Alternatives to GDP
Welcome back to this meeting of the Economy, Energy and Tourism Committee. I am delighted that we are joined by Professor Joseph Stiglitz. Can you hear me this afternoon, Professor Stiglitz?
Professor Joseph Stiglitz
Yes, I can.
It is morning where you are. Good morning.
Good morning. It is a rainy morning in New York.
Thank you for taking the time to join the committee. I should introduce myself: I am Murdo Fraser, the committee’s convener, and I am joined by a number of colleagues. We are keen to talk to you about alternatives to gross domestic product as a measure of economic success and progress.
Before we get into questions, I believe that you are keen to say something by way of an introduction.
Sure; let me begin. I am delighted to be here to talk to you. My work with the international Commission on the Measurement of Economic Performance and Social Progress has underlined concerns over the adequacy of GDP as a measure of wellbeing. I hope that my remarks today will provide further impetus for the work in Scotland to improve and implement better measures of performance.
That is important, because what we measure affects what we do. If a country assesses success by the wrong measures, it is likely to do the wrong things. Metrics such as GDP are part of our information system, and information systems guide how we steer the economy. That GDP is not a good measure of wellbeing has long been recognised. Simon Kuznets, who is widely credited with creating our system of national accounts, was aware of its limitations. In 1934, he commented:
“The welfare of a nation can scarcely be inferred from a measure of national income.”
Yet, as our report pointed out, while changes in our economy and our society meant that GDP or GNP—gross national product—was increasingly inadequate even as a measure of market activity, it was increasingly relied on as a measure of performance. Thirty-four years later, in a cogent criticism of what was wrong with it as a measure, Robert Kennedy remarked:
“it measures everything except that which makes life worthwhile.”
Since then, those warnings have been ignored as GDP and GNP have become even more central to our measurement of success. In performance-oriented societies, we want metrics, and GDP and GNP provide such a metric. However, since Kennedy’s time, matters have become worse, because of changes in our technology and because we have shifted focus from GNP to GDP, which is centred on measuring the goods that are produced within a country, not even the incomes of the citizens of a country.
We have been pleased by the reception that our report has received and the research efforts and policy initiatives that it has encouraged and spawned. We hoped that our report would spur not only research, but a framework around which a more meaningful discussion could take place about societal objectives, with a broader engagement of civil society. We said that wider and more open public discussion would be crucial.
Let me commend Scotland for the several efforts that are being made to develop better measures of performance. Under the aegis of the Carnegie UK Trust, a round table on measuring economic performance and social progress in Scotland was created, and its report, “More than GDP? Measuring What Matters”, used the template of our report to review the success of Scotland and the extent to which Government was being held accountable in performing its role in contributing to Scotland’s success.
A number of the observations that that report made highlight the points of our original report. It said:
“Put simply, GDP measures the ‘busy-ness’ of our economy. But is a growing economy busy doing the right things? Making our economy do more will not necessarily lead to the things we want.”
It also said:
“Our over-reliance on GDP makes it difficult for politicians to back policies that are good for society or the environment, but which might hamper an increase in GDP.”
In reviewing the Scottish attempts to assess the country’s performance in a way that goes well beyond GDP, the report observed:
“‘The most important fact about the NPF is that it exists’. The innovative work and thinking in developing it ... deserve praise.”
It emphasised the need for indicators of performance for the Government and for society more broadly, but said that it was also critical that measurements helped to move Scotland towards its own goals. In effect, it recognised that many of those goals lay outside the traditional market economy, and that even those goals that lay within the market economy were not necessarily well valued by prices in the price system and, therefore, were not incorporated accurately in GDP.
A standard theorem in economics is that when the price system works well, it can be used for efficient decentralisation, but a standard problem in the public sector is how to decentralise and devolve responsibility. There is a belief that such decentralisation may lead to better delivery of public services, but that will be true only if those who deliver public services have the right incentives. Problems of agency delegation are pervasive. As we emphasise in the Scottish report, if the price system provides an inadequate framework for delegation and decentralisation, something else must be put in its stead. The Scottish report is an attempt to do that.
I am particularly pleased that a lively discussion has emerged in Scotland over the critical question of what matters and how best to capture that in our metrics. It is exactly what the commission hoped would follow from our report. We hoped that the report would lead not just to better metrics but to stronger public awareness and a more vibrant public dialogue on issues that we believed should be at the centre of our society’s concerns. Oxfam’s humankind index, which was formulated with the New Economics Foundation and the Fraser of Allander institute, is another commendable example of that approach, but I do not want to comment now on its recommendations.
