Daylight Savings Time is pointless and harmful

Nov 12, JDN 2458069

As I write this, Daylight Savings Time has just ended.

Sleep deprivation costs the developed world about 2% of GDP—on the order of $1 trillion per year. The US alone loses enough productivity from sleep deprivation that recovering this loss would give us enough additional income to end world hunger.

So, naturally, we have a ritual every year where we systematically impose an hour of sleep deprivation on the entire population for six months. This makes sense somehow.
The start of Daylight Savings Time each year is associated with a spike in workplace injuries, heart attacks, and suicide.

Nor does the “extra” hour of sleep we get in the fall compensate; in fact, it comes with its own downsides. Pedestrian fatalities spike immediately after the end of Daylight Savings Time; the rate of assault also rises at the end of DST, though it does also seem to fall when DST starts.

Daylight Savings Time was created to save energy. It does do that… technically. The total energy savings for the United States due to DST amounts to about 0.3% of our total electricity consumption. In some cases it can even increase energy use, though it does seem to smooth out electricity consumption over the day in a way that is useful for solar and wind power.

But this is a trivially small amount of energy savings, and there are far better ways to achieve it.

Simply due to new technologies and better policies, manufacturing in the US has reduced its energy costs per dollar of output by over 4% in the last few years. Simply getting all US states to use energy as efficiently as it is used in New York or California (not much climate similarity between those two states, but hmm… something about politics comes to mind…) would cut our energy consumption by about 30%.

The total amount of energy saved by DST is comparable to the amount of electricity now produced by small-scale residential photovoltaics—so simply doubling residential solar power production (which we’ve been doing every few years lately) would yield the same benefits as DST without the downsides. If we really got serious about solar power and adopted the policies necessary to get a per-capita solar power production comparable to Germany (not a very sunny place, mind you—Sacramento gets over twice the hours of sun per year that Berlin does), we would increase our solar power production by a factor of 10—five times the benefits of DST, none of the downsides.

Alternatively we could follow France’s model and get serious about nuclear fission. France produces over three hundred times as much energy from nuclear power as the US saves via Daylight Savings Time. Not coincidentally, France produces half as much CO2 per dollar of GDP as the United States.

Why would we persist in such a ridiculous policy, with such terrible downsides and almost no upside? To a first approximation, all human behavior is social norms.

What really happened in Greece

JDN 2457506

I said I’d get back to this issue, so here goes.

Let’s start with what is uncontroversial: Greece is in trouble.

Their per-capita GDP PPP has fallen from a peak of over $32,000 in 2007 to a trough of just over $24,000 in 2013, and only just began to recover over the last 2 years. That’s a fall of 29 log points. Put another way, the average person in Greece has about the same real income now that they had in the year 2000—a decade and a half of economic growth disappeared.

Their unemployment rate surged from about 7% in 2007 to almost 28% in 2013. It remains over 24%. That is, almost one quarter of all adults in Greece are seeking jobs and not finding them. The US has not seen an unemployment rate that high since the Great Depression.

Most shocking of all, over 40% of the population in Greece is now below the national poverty line. They define poverty as 60% of the inflation-adjusted average income in 2009, which works out to 665 Euros per person ($756 at current exchange rates) per month, or about $9000 per year. They also have an absolute poverty line, which 14% of Greeks now fall below, but only 2% did before the crash.

So now, let’s talk about why.

There’s a standard narrative you’ve probably heard many times, which goes something like this:

The Greek government spent too profligately, heaping social services on the population without the tax base to support them. Unemployment insurance was too generous; pensions were too large; it was too hard to fire workers or cut wages. Thus, work incentives were too weak, and there was no way to sustain a high GDP. But they refused to cut back on these social services, and as a result went further and further into debt until it finally became unsustainable. Now they are cutting spending and raising taxes like they needed to, and it will eventually allow them to repay their debt.

Here’s a fellow of the Cato Institute spreading this narrative on the BBC. Here’s ABC with a five bullet-point list: Pension system, benefits, early retirement, “high unemployment and work culture issues” (yes, seriously), and tax evasion. Here the Telegraph says that Greece “went on a spending spree” and “stopped paying taxes”.

That story is almost completely wrong. Almost nothing about it is true. Cato and the Telegraph got basically everything wrong. The only one ABC got right was tax evasion.

