Economic Metrics and Invisibility
There is a joke about an inebriated man looking in a parking lot for his car keys one night. He keeps looking over and over again in the same spot. Finally, a helpful pedestrian tries to help and asks, "So I take it you think you lost them in this spot?" The man replies, "No, but this is the only place where the light is shining."
This may be a bad joke, but it is not a bad metaphor for describing the error of allowing economic metrics like gross domestic product (GDP) to be viewed as the main end goal of economic policy. Of course, growth is important. But the focus on GDP represents the most classic economic confusion of means and ends. Indeed, any economic metric that cannot tell us whether the great majority of people are seeing their lives enhanced cannot be a rational or humane end goal for economic policy. The only logical end goal for economic policy in a democracy is that which lifts up what matters most in the lives of the people that policy is supposed to serve. Economics, by the people, of the people, and for the people.
Nobel Prize-winning economist Richard Thaler has said that a mistake in many human activities is to focus more on what can be measured than on what is most important. Consider your own life. For many of us, finding a loving, supportive life partner and the happiness of our children are the highest values-even if those values are incalculable and can never be measured with precision. Yet economics in practice is unusually focused on what can be counted, measured, added, and subtracted. As a consequence, we miss a lot of what we would capture if we focused more on the end goal of economic dignity.
Two Kennedys and Two Views of GDP
Robert F. Kennedy is known for offering an eloquent critique of what GDP does and does not measure. In 1968, he noted 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.
He went on to note what it does not measure:
The gross national product does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. . . . [I]t measures everything in short, except that which makes life worthwhile.
This is not to dismiss the importance of economic growth. A growing economy with rising productivity is critical to how a nation can produce more goods and critical services with fewer labor hours and raise standards of living generation by generation. A growing economy can make more room for more people to move up or move in without others having to take a smaller slice of the economic pie. And there is increasing evidence of how promotion of aspects of economic dignity complement, not detract from, growth. Reducing vast inequality puts more money in the pockets of families who will spend on their basic economic security, leading to higher economic demand. Policies that ensure that all Americans have first and second chances to pursue their potential means not only more people finding purpose and meaning in their economic lives, but more success in ensuring we are producing at our national potential.
Yet economic growth by itself should never be considered an appropriate ultimate end goal for economic policy. Its ultimate value lies in the degree it serves as a means to lift up what is most universally treasured and precious in people's lives. In a nation that structures its markets and economic policy to lift up all of its people, a 4 percent growth rate can be a vital means to the end goal of a more just society. Yet a 4 percent growth rate is hardly an end goal for all economic policy if it is produced through mass exploitation of workers or delivers benefits to only the top one-tenth of 1 percent.
This is not a theoretical exercise: consider Norway and Saudi Arabia. Both are relatively high-wealth nations with major oil reserves. Over the past few decades, both have had multiyear GDP growth rates of 4 percent or more. Yet the benefits of this strong GDP vary dramatically for each country's citizens. Norway is famously egalitarian, its increased growth broadly shared. In Saudi Arabia, meanwhile, a royal family leads the government and owns the world's biggest oil company, which dominates the country's economy. Changes in GDP may reflect the fortunes of the royal family but reveal little about the standard of living for the typical Saudi Arabian, especially women, who lack the most basic freedoms.
Ironically, the line that is often used to justify a focus on economic growth as an end goal came from Robert Kennedy's brother, John F. Kennedy. JFK's line that "a rising tide lifts all boats" is often used to promote GDP as an ultimate end goal based on a kind of faith that a rise in growth will automatically lift the well-being of all people. It has also been used by some to argue that tax policies that benefit the most well-off will automatically lead to widely shared growth. This is kind of a double-water metaphor: benefits to the most well-off will trickle down and thus create a rising tide benefitting everyone. In fact, Kennedy never used the "rising tide" line to defend tax cuts or the types of market fundamentalist policies that conservatives frequently use it to advance. Indeed, the first time JFK used the line as president was in Colorado on August 17, 1962, to appropriately praise congressional approval of a giant dam project. But there is little question that JFK's rising tide line gets repeated across the political spectrum to advance the dangerously false assumption that the connection between raising the economic tide and lifting up all families is automatic. It is not. Whether all boats are being lifted in the ways that matter most to people's lives is the test for whether economic growth is working-and never to be assumed to be a by-product of GDP.
Some who seek to push GDP as the only goal that matters suggest that the question of whether all boats are in fact lifted in a rising tide is a second-order matter of "distribution." Nobel Prize-winning economist Robert E. Lucas Jr. has written, "Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution. . . . The potential for improving the lives of poor people by finding different ways of distributing current production is nothing compared to the apparently limitless potential of increasing production." The notion is that hardheaded, serious economic thinkers focus on the core end goal of economic growth, and the idea of how well it spreads benefits to the large majority of a nation's people is for those who place softhearted politics over hardheaded economics. I vehemently disagree. How well markets and economic policy lifts up what matters most in people's lives is not a second-order issue. It is the whole ball game, the only legitimate end goal of economic policy.
But What About Better Economic Metrics?