In conclusion, I will leave you with five general observations. First, technical matters are important; if they are not addressed, our metrics can be misleading. One of the commission’s three working groups delved deeply into the issue, and I hope that Scotland will provide support for continued work to improve our measures.
Secondly, distribution matters. What is relevant is not just how a country does on average, but how the benefits are distributed. My recent book, “The Price of Inequality”, emphasised the many dimensions of inequality and how they are increasing in most countries around the world. I argued that we pay for that inequality; it weakens our economy, undermines our democracy and divides our society. An economy such as that of the United States in which GDP is going up while most citizens’ income is going down is not a successful one, but an emphasis on GDP might lead one to conclude otherwise.
Thirdly, sustainability is vital in every respect—environmental, economic, political and social. Although America experienced growth in the early years of this century, it was a false prosperity and was not sustainable. Even worse, the west’s seeming prosperity is not environmentally sustainable. We will have to learn to live within the confines of our planet’s limited resources and cannot ignore global warming. Again, I commend the Scottish Government’s work in that arena.
Fourthly, what we care about is wellbeing as it is broadly defined. Material goods are a means to an end, not an end in themselves. We in the 21st century are fortunate enough to have more than enough goods to meet everyone’s basic needs if they were fairly distributed, but the organisation of our society might leave many insecure and isolated and lead to a poorer environment and a divided society with more inequality.
Finally, I want to return to my central theme. My hope was that the commission would give rise to a worldwide dialogue on what really matters and that dialogue would in turn become an instrument for creating a better society, in which more individuals would be able to live the kind of life that modern technology can support. I commend you on your work in creating that kind of dialogue in Scotland.
Thank you very much for that comprehensive introduction, in which you have raised a load of questions that I know my colleagues will want to pursue. We are quite short of time this afternoon, so I have asked colleagues to ask brief questions in the hope that we can get through the list that we have before us.
First, are you proposing that GDP be replaced altogether as a measure of economic success or do you accept that it still has a role but needs to be complemented with other measures?
We need a measure of market activity such as GDP. I must emphasise the important point that I made in my introduction about the major flaws in the way that we measure GDP or market activity. An important issue for certain small economies is that GDP is a measure of the production inside an economy, not the income of its citizens. Those two numbers will be the same in a closed economy but in more open economies they can differ. One dramatic example is that of Ireland, where GDP and GNP have differed markedly because a lot of the economic activity that is supposed to occur in the country actually comes from multinationals, which means that the income does not stay in the country. It gets a little cut from taxes, but its income is not enhanced. As I have said, GDP and GNP are markedly different and I would argue that people should be focusing on GNP.
13:15
Thank you for that clarity.
I have one follow-up question before I bring in one of my colleagues. You spoke a lot about the need to reduce inequality. Do you believe that we can reduce inequality without increasing taxation on those who are better off?
Taxation is one important component that ought to be part of a package. In my book, I have laid out a fairly comprehensive agenda—21 items—for how we can address inequality. I am more familiar with the tax system in the United States, where we tax speculators at lower rates than we tax people who work for a living. Arguably, that distorts our economy and increases inequality.
However, taxation is not the only instrument for reducing inequality. One thing that I was really concerned about in my book is equality of opportunity. Among the advanced industrial countries, America has become one of the worst for equality of opportunity, which is very different from the image of America that is annexed to the American dream. Education is absolutely critical for opportunity, so education is another element. Of course, you cannot have good public education without revenues, so taxes also become part of that agenda.
Thirdly, at least in America—this is true of most other advanced countries—one of the major sources of inequality is what I call rent seeking. That notion is that some people get a large income not because they have contributed to society by making the pie larger, but because of their efforts to take a larger slice of the pie. For example, when the financial sector and the bankers brought the economy to the brink of ruin, they were not contributing to a better economy. What they were doing, particularly in America, was predatory lending, abuse of credit card practices and manipulating markets. All of that is about trying to take money from others, not making our economy work better. Those are all examples of how we can simultaneously reduce inequality and make our economy perform better.
