you’re measuring things on such a short time horizon that you can’t actually see the full costs and benefits of policy decisions. So we’re integrating the GPI with a ten-year budget plan outcomes metric and then begin to make explicit what our policy and state budget decisions will mean to all three capital accounts (our physical capital, human capital and environmental capital)…. The intent in Oregon is to use the GPI to craft the state budget. Oregon has a long history of working up alternative metrics we had the Oregon Progress Board… but one of the reasons it didn’t move the dial is because it wasn’t attached to state policy decisions and state budget decisions… We worked with a group of graduate students and an ecological economist at Portland State University. We have a rudimentary GPI, now we are hiring a person to oversee the implementation of GPI. The first part of that will be updating the GPI, making it more rigorous.”

Bernie Sanders, Senator (VT) told me why he thinks the federal government needs to look at GPI:

“I think it is enormously important. GDP tells us about the economic growth we see as a nation, but it doesn’t tell us anything about who benefits from that growth… What we have got to do is come up with an approach that tell us how we are doing as a nation in terms of well-being for our people… Who is benefiting from economic growth, that’s the first thing that GPI tells us. Secondly, and more importantly, if someone builds a coal-burning plant and that creates economic growth, GDP measures that, but if that creates global warming, GDP doesn’t measure that… You can create jobs having one guy dig a ditch and another guy fill in that ditch… but what the GPI does is it gives us some guidelines as to what our priorities are as a nation…”

Eric Zencey, author most recently of The Other Road to Serfdom and the Path to Sustainable Democracy and a key architect in Vermont’s GPI program, told me how he convinced Vermont legislators to look into GPI:

“It just makes such good common sense… some of us hung around the capital and talked it up a little bit… We got attention because if you can get out there and say, ‘we oughta measure what matters,’ it’s hard for someone to say we should measure what doesn’t matter… Sound business practices include subtracting costs from benefits… this is just double-entry bookkeeping to the economy as a whole… Another factor in the acceptance of GPI was that the legislature had committed to doing outcome-based budgeting… if you are going to argue that programs have to be evaluated against the outcomes they produce than you have to some larger strategic sense of what you want those outcomes to be. GPI is outcomes at the macro level.”

5. Right, right, but let’s get wonky. How do we take this from an idea and actually implement it?

John Kitzhaber, Governor of Oregon, gave me the nitty-gritty about how to implement the GPI with budget decisions:

“If you invest in at-risk kids you can’t show the ROI [Return on Investment] in two years, but you can sure show it in five or six years. So we became intrigued about how we could not just adopt the GPI but make it an effective driver for policy and budget decisions….The holy grail of GPI advocates is making it more than an academic tool but to integrate it with policy. So first we’re creating a website to inform people of what this is… and we also want to see what elements of GPI we could integrate into our 2015 – 17 budget as pilots. One area where we could get good outcomes is at-risk kids. We need to start small, but what elements could we integrate in 15-17 and then what can add into the 17-19 budget. When I leave office and hand over the 19-21 budget hopefully by that time we’ve institutionalized the trajectory of using these metrics to guide budgetary policy…Most of the interest I’ve seen has not been legislative leadership, but governors and budget-makers, people on ways and means committees. It also has to be an educational initiative, that’s the importance of the website… It’s very important to get governors behind this…

Doug Hoffer, Vermont State Auditor, talked to me about how his office will use GPI for performance audits:

“My office only conducts performance audits (having contracted out for the mandated financial audits) so there may be opportunities to use the GPI as we go forward. The process of performance auditing is defined by GAGAS standards but the choice of audit topics and the definition of objectives allows for some discretion. To the extent we measure program performance against legislative intent, it may be possible (this being Vermont) that GPI values are explicit or inferred. Our only constraint would be the quality and reliability of the data used in our analysis. We are not allowed (nor is it prudent) to make findings and recommendations without sufficient supporting evidence. In any case, I look forward to using GPI metrics as circumstances permit.”

Eric Zencey tells me about standardization,

“GPI 2.0 includes some additional tweaks that cover things that are front and center for other states, some researchers in Hawaii said, ‘this is very East-coast centric’ and Utah said, ‘what about water security and range-land?’ So GPI 2.0 will include some of those things. There is a high level of cooperation among states. I see this GPI summit group like the American Society for Mechanical Engineers which sets standards… There are some elements of GPI that are science-based, other parts, it’s arbitrary, it just matters that we all do it the same.”

