Re: Standard of living index

Sat, 04 May 1996 17:07:50 +1000
Bruce R. McFarling (ecbm@cc.newcastle.edu.au)

On Fri, 3 May 1996, Greg Ehrig wrote:

> Found the standard of living index that someone mentioned before:
>
> What it is is just consumption plus government minus military:
You will recall that what I had said was along the lines of start
with GDP, identify things you want to count as benefits, omit things you
want to count as neutrals, and subtract the things you want to count as
bads. Making the point that adding everything at market values and using
it as a welfare measure is *specifying* that everything is a good, and
nothing is a neutral or a bad, which is just as biased (and potentially
politically motivated) as any other specification in the family. It is
not 'neautral' because 'it does not attempt to judge which are good and
which are bad': it *implies* that all transactions are beneficial. And
this is independent of the question of unweighted, weighted, or
prioritized measures: GDP as a welfare measure specifies that everytime
money is spent it is good, and everytime it is not spent, it is bad.
And I suggested starting here, and subtracting spending on prisons
as well as military spending. I don't know where to find those numbers at
the moment, but *including* them *requires the premise* that building more
prisons is a good thing for people's standard of living.

> This means that when military spending goes up, Standards of living go
> down, and when investment goes up, standards of living go down.
Notice: if aggregate demand is shifted from military spending to
investment: standard of living goes up on this index. Of aggregate
demand is shifted from consumption to investment, current standard of
living goes down.
That's exactly how I would argue it should work, at least in
qualitative terms. Someone alse could argue the contrary. But the
judgement is not avoided when it is evaded by relying on GDP: rather, a
specific contrary judgement is being made. And saying "well, at least I
know the problems with GDP" is not a convincing argument that all
purchases should be treated as contributions to personal welfare.

> Now, according
> to Richard, the Japanese corporatocracy is the model worthy of
> emulation.
BTW, this is a point (the joys of emulating Japanese
corporatocracy), where I am a little dubious. Refer to Dossbach's (sp?)
excellent work on Japan and 'Post-Fordism'.

> Let's compare the numbers for standard of living for
> Japan and, oh, let's say, the U.S. Remember that absolute numbers
> don't mean anything to this measure -- Rather, it shows which
> sectors of the economy are being stimulated at any given time.
That's not what I said, and since I am the 'someone' alluded to
above, I think this is significant. I said take GDP, go to the World Bank
indexed value, subtract prisons, see where you are, and keep going.
Obviously you multiply the index number by total GDP to get the indexed
value.

> It does not tell you whether the pie is growing or not, just who is
> getting what proportion of each slice of the pie.
Obviously: the World Bank datset avoids correlating the time
series unecessarily, since it was developed for time series econometric
estimation. The index number is given instead of the indexed GDP value
for very good statistical reasons, but that does not prevent us from using
the indexed value.

> Remember, Japan
> spends almost nothing on its military as a % of GDP, so the Japanese
> living standards should be much higher than the U.S. ----
Why? This is false. Current spending on investment is *not* a
contribution to current standard of living. You can make an argument
that current investment will lead to improved future standards of living,
but that is a case to be made by establishing the relationship between
previous investment spending and current standard of living, not by _a
priori_ dictating that current investment spending contributes to the
current standard of living just as much as current consumption spending
(and whether or not the GPI subtracts or omits the right things from C,
obviously not even all current consumption spending represent an
improvement in welfare).

> For Japan:
>
> 1970 63.8
> 1971 64.8
> 1972 64.9
....
> 1987 64.5
> 1988 63.3
> 1989 62.5
>
>
> For the U.S.:
> 1970 76.9
> 1971 76.1
> 1972 76.1
....
> 1987 75.8
> 1988 75.6
> 1989 74.9


> Surprise! lIving standards for the U.S. are higher! The reason is that
> this does not really reflect living standards -- just the relative
> balance in society between consumers(C) and (G); and producers (I)
> and military. Japan squeezes its consumers, taking away their share
> of gdp, and redistributes the flow to producers. Thus, their
> "standard of living" is much lower.
I will state a hypothesis: consider the indexed value and even on
this index the growth in standard of living story will change
dramatically. And I have not looked at these particular indexed values,
so that *is* a hypothesis.

> This is why this is not a particularly relevant data series to our
> discussion.
And this has been why it is one *quite* relevant point of
departure for exactly the type of critical judgement that must be
exercised to offer market value - based aggregates as welfare measures.

Virtually,

Bruce R. McFarling, Newcastle, NSW
ecbm@cc.newcastle.edu.au