Good morning, Professor. First, I thoroughly enjoyed your most recent book, “The Price of Inequality”. As I was reading that, I was thinking of the book “The Spirit Level”, which you may also have read, in which Wilkinson and Pickett show that inequality is correlated not just with a range of social outcomes but with GDP per capita. The authors found that, where there was least inequality, there was best economic performance in terms of GDP per capita.
To come to my question—I should apologise to my colleagues, but your introduction answered my initial five questions, so this is actually question 6—are those things mutually exclusive? Does GDP per capita still have some usefulness if we include it with other measures? Should our primary focus be inequality rather than getting too tied up in how we measure it?
One thing that I emphasised in my introductory remarks is that GDP per capita talks about what is happening on average, but the average person is not average. When you have a lot of inequality, GDP per capita does not tell you what is happening to the typical citizen or representative voter. That is what we ought to focus more on. If I had to pick up a number—there is no single number that can capture anything as complex as our economy or society—I would say median household income or median disposable income. In other words, you want to talk about the person in the middle, which is not the same as the average.
What has been happening in the United States, just to give you a picture, is that per capita income has been rising—in 2009 it went down, but with that exception it has gone up almost every year—but median income for the typical family in the United States, with half above and half below, is lower today than it was in 1996, a decade and a half ago. Median income of a full-time male worker in the United States is lower than it was 40 years ago. A society that says to the typical worker, who is working full time, putting in all his efforts, that the income today is the same as it was 40 years ago is an economy that is not having progress and is not successful.
People say that America is a great success and everyone congratulates it. It has some strong aspects, and we have to commend the innovation. However, in terms of delivery to most citizens, it has failed. That means that we ought to have a dialogue in the United States. Why has it failed? What can we do to make it work? I am glad that that kind of dialogue is beginning to occur in Scotland.
The purpose of the Scottish Government, as set out in its 2011 document, “The Government Economic Strategy”, is to increase sustainable economic growth. The Government is measuring that by using seven targets, in an effort to broaden measures and consider progress on, for example, inequality. However, GDP still retains its central place. How appropriate is the Government’s framework for measuring economic progress and wellbeing? Have we got the balance right between measures of production and measures of wellbeing? Should the headline indicator in the framework continue to be GDP? Should it be GNP, which you have said that you prefer, or should an entirely different measurement take the central place?
The commission recommended what we called a dashboard approach. As I said, no single number can capture anything as complex as our society. You want a measure of how much resource is available to you, because that will determine what you can spend on education and whatever else you decide to spend money on. The resources are an important dimension of the economy and therefore of society.
However, that does not really capture a lot of what is going on. As I said, resources are a means to an end, and the end is the greater wellbeing of our citizens. You therefore want to begin to think about what will affect people’s wellbeing. That is what you ultimately want to get at, but it is a more difficult question and economists do not have such good measures in that regard.
I hope that as a result of the impetus of the commission there will be work in each society and each country to try to develop better measures of wellbeing and what it means to be well off. In our original report, we identified several components, and some of the work that is going on in Scotland and elsewhere has reinforced the importance of those components.
I will mention a couple. Health is obviously very important. Security is very important. GDP does not necessarily capture well either health or security. Again, I will talk about the United States, because I know more about it. We have a very inefficient healthcare system, which does not deliver well. We spend 17 per cent of GDP on health, but the health outcomes—the healthiness of our people—are poorer than in the UK, France and other countries that spend a lot less. That is a real example of where GDP is not a good measure.
A third important dimension that we talked about is connectedness. It is very important for people to be connected with other people—the nature of the social fabric is important. Another dimension that we emphasised is employment. People want to contribute to society in one way or another, and when our economy or society does not provide enough jobs, citizens’ wellbeing is undermined. That is a real concern in Europe and America today, because we are not creating enough jobs.
Could we in Scotland devise our own indicator that we could use for our own budgetary processes? How meaningfully would that engage with our progress if it was not more widely recognised?
There are two separate functions of the metrics, one of which is to get a benchmark to assess how well you are doing relative to others. We all need yardsticks to see whether we are doing well or poorly. Standards and comparisons are important for that process. Unfortunately, the comparisons are often very misleading.
Before the financial crisis, for example, a lot of people looked to America and at how good its GDP was. The view in a lot of countries was that they should emulate the United States. One of the motivations for some of our work in the commission was the view that the United States was not the model for other countries because it had high inequality—most citizens were not doing well—and its finances were not economically or environmentally sustainable, but GDP did not tell us that. If people were chasing GDP, they were chasing the wrong thing. Comparisons are important, but I emphasise that they should be the right comparisons.
