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Measuring Progress (pt. 1)

by nanne Mon Nov 6th, 2006 at 11:44:14 AM EST

from the diaries. - Jérôme

GDP is a poor measure of a country's performance. When it is the main objective of a country to maximise its GDP growth, poor policies are likely to result.

This, I think, is part of the consensus in this community, which abounds with criticisms of the blind fixation on GDP growth and associated 'reform' measures. Criticism in itself is not enough, but the European Tribune has also shown considerable interest in developing a positive alternative account of development and progress.

After sort of promising it, I went to do some research on the various rankings that existed.


Putting these together in any kind of meaningful way is going to be a lot more work than I expected, because the measurements are often not compatible. And thanks to google plus the ET archive, I managed to find a lot. So this is the first part, the purpose of which is to provide an overview and a discussion.

...

The various alternative measurements are not used to their full effect. GDP growth still rules as an overall policy objective. Part of the problem is that the alternative measurements are often incomplete themselves, lack an an overarching philosophy, do not produce rankable results, or have not done the empirical part (yet).

Reasons for using GDP

Apart from inertia and the problems of various alternative measurements, there are, I think, two main reasons why GDP is still so widely used as a measurement in policy making. The first is power, the second is jobs.

The problem with GDP is that for a long time, it has been a very good measurement for a country's power, and in some ways, it continues to be. This goes for soft power as well as hard power. The much-vaunted soft power of the EU is largely due to the pull of having the largest internal market in the world. This causes foreign companies to comply with its standards (even in markets where these don't apply), and foreign countries to seek friendly relations and in some cases Membership.

GDP is seen as being convertible into hard power. This view has recently been undermined by the guerilla wars in Iraq and Lebanon, as well as the deteriorating situation in Afghanistan. It now seems that GDP differences are largely irrelevant in asymmetric warfare. As it can be expected that many of the future conflicts will be asymmetric rather than conventional, GDP is less relevant for hard power than it used to be.

Between states, power is largely seen as a relative good. This too is what makes GDP a good measure of power. Less GDP growth equals relative decline. But it causes a disconnect with what we should want politicians to do, which is to care primarily about the well-being of their citizens, which is a rather more absolute good. Apart from being rather incomplete, GDP growth is less telling when it comes to absolute goods, as Jerome explains here.

This problem is one of attitude, or loyalty. Politicians can identify with the state and its requirements rather than with the population. This may be democratically justified if the population is strongly nationalist.

Politicians also tend to think that economic growth equals job creation. Creating jobs is what most social-democratic parties in Europe see as their central task and as long as the belief in the link between growth and job creation remains strong among them, there will be no force in the center questioning the role that GDP growth plays in public policy. This problem is one of perception, and can be solved much easier than the problem above.

The incomplete 'Genuine Progress'

A measure of progress should be as complete as possible. You could, for instance have a measure that offsets for GDP growth that is uneconomical (spending on undesirables, spending at the cost of wealth) and that offsets for growth that is unsustainable. Add contributions to wealth that are not valued in money and you roughly have the Genuine Progress Indicator, made by the fine people at the Center for Redefining Progress.

The GPI, however, doesn't measure such things as health, human rights or happiness. What it does measure doesn't substitute for these omissions (which are, however, admitted). The measure has also not yet been applied on a global scale. Doing so would be a rather large research project, so unfortunately we can't really use this ranking.

The Rise of Happiness

It has become popular to use happiness as an alternative - or even overarching measure. This has been pictured in this diary of Jerome, for instance. It has also gained some political traction following Richard Layard's book 'Happiness, Lessons from a new Science'. The problem with this approach is that it is utilitarian - it portrays happiness as the greatest good, which it is not. Utilitarianism is also prone to a consequentialist calculus that ignores inviolable rights, or to formulate it differently, that does not distinguish between more and less fundamental goods.

The violent death of a gladiator slave cannot be made up for by the happiness of the masses in the Colosseum, to put it in a charged manner. It might be said that happiness correlates with respect for human rights to a high degree, but this correlation is far from perfect. Happiness cannot serve as a proxy for all that we want to know.

Happiness also doesn't adjust for sustainability, but this can be more easily remedied. The sustainability factor is included in the Happy Planet Index. The HPI is made through the following calculation: life satisfaction times life expectancy, parted by ecological footprint (with the individual elements weighted). The ecological footprint is useful in showing roughly how far a country is removed from sustainability but it doesn't directly measure the damages done and resources depleted. Not that those can be easily measured...