Here’s someone else arguing that Greece has a problem with corruption and failed governance; there is something to be said for this, as Greece is fairly corrupt by European standards—though hardly by world standards. For being only a generation removed from an authoritarian military junta, they’re doing quite well actually. They’re about as corrupt as a typical upper-middle income country like Libya or Botswana; and Botswana is widely regarded as the shining city on a hill of transparency as far as Sub-Saharan Africa is concerned. So corruption may have made things worse, but it can’t be the whole story.

First of all, social services in Greece were not particularly extensive compared to the rest of Europe.

Before the crisis, Greece’s government spending was about 44% of GDP.

That was about the same as Germany. It was slightly more than the UK. It was less than Denmark and France, both of which have government spending of about 50% of GDP.

Greece even tried to cut spending to pay down their debt—it didn’t work, because they simply ended up worsening the economic collapse and undermining the tax base they needed to do that.

Europe has fairly extensive social services by world standards—but that’s a major part of why it’s the First World. Even the US, despite spending far less than Europe on social services, still spends a great deal more than most countries—about 36% of GDP.

Second, if work incentives were a problem, you would not have high unemployment. People don’t seem to grasp what the word unemployment actually means, which is part of why I can’t stand it when news outlets just arbitrarily substitute “jobless” to save a couple of syllables. Unemployment does not mean simply that you don’t have a job. It means that you don’t have a job and are trying to get one.

The word you’re looking for to describe simply not having a job is nonemployment, and that’s such a rarely used term my spell-checker complains about it. Yet economists rarely use this term precisely because it doesn’t matter; a high nonemployment rate is not a symptom of a failing economy but a result of high productivity moving us toward the post-scarcity future (kicking and screaming, evidently). If the problem with Greece were that they were too lazy and they retire too early (which is basically what ABC was saying in slightly more polite language), there would be high nonemployment, but there would not be high unemployment. “High unemployment and work culture issues” is actually a contradiction.

Before the crisis, Greece had an employment-to-population ratio of 49%, meaning a nonemployment rate of 51%. If that sounds ludicrously high, you’re not accustomed to nonemployment figures. During the same time, the United States had an employment-to-population ratio of 52% and thus a nonemployment rate of 48%. So the number of people in Greece who were voluntarily choosing to drop out of work before the crisis was just slightly larger than the number in the US—and actually when you adjust for the fact that the US is full of young immigrants and Greece is full of old people (their median age is 10 years older than ours), it begins to look like it’s we Americans who are lazy. (Actually, it’s that we are studious—the US has an extremely high rate of college enrollment and the best colleges in the world. Full-time students are nonemployed, but they are certainly not unemployed.)

But Greece does have an enormously high debt, right? Yes—but it was actually not as bad before the crisis. Their government debt surged from 105% of GDP to almost 180% today. 105% of GDP is about what we have right now in the US; it’s less than what we had right after WW2. This is a little high, but really nothing to worry about, especially if you’ve incurred the debt for the right reasons. (The famous paper by Rogart and Reinhoff arguing that 90% of GDP is a horrible point of no return was literally based on math errors.)

Moreover, Ireland and Spain suffered much the same fate as Greece, despite running primary budget surpluses.

So… what did happen? If it wasn’t their profligate spending that put them in this mess, what was it?

Well, first of all, there was the Second Depression, a worldwide phenomenon triggered by the collapse of derivatives markets in the United States. (You want unsustainable debt? Try 20 to 1 leveraged CDO-squareds and one quadrillion dollars in notional value. Notional value isn’t everything, but it’s a lot.) So it’s mainly our fault, or rather the fault of our largest banks. As far as us voters, it’s “our fault” in the way that if your car gets stolen it’s “your fault” for not locking the doors and installing a LoJack. We could have regulated against this and enforced those regulations, but we didn’t. (Fortunately, Dodd-Frank looks like it might be working.)

Greece was hit particularly hard because they are highly dependent on trade, particularly in services like tourism that are highly sensitive to the business cycle. Before the crash they imported 36% of GDP and exported 23% of GDP. Now they import 35% of GDP and export 33% of GDP—but it’s a much smaller GDP. Their exports have only slightly increased while their imports have plummeted. (This has reduced their “trade deficit”, but that has always been a silly concept. I guess it’s less silly if you don’t control your own currency, but it’s still silly.)

