Tag Archives: OECD

The Secular Nature of Inequality Growth

The OECD has just published a substantial report on inequality across its member countries (most of the world’s developed nations). To give you a taste of the topic, the OECD’s 2 minute introductary video is here:

Let me pull out some key charts and make some observations. First, aggregate income has been rising, but the elites have been harvesting the majority of the gains (click for larger image):

OECD Inequality jpegIf you were of libertarian disposition, you may look at this chart and say “so what? Everyone is growing richer, but some are just growing richer faster.” I would be very reluctant to adopt such a stance. Continue reading

Chart of the Day, 31 Jan 2015: Happy Danes, Sad Greeks

The Atlantic has just published a fabulous article entitled “The Danish Don’t Have the Secret to Happiness“.  It is a response to a myriad of charts that look like this (taken from a tongue in cheek article in the British Medical Journal that The Atlantic references):

Life Satisfaction jpeg

Michael Booth, the author of the Atlantic article, is a Danish happiness cynic, questioning the happy state of Denmark on three fronts. He posits that

1. Danish happiness is a false construct arising from low expectations,

2. the boring nature of Danes allows them to remain happy, and

3. their smugness will ultimately lead to the nation’s final demise.

The low expectations argument is a restatement of what the happiness economist Caroline Graham calls the ‘happy peasants and miserable millionaires’ paradox (see, for example, here). According to her, our happiness set point can be a function of our surroundings.

While the research confirms the stable patterns in the determinants of happiness worldwide, it also shows that there is a remarkable human capacity to adapt to both prosperity and adversity. Thus, people in Afghanistan are as happy as Latin Americans – above the world average – and Kenyans are as satisfied with their healthcare as Americans. Crime makes people unhappy, but it matters less to happiness when there is more of it; the same goes for both corruption and obesity. Freedom and democracy make people happy, but they matter less when these goods are less common. The bottom line is that people can adapt to tremendous adversity and retain their natural cheerfulness, while they can also have virtually everything – including good health – and be miserable.

Indeed, an individual’s happiness set point can not only be a function of relative health, wealth, beauty and so on relative to one’s peers but also the same yardsticks measured against one’s past life. So how about the Greeks? Are they adapting to their new straightened circumstances? According to OECD data, the answer must be “no” or at least “not yet”. From the “How’s Life in Greece, May 2014” survey, life satisfaction comes in at around 4.7 out of 10, which puts Greece at the bottom of the OECD (here).

Further, while life satisfaction can be dubbed a function of the remembering self (when I sit down in a chair and think of my life, am I satisfied), people’s happiness as also related to their experiencing self (using the Nobel prize winner Daniel Kahneman’s terminology– see my post here). In short, am I cold, hungry, stressed, anxious , sad and/or in pain; or am I warm, replete, joyful, relaxed, rested and/or content? The OECD reports that only 52% of Greeks report having more positive than negative experiences in an average day (the lowest in the OECD) compared with an average of 76%.

For Greece to live with long-term austerity, Angela Merkel and the Troika must believe that Greek happiness indicators must, in the course of time, reset upwards. Unfortunately, they haven’t been reading the happiness literature in sufficient depth. While life satisfaction can adapt, adaption is generally a reaction to a set of circumstances that you have grown up with. Such forms of satisfaction lack what Graham calls “agency” or “the capacity to pursue a fulfilling and purposeful life”.  And once you have tasted “agency” you don’t want to lose it.

The appeal of Syriza, and its slogan of “hope”, is its potential to restore a degree of agency to the Greek people. Whether they can deliver this agency is a different question. In reality, income and wealth bestow a high degree of agency since they give us the financial wherewithal to make choices. However, agency can still arise from non-financial means, such as having the ability to adopt a non-conventional lifestyle, move from one area to another, change career, better one’s education and gain access to art and culture.  To stop disillusionment setting in, Syriza will have to put much effort into the fostering of such sources of low cost agency.

Happiness can be viewed from other vantage points too. Many scholars of happiness have identified eudaimonia as a source of happiness. This is sometimes described as human flourishing, but I prefer to view it as the sense of participating in and contributing to something greater than one’s own life. Past political movements have tapped into eudaimonia to give their followers a sense of shared propose and even destiny–sometimes, of course, to disastrous effect. However, at its best, it can be a fuel for transformational social movements that enthuse and enrich those advancing the cause as much as the final beneficiaries. Alexis Tsipras has certainly given Greeks a vision of change that could stimulate eudaimonia, but whether this can morph into a philosophy or ideal that has some staying power beyond the post-election honeymoon is a different question.

Meanwhile, for Danes seeking eudaimonia, a temporary move to Greece would not be a bad idea. But remember that the Danes always have the option of returning to Denmark and restocking on more mundane sources of happiness. The Greeks don’t.

The Absurdity of ‘Abenomics’ and the PM’s ‘Three Bendy Arrows’ (Part 2: Accounting for Growth)

In my last post on the policy agenda of Shinzo Abe, I took issue with both the Japanese prime minister’s choice of economic growth as almost the sole goal of government, but more importantly his ability to achieve such growth. Indeed, it is my contention that Japan has a post-growth economy, the principal reasons for which are twofold: demographics and diminishing returns to technology.

The above statement can be put in the context of growth accounting. From the OECD Compendium of Productivity Indicators 2012 we see a summary statement on growth drivers:

Economic growth can be increased either by raising the labour and capital inputs used in production, or by improving the overall efficiency in how these inputs are used together, i.e. higher multifactor productivity (MFP). Growth accounting involves decomposing GDP growth into these three components, providing an essential tool for policy makers to identify the underlying drivers of growth.

