Posted Thursday, Nov. 1, 2012, at 12:49 PM
As anyone who has every tried to create a foolproof system for anything will tell you, the perfect machine – the flawless economic model – simply does not exist. Ask the boys at Long Term Capital Management, the hedge fund of the 1990s led by two Nobel winning economists that nearly brought down the US economy in 1998. Nobody knows everything – period.
This thought occurred to me last night as I attended the launch of the Legatum Institute’s latest Prosperity Index last night in London.
This index, a broad and intellectually rigorous effort to find something better than GDP to measure a nation’s wealth, is something any smart person can get behind. Essentially, Legatum adds such elements as education, social support, entrepreurship and opportunity, personal safety and health to its index. It’s interesting to see how this shakes up the “league tables” so many of us (myself included) fixate on. So, here’s Legatum’s Index compared with the 2011 IMF GDP rankings:
IMF Rankings by GDP Legatum Rankings (Prosperity Index)
1 United States 1. Norway
2. China 2. Denmark
3. Japan 3. Sweden
4. Germany 4. Australia
5. France 5. New Zealand
6. UK 6. Canada
7. Brazil 7. Finland
8. Italy 8. Netherlands
9. India 9. Switzerland
10. Canada 10. Ireland
11. Russia 11. Luxembourg
12. Spain 12. United States
13. Australia 13: UK
14. Mexico 14. Germany
15. South Korea 15. Ireland
This is great stuff. This year, for instance, was the first since the index began in 2009 that the US has fallen out of the top ten. Not much of a sample, but still interesting.
Why mess with GDP? GDP has been around since the Depression. It’s a measurement of all goods and services produced by an economy, and, as such is useful. It’s also nice, whether the topic is economic growth, military power or baseball, to be able to avoid asterisks (in baseball’s case, for steroid enhanced performance, for instance. Then again, mortgage-backed securities are a sort of economic steroid, I suppose, but that’s another post ...)
But projections based on GDP can be very flawed. A country can produce an ever increasing amount of goods and services, but the measurement only goes so far if those goods and services are monopolized by a small, corrupt elite.
GDP growth in Latin America, for instance, has been a great story since the mid-1990s. But it remains the most unequal continent n the world in terms of wealth distribution. So why are we so fixated on GDP growth in Paraguay being higher than it is in Estonia if people in Paraguay are miserably poor?
This is an important economic debate – with serious implications for the way we look at China’s rise, India’s struggles, Africa’s fast growth, etc.. And that’s why, as wonderful as I think Legatum’s efforts are, I have to point out the flaw.
Legatum ranks the United States number 2 in the world in health care. How can this be? Is this some evil plan by right-wingers to argue that free market, drop-the-poor health systems produce better results?
Certainly, indicators of health don’t support the notion. We have much higher infant mortality than Europe, (6.5 per thousand compared with 3-per-thousand in Europe). We live less long, we are obese, and let’s face it, we spend a fortune on our insurance.
Oh, yeah, and 25 PERCENT OF US HAVE NO ACCESS TO HEALTH CARE outside a hospital emergency room.
Interestingly, when you look at the page where the health sub-index is explained, the answer to this rogue result is plain to see. The criteria are hospital beds, spending per capita, under-nourishment, health adjusted life expectancy, infant mortality, water quality, sanitation, death from respiratory disease, health problems, well-rested, satisfaction with environmental beauty, level of worrying, satisfaction with health.
But “access?” It’s invisible. Indeed, by adding “spending per capita” the case is skewed even further. That’s like saying the Camden NJ school system is the best in the world because it spends more per student than any other district.
Egad! I still support what Legatum is doing. But that’s just a glaring, obvious flaw in their model. I admire many of those connected with the Institute, and assume there’s been no deliberate attempt to skew the numbers. We’ll know for sure if they change them up next year. It's an honest mistake, I think, and unlike the ones made in global finance, it's easy to fix.