Once the crash happened, the US had sovereign monetary policy and the wherewithal to actually use that monetary policy effectively, so we weathered the crash fairly well, all things considered. Our unemployment rate barely went over 10%. But Greece did not have sovereign monetary policy—they are tied to the Euro—and that severely limited their options for expanding the money supply as a result of the crisis. Raising spending and cutting taxes was the best thing they could do.

But the bank(st?)ers and their derivatives schemes caused the Greek debt crisis a good deal more directly than just that. Part of the condition of joining the Euro was that countries must limit their fiscal deficit to no more than 3% of GDP (which is a totally arbitrary figure with no economic basis in case you were wondering). Greece was unwilling or unable to do so, but wanted to look like they were following the rules—so they called up Goldman Sachs and got them to make some special derivatives that Greece could use to continue borrowing without looking like they were borrowing. The bank could have refused; they could have even reported it to the European Central Bank. But of course they didn’t; they got their brokerage fee, and they knew they’d sell it off to some other bank long before they had to worry about whether Greece could ever actually repay it. And then (as I said I’d get back to in a previous post) they paid off the credit rating agencies to get them to rate these newfangled securities as low-risk.

In other words, Greece is not broke; they are being robbed.

Like homeowners in the US, Greece was offered loans they couldn’t afford to pay, but the banks told them they could, because the banks had lost all incentive to actually bother with the question of whether loans can be repaid. They had “moved on”; their “financial innovation” of securitization and collateralized debt obligations meant that they could collect origination fees and brokerage fees on loans that could never possibly be repaid, then sell them off to some Greater Fool down the line who would end up actually bearing the default. As long as the system was complex enough and opaque enough, the buyers would never realize the garbage they were getting until it was too late. The entire concept of loans was thereby broken: The basic assumption that you only loan money you expect to be repaid no longer held.

And it worked, for awhile, until finally the unpayable loans tried to create more money than there was in the world, and people started demanding repayment that simply wasn’t possible. Then the whole scheme fell apart, and banks began to go under—but of course we saved them, because you’ve got to save the banks, how can you not save the banks?

Honestly I don’t even disagree with saving the banks, actually. It was probably necessary. What bothers me is that we did nothing to save everyone else. We did nothing to keep people in their homes, nothing to stop businesses from collapsing and workers losing their jobs. Precisely because of the absurd over-leveraging of the financial system, the cost to simply refinance every mortgage in America would have been less than the amount we loaned out in bank bailouts. The banks probably would have done fine anyway, but if they didn’t, so what? The banks exist to serve the people—not the other way around.

We can stop this from happening again—here in the US, in Greece, in the rest of Europe, everywhere. But in order to do that we must first understand what actually happened; we must stop blaming the victims and start blaming the perpetrators.

What would an interplanetary economy look like?

JDN 2457397

Today’s post is the second Reader’s Choice topic, chosen by a vote of my Patreons.

Remember, you too can vote on future topics if you pledge at least $10 per month.

Actually, there was a tie between two topics; since I was in an SF mood today, I decided to do this one as the official Reader’s Choice post. The second, “The challenges and possibilities of a global basic income”, I’ll do as a later post. (If I don’t get around to that before the next vote, you can of course always vote for it again.)

Will we ever colonize outer space? Many people thought we’d be there by now.

In Blade Runner, released in 1982, Roy was built and deployed to the outer colonies in 2015, which you may remember as the year that just ended.

Predictions of the future are often wrong, but predictions from the 20th century of the 21st century seem to be consistently overoptimistic about technology. In a past Idiot Free Zone post, I hypothesize that this is due to the confusion between exponential and logistic growth.

Paul Krugman is also a big fan of SF (it is actually about as likely that I’d run into Krugman at Worldcon as at an economics conference), and he wrote a paper on the possibility of interstellar trade way back in 1978. I think he’s kind of satirizing economic theorists actually; he uses sophisticated mathematics to address a problem that doesn’t exist in the real world—just like they do.