There is another important purpose, which is that you must make your own decisions about the direction of your society. There is no reason why Scotland should do exactly the same thing that every other country does. You may want to emphasise educational opportunity more than other countries do. If that is what you decide, it will be important for you to focus measures on such opportunity, and you can say that it is okay if you are not doing so well on some other measures if you are doing well on the things that you care about; you can say that, as a society, you are going to grade yourselves more on that criterion than on others.
The Organisation for Economic Co-operation and Development has undertaken an important initiative that it has really got right. The OECD did follow-up work on some commission work and created a set of indicators, but it said that there is no reason why people need to weigh different things in the same way. The OECD therefore allows different people to come in and, for example, put a lot of weight on the environment or on inequality, depending on what they think is more important. The OECD standardised the metrics in each of the dimensions, but it said that people could put different weights on the elements to create their own report card of their overall performance.
What is your view on the Legatum prosperity index as a measure of fairness and wellbeing in countries?
Which prosperity index?
The Legatum prosperity index.
I am not sure that I know the detail of that. There are a lot of indices out there and I do not think that I know that one, at least not under that name. Do you want to describe it a little bit or give any particular characteristic of it? Let me make a general comment first, though. There are many indices—for example, the United Nations development programme has an index—and each of them puts particular weight on particular things and has technical issues about how it does that and what it includes. Obviously, I and the commission did not have the time or opportunity to review all the different measures and come to a view on them; it was more about looking at the principles.
Okay. You mentioned education in the context of inequality in America. To what extent does the American model of university and college education exacerbate inequality?
13:30
It is one of the most important contributors and it is, unfortunately, getting worse. What is going on in England is a source of concern. I will explain what the basic issue in the United States is.
I mentioned before that real median income—income in the middle—is stagnating and going down. It is lower than it was 15 years ago. However, meanwhile, the cost of a college education has been going up for two reasons. The first reason is that the cost of the inputs has been going up. It is a service sector and requires many skilled workers, and skilled worker salaries have been going up.
The second reason is that the Government’s contribution to higher education has been going down markedly. The result is that tuition fees in public schools have been soaring in the United States, especially since the beginning of the downturn.
With incomes going down and tuition fees going up, many children of poor families will not be able to afford a university education. In the 21st century, you need a university education to compete.
Students used to take out loans. Unfortunately, the burden of those loans has gotten larger and larger. In America today, student loan debt is larger than credit card debt—it has soared that much.
We did something that was really bad: we passed a law that said that student debt could not be discharged, even in bankruptcy, to discourage students from taking loans. The consequence is that the average student graduating from college now has more than $25,000 of debt but some have more than $100,000.
I am sorry to interrupt, but do you have similar concerns about England?
Yes. Tuition fees there have been going up, and that makes a college education less affordable. Student loans can become very oppressive.
Australia has designed a good way of getting around it—what they call income-contingent loans. Everybody participates in that programme. Money is lent to students to pay for their education. Everybody takes out such loans and the amount that they pay depends on how well the student does. If the education delivers a high income, they pay back more; if they decide that they want to go into public service and take low pay, the amount that they pay back is less. Those who wind up with a high income pay back a larger amount; those who have a lower income pay a smaller amount.
That model has been working well. Other countries ought to consider it.
I would welcome your view on how Oxfam’s humankind index approach might help to counter the mismatch between people’s experience of life and how official statistics describe their situation, as noted in the Stiglitz commission report.
Oxfam did a good job of listing in its humankind index the things that, in their interviews, people said were important to them. They talked about housing, health, living in a neighbourhood in which they could enjoy going outside, having a clean and healthy environment, having satisfying work to do and family. Income was in the middle of the list.
Obviously, the Government cannot solve all those problems—it cannot solve family relationships—but it plays an important role in many of them, such as the environment, the kinds of communities that we create and ensuring that people have an opportunity for a good job. That provides an important reminder that money is necessary but not sufficient. Government cannot solve every problem, but it can do things to improve the wellbeing of society and of individuals.
We have talked a lot about the wholesale alternatives to GDP, but when we look at many of the things that have been mentioned as indicators of wellbeing, such as having a low crime rate, having a fulfilling job, enjoying good health and not depleting resources, we see that they are all matters that have direct economic costs as economists would traditionally understand them. Why has economics as a discipline not kept up?
