- Ranking income distribution, the Organization for Economic Cooperation and Development (OECD) says that Denmark is one of the most equal countries the world while Mexico is one of the least.
- For overall well-being, Gallup selects Virginia, Wisconsin and New Jersey as the top 3 states in the U.S.
- U.S. News ranks Harvard and Princeton #1 for 2011.
Yes? Malcolm Gladwell says not necessarily.
Explaining in the New Yorker why ranking is flawed, Gladwell emphasizes that subjective variables are tough to define. Yes, you can choose a valid list of categories on which to base a list. Then though, it gets tricky. For the colleges list, how to quantify student engagement? Is faculty quality really about degrees and salaries?
Our bottom line: Health care, corporate responsibility, national debt, life expectancy…we see ranks everywhere. When should we be skeptical?
The Economic Lesson
When economist Robert Whaples discusses income inequality (#7) in an excellent Teaching Company series on contemporary economic issues, he first has to define income. And that, he says, is not easy.
- Collecting data, the Census Bureau does not necessarily recognize noncash public benefits.
- Retirement and health insurance packages are excluded.
- Households tend to “underreport nonwage sources of income.”
In addition, changing household size is relevant. We could even debate whether we would learn more from money spent than money earned.
This returns us to the OECD’s income inequality list. Would we agree with their definition of income?
An economic question: For movies or songs, create a list and define your variables. Are they tough to quantify?
Having just looked at the “Human Development Report 2010” from the UN, I thought of a former mayor of NYC, Ed Koch. Mayor Koch used to ask, “How am I doing?” Let’s assume that an economy can ask the same question. What yardstick would you use for an answer?
The GDP is a possibility. It tells us the value of goods and services that we produce. If we make more cars and grow more wheat and examine more teeth, then our economy has grown. Can we say that we are doing well if the U.S. is #1 in the world?
The “Human Development Report” (HDR) has per capita income as one variable but also looks at education, and life expectancy. Using the HDR yardstick, Norway is #1. Separately, the authors of the report look at other variables including sustainability, gender inequality, security, and “decent work.”
Yet another possibility takes us to the “Index of Economic Freedom.” Using variables that assess the extent that government influences an economy such as trade freedom and property rights, the “Index of Economic Freedom” places Hong Kong at the top.
The Economic Lesson
Yardsticks influence economic policy. Just because we measure something, we tend to want to influence it. So, if we focus on GDP (and whatever components that includes), then we will try to improve it. If employment numbers stand out, then they become most important. Correspondingly, if decide that HDR is our key yardstick, most likely, we will keep a spotlight on its variables.
Sometimes, the Federal Reserve has a dilemma because it has to decide which yardstick it values most: the inflation yardstick or the one that looks at unemployment.
Which yardstick do you believe we should use to answer, “How are we doing?”