Well-being metric fits better than GDP

During a 2008 discussion of the global financial crisis at the London School of Economics, Queen Elizabeth II famously floored a room full of financial heavyweights by asking, "Why did no one see it coming?" That question has been haunting economists ever since, as the recognition has slowly taken hold that, in the supposed "golden age" preceding the crisis, they were blind not only to the potential consequences of failure - but also to the true cost of "success."

That period was, in many people's view, tarnished by greed, with rapid GDP growth accompanied by increasing inequality of income and well-being.

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Leaders in Germany, France, the United Kingdom, and the United States seem to understand this, as they call for a new, more comprehensive policy target to replace national output. And such a target can be established. Indeed, a group of economists (including me) concluded in a report commissioned by the Legatum Institute that, despite its apparent subjectivity, "well-being" - or life satisfaction - can be measured robustly, compared internationally, and used to set policies and judge their success. The task for governments is to commit to putting this focus on well-being into practice.

A few key insights should inform that process. First, governments would be better served by focusing on stability, even if it means sacrificing some output. As Kenneth Rogoff and Carmen Reinhart have shown, financial crises are costly because recoveries from them are slow.

But well-being research yields a sharper insight: even if we could bounce back from a crash, the cost would be high. Boom-and-bust destroys well-being, which is diminished far more by a fall in GDP than it is enhanced by an equal and opposite GDP increase.

Second, well-being - unlike GDP - is boosted more by increases in income among the poorer segments of the population than by increases among the wealthy. That is why the richer European economies tend to have large automatic stabilizers built into their public finances. However, the absence of redistributive mechanisms across countries within the eurozone clearly exacerbated the tensions during the recent crisis.

Third, the implementation of a well-being metric to guide policies would have the most rapid - and radical - effect at the national level. As a measure of policy success, GDP is particularly poorly suited to countries with large public sectors. The crude output measures that are used, such as the number of medical procedures carried out or the number of fires extinguished, miss a crucial point: while responding to the need for such services is a good thing, reducing the need for them would be better. And more efficient health services might spend less on hospitals and doctors and more on encouraging healthy lifestyles.

Societies would be better served by a policy focus on factors that have been shown to be critical to life satisfaction: relationships, community, security, and physical and mental health. For example, while mental health is a key determinant of how people feel about their lives, it remains a low priority in most countries. In the US, there were more suicides than road deaths last year, and there are three times more suicides than road deaths in Germany and the UK. In the UK, the vast majority of people diagnosed with mental illness go untreated, at a huge cost not only in well-being, but also in disability benefits and lost earning power. Targeted policies aimed at raising awareness of mental-health issues and improving access to treatment would help to kick-start a recovery in well-being.

Of course, specific priorities vary by country. For example, in aging societies, loneliness and long-term health become particularly important.

The fourth key insight is that indicators of well-being interact. Volunteering does not only enhance the lives of those who are served; it also boosts the life satisfaction of the volunteers. Likewise, given that unemployment diminishes both well-being and national income, effective back-to-work policies score two goals, as do policies aimed at augmenting citizens' life skills through improved parenting and education.

This has positive implications for funding well-being enhancing programs. After all, the goal is not to inflate budgets, but to reallocate resources in ways that will ultimately boost citizens' satisfaction and prosperity.

Finally, reliable data will be critical to guiding efforts and evaluating progress. Fortunately, most developed countries - and an increasing number of developing countries - recognize the importance of collecting data on well-being. Add to that the parameters for measurement set by the Organization for Economic Cooperation and Development, and international comparisons of well-being become possible.

The world is ready for a new, comprehensive metric for national and global progress and prosperity, one that tells us whether people really are better off - and how to ensure that they are.

The author is a member of the British House of Lords, was Cabinet Secretary from 2005 to 2011. Project Syndicate