6. Okay, but can this get bipartisan support?

John Kitzhaber tells me that Republicans are interested in his state,

“The GPI can get public bipartisan support when it moves from the academic to the practical. We have to show the practical applicability…I’ve very committed to make it happen, we can’t have any false starts…For example the business community and a lot of Republicans in the business community are very interested in early-childhood education. They understand there is a big ROI there. If you can show that by more exclusively connecting the consequences of our budgetary and policy decisions to downstream costs, whether those are depletion of natural capital or driving up the cost of the social safety net becomes more resonant.”

Eric Zencey tells me how GPI can make the government more efficient,

“We had a Republican governor before Peter Shumlin and he brought to a Democratically controlled legislature a proposal [Challenge for Change] that would improve the efficiency of the provision of government services. When I started talking about GPI, at first they pushed it aside; I wrote back and said, ‘everything you hope to accomplish is easier under a GPI.’ An aide wrote back to me and said, ‘you just moved up on the list.’ The aide noted that this could make sure that Challenge for Change did not become a just an axe.”

7. What about the federal government?

Eric Zencey talks about the institutional memory in the federal government:

“There was interest from the BEA and there is institutional memory; they know GDP is a flawed measure… Absent federal action, GPI is going forward like other important initiatives are, a state-by-state level. I don’t think we’ll need all 50 before we get action… when somewhere between 30 and 35 states are compiling and using it.”

Cylvia Hayes tells me about trickle-up leadership:

“I think that, unfortunately we are at a point in this country that the federal governance structure is so flawed that we aren’t going to significant breakthrough leadership on any of the big issues in front of us. One of the reason’s John decided to run again was because of the notion I call trickle-up leadership. We believe that states are the innovation labs right now and that if we can have state and multistate regional collaboration on bold and innovative policies on a whole host of issues from energy and climate to poverty eradication, that will provide an opportunity for trickle-up and trickle-out leadership.”

John Kitzhaber talks about critical mass:

“We have a working relationship between Oregon, Washington, California and British Columbia… If we can work with Washington, which is interested in this and bring California on board, we can get a critical mass…I see it coming out of D.C. but I see D.C. responding to states…”

Bernie Sanders talks about his goal:

“I’m very proud that Vermont and Maryland are moving forward… all of which is terribly important in helping us to gain information about what it takes to make us a happier, healthier society…What Vermont and other states are doing is exactly the right thing… I’ll be introducing legislation soon to bring the GPI to the federal government.”

8. Okay, but we can’t measure happiness! Isn’t this just a pie-in-the-sky idea?

Cylvia Hayes explains why Bhutan has been unfairly characterized:

“When John and I went to Bhutan the newspaper here was critical of it, but what was interesting was the positive response defending the concept… there is a hunger for it, but the happiness frame was unfortunate because it tends to get trivialized. But when you look more deeply at what Bhutan is doing, it’s not trivial at all. They are attempting to run policy and infrastructure decisions through a triple-bottom line, much more comprehensive set of metrics that gives a much fuller account of the what the effects of the policy will be. That, a tool like that, should be attractive regardless of your party affiliation if you are interested in making wise public decisions with your public dollars.”

Eric Zencey talks about why GPI is serious,

“They try to associate GPI with something it isn’t then attack the thing it isn’t. GPI isn’t that flakey happiness… we’re not measuring happiness. They are both alternative indicators and they both have arguments for them, but this is not the gross happiness indicator. There have been attempts to throw smoke and throw sand.”

What a Wall Street banker says about our society

n the New York Times, a former Wall Street banker begins a deep and emotional piece on wealth addiction with the following confession:

In my last year on Wall Street my bonus was $3.6 million — and I was angry because it wasn’t big enough. I was 30 years old, had no children to raise, no debts to pay, no philanthropic goal in mind. I wanted more money for exactly the same reason an alcoholic needs another drink: I was addicted.

The piece is important for numerous reasons, but what strikes me particularly is how much Polk’s story coincides with what we are feeling as a nation. Last week I wrote about new evidence that as societies develop, they eventually reach a point where increases in GDP no longer bring about corresponding gains in happiness.

As more states across the U.S. (and more countries across the world) begin adopting alternative measures they find that while GDP has been increasing, other measures of well-being have remained flat. Our national Genuine Progress Indicator, which takes into account environmental, social and distributional (inequality) has remained stalled for decades, while GDP growth has plodded forward.