I think we will eventually at least reach the point of interplanetary colonization, if not actually interstellar. To begin, let me emphasize that vital distinction. Mars is currently about 60 million kilometers away at its closest approach. The core of the Alpha Centauri system is 4.24 light-years away, which is about 40 trillion kilometers. The distance from Ann Arbor to Toledo is about 84 kilometers. Thus, the difficulty of going to Alpha Centauri is about as much higher than that of going to Mars as the difficulty of going to Mars is compared to going from Ann Arbor to Toledo—each a factor of 700,000 times the distance.

With current technology, we can send robots to Mars (how cool is that? We did get some of the future we were promised). A typical trip takes about half a year. It costs us about $2.5 billion to do that, though India somehow managed to at least make Mars orbit for $75 million. Even if we use the $2.5 billion figure, that still means our current economic output the US and Europe alone could support hundreds of missions per year if we were willing to pay for it. (Devote the entire US military budget to NASA and we could land a new robot on Mars every day.) Interplanetary travel is most definitely feasible.

Interstellar travel on the other hand, is still far out of reach. In principle we are limited by the speed of light; in fact, it’s a good deal worse than that. The fastest we have ever gotten a spacecraft leaving the Solar System is about 60,000 km/h; at that speed it would take almost one billion hours to get to Alpha Centauri, which is over 100,000 years. We will need substantial breakthroughs in spacecraft propulsion before we can even consider sending anything to even the nearest stars. (I wouldn’t give up hope completely, however; in 1901 someone could just as well have criticized H.G. Wells’ The First Men in the Moon on the grounds that no one will ever invent a propulsion system powerful enough to reach the moon.)

By the time we manage interstellar travel, our technology will be so much more advanced it’s hard to even imagine what things will be like. But interplanetary travel we could probably do right now.

So let’s suppose we do in fact establish colonies on other planets—most likely Mars and Mercury, as well as several moons of Jupiter and Saturn. What would our economy look like once we did?

For a decidedly Game of Thrones take on this situation, see The Expanse. Their scientific accuracy is quite good (although they still have sound in space!); so far, their economic accuracy seems pretty good as well, but so far I haven’t seen enough yet to be sure.
One thing I think The Expanse does get right is that asteroid mining is a vital part of the interplanetary trade network. The thing that’s currently keeping us from colonizing other planets is a lack of economic incentives to bear the enormous cost of space travel. Asteroid mining is one thing that might actually provide those incentives, if we can leap just a few more technological hurdles in terms of mining robots and spacecraft propulsion.

Many asteroids contain metals such as silver, gold and platinum at concentrations 20 times as great as anything found on the surface of the Earth. The amount of iron and nickel they contain is even larger; we could supply the entire iron production of the Earth (3.2 billion tonnes) with a single asteroid, 16 Psyche, for the next million years. That one asteroid over 2e19 kg of nearly pure iron-nickel, which is 200 quadrillion tonnes. Many asteroids also contain large concentrations of other useful and rare metals, such as lithium and neodymium.

It is unlikely we would actually try to colonize asteroids (they do in The Expanse, but I’m not sure I buy it). None are large enough to support an atmosphere (kind of by definition), so we’d have to build space stations large enough for permanent habitation. With such ludicrous amounts of iron all around us, that might be possible; but would it be cost-effective? I think it’s more likely that we would have temporary habitats, able to support people for several months or maybe a few years, and people would basically do “tours of duty” working in the asteroids, and then return home. This is similar to how we use space stations right now; you can live there for a long time—the standing record is over a year—but nobody lives their whole life there. It might be a sort of “seasonal” work, where the seasons are decided by large-scale orbital mechanics rather than local planetary axial tilt. (We might have to start doing “seasonal adjustments” to statistics based on this!) Provided that the workers are paid a substantial portion of the spoils—by no means a certainty, as we all know from sweatshops around the world—this work could easily be lucrative enough that you become a millionaire after a tour or two and then retire.

But they might well return home to Mars, since the orbital transfer from the asteroid belt to Mars is considerably easier (it has what we call a lower “delta-v”) than the same transfer all the way back to Earth, and the launch and landing are even easier still. Mars does support an atmosphere—currently very thin and not breathable, but that could change with terraforming. It is also large enough to spread out with room for many homes, greenhouses, power plants, etc., and has enough gravity to at least keep human bodies as a basic level of functioning without too much additional support. (Mars’ gravity is about 40% that of Earth’s.)

