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?”