Well, it has been trying. Maybe I should tell you a little story. When I was chairman of the Council of Economic Advisers under President Clinton, I tried to get the US to move to what I call a green GDP. That would involve our taking GDP but recognising that we are depleting some of our natural resources and engaging in the degradation of our environment with pollution, and recognising that our success as an economy ought to take those negatives into account. A company that wears out machines takes depreciation into account. When we use up our resources, we ought to take depletion into account. At the level of the firm, we do that, but at the level of our society, we do not.
I tried, but there was a lot of push-back. Why did that happen? As I said before, what we measure affects what we do. If we start thinking about pollution and environmental degradation, we will discourage certain kinds of activity. In particular, it will naturally lead us to think twice about coal. There is no such thing as clean coal. It is just a question of degrees of dirtiness of coal. Coal has all kinds of effects on environmental degradation and greenhouse gases. The coal industry understood that we were on to something important. It understood the importance of the objective of trying to get good measures, and that is why it tried to squelch it. The industry did what it could. It said, “If you continue to work on this, we’ll take away your funding.” It really undermined the efforts.
Economists have been aware of these problems for some time—that was 20 years ago—but there are special interests that are resisting the introduction of these ideas into the main stream of political discourse. I hope that Scotland will lead the way in introducing them.
Do you see a role for a baby-steps approach with a modified form of GDP, which might be easier for certain quarters in the debate to swallow, or do you think that in some ways that might be more difficult?
The basic ideas that I tried to articulate are all baby steps, but they are multiple. They include going from GDP to GNP, taking into account resource depletion and degradation, looking at inequality and looking at the median rather than the average. Those are not big, revolutionary things and we already have all of them in our toolkit. We could do them right away and put them on what I call our dashboard, so that we keep them in our vision.
In the long run, there are some more difficult things. Some of your questions have been about wellbeing in a broader sense, and incorporating those things will be more difficult, but we know some of the elements of the problems, such as unemployment and health, and we can get some indicators of those things on to our dashboard.
It will be more difficult, however, to decide how we weight and think about those indicators. They cannot simply be added up—they reflect different dimensions of our society. That is why I have been emphasising the point about dialogue. This goes back to the point about metrics. You will not easily add up health, environment and GDP. There is no way to put those numbers together in a single number. It is important to have an array of numbers that you can start to think about.
I can give you an analogy, which might be helpful. A driver wants to know how much gas is in their gas tank, and they want to know how fast they are going. If they add up those two numbers, they get a number, but they do not know what to make of it. Both of the numbers are needed for someone to know what to do when driving their car.
That is what I would urge you to do. Let us not try to get everything into one number. Let us consider various dimensions and then discuss things. Are we not emphasising the environment enough? Are we not emphasising inequality enough? Are we not emphasising employment? Let us have a dialogue about that.
You spoke earlier about the OECD indicators. Could those, or indeed something else, be used as an alternative to GDP as an international indicator? If so, how would we develop and implement such an index?
Internationally, a number of efforts are being made to provide a small set of indicators that would be internationally comparable across countries. There are better data for the advanced industrial countries than there are for developing and emerging markets, so the data sets are richer for the developed countries and you could do a better job comparing the advanced industrial countries.
I have mentioned the efforts of the OECD to create a set of benchmarks in various areas. There are three things that I think are essential to include in a small set of indicators concerning the narrow economics, leaving out health and other attributes such as incarceration—there are lots of social attributes. The first of those three essential things is to have some measure of GNP and the income of citizens. I say “some measure”—we want to include something about environmental degradation and resource depletion, as I said before. We want to take into account the things that are going on—not just the conventionally measured market income.
Before I come to the second essential thing, let me make one more comment about conventional measurement. One problem is that we often mismeasure the contribution of Government to GDP or GNP. The reason for that is that we tend to measure the output in the public sector by the input, because we do not have prices. As a result, we are not really assessing the contribution of the public sector to wellbeing. It distorts our metrics and, in effect, we assume that there is no increase in productivity in the public sector. However, we could consider, for instance, how the public sector social security programme increases security, which is very valuable. People would have been willing to pay quite a bit for that insurance if the market provided it, but the market typically does not provide good disability insurance, good annuities and so forth, so we are not capturing the importance of the public sector’s contribution to our wellbeing. That gives rise to a real bias, and it biases our thinking about the importance of what the Government can do to enhance wellbeing. That is one statistic that I would include.