Could it be that as a society, we are addicted to growth? There are numerous indications that this is the case. For one, research finds that when asked ““What do you think will be the most serious problem facing the world in the future if nothing is done to stop it?” only 10 percent of American said, “the economy,” while 25 percent said “the environment” or “global warming.” And yet progress on climate change is constantly stalled by members of Congress warning of harm to economic growth (even though climate change will is alreadypummeling economies).

Regulations are constantly denounced on the spurious claim that they will “kill jobs,” even though the most comprehensive studies show that they don’t. We have ad campaigns based around the idea that you should ruin perfectly good phones and computers, even though e-waste imposes horrific costs on the environment and children in developing countries.

As E.F. Schumacher warned, “Call a thing immoral or ugly, soul-destroying or a degradation to man, a peril to the peace of the world or to the well-being of future generations: as long as you have not shown it to be ‘uneconomic’ you have not really questioned its right to exist, grow, and prosper.” Obama has opened up new drilling, pressured by groups promising “jobs” and “growth” even while we face an inflating carbon bubble.

As Oscar Wilde wrote long ago, “In a community like ours, where property confers immense distinction, social position, honour, respect, titles, and other pleasant things of the kind, man, being naturally ambitious, makes it his aim to accumulate this property, and goes on wearily and tediously accumulating it long after he has got far more than he wants, or can use, or enjoy, or perhaps even know of.” What he says of individuals can just as easily apply to societies.

Why more GDP might not make us happy

Eugenio Proto and Aldo Rustichini have written a new column for VOX in which they argue that once GDP per capita reaches a certain level, it actually begins to correlate with lower life satisfaction.

Of course, this result shouldn’t be too surprising; GDP is a measure of economic production, and an excellent measure at that. But as Robert Kennedy noted in his 1968 speech,

Our Gross National Product [a measure of economic production that considers ownership rather than geographic location], now, is over $800 billion dollars a year, but that Gross National Product – if we judge the United States of America by that – that Gross National Product counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for the people who break them. It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl. It counts napalm and counts nuclear warheads and armored cars for the police to fight the riots in our cities. It counts Whitman’s rifle and Speck’s knife, and the television programs which glorify violence in order to sell toys to our children.

Simon Kuznets, the Nobel-prize winning economist who developed GDP, wrote in The New Republic, “Economic growth involves a variety of costs that must be recognized. Because of this, “goals for ‘more’ growth should specify more growth of what and for what.”

When people talk about GDP, they rarely understand the limitations of GDP as a measure of progress. GDP does not account for the social or environmental consequences of growth, nor the economic sustainability of growth. It doesn’t consider whether we’re producing bombs or butter. It doesn’t consider whether our economic growth may be coming at the expense of consumer safety, a worrying problem in the wake of thecontaminated water in West Virginia.

For poor and developing countries, positive GDP growth serves as a proxy for eliminating immiseration. For a developed country, immiseration is not as great a threat, and environmental and social sacrifices that may have been tolerated for growth are no longer countenanced. Already countries like Brazil, China and India are worrying about the environmental consequences of untrammeled growth. In American, people want more time with their families and shorter commutes.

A better measure of what matters is the Genuine Progress Indicator (GPI), which takes into account 26 economic, social and environmental indicators. States across the U.S. are beginning to implement GPI, and they’ve discovered that much of their recent GDP growth hasn’t budget the GPI. Here’s what it looks like in Vermont:

Eric Zencey, a key architect of Vermont’s move to GPI and one of the economists who is developing it with the Gund Institute, told me, “sound business practices requires deducting costs from benefits. We can change the conversation to what matters.” Here’swhat GPI looks like for the U.S. as a whole:

This helps explain why GDP is divorced from life satisfaction for developed nations.

Moving Beyond GDP

The 2007 economic crisis and the lingering stagnation it wrought has lead economists, philosophers and policymakers to a profound rethinking of how we measure economic performance and social progress. As Joseph E. Stiglitz, Amartya Sen and Jean-Paul Fitoussi write in the foreward to their book, Mismeasuring Our Lives, during the run-up to the 2007 crisis, “the seemingly strong performance of some countries prior to the crisis (as predicted by GDP) was not sustainable and was based on “bubble” prices that exaggerated profits and output.”

The Inclusive Wealth Report introduces policymakers to a unique measure of economic progress that examines all of a country’s capital sources, including manufactured capital, human capital and natural capital. The Inclusive Wealth Index (IWI) measures the key inputs to a country’s productive capacity include natural capital, human capital and manufactured capital – later reports will also hopefully include a measure of social capital.  By examining progress towards a “Green Economy,” the Inclusive Wealth Report is a first step away from GDP and toward a more comprehensive metric of human progress.

