Sunday, January 2, 2022

IMF magazine publishing paper about a replacement for GDP or the HDI with a less arbitrary (they believe) personal well-being index

Authors in 2021 re-publishing their cherished table from 2014... Their proposal is to replace the very defective GDP index with a composite of the indicators below. From Measuring the Essence of the Good Life, by Daniel Benjamin, Kristen Cooper, Ori Heffetz, and Miles Kimball. F&D Magazine, Winter 2021.

Constructing the HDI

On its website, the United Nations Development Programme (UNDP) describes the HDI as “created to emphasize that people and their capabilities should be the ultimate criteria for assessing the development of a country, not economic growth alone.” But after those lofty words, the description turns to technical detail: “HDI is a summary measure of average achievement in key dimensions of human development: a long and healthy life, being knowledgeable, and having a decent standard of living. The HDI is the geometric mean of normalized indices for each of the three dimensions.” 

The technical details determine how the UNDP puts into practice its lofty goal: which dimensions of well-being (or capabilities) the HDI tracks, what it leaves out, and what relative importance it gives to the things it does track. For example, according to the geometric mean used by the HDI, a percentage change in HDI is the equally weighted average of the percentage changes of its components.

The HDI is surely the best-known practical application of Sen’s capabilities approach. It provides a single, simple number that both summarizes the state of a country at a point in time and is easy to construct and explain.  

Getting to less arbitrary

Still, although it captures more dimensions of well-being than GDP does, the HDI is arbitrary in its choice of what to include and how to weight what it does cover. The goal of an enhanced well-being index is to include many more than three dimensions of well-being and to weight them based on the values of the people in the country. 

A major reason the HDI focuses on longevity, education, and income is that when the index was introduced in 1990, these important dimensions of a good life were among the few variables being widely measured across countries in a reasonably comparable way. Unavailability of data has similarly constrained the reach of other Beyond GDP initiatives—such as the Genuine Progress Indicator and the Organisation for Economic Co-operation and Development’s (OECD’s) Better Life Index. But lack of current data should not constrain our vision of what a good index should look like.

Some Beyond GDP initiatives have gotten around these data constraints by using surveys, which can be conducted relatively cheaply around the world in real time. Indeed, real time is crucial to policymaking. For example, how the HDI performed during the pandemic is still unknown because, at the time of this writing, the latest numbers available are for 2019.

Some researchers have proposed using single-question survey measures of happiness or life satisfaction. However, research, including some of our own with Alex Rees-Jones of the University of Pennsylvania, suggests that answers to these survey questions do not capture the full range of what people care about when they make choices. Partly to address this shortcoming, other Beyond GDP initiatives, such as those of the OECD and the UK Office of National Statistics, ask additional survey questions to measure dimensions of well-being other than happiness or life satisfaction. But multiple survey questions reintroduce the question of how to weight the dimensions of well-being relative to one another. 

Our research makes clear the importance including multiple components in a measure of national well-being and the importance of getting the weighting right. Those issues are at the core of our efforts to construct a theoretically sound well-being index. The weights we recommend are relative marginal utilities—traditionally defined as the additional satisfaction an individual realizes from one more unit of a good or service, but in this case from one more unit of an aspect of well-being. We propose to estimate marginal utilities based on stated preferences in specially designed surveys, described below. 

Some older results illustrate our approach, which we are still developing. In Benjamin, Heffetz, Kimball, and Szembrot (2014) we asked survey questions about 136 aspects of well-being—a list that aimed to comprehensively reflect all proposed aspects of well-being. (An actual index should comprise fewer aspects of well-being and avoid, or adjust for, conceptual overlaps.) The table shows estimated weights based on policy choices—described as “national policy questions that you and everyone else in your nation vote on.” Respondents chose between pairs of hypothetical policies, which involved trade-offs between aspects of well-being. Our statistical procedure inferred weights for the aspects of well-being based on respondents’ choices, so that an aspect of well-being is assigned higher weight if it has a bigger impact on the policy respondents preferred. Because of space constraints, the table illustrates the results using 18 of the 136 aspects of well-being: the three with the highest weights, other interesting aspects in the top 10, every aspect that seems closely related to HDI components, other aspects for which data are widely collected, and an aspect on the natural environment. We normalize the weight on the top aspect—freedom from corruption, injustice, and abuse of power—to 1.00.

Although many things could be said about the table, we limit ourselves to three points. 

Many of the top aspects are clearly capabilities in Sen’s sense, including the first one, which does not guarantee a good life, but helps make one possible.

A number of important aspects of well-being—with weights of at least 75 percent of the top aspect—are missing from many measures of national well-being, such as the HDI. 

The weights for many aspects of well-being that have received much attention are well below the weights for those at the top. For example, “people not feeling anxious”—one of four aspects collected in large samples of individuals by the UK Office of National Statistics—is weighted less than a quarter of the top aspect. For those relevant to the HDI, “people’s health” and “people’s financial security” have almost three-quarters the weight of the top aspect, but others—knowledge, skills, and access to information; understanding the world; long lives; and average income—have weights no higher than 54 percent of the top aspect.