For many years, I bought into the notion that the way to get beyond GDP as the end goal of the economic policy world was simply to push our focus toward other economic metrics that were better proxies for shared growth and shared prosperity. Measures like the Gini-coefficient, median income, unemployment rates, and job growth paint a more accurate picture of whether a rising tide is in fact lifting all boats than examining GDP or the value of the stock market. Yet even those metrics are still means to larger economic ends-and have shortcomings when they are considered ends in themselves.
Consider the Gini coefficient, which is named after an Italian statistics whiz named Corrado Gini (I promise it is not as complicated as it sounds). The Gini coefficient measures how much inequality there is in an economy, with a measure between 0 and 1. If a country had a 1, it would mean that one person controlled all of a nation's income. If it was 0, it would mean that income was perfectly equal among all its citizens. If the number is moving toward 0, it means your nation is improving when it comes to economic inequality.
While there are few economic goals as important as reducing economic inequality, even a measure like reducing the Gini coefficient cannot be seen as an ultimate end goal in itself. For example, imagine if the United States implemented a set of policies that reduced the income of the very richest Americans by 30 percent while reducing the income of everyone else by 20 percent. The Gini coefficient would have gotten better, but no one would likely be celebrating. A version of this actually happened: the World Bank estimates that the United States' Gini coefficient declined from 2007 to 2010 during the severe economic hardship of the Great Recession. The point here is that even a metric that measures something as unobjectionably good as reducing inequality is still not an ultimate end goal in itself, if it is not in the context of serving a larger end goal of lifting up lives and well-being together with reducing economic inequalities.
Median income is certainly more informative to our economic goals than average income. To ruthlessly steal a metaphor from my friend and fellow short man Robert Reich, telling people what average income is can be like saying that LeBron James and I are on average six feet tall (I am five foot five). Or like saying that when Bill Gates walks into a bar, the average income inside immediately becomes astronomical. Median income avoids this problem: it tells us whether the typical American is making more or less income. As painfully slow income growth over the last several decades has been one of the great drivers of economic inequality and insecurity for working families, sustained and robust increases in median income would clearly be a critical ingredient to more shared prosperity. And yet, even seeing median income alone as an economic end goal can blind policymakers to other economic dignity pains. Median income can easily rise for a few years, even as Americans experience greater insecurity over health and retirement security, pessimism over the prospects for their children-not to mention rising health, childcare, and higher education costs that for many families can swamp an increase in wages. A singular focus on even median income can make invisible much of the anxiety, economic fear, abuse at work, and economic disillusionment that has been part of the recent angst with status quo politics in the United States and across much of the world.
None of this is to suggest we should give up on economic metrics. Far from it. The economics profession should do everything in its power to design economic indicators that paint a more refined and accurate picture of whether the quality of most people's lives is improving. There has been progress. Official unemployment statistics now include a broader measure with a riveting name, the "U-6." While that name may sound like a rock band or military plane, it provides a much better economic picture of not just who is unemployed, but who is struggling due to working part-time against their will or has given up looking for a job because they are so discouraged. There also is a better poverty metric. The relatively new Supplemental Poverty Measure gives a more accurate picture of economic hardship by reflecting out-of-pocket health spending, local living costs, and whether low-income people benefited from policies like the earned income tax credit (EITC).The Commission on the Measurement of Economic Performance and Social Progress, which was called for in 2008 by French president Nicolas Sarkozy and is led by noted economists Amartya Sen, Joseph Stiglitz, and Jean-Paul Fitoussi, was a search for better economic measurements of human well-being. Heather Boushey, head of the Washington Center for Equitable Growth, has made great progress in promoting an important new measurement of GDP-GDP 2.0-that aims to tell us how much growth is going to people at the bottom, middle, and top of the income ladder. Likewise, it could be worthwhile to create an Economic Dignity Index that seeks to paint a comprehensive picture of how well people in our nation experience a comprehensive sense of economic dignity in their lives.
Yet we should also be under no illusions. As Stiglitz and his coauthors rightly note, "there is no simple way of representing every aspect of well-being in a single number in the way GDP describes market economic output." Any single metric makes it too easy to make too many people and too many types of economic pain invisible to policymakers.
When I was the national economic adviser under President Clinton, I can remember during the boom of the late 1990s that the classic economic metrics-GDP, jobs, poverty, median income-were all clicking so well. I asked our star economic staffer and future Office of Management and Budget director Peter Orszag to look through every possible economic metric to see if we could spot any weaknesses in the economy. It turned up a curious weakness: personal bankruptcies, which ended up being explained in a significant way by the devastating cycle stemming from health-care costs, even in a roaring economy. So yes, the review of all economic metrics was of course worthwhile. But it would have been smart as well to ask the entire staff to consider, even in a strong economy, what were the worst types of economic pain, despair, and domination that existed in our economy even if they were not showing up in any metric? That type of inquiry avoids the unfortunate tendency in the economics profession to only dignify an issue as "economic" when it shows up in a traditional economic metric-a habit that allows too much economic pain to be invisible. Too often, important issues such as paid family leave or workplace sexual harassment or workers struggling with addiction are only classified as an "economic issue" when they show up in a quantifiable metric like workforce participation numbers. But why?
If, for example, the need to support family or to pursue economic potential leads millions to experience harmful abuse or harassment at work, or compromises their capacity to care for their children or other loved ones, why should that not be seen as a major economic issue-whether or not it shows up in a traditional economic metric? Economic dignity will never be Moneyball.