The well-being index

American Demographics, Feb, 1996 by Elia Kacapyr

Are you better off than you were four years ago? Americans will hear this question many times over the next few months from presidential hopefuls. Republicans will naturally claim that Americans' lives have deteriorated during the Clinton era, while Democrats will point to anything showing an upward trend. So what's the truth?

The truth, of course, is that some people are better off then they used to be, and others are worse off. The challenge is how to condense these ups and downs of individual lives into a single indicator. And in a nation as diverse as the U.S., this is a big challenge.

It has become fashionable, at least in economic circles, to criticize broad measures such as the Consumer Price Index (CPI) and Gross Domestic Product (GDP). This is not the first time these measures have come under the gun, nor are they getting their worst whippings ever. Social scientists have bemoaned the inadequacy of the GDP since its inception in the 1940s, and the early 1970s were a high-water mark for lambasting the indicator.

The difference is that, this time, the critics are producing their own statistics to address the inadequacies of current economic measures. To this, American Demographics adds its Index of Well-Being. Ours is a new way of getting a quantitative fix on the essentially intangible quality of life. Our goal is to explore trends in various components and track monthly changes in others, in conjunction with a monthly presentation of vital statistics and other pertinent demographic information. It will become a regular department in the magazine starting next month.

BROAD ECONOMIC MEASURES

Last fall, the CPI was criticized by economists for overstating inflation by as much as 1 percent per year. Likewise, GDP grew an inflation-adjusted 467 percent between 1940 and 1993, but few would suggest that this represents a quintupling in the standard of living. Per capita disposable income might seem like a more precise measure of economic health, but it doesn't tell the whole story, either. One reason is that disposable income is adjusted for inflation using the currently out-of-favor CPI. Another is that the amount of money people have coming in may or may not have any relation to what their money can buy.

The essential problem with GDP as it currently stands is that a growing GDP doesn't necessarily correspond to a rise in the population's well-being. GDP estimates the dollar value of all the goods and services the U.S. produces, but more production does not automatically create a higher standard of living.

One example is military hardware. Some would argue that an increase in weaponry is a bad thing. Likewise, the production of cigarettes may provide jobs in agriculture, manufacturing, retail, and ultimately, as a result of product use, in health care. But those who disapprove of the industry would not say that the resulting flow of money to the economy adds to America's well-being. More production can also result in more pollution and depletion of resources, but the GDP does not account for environmental degradation. One person's economic boon may be another's economic woe.

Moreover, measures such as GDP and total consumer spending don't account for things people do for themselves. If you fix your own car, this does not add any money to the collective GDP pot, as it does when you take it to a professional repair shop. As the saying goes: "Marry your mechanic and lower the GDP." It doesn't show up in spending estimates, either, except for the cost of the parts. Yet the car gets fixed either way, and that is certainly worth something to somebody.

Other criticisms of macroeconomic measures revolve around the fact that they do not consider quality-of-life issues such as crime, poverty, and leisure. Many of these criticisms are unfair, because GDP was never meant to measure quality of life. Likewise, income measures aren't supposed to account for trends in spending or prices. In turn, CPI estimates don't claim to say anything about Americans' financial status. But all of these have been used as proxies for living standard because nothing better existed.

Now several alternatives to GDP have emerged, as different organizations pursue different ways to measure people's actual well-being as opposed to the sheer size of their nations" economies. For example, the World Bank has developed an estimate of national wealth that takes into account environmental decay and resource depletion. Its explicit accounting for such "green" factors results in a very different ranking of nations by economic wealth.

Another remake of the GDP has been produced by Redefining Progress, a San Francisco-based think tank. Its Genuine Progress Indicator (GPI) incorporates rough estimates of the actual dollar values of pollution, resource depletion, crime, divorce, loss of leisure time, and time spent watching TV, among other factors. It then deducts these costs, which the group views as negative drains on the economy, from another standard measure of economic progress, total consumer spending.