GDP, the report notes, was developed during WWII to help policymakers determine what sectors of the economy were growing and which were lagging behind. It was never intended to be what it has become: the measure of a nation’s progress. The many shortcomings of GDP are laid out in a 2012 Demos report by Lew Daly and Stephen Posner.

The most important shortfall of GDP is that it measures income, not wealth. To see the difference, imagine two people, Bernie and Janice. Bernie earns $100,000 a year, but spends their entire on income on cruises to the Bahamas, pizza parties and wax statues. Janice earns only $50,000 a year, but uses $10,000 to go back to school and get a Master’s degree, $10,000 as a down-payment on a house and $10,000 to purchase stocks and bonds. Although Bernie’s income is higher, he has no capital stock, and therefore he has no wealth.

Countries, of course, are not like people. But the same distinction exists. Some countries spend their money on infrastructure and education, while others fritter it away on statues of their “Dear Leader.” Some countries work to use natural resources sustainably, others doze over rainforests.

GDP measures market output, but it does little to guide policymakers because it focuses exclusively on financial and physical assets. The most important forms of wealth are human, social and natural capital. This more expansive understanding of wealth is especially important given the current debate between austerity and reinvestment.

These shortcomings led the UN to develop the Human Development Index which considered indicators like literacy, mortality as well as the standard of living. Neither index however, takes into account the state of the environment and therefore the long-term  sustainability of growth.

The idea of sustainable development, or what E.F. Schumacher termed “Buddhist economics,” is not a new one. Schumacher feared, “An attitude to life which seeks fulfilment in the single-minded pursuit of wealth – in short, materialism – does not fit into this world, because it contains within itself no limiting principle, while the environment in which it is placed is strictly limited.” The inclusive wealth framework is an important step towards a more comprehensive measure of economic growth.

The framework moves from examining exclusively material progress to a framework that includes leisure, spiritual aspirations, social relations and environmental security. The framework was designed by the great Kenneth Arrow in collaboration with Partha Dasgupta, Lawrence Goulder, Gretchen Daily, Paul Ehrlich, Geoffrey Heal, Simon Levin, Karl-Goran Maler, Stephen Schneider, David Starrett and Brian Walker. In a 2004 Journal of Economic Perspectives essay entitled “Are We Consuming Too Much?” they propose the following criterion, whether a society’s investments in human and manufactured capital offset their use of natural capital.

By this measure, 14 of the 20 countries surveyed were growing sustainably, including the United States. However, the growth was not as dynamic as GDP growth. The United States provides an example. While GDP (the red line) increased by 37%, Inclusive Wealth Index (the dark green line) increased by only 13% because of a steep decline in natural capital (the light green line). Human capital (yellow line) increased by 8% and produced capital (grey line) increased by 68%.

In every country, human capital increased, and in most countries, produced capital increased as well. However, in Colombia, Nigeria, South Africa, Russia, Saudi Arabia, and Venezuela the natural capital depletion was not offset by increases in human capital and natural capital. This indicates that their economic growth is not sustainable.

By taking into account the capital formations which determine future growth, countries can better prepare themselves for the future. The U.N. report suggests that countries should target monetary and economic policy to IWI to ensure sustainable, rather than short-term growth. Such a shift was recently suggested by Jeffrey Sachs in a recent Huffington Post op-ed:

Since the 2008 financial crash, our country has been reeling without getting its economic policy right. What we needed then, and need now, is a new kind of macroeconomics; one that aims for investment-led growth, not consumption-led growth. But investment-led growth can’t be achieved by a temporary stimulus. It requires a very different kind of strategy and policy. Investment-led recovery requires a clear identification of our society’s longer-term needs, needs that can be filled through complementary investments by the public and private sectors. Think of railroads and farms in the late 19th century; highways, cars, and suburbs in the 1950s; and information technology, smart grids, and low-carbon energy for our time. And it requires a set of public policies to spur those investments, in part by using smart public investments to help leverage a private-sector investment boom.

If economic growth were targeted to the IWI instead of GDP, such a change would be easy. However, since GDP does a poor job of accounting for investments in human capital and the depletion of natural resources, it encourages policymakers to look toward short-term boosts, often encouraging wasteful spending. The changes Sachs wants to see will be nearly impossible politically as long as policymakers are arbitrarily constrained by the shortcomings of GDP.