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The second statistic that I think it is important to focus on—remember that I said before that GDP or GNP is an average, whereas you want to know what is happening to the representative individual—is some form of median income. That is an important measure of inequality. Where you have no inequality, the median and average will be the same; where you have a lot of inequality, the two can differ a lot. Where you have growing inequality, the two can move in different directions. That is why I would talk about the median.
The third number that is very important is a metric or measure of sustainability. Again, we would like to have measures of environmental, economic and social sustainability, but even in a narrow set of indicators economic sustainability is a critical measure. For economic sustainability, you have to look at the wealth of the economy; what it is saving; what increases it is making to its capital stock; what it is depleting or using up or wearing out; and its indebtedness—if a country is borrowing from abroad, the wealth of its citizens is not increasing.
For example, when I looked at what was happening in the United States from 2000 to 2007-08, I said that the United States was not performing well. Why? Because we were borrowing so much from abroad. We were becoming more and more indebted at the level of the nation, at the level of the Government and at the level of the household. Our wealth was not going up in the way that it should have been, and the wealth that was going up was the fake wealth of a housing bubble, which was not going to be sustained. I came to the view that this was not sustainable economically—it was not sustainable environmentally, but that is another set of numbers—and, therefore, GDP was not telling us how well we were doing.
Good morning, Professor Stiglitz. The commission’s report says that the issue is about measurement rather than policies. In the book “The Spirit Level”, to which my colleague Mike MacKenzie referred, Wilkinson and Pickett state:
“different ideologies will of course affect not only government policies but also decisions taken in economic institutions”.
Given your cynicism regarding the USA, which is not applying these measures, how do you see that these new measures can be applied in such a way as to support business and fund competitiveness internationally?
As I said, these metrics are part of our information system, and having good information is critical for steering an economy. At the level of the firm, firms have a balance sheet and income statements, which are the accounting frameworks that firms use for steering. When they look at their accounting framework, they will want to know what different divisions are doing, what their income and profits are and what their balance sheets are. That is the way that firms steer. In some sense, the same thing applies to the economy.
For instance, if an economy is growing but it is growing on the basis of natural resources that are being depleted, that raises a question about whether it is sustainable. One question that many people are now asking about the UK is whether the so-called period of prosperity that it had was really a false prosperity, in which it took all that income coming in from the North Sea but, rather than investing it in enhancing physical capital and human capital such as technical skills, it spent a disproportionate amount elsewhere and did not create the basis of capital accumulation. That is where this notion comes in that we should have a careful look at whether, in depleting your natural resources and using up your endowment, given that wealth below the ground is getting less, you are more than offsetting that by creating wealth above the ground. That should have been at the centre of the debate from the beginning of North Sea gas and oil. If it had been, you would have said, “Well, if we aren’t investing above the ground, we’re becoming less competitive, because in some sense our wealth is going down. We don’t have the productivity or inputs that will make us competitive with other countries.”
Good morning, Professor Stiglitz. Do you agree that one of the reasons for measuring alternatives to GDP is to report publicly on them so that wider society can relate to how flourishing and prosperous Scotland is and, we hope, become more engaged in the political process?
Very much so. That is one of the main planks. In a way, when there is a single-minded focus on GDP in a very narrow sense, people will say, “We’ll leave that to the technocrats and economists. Let the people who know about that manage the economy.” That has led to a set of attitudes that has excessively elevated the importance of technocrats in solving our society’s problems.
It is a fact that every society faces complicated trade-offs. How much emphasis should we put on the creation of employment? We ought to put a lot of emphasis on that, but the technocrats—people at the European Central Bank—never talk about that. That is the critical factor. They say that we should just cure inflation, and that will mean that the economy will work well. They have tried to depict a situation in which there are not all the choices that societies have. By focusing on the many dimensions of what constitutes wellbeing, I hope that we will contribute to this kind of discussion and a broader dialogue in society.
I have a follow-up question on the same line of thought. Would it be beneficial to report on two or three headline measures, such as security of employment, quality of the local environment and equality measures, that would be more comprehensible to people at the same time as considering the GDP, rather than adopt one alternative aggregated measure?
