Financial Transparency Coalition

For many years economists and policy makers have taken issue with GDP as a measure of national wealth. Statistics like these tend to over-emphasize certain elements of wealth and under-estimate others. Economists often point to the fact that, for example, income generated from the sales of cigarettes is included in GDP (something which might actually have negative value) while value generated from a stay-at-home-mom (or dad) is not. As I’ve noted, there are problems with other economic indicators like the Consumer Price Index (CPI), the unemployment rate, and the traditional measure of Illicit Financial Flows—all of which are used to measure economic progress and form an integral basis of public policy decisions. But the problems with GDP are often more widely discussed and emphasized than with these others because it is such a universal and ubiquitous benchmark of national well-being.

To solve this problem, economists have tried other measures of well being—for example the Human Development Index (HDI), which the United Nations uses to measure development. The HDI assesses countries on three dimensions—income (measured in GDP), health (measured in life expectancy at birth) and education (measured in mean years of school and expected years of schooling). The HDI has gone far to push our traditional understanding of wealth and development and certainly gives a more comprehensive view of these issues. But the HDI does not solve many of the short comings of GDP. It does not include, for example, environmental goods—like clean air and water, which certainly have economic value—or governance values of human rights or freedom from corruption.

To that end, the OECD has just introduced a new index of national well-being called the Better Life Index, which allows users to visualize and compare key factors that contribute to well-being in member countries. Unlike the HDI, this index does include measures of well-being beyond health and education, as well as: housing, jobs, governance, health, community, safety, life satisfaction, work-life balance, and the environment.

The Better Life Index does not provide a rank, but rather is interactive so that each user may rank countries according to their own priorities. Suppose, for example, I value governance and community over safety and life satisfaction, my rankings could reflect my disequal weights accordingly. It is visual, which might help it appeal to a broader audience. Steve Landefeld, Director of the Bureau of Economic Analysis, has commented that political issues like well-being are “left to those responsible for guiding social movements and legislative policy. Economists’ contributions must continue to focus on what economists can uniquely provide; the objective impacts of such programs.” Which is why the folks at the OECD have kept it interactive.

This is a helpful step in the right direction. Economic well-being is not the same as GDP. GDP does not include all of the aspects of an economy that have value.  I am a fan of this new index, which goes a step further in acknowledging these facts. On the other hand, there will always be criticisms. I have a couple. The governance topic, for example, includes only voter turn-out and transparency in rule-making, but not corruption or other governance issues. The environmental topic only includes air pollution, not water quality, wildlife diversity, or forest resources. On the other hand, to include every measure of economic value would be monumental to the point of infeasible.

This measure will not replace GDP. Even the OECD has admitted much of its work will still focus on GDP. All told, I would say this index is a useful tool for policy analysts and it shines a light on an important issue in international statistics, but it does not represent a significant step forward for researchers looking for a quantitative benchmark of national well-being.