Lecture 4: Measuring Welfare Nicolas Roys University of Wisconsin Madison Econ 302 - Spring 2015
Comparing welfare across countries and over time How succesful is an economy at delivering the highest possible welfare for its citizens: I per capita GDP is standard answer GDP 6= Welfare: I Consumption I Health and Life Expectancy I Leisure I Inequality I... But GDP per capita only measures income...
Our gross national product... if we should judge America by that 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 those who break them. It counts the destruction of our redwoods and the loss of our natural wonder in chaotic sprawl. It counts napalm and the cost of a nuclear warhead, and armored cars for police who fight riots in our streets. It counts Whitman s rifle and Speck s knife, and the television programs which glorify violence in order to sell toys to our children. Yet 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. It measures neither our wit nor our courage; neither our wisdom nor our learning; neither our compassion nor our devotion to our country; it measures everything, in short, except that which makes life worthwhile. Robert F. Kennedy, the University of Kansas, March 18, 1968
Example: France vs. the U.S. U.S. has higher private consumption: I France GDP per capita = 70% of USA GDP I France Consumption per capita = 66% of USA consumption per capita But compared to the U.S., France has: I more leisure (1836 hours worked per year versus 1591) I less inequality I more public consumption (in percentage) I longer life expectancy (79 years versus 77)
Welfare vs. GDP (Jones and Klenow, 2011) Welfare combines consumption, leisure, inequality, life expectancy Welfare, λ 1 1/4 1/16 1/64 1/256 1/1024 Sweden Luxembourg U.S. France Norway Malta Hong Kong Ireland Czech Rep. Singapore Costa Rica South Korea Tunisia Chile Bahamas Bosnia / Herz. Mexico Malaysia Jordan Venezuela Albania Russia Moldova Vietnam China Tajikistan South Africa India Bolivia Uzbekistan Djibouti Yemen Haiti Benin Madagascar Cote d Ivoire Lesotho Ethiopia Nigeria Tanzania Sierra Leone Zimbabwe Guinea Bissau Central African Republic Rwanda Somalia Zambia Botswana Namibia 1/64 1/32 1/16 1/8 1/4 1/2 1 GDP per person (US=1)
But the deviations of welfare from GDP are large... The ratio of Welfare to Income 1.4 1.2 1 0.8 0.6 0.4 0.2 0 Sweden France Malta Greece Germany Albania Bosnia / Herz. U.K. Japan Israel Austria Cyprus Jordan Macedonia Canada Costa Rica Bulgaria Slovenia Switzerland United States Tunisia Hong Kong Moldova Sri Lanka Portugal Egypt Mauritius Norway Tajikistan Hungary Romania Vietnam Nicaragua Ireland Estonia Puerto Rico Luxembourg Philippines Pakistan Chile Mexico South Korea Yemen India Brazil Ghana Bangladesh China Iran Malaysia Thailand Venezuela Singapore Nepal Bolivia Russia Madagascar Haiti Bahamas Guyana Niger Cambodia Gambia Turkmenistan Ethiopia Djibouti Tanzania Kenya Guinea South Africa Somalia Nigeria C.d Ivoire Rwanda Botswana Zambia Zimbabwe 1/64 1/32 1/16 1/8 1/4 1/2 1 GDP per person (US=1)
Measuring Welfare GDP per capita is highly correlated with welfare but differences are important: 1. Western Europe is much closer to the U.S. when we take into account Europe s longer life expectancy, additional leisure, and lower inequality 2. Many developing countries are poorer than incomes suggest because of a combination of shorter lives, extreme inequality, higher saving rate
Income inequality in Europe and the United States, 1900 2010 Share of top income decile in total pretax income 50 percent Top 10% income share: Europe Top 10% income share: U.S. 45 40 35 30 25 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 I In1900-1910, income inequality was higher in Europe than in the United States; in 2000-2010, it is a lot higher in the United States
Wealth inequality in Europe and the United States, 1870 2010 Share of top wealth decile in total net wealth 100 percent 90 Top 10% wealth share: Europe 80 Top 10% wealth share: U.S. 70 60 50 1870 1890 1910 1930 1950 1970 1990 2010 I wealth inequality is always a lot higher than income inequality I wealth inequality is less extreme today than a century ago, although the total quantity of wealth relative to income has now recovered from the 1914-1945 shocks