Bluffton Economics

04/10/17

Bluffton University economist develops a simpler, more accurate measure of well-being

Gross Domestic Product (GDP) has been the standard measurement of well-being for years, but Dr. Jonathan Andreas, associate professor of economics, will soon present his original research in an effort to sway world leaders and fellow economists toward another standard—MELI. MELI stands for Median Expected Lifetime Income, and Andreas developed the formula as a simpler and more accurate measure of well-being. He will discuss MELI as a featured speaking during the International Association for Research in Income and Wealth conference in Seoul, Korea, on April 27. Power players from agencies including the International Monetary Fund, the World Bank and the Bureau of Economic Analysis will be in attendance.

“I absolutely think MELI has the potential to improve lives. Economists agree GDP is a bad measure. The problem is nobody has been able to agree upon a better measure,” said Andreas. “If we were just using a better measure, which MELI is, it would have an enormous affect on how we think about minimum wage, monetary policies, taxation, environmental regulation and even recessions. If policymakers were paying attention to a better measure than GDP, we would have better policies and that will trickle down to the average American.”

The problem with GDP

GDP is the main way economists measure the health of a country’s economy, and in the United States GDP has been steadily rising for the past 30 years. However, GDP completely ignores inequality and that’s unacceptable to Andreas.

“If median income had risen as fast as GDP, and if the average American had been sharing in the increased prosperity like we had in previous decades such as after WWII through the 1970s, the average American would almost have twice the income,” said Andreas.

One of the major problems Andreas has with GDP is that it includes net exports and investment spending, which everyday people would never consider as income.

Andreas explains net exports in terms of owning a family farm. “If your family farm produces a bunch of chickens and you give them to the neighbors, that’s not really an increase in your well-being. It’s actually a sacrifice that you get nothing back for. But by loaning them 100 chickens, it looks like your income is high. However, next year, if they return the favor and give you an extra 20 chickens as interest, that doesn’t count at all.”

Investment spending is another measure that erroneously inflates GDP. For example, Qatar is heavily investing in new roads, refineries and pipelines, and Qatar currently has the highest GDP per capita in the world at $145,894. However, “If you go to Qatar it doesn’t look like a rich country because a large percentage of their GDP is based on investment spending, which has nothing to do with people’s everyday lives right now,” said Andreas. “If you actually look at income going to households, including the portion governments are spending on consumption, it’s actually lower than in the United States.”

The case for MELI

MELI is measured by adding up the median income for every age group in the population weighed by the probability of survival to a specific age. It is an expected value of how much someone would earn in a lifetime, if economic conditions persisted as they are in the current year.

Andreas says the United States has let inequality rise so much in the last few decades, in part, because nobody is paying attention to it, and one of the reasons nobody is paying attention to it is because there simply isn’t a true measure of the middle class. “Intergenerational mobility is plummeting. During our parent’s generation, almost everyone became more prosperous than their parents,” said Andreas. “In our generation, that’s not happening.”

Andreas believes MELI would provide a reality check because its data would provide a standard definition for the middle class—it could be statistically mapped out. He also believes using MELI could motivate policymakers to stem rising inequality in the United States.

Conference solutions

More than 100 economists from across the world are expected to attend the IARIW conference. The theme, “Beyond GDP: Past Experiences and Future Challenges in the Measurement of Well-being,” perfectly fits Andreas’ research.

“About half of the people going to the conference are people who work for central banks and statistical agencies like the Bureau of Economic Analysis in the United States,” said Andreas. “These are the people who actually measure inflation and GDP.”

In fact, The IARIW was started as an international organization with the purpose to measure income and wealth and to standardize international harmonization on how to collect it. They are the ones that came up with GDP as the measurement of well-being.

Andreas is going to the conference in hopes of finding collaborators because getting leaders across the world to embrace change will be a monumental task.

“Compared with GDP, MELI is a relatively cheap and easy thing to measure, but this is not a one-person change. This is a social process. If I can get a couple of people in a couple of bureaucracies to start working on this, it could take off."

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