Measuring Progress in Our Standard of Living
The NY Times Declares that GDP Accounting should R.I.P. If we don't rely on GDP growth rates, how do we answer basic questions such as; "Are you better off than you were 4 years ago?" How do we judge when the economy is in bad shape? How will the Fed decide whether drastic intervention is warranted?
The challenge for economists is that we do not have a revealed preference test for figuring out your answer. Ideally, there would be a market for a time machine. This time machine could take you back to any past date and location. Once back, you have to live there and you can't change history such as killing Hitler or tipping off the FBI about foreign pilots pre 9/11. The economist would observe the market clearing price for each location at each past date. Suppose that the aggregate supply curve is set at 5,000 seats on the time machine for each place and time. Once there, you must live there for 3 months and you can't buy google stock! (so this is about consumption not inside information and investment).
From observing the market prices of "vacations" to these places at different dates, we could learn about how different nations' standard of living is changing over time. Without such a time machine's pricing, how do we judge "progress"? Now, you would say that old people would pay the most to buy a slot in the time machine but we wouldn't make them younger. A 95 year old in 2009 would need to go live as a 95 year old in 1952 Georgia if that is what he bid for. Clearly, different demographic groups would have different bidding schedules for different locations at different dates.
Armed with the time machine, we would study whether the average person's bid is a negative number. This would reveal that they want to stay here in Los Angeles in 2009 rather than going to Los Angeles in 1999 or 1989 or 1909.
A microeconomist would study the slope of the bid function with respect to the calendar year. Those demographic groups with the steepest increasing bids with respect to calendar year would reveal themselves to be the ones enjoying the greatest progress in their standard of living.
The challenge for economists is that we do not have a revealed preference test for figuring out your answer. Ideally, there would be a market for a time machine. This time machine could take you back to any past date and location. Once back, you have to live there and you can't change history such as killing Hitler or tipping off the FBI about foreign pilots pre 9/11. The economist would observe the market clearing price for each location at each past date. Suppose that the aggregate supply curve is set at 5,000 seats on the time machine for each place and time. Once there, you must live there for 3 months and you can't buy google stock! (so this is about consumption not inside information and investment).
From observing the market prices of "vacations" to these places at different dates, we could learn about how different nations' standard of living is changing over time. Without such a time machine's pricing, how do we judge "progress"? Now, you would say that old people would pay the most to buy a slot in the time machine but we wouldn't make them younger. A 95 year old in 2009 would need to go live as a 95 year old in 1952 Georgia if that is what he bid for. Clearly, different demographic groups would have different bidding schedules for different locations at different dates.
Armed with the time machine, we would study whether the average person's bid is a negative number. This would reveal that they want to stay here in Los Angeles in 2009 rather than going to Los Angeles in 1999 or 1989 or 1909.
A microeconomist would study the slope of the bid function with respect to the calendar year. Those demographic groups with the steepest increasing bids with respect to calendar year would reveal themselves to be the ones enjoying the greatest progress in their standard of living.
posted by Matthew Kahn at 1:23 PM
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