Next, let’s look at the headwinds to growth cited by the last governor of the Bank of Japan, Maasaki Shirakawa, who hardly ever stepped onto a podium to give a speech without including the following slide in his presentation pack (click for larger image):

Labour Force jpeg

As you can see from the chart above, labour inputs—the red section of each bar—have become a strongly (and increasingly) negative component of growth. The blue section of each bar—which encompasses both capital deepening and multifactor productivity (innovation and efficiency)—has also shrunk substantially.

So if Shinzo Abe wishes to bolster growth he has to do one of three things when he shoots his three policy arrows: 1) increase labour inputs, 2) expand capital inputs or 3) encourage multifactor productivity growth (innovation, creativity and organisational efficiency). Continue reading

Life: What’s It All About?

Since 2007, capitalism within advanced countries has faced a growing crisis. The long-term neo-liberal prescriptions of the 1980s and 1990s appear to have stopped working: deregulation, privatization and globalization have all lost the ability to sustain an expected 2 to 3 percent rate of economic growth. Moreover, faced with a stalled growth engine, policy makers have been unable to put their economies back on an expansionary track though either the use of super loose monetary policy or large government-backed fiscal injections.

I would argue that demographics, a decline in technology-led productivity and growing resource constraints make the goal of achieving past levels of GDP growth all but unattainable. But it gets worse. Current policy is not only focusing on an outcome that cannot possibly be achieved (substantial and sustainable GDP growth), but also is worsening a whole range of other socio-economic measures that are arguably much more important than GDP.

The OECD’s 2011 publication “How’s Life? Measuring Well-Being” provides a good starting point for studying what has gone wrong. From the introduction:

Everyone aspires to the good life. But what does a “good” (or better) life mean? In recent years, concerns have emerged that standard macro-economic statistics, such as GDP, which for a long time had been used as proxies to measure well-being, failed to give a true account of people’s current and future living conditions. The ongoing economic and financial crisis has reinforced this perception and it is now widely recognized that data on GDP provide only a partial perspective on the broad range of factors that matter to people’s lives.

The report then goes on to stress that continued economic difficulties should not be an excuse to abandon any considerations other than GDP:

Even during times of economic hardship, when restoring growth matters for the achievement of many of many well-being outcomes, such as having a good job or access to affordable housing, at the core of policy action must be the needs, concerns and aspirations of people and the sustainability of our societies.

So what are the OECD’s favoured measures of well-being? They provide us with 11 metrics, divided into two categories

Material Living Conditions

  1. Income and wealth
  2. Jobs and earnings
  3. Housing

Quality of Life

  1. Health status
  2. Work and life balance
  3. Education and skills
  4. Social connections
  5. Civic engagement and governance
  6. Environmental quality
  7. Personal security
  8. Subjective well-being

The figure below shows the feedback loops between these metrics, implications for sustainability and the interaction with GDP (click for larger image).

How's Life Figure 1.2 jpeg

I find the OECD’s approach uplifting since it makes GDP a means to an end, not an end in itself. Surely, it is time that every political party from the left or right takes this fact onboard and makes well-being a central plank of their policy platform? We occasionally pay lip-service to non-growth goals, but this is not enough. Growth is not a goal in and of itself!

Moreover, policy-makers in developed countries are utterly failing to achieve their false god of GDP growth, and in the process are degrading what should be the true goals of improved living conditions and quality of life for the average citizen. Indeed, the fruits of any growth that can currently be squeezed out of the system are being funneled toward an ever-narrower section of society.

Nonetheless, I have a major problem with the OECD’s methodology. Just as GDP is a means toward improving material living conditions and quality of life, so material living conditions and quality of life are just means toward better subjective well being—in other words, ‘happiness’. In short, the category ‘subjective well-being’ has been relegated to one category among many. It’s proper place is at the apex of society’s needs and goals. Both ‘quality of life’ and ‘material living conditions’ should  be subservient to ‘happiness’.

Of course, ‘happiness’ itself is a slippery concept. The OECD report limits itself to two categories: 1) positive and negative affect, which we can think of as feelings like joy, and 2) life satisfaction, which is an evaluation of how happy we are through reflecting on our current life.

For this post, I will limit myself to a quick look at the OECD’s findings on self-reported measures of life satisfaction using the Cantril Ladder, pioneered by the psychologist Hadley Cantril. The OECD’s Cantril ladder approach is based on data taken from the Gallup World Poll (here), who in turn ask this question:

Please imagine a ladder with steps numbered from zero at the bottom to 10 at the top. The top of the ladder represents the best possible life for you and the bottom of the ladder represents the worst possible life for you. On which step of the ladder would you say you personally feel you stand at this time?

From the results of the Gallup World Poll, the OECD reports the following graph of life satisfaction by country:

Cantril Ladder jpeg

And the even more intriguing graph showing only a weak relationship between life satisfaction and GDP per capital:

Life Satisfaction versus GDP per Capita jpeg

Out of which comes the “Easterlin Paradox”. This paradox, in the words of the OECD, is that “a higher rise in personal income leads to higher subjective well-being for that person, but that a rise in average incomes for a country does not give rise to a corresponding increase in the country’s average subjective well-being.”

Against this background, I feel that the burgeoning field of ‘happiness studies’ could provide us with some theoretical tools to tackle the neoclassical economic crisis, deepening resources constraints and the looming threat of climate change. Indeed, I think such studies could provide us with a framework for a fresh political movement that goes beyond neo-liberalism and 1950s and 60s style socialism. I will return to this theme in future posts.