So the index has that flaw, and it also has the general flaw of being utilitarian. I also think that its focus on sustainability is too large for it to be taken seriously by western governments. Where the flaw lies in that context can be debated, though.

GNH: Beyond Happiness

Gross National Happiness is a Buddhist approach to economics originating from Bhutan. As explained in the HPI report, it was originally a somewhat vague paternalistic policy from a benevolent dictator who wanted 'what was actually best for Bhutan'. But right now it's being developed into something more rigorous and universally applicable. The project entails finding indicators for 9 different areas:

1)Living Standard
2)Health
3)Education
4)Ecosystem diversity and resilience
5)Cultural vitality and diversity
6)Time Use and Balance
7)Good governance
8)Community vitality
9)Psychological well-being

Trying to find data for a range of domains is more comprehensive, and a better way to measure genuine progress than attempts to moderate GNP, I think.

Next up: a hopefully shorter diary on the capabilities approach.

Thoughts?

Display:
by nanne (zwaerdenmaecker@gmail.com) on Sun Nov 5th, 2006 at 10:45:08 PM EST
See also: Socratic Economics I: Why GDP growth above all else? by Colman on June 29th, 2006

Those whom the Gods wish to destroy They first make mad. -- Euripides
by Migeru (migeru at eurotrib dot com) on Mon Nov 6th, 2006 at 04:57:42 AM EST
[ Parent ]
Some more reasons for using GDP growth as a measure, from that thread:
It is not the actual greatness of national wealth, but its continual increase, which occasions a rise in the wages of labour. It is not, accordingly, in the richest countries, but in the most thriving, or in those which are growing rich the fastest, that the wages of labour are highest.
(Migeru quoting Adam Smith)

I think this factor can be subsumed under 'jobs'. The wages of labour should be determined by the law of demand and supply on the labour market. If growth automatically leads to job creation, an economy with a higher level of growth should have a tighter labour market. The demand is higher and the supply is lower. Thus higher wages. I don't see an alternative explanation for why GDP growth should lead to higher wages (in (neo)classical economics).

Another reason mentioned is tax base. I don't think GDP is that accurate a measure of the tax base, net domestic product would be better (see regrettables). Tax base is somewhat similar to power, but also different. Rather than the position with regard to other countries, the tax base is relevant for the extent to which politicians can spend on their pet projects. The problem is the same as with power, caring primarily about something else than the good of the people.

Yet another reason mentioned is that GDP growth is necessary to keep the stock market/capitalist project from collapsing. A bit paranoid, but that doesn't make it completely unlikely. I can't evaluate this one.

by nanne (zwaerdenmaecker@gmail.com) on Mon Nov 6th, 2006 at 05:59:06 AM EST
[ Parent ]
Yet another reason mentioned is that GDP growth is necessary to keep the stock market/capitalist project from collapsing. A bit paranoid, but that doesn't make it completely unlikely. I can't evaluate this one.

Pace rdf and Jerome, is it part of the (neo)classical canon generally thought that a modern capitalist society needs a continual rise in median income (wages, capital gains, rents, etc.) in order to survive?

Rien ne réussit comme le succès.

by marco on Mon Nov 6th, 2006 at 07:16:40 AM EST
[ Parent ]
According to Keynes all that is needed is that nominal wages don't decrease and that real wages decrease only slightly at worst, plus keeping a sufficient level of internal demand.

Those whom the Gods wish to destroy They first make mad. -- Euripides
by Migeru (migeru at eurotrib dot com) on Mon Nov 6th, 2006 at 07:31:52 AM EST
[ Parent ]
Median income, no. Average income, perhaps. Median income can drop quite a lot, as long as the income at the top grows faster. At a certain point you will get a lot of social tension, but that is an external influence (in the capitalist system).

I'm not well-versed enough in economics to address all aspects here, but let's take the stock market.

Can the stock market grow in a steady state economy?

Yes, but this will be at the cost of other sectors of the economy. Growth can continue indefinitely if it follows a logarithmic function, but at a certain point it becomes too small to notice.

Can the stock market survive if it is -on average- static?

I don't see why not. Some companies will continue to do better than others in some periods. No one will win or lose from investing in the market on average. But enough people take part in lotteries where on average, you lose. The stock market is a better option than that.

How good a measure is GDP for the stock market?

I think that, like the tax base, net national product is a better measure for the stock market on the intermediate term than gross domestic product. The way NNP is calculated goes as follows: GDP (plus) net income from abroad* (minus) consumption of capital.

