Measuring economic strength with quality of life

The standard way of measuring a country’s economic success is to look at per capita gross domestic product — the total output of goods and services divided by population. The more cars and computers produced and the more doctor visits and restaurant meals per person, the better the economy is thought to be doing. By that yardstick, the U.S. performs best among the world’s large, diverse economies.

But is per capita GDP really the best way of gauging how good a job an economy is doing at taking care of people? Pete Klenow proposes a more comprehensive measure of economic welfare that includes not only consumption of goods and services, but also other things people value. That includes leisure time, long life expectancy, and economic security. Looked at that way, much of the performance gap between the U.S. and other advanced economies melts away. 

Klenow is the Ralph Landau Professor in Economic Policy and Gordon Moore Senior Fellow at the Stanford Institute for Economic Policy Research.

In a paper co-authored with Stanford Graduate School of Business economist Charles Jones, Klenow compares the United States and France. GDP per capita in France is about two-thirds of what it is in America while per-person consumption of market goods is only 60 percent of the U.S. value. However, French life expectancy is significantly higher and Americans spend about 60 percent more time on the job. In addition, inequality, which Klenow and Jones use to measure economic insecurity, is much greater in the U.S. When the authors calculate how much people care about these factors, French living standards rise to 92 percent of those in the U.S.

“Our overall finding is that Europe and other developed countries like Japan look closer to us,” says Klenow, who directs SIEPR’s Macroeconomics and Monetary Policy Program. “But, in developing countries, where there typically is higher inequality and life can be short, the gap with the United States is even wider than standard measures show.”

Klenow is a Stanford PhD who came back to The Farm after stints at the University of Chicago and the Minneapolis Federal Reserve Bank. Much of his research has explored the role of productivity in economic growth.

“I’m interested in macro questions such as why productivity rises over time, why it differs across countries, and why it fluctuates,” he says.

His recent work poses one of the oldest and most fundamental questions in economics: Are capital and labor being used where they should be to fuel economic growth? Klenow notes that an economy’s efficiency depends on how good a job it’s doing directing investment and employing workers in the most productive places. 

Klenow’s research on China suggests that country’s growth story is far from over, despite current uncertainty. In a study of Chinese and Indian manufacturers, he and fellow researchers found much greater variations in efficiency than among their American counterparts. If China reduced that efficiency variation to U.S. levels, productivity could rise by almost a third, Klenow estimates. And he sees reason for optimism. The continuing spread of market competition in China means that inefficient enterprises are still being weeded out.

“China has a fair bit of room to grow,” he says.