On the basic framework of benchmarks, in response to an earlier question I said that Scotland’s benchmarks do not necessarily have to be the same as those of other countries. Benchmarks can be explorations. Scotland might want to explore things that other countries have not yet done. Many Americans are certainly currently affected by a sense of insecurity. The GDP could go up and insecurity could go up. If we ask what affects people’s wellbeing, we will find that a high sense of insecurity is really bad. We are talking about all kinds of insecurities: health, economic, job, fiscal and environmental insecurity. Some of the follow-up work from the commission is beginning to think about how we try to capture the notion of insecurity, as people really care about that. Another issue is a sense of community. There is a lot of evidence that community and connectedness are important for an individual’s sense of wellbeing. There are measures of some of those things. They are imperfect, but we have forgotten that GDP is not a perfect measure of output. We have used it for so long that we have forgotten all the imperfections and blemishes. When the measure was being created, everybody who debated it was very much aware of the blemishes. We have used it for long enough to just forget about all the blemishes, but sometimes they turn out to be important.
We are getting towards the end of our time. The last question is from Ken Macintosh.
Professor Stiglitz, you said in your opening comments that Scotland’s national performance framework is a welcome measure, although I think that you said that, at present, just the fact that it exists is perhaps its biggest contribution. You have focused on median household income. The most recent figures in Scotland show that median household income has fallen by £1,200. That suggests a difference between the practical reality in Scotland and some of the steps that we are taking—or not taking—to counter that reality. What measures could we take to move away from GDP and to use more practical indices that include wellbeing, which would make a difference to the way in which we run our economy and Government?
One thing is exactly the point that you make: a focus on median rather than average starts putting a focus on what is happening to the average citizen, as we jokingly say. If the upper 1 per cent in the United States do better, that is nice for them but, if that does not affect the rest of our society, do we actually have a society that is working? I do not mean to keep coming back to the United States, but one telling statistic in the United States is that, in the past two years, 120 per cent of the increase in income in the United States went to the top 1 per cent. That means that all the increase went to the top 1 per cent and everybody else was worse off. When something like that is going on, the Government should be worried. Something is failing.
Figuring out what is failing involves a complicated diagnostic. That is why we need to consider other things. Is it employment? That is one of the variables that I would include as an important metric on my dashboard. Is it wages? Are the wages of the people in the middle falling behind and, if so, what is the reason for that? Are we failing to give people the skills that they need to compete? If so, that relates to education.
I come back to the point that I made in my introduction, which was that our metrics are part of our information system for steering the economy. When a doctor does a diagnosis, they start asking questions and they might say, “For this patient, I need to run another test.” They need to get more data to separate one diagnosis from another. The same thing applies to your country. As you start to think about where the problems are, you will start to say, “Let’s look more carefully.” I think that the answer is that you will look more carefully at your education system, wages, your system of employment and job creation. That leads to thinking about the impediments to job creation and whether the financial system is delivering capital to small businesses or is just engaged in manipulating LIBOR—the London interbank offered rate.
I have a brief supplementary question. Your contribution to Scotland is important, not only in the debate about indices of wellbeing but through your comments about moving away from austerity economics and perhaps producing fiscal growth. You are also heavily involved in the fiscal commission working group in Scotland. That group recommends that Scotland should have a currency union with the rest of the UK. Do you think that that is essential for an independent Scotland?
I will just say that the report to which you refer was a report of the collectivity of that group. We did not each agree on the weight that was associated with every recommendation. As with any group report, it gives a sense of the group’s view, although there were differences. For the report to have meaning, we all said that there should be nothing in it that we felt was so outrageous that we wanted to dissent from it. There was a broad consensus, but we did not all give the same weight to the recommendations.
On the issue that Mr Macintosh raises, one important discussion was about transition versus the long run. There was concern about the factors that might make for a smoother transition, but there was also a discussion of the fact that, in the long run, Scotland will have to re-examine its institutions. It will be important to have a structure that has flexibility, so that over time the institutions will be able to adapt to the change in circumstances. As we thought about that issue, the two notions that were influential were the smoothness of the transition and the flexibility to move eventually to the institutional structure that is appropriate for Scotland. So—
I am sorry to cut you off in mid-flow, Professor Stiglitz, but our time has gone and we are in danger of breaching parliamentary process by sitting at the same time as the Parliament is sitting. I am grateful to you for giving your time to the committee. We will follow-up this piece of work with great interest. On behalf of committee members, I thank you very much.
Meeting closed at 14:00.