*negative when more money goes abroad

by nanne (zwaerdenmaecker@gmail.com) on Mon Nov 6th, 2006 at 08:04:49 AM EST
[ Parent ]
Median income, no. Average income, perhaps. Median income can drop quite a lot, as long as the income at the top grows faster.

But that income accumulating at the top needs to be reinvested into the economy or else oversaving will eventually dry up the money supply and kill demand, no?  So it seems that even if average income remains steady, if too few people are getting the bulk of that income while the majority are seeing less of it, the economy would be in a more precarious state than if the income were more evenly distributed (yikes, I really need to read up on the basics here.)

Have there been any examples in the last 100 years or so of societies managing alright with "steady state" incomes?  (I am wondering if Japan since their bubble burst would be one, but have not been able to find information about income there during that period.)

At a certain point you will get a lot of social tension, but that is an external influence (in the capitalist system).

Could you describe what you mean by social tension and how it arises?  Also, what do you mean by "an external influence (in the capitalist system)"?  Do you mean that social tension is essentially a psychological or sociological phenomenon?

Rien ne réussit comme le succès.

by marco on Mon Nov 6th, 2006 at 09:29:38 AM EST
[ Parent ]
Suppose it were possible to show that GDP growth correlates with income inequality. What would be the political implications?

Those whom the Gods wish to destroy They first make mad. -- Euripides
by Migeru (migeru at eurotrib dot com) on Mon Nov 6th, 2006 at 09:35:31 AM EST
[ Parent ]
Inequality (whether strictly in income or if not, in perks and status) is just a fact in every political/economical system in existence now or in the past, whether these systems where economically succesful or not.

I take it for granted the desire for some degree of inequality is rooted very deep in the human physiology (I mean, the desire to be on the higher end of the ladder, of course), just as well as offsetting tendancies for altruism and equity (not the same as equality), which make most primates "social species" and not just lone predators.

May be your question should be rephrased as "does GDP growth implies income inequality growth ?"

Stricly considering the span of all incomes, I think yes (the rock bottom will always earn absolutely nothing, whatever the wealth of a nation, whatever the social system, there are always dropouts - meanwhile, if the total wealth grows, the top earners will probably earn more even if their share in the total erodes).

With more subtle statistical definitions of inequality, like variance, percentiles etc... I think history says no: Jérôme has shown us many graphs with the rich getting much richer in recent years, but also that in many other periods of recent history inequalities were stable or decreasing, although western economies were still experiencing growth during these periods (including most of the cold war, viet nam war, etc..)

May be we should look into other predictors of change in inequality, I think we could find something better with combinations of:

  • the change in the rate of growth,
  • the inflation rate (notice the record low inflation of recent years ? profits mostly the asset-owners, whereas high/growing inflation, as long as it doesn't turn into outright chaos, profited middle class households with fixed-rate mortgages through most of the 2nd half of 20th century),
  • the fiscal gap, as defined in generational accounting, eg Kotlikoff: this measures how the boomer generations are getting richer than the young will ever be...

Feel like doing some parametric fitting in R ?

Pierre
by Pierre on Mon Nov 6th, 2006 at 10:13:56 AM EST
[ Parent ]
May be your question should be rephrased as "does GDP growth implies income inequality growth ?"

I think I mean what I said: GDP growth correlated with income inequality.

Where are the data for this parametric fitting?

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Migeru (migeru at eurotrib dot com) on Mon Nov 6th, 2006 at 10:20:57 AM EST
[ Parent ]
mm, the data... that's the really difficult part.

Well, I know where to get inflation, growth series for France (e.g. www.insee.fr). But inequality is much harder to summarize with a single indicator. INSEE does regular studies in France, but the frequency is far lower than yearly (like, every 5 years) and the indicators do not all remain the same making comparison very hard over 10, 15 years. Generational accounting is only coming into the spot lights now, and we certainly won't find any retrospective series on this at this point (and probably not anytime soon in France).

For other countries, which we would need to make correlations significant , the same series that are easy for France would be easy too. But I am even more clueless as to how to get the others. I remember one graph from Jérôme with the income of the top US percentile, we could lay it in a table of approximate numbers. But that is still only one country.

At this point I'm thinking, correlation with such simple series as inflation and growth have certainly been run already... I'm gonna go googling !

Pierre

by Pierre on Mon Nov 6th, 2006 at 10:40:12 AM EST
[ Parent ]
Do we have a series of the Gini coefficient?

