Where are living standards the highest? You might think that’s an easy question to answer. Just take a country’s total income (in the United States, that’s now about $18 trillion) and divide by the nation’s population (U.S.: now about 320 million). The result is per capita income (now about $56,000 for every man, woman and child in the United States). Compare that with other countries’ per capita incomes, and you can see, at least crudely, who has the highest living standards.
For years, this has been the drill; and for years, economists have known that the drill is misleading, because it omits many other factors — some positive, some negative — that determine living standards: health, crime, pollution, congestion, equality (or inequality), security and leisure, to name a few. The trouble is that it’s hard to know which factors to include and how much weight to give them.
We now have a new effort to solve these problems. Two Stanford University economists — Charles I. Jones and Peter J. Klenow — have devised a way to relate a nation’s economic well-being to four factors: 1) consumption per person, adjusted for inflation; 2) inequality, reflected in differences of per-person consumption; 3) health, expressed as life expectancy; and 4) leisure time, derived by subtracting adults’ working hours from total hours. The result: a single number that supposedly reflects a country’s overall welfare.
There can be big differences between a country’s per capita income and its per capita welfare, as estimated by Jones and Klenow. The table below compares the United States with nine other advanced economies. The United States is given a baseline value of 100, and other societies are rated as a proportion of the United States. For example, France’s per capita income is 70 percent of the United States’, and its per capita welfare is 91 percent of the U.S. level. (The figures are for 2007.)
(as share of U.S. level)
Source: Jones-Klenow study
As the table shows, the United States still leads among major countries in both per capita income and welfare (only Norway and Singapore have higher incomes; no country has higher welfare). However, many European countries are close to the United States in total living standards. Europeans have longer life expectancies, work less and have more equal societies, write the Stanford economists. These advantages offset Americans’ higher consumption.
A final conclusion reached by Jones and Klenow — not shown in the table — is that the per capita welfare in many poorer societies is actually lower than their incomes. This reflects shorter life expectancies and highly unequal societies. For instance, Chile’s per capita income is 31 percent of the United States’, and its per capita welfare is 20 percent of the U.S. level.
Using the Jones-Klenow formula, Bernanke and Olson estimated that per capita economic welfare in the United States grew almost 1 percent a year from 2007 to 2015 — slower than the pace from 1995 to 2007 (3 percent) but contradicting the view that living standards have stagnated. But this finding depended heavily on continued gains in life expectancy and leisure. Using incomes alone, economic growth verges on stagnation.
There’s the rub. Prosperity — higher per capita welfare — depends on how it’s defined, and there’s no consensus on that. Granted, the notion of devising a single number that measures “progress,” netting out economic growth’s benefits and costs, is attractive. It’s also a potentially dangerous pipe dream.
One problem is the difficulty of cross-border comparisons. Different societies have different cultures, values and goals. “The French take long vacations and retire earlier [than Americans],” note Bernanke and Olson. How societies satisfy their own aspirations involves different outcomes.
The process is also easily politicized. Transportation advocates may want more emphasis on congestion; environmentalists might lobby for a greater weight for pollution. The more factors (crime, congestion, schooling, pollution, economic security) that go into the umbrella welfare statistic, the less it says about any of them. It becomes a statistical nightmare intelligible only to economists, statisticians and accountants. And maybe that’s the point.
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