Evaluating public policies, regulation, growth...

It has been a while since I have been wanting to write this post...lack of time, and then bad health have prevented me from doing so. As a result, I'll at least start, even if it stays shorter than I'd like. At issue again: how to evaluate what we are doing in terms of public policy, and how we are doing in terms of economic development, with something else than GDP.

GDP is bad because of a number of reasons:

- it counts as "growth" any added monetary activity, even if the activity (a) is not a really new activity, but just something becoming monetary, that previously was done "in house" (e.g. outsourcing your child's care to a nanny adds GDP...) and/or (b) is actually noxious for the country (e.g. increasing distance between house and workplace means more mileage means more cars, fuel etc., means more GDP) - this is well known, and has been known for ages

- growth can be tremendously unequal and thus strong growth can lead to no improvement (or even a worsening) in conditions for the majority of the population (see most of the Bush years, or even most of the last 30 years in OECD countries - have a look at Robert Reich's book "Supercapitalism" on this, for instance)

- huge differences in GDP usually correlate well with differences in well-being (think: Switzerland vs. Bhutan) - but smaller differences (as, for instance, between north-western Europe, the USA, Canada, Japan) usually are less important than other factors (environment, health care, infrastructure, education etc.) in what people feel as well being

- the accumulated stock of wealth is just as, or more, important than this year's GDP - for instance, when I used to live in Italy, the GDP/capita was not much below France's (it was 10 years ago) - it was lower, but not that much. However, you could see that the country (particularly in Rome, where I lived) had had a significantly lower level of output than France for well over a century. The accumulated infrastructure was poor.

And I could go on and on...

Now, GDP is good for one reason: it exists, it has a clear definition, is measurable, can be aggregated, compared etc. (Well, there still is the thorny question of using purchasing power parity vs. current exchange rates, both being bad for different reasons, but then again...)

So what do we do? A few ideas:

- The UN has this crude instrument, the Human Development Index. It combines GDP, education and health statistics. But it is quite crude too, and relies a lot on GDP anyway. And it is difficult to use it to track policy outcomes and short-term changes, because the indicators used on education and health (life expectancy at birth) vary slowly...

- Cost-benefit analysis of specific policies: how much do they cost to implement (e.g. for a regulation, using the "standard cost model" to measure this - relatively reliable at least), and comparing this to what they bring (often far more tricky to evaluate...this is the problem)

- Looking at SEVERAL indicators simultaneously: GINI coefficient (inequality) or similar measures of inequality, health indicators, education indicators, crime indicators, environment, etc. - and GDP. Maybe this would be the most useful: having systematically, whenever there is a policy discussion, a set of indicators, and looking at the evolution of ALL of them...

Comments welcome!