Those whom the Gods wish to destroy They first make mad. -- Euripides
by Migeru (migeru at eurotrib dot com) on Mon Nov 6th, 2006 at 10:58:53 AM EST
[ Parent ]
I found this:


Those whom the Gods wish to destroy They first make mad. -- Euripides
by Migeru (migeru at eurotrib dot com) on Mon Nov 6th, 2006 at 11:03:27 AM EST
[ Parent ]
This one mostly tells us that profiteers are king when a country spirals into collapse.

Pierre
by Pierre on Mon Nov 6th, 2006 at 11:08:55 AM EST
[ Parent ]
This diagram is practically useless. It only tracks the absolute change of gini and not the initial value or if the change was positive or negative.

As I read it, the countries that did relatively well did not change their income inequality much but those who did change it fared worse. But to which direction we cannot tell.

Orthodoxy is not a religion.

by BalkanIdentity (balkanid _ at _ google.com) on Mon Nov 6th, 2006 at 01:58:02 PM EST
[ Parent ]
And this:


Those whom the Gods wish to destroy They first make mad. -- Euripides
by Migeru (migeru at eurotrib dot com) on Mon Nov 6th, 2006 at 11:04:46 AM EST
[ Parent ]
and this one is some kind of funny modern art ...
probably based on the same IMF sort of data series in the PDF I found. it is tricky to read: if you have an increasing share of (international) trade in your gdp (i.e. you are "globalizing"), your have a positive change in Gini (i.e. more inequality, but the significance seems so low I don't know what to think of it, one of the reason the paper was bashed on the web)

Pierre
by Pierre on Mon Nov 6th, 2006 at 11:15:58 AM EST
[ Parent ]
OK, I found:

http://www.aeconf.net/Articles/May2002/aef030105.pdf

Very high in google, not sure it really warrants of its worth. Although observing that the debtor-creditor scenario can make inflation beneficial to the middle class (which has access to credit), global empirical data suggest that inflation is bad for inequalities (because the really poor don't have access to credit to take advantage of the inflation ? and because the rich move faster to adapt to it ?), even filtering out data points where it's actually hyper-inflation wrecking an entire country.

There is also this:
http://www.eldis.org/static/DOC4760.htm
from the IMF, so probably heavily loaded also (it says max growth = good for the poor, whatever the rest), but it gets wrung at:
http://delong.typepad.com/sdj/2005/06/is_inequality_a.html
(again, don't know exactly what it's worth).

So there are many references to well formatted data series in these papers, but eventually the conclusion after critical reading seems to be that ... there is no general, worldwide, significant link between anything.

OK, I go back to sleep !

Pierre

by Pierre on Mon Nov 6th, 2006 at 11:07:34 AM EST
[ Parent ]
When I tell a friend of mine that inequality is increasing in the U.S., he basically replies, "Why is it a bad thing that some people's incomes are growing faster than others', as long as everyone is making more each year in real income [by which I think he means median income is increasing]?"

Yes, median income in the U.S. has dropped 2 or 3 out of the last five years I believe, but over the long term, median real income does steadily increase, I believe.  The point is that there are many people who are not at all bothered by the notion of increasing inequality, as long as everyone generally is always doing a little better than last year.  And so the political implications of a corrleation between GDP growth and income ineqality are not necessarily significant among such people.  (Also, I was just talking to some mainland Chinese people at a party this past weekend, and when I asked them about the thousands of riots per year and unemployed hordes clogging the cities, their attitude in a nutshell was that, Yes, some people are getting rich far faster than others, but overall, everyone is better off than they were 5, 10 years ago, even the poorest.)

What I am curious about is:

  • Can modern economies remain healthy even when people's incomes overall do not continually increase (but don't necessarily decrease either)?

  • Would there be anything wrong with GDP growth that (1) does not consume natural resources beyond replenishment rates and, (2) does not destroy the environment (through pollution, etc.), and (3) does not tend to increasing income inequalities?

To the first point, in your comment above referencing Keynes, you answered in the affirmative (and I believe Nanne's answer was in agreement with that.)

Regarding the second point, I guess the first question is: Is such an economy even feasible?  I think Colman and Jerome may answer in the affirmative, at least with respect to the consumption of natural resources.  If so, can GDP grow without increasing socioeconomic inequalities (which sort of goes back to your question)?

Rien ne réussit comme le succès.

by marco on Mon Nov 6th, 2006 at 10:17:06 AM EST
[ Parent ]
Would there be anything wrong with GDP growth that (1) does not consume natural resources beyond replenishment rates and, (2) does not destroy the environment (through pollution, etc.), and (3) does not tend to increasing income inequalities?

1) Suppose you consume all natural resources at replenishment rates; 2) realise that that means there is no untamed environment left, but it also implies waste is produced at the natural absorption rate; 3) Suppose income inequality stays constant.

Where is GDP growth going to come from?

  • productivity growth
  • innovation [as in, more nutritious crops, less wasteful manufacturing and more services]
  • population decrease

Also, looking at the history of life on Earth one should realise that "consuming all natural resources at replenishment rates" is not the way things work, and that what's wrong about our current predicament is not that we're changing the environment but that we're changing it so fast we're causing a mass extinction.

Ecology teaches us some lessons about inequality, diversity and complexity, too. The "problem" of political economy is human solidarity and empathy.

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Migeru (migeru at eurotrib dot com) on Tue Nov 7th, 2006 at 05:04:11 AM EST
[ Parent ]
Heh, I get the same scare reaction here (reading up on the basics).

The income needs to be reinvested, surely, but I don't know why this would need to benefit median income. Investment can be primarily in capital, and to the benefit of the rich. The wealth does not need to trickle down. In terms of survival of the capitalist system. Demand can be taken over by the richest.

Of course, this is not necessarily optimal. Investing mainly in capital should bring declining marginal profits, whereas the marginal cost of labour should decline as a result, etc. So at a certain point some of the growth at the top should trickle down. But it does not need to.

By social tension (we're shifting discourses quite radically here) I mean that the people are more prone to protest, theft, riots or revolutions. If there is great economic inequality and the living conditions of the rich are improving at the cost of the bulk of the population, this will, I think, be more likely.

Because we were talking about developments that would undo the capitalist system, I called this external. Because the capitalist system is about the economy. Of course, one could take a different view on that. The value of social coherence is not included in the economic system, as far as I know. So, yes, I would say that it is sociological, or psychological.

by nanne (zwaerdenmaecker@gmail.com) on Mon Nov 6th, 2006 at 01:00:34 PM EST
[ Parent ]
But that income accumulating at the top needs to be reinvested into the economy or else oversaving will eventually dry up the money supply and kill demand, no?

No, that is the pre-Keynesian loanable funds theory. It is true that the "accumulation" destroys the income, and an equivalent amount of new purchasing power must be created if the economy is not going to slow down ... which could be created through deficit spending, through the acquisition of new real assets, or through the equivalent standing behind the net capital and official account outflows that permit a current account surplus.

But the creation of purchasing power for new investment in real assets is not "reinvestment of savings".

The modern purposes of the loanable funds theory (normally dressed up in modern equations to let it slip by) are to allow microeconomics to pretend to be macroeconomics by assuming away the problem of determination of national income, or else to justify measures designed to benefit the wealthy in the guise of "encouraging saving", given that (in the words of JK Galbraith), those with money to save tend to have more money than those that do not have money to save.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Nov 7th, 2006 at 08:33:45 AM EST
[ Parent ]
You should look at this:

ALTERNATIVE MEASURES OF WELL-BEING - OECD ECONOMICS DEPARTMENT WORKING PAPERS No. 476"

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet

by Melanchthon on Mon Nov 6th, 2006 at 10:28:47 AM EST
Much of the rise in wealth inequality (at least in the US) over the past 40 years has been due to the increase in price of publicly traded shares and real estate.

Since these things have no "intrinsic" price what we have seen is a form of selective inflation. Share price increases have shifted wealth away from the working class to the investing class. This has been done through a variety of mechanisms such as stock buybacks and pointless mergers and acquisitions.

Many societies have existed until very recently with no functioning stock market. To install one is one of the primary goals of the world financial community. Stock markets provide very little in the way of socially useful activity. The small amount of new share offerings is dwarfed by the huge amount of speculation.

Real estate is another area where prices have lost correlation with functionality. A house is still house regardless of the market price. The inflation of the price doesn't make an existing structure more useful.
 

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Mon Nov 6th, 2006 at 10:36:09 AM EST
5)Cultural vitality and diversity

An interesting thing to have in a happiness index, considering that Putnamns latest book show that diversity has a highly negative effect on social capital.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Mon Nov 6th, 2006 at 01:52:45 PM EST
One measure used widely in the Development community, because it is based on widely available measures and arguably captures a lot of elements of quality of life that are missed by GDP, is the Human Development Indicator, a composite indicator based on life expectency, adult literacy, youth enrolment in education, and per capita GDP. UNDP has a site with an HDI Calculator.

The most recent list (pdf) is also available on the UNDP site, based on 2002 data.

And of course there is also the biocapacity surplus/deficit based on the Ecological Footprint (in hectares) of a national economy compared to its biocapacity. National Footprints, in gross and per capita terms can be downloaded from the Global Footprint Network site.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Mon Nov 6th, 2006 at 02:03:23 PM EST
Well, Prodi still buys into the GDP thing:

"My idea is clear. I have to put the public finances in order but my first goal is growth, otherwise I shall never have the resources to put my budget in order."

Prodi: Italy must lift growth or be 'lost'

What would happen if Italy did not grow?  What if Prodi did manage a way to get his finances in order by reducing government spending so that he did not have to raise taxes to reduce Italy's budget deficit?  In the short term, it would probably be very painful.  But once the public finances were "in order", could Italy sail steady as she goes into the future with 0 growth?

Rien ne réussit comme le succès.

by marco on Mon Nov 6th, 2006 at 07:19:46 PM EST
well, i rgink the problem in italy may be organised crime, especially in cahoots with disorganised elements in the state bureaucracy, (understatement of the millennium).

mafia profits are unfactorable (infatturabili!), and if they were counted in, i think italy could be a little china of economic growth.

first thing, if italy could improve on buying 85% of its energy from abroad, while being europe's slowcoach on alt. energy, think how much capital that is slushing daily out of the country...it should have peeps up in arms, but....

you think that new striker for juventus is worth the money?

did you try chopping the onions into 2 mm squares before delicately bronzng them in the extra virgin olive oil?

no. no. it must be oil from lucca....

cool telefonino
etc

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Mon Nov 6th, 2006 at 08:56:42 PM EST
[ Parent ]
Italy is an interesting case, because it has a declining population. So its people would still have an increasing income if it has zero net growth.

Unfortunately, the population is not merely declining but also aging. This will put an increasing burden on public finances, because Italy has a pay as you go pension system. In addition, it has a huge foreign debt which will put an increasing strain on public finances as long as the budget deficit is larger than Italy's economic growth. I can imagine three strategies that the country can take.

Italy can try to grow its way out of this crisis, save its way out of this crisis, or work its way out of this crisis.

According to the FT article, Prodi is pursuing a particular kind of industrial politics to increase the country's growth. I very much doubt that this will work out. Liberalising the energy markets should yield a large short-term benefit that can be used to decrease foreign debt. But it is not likely to improve the country's balance on energy imports. And I don't see how furthering mergers and acquisitions through tax incentives will have a large positive effect. It's better to encourage growth from the bottom, I think. The largest potential for growth is in the country's south, which should be better integrated into the economy. For this, there are three policies that can work. EU expansion on the balkans, building a better infrastructure connecting north and south, and cutting corruption.

Saving can be done by drastically decreasing all kinds of benefits and increasing the pension age. However, this will not necessarily increase the labour market participation of older people, for which the obstacles seem to me to be mainly motivational (on the side of employers) and structural. So, it will most likely result in a social tragedy. There are some ways of saving that may avoid this tragedy, such as means testing social security or taxing pensions at the higher end (don't know how this plays into the situation in Italy). But these will not yield the required savings.

Working is the most interesting way of getting out of the crisis. So, what Italy needs to do is finding a way to increase the labour market participation of the 50-75 age group, by solving the structural obstacles and by finding ways to valorise and integrate the services rendered by these people outside of the money economy.

by nanne (zwaerdenmaecker@gmail.com) on Tue Nov 7th, 2006 at 04:57:56 AM EST
[ Parent ]
Another problem you might run into is that a country with a high GDP would have additional flexibility to optimize whatever new metric you come up with.

Suppose the new metric is "lowest ratio of high earners to low earners, times median earnings." A GDP-rich country could, if it bought into this metric, adjust its taxes or pay scales so as to optimize this new metric and end up with a higher ranking than a GDP-poor country could.

Or suppose the new metric is completely cash-independent. Perhaps something like "fraction of population with PhDs, independent of all other considerations." A GDP-rich country could still survive with 99% of its population spending most of its time working on a thesis, while a GDP-poor country would have less time available for academic pursuits.

It seems to me that GDP is an ok metric in itself, and that the problem is one of relative values. How do you balance "it's better to have lots of people in school" against "it's better to have lots of people working."

by asdf on Mon Nov 6th, 2006 at 07:52:57 PM EST


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