Of course, most of the products we make are going to be used on Earth—most of everything is going to be used on Earth, probably for centuries to come. It’s possible that we’ll end up like the British Empire did where the colonies are more populous than the source, but it will take a long time for that to happen. (Moreover, the primary reason—cheap, fertile agricultural land—will not apply unless we happen upon a habitable planet or get very good at terraforming.) This means we will need to ship something from Mars to Earth. But since the delta-v is exceptionally high, we’ll want to ship as little as possible. I think this means that we will do most of the refinement and even manufacturing on Mars, and then ship prefabricated components to Earth. Any process that removes mass will be done on Mars, to minimize the amount of mass that needs to make the trip to Earth.

And what will Earth provide in return? As we import this huge quantity of metal (or metal components), what will we export in return?
Well, one possibility is that we won’t—at first, we (by which I mean “our corporations”) will simply retain ownership of the entire supply chain and do all the accounting as though production were being done entirely on Earth. We won’t think of it as “trade”, just as corporations engaging in a series of prospecting and mining ventures. At least at first.

Yet this will become increasingly unwieldy, just as it became unwieldy for the British Empire to retain control of all its colonies and collect their taxes for the Crown. Communication between Mars, Earth, and the asteroid belt will be relatively fast—a few hours delay at worst—but travel will be very slow and very expensive. Local institutions will form and assert themselves, and may eventually topple the corporate managers, expropriate their assets, and create new governments. The corporations could see the rebellion coming a year in advance from the transmissions, and still be powerless to stop it because the ships will take too long to arrive.

Once new local governments form, we will start thinking of it as “trade”. So what will we be trading? To some extent people on Mars might simply accept Earth currency (perhaps US Dollars, or Euros, or as I like to imagine some unified currency, perhaps the Atlantic Union Dollar); but only if they can then use that Earth currency to buy things they actually need. What will they actually need?

Food, for one. Some amount of food production will be done on Mars by necessity—you can’t survive if you depend entirely on imported food to survive. But it will be expensive, and most likely nutrient-dense but tasteless and monotonous genetically-engineered vegetable products. People will get tired of eating bricks of processed Aresoy(TM) for the 17,000th time and will crave real food; Earth will respond by selling them frozen steaks at $12,000 per kilogram. Probably only luxury foods will be imported, actually; why spend $11,900 for a hamburger when you can spend $12,000 for filet mignon? Nominal income on Mars will be huge—millionaires will be ubiquitous. At purchasing power parity, it may not be so impressive, once you account for the ridiculous cost of food and housing. It’ll be like living in Silicon Valley—on steroids.

Water, perhaps. This one is not as obvious as it may seem. While Earth does have the largest concentration of liquid water (except for a couple of moons of the gas giants), there is plenty of ice in them thar asteroids. It will most likely be cheaper (albeit not cheap) to obtain water by capturing and melting down asteroid ice than to ship it all the way from Earth.

But I think the most important Earth export will beculture. The main products that Martians will want to buy from us will be books, movies, songs, video games, hologram simulations. They will be blueprints, patents, 3D printer schematics. Those who travel to Mars will be bold, adventurous, many of them loners and misfits—but deep down they will still sometimes long for the comforts of the books they read as children, the songs they listened to as teenagers. The beautiful thing about selling culture is that it can be transported almost for free—just add it to the radio transmissions you were already sending. Mars will also produce its own culture, of course, but the much smaller population and constant struggle for survival will mean that most of the cultural flow will be outward from Earth to the colonies rather than the reverse. The Internet won’t work normally between Earth and Mars due to the time delay, but there will be something like it, a local MarsNet that caches material from the Internet on a delay of a few hours and then shares it with the colony. You won’t download webpages in real time, you’ll request them a day in advance. You won’t send instant messages, but sending email will be hardly any different. (Instead of Nigerian princes we’ll start getting scam spam about Martian mining entrepreneurs.) Whoever owns this communication monopoly will become fantastically rich, perhaps even more so than the mining companies themselves—because the mining companies have overhead.

Overall, the increased availability of previously-scarce metals like gold, lithium, and neodymium will make new technologies possible and also widely available, including battery technologies that might finally allow Earth to wean itself off of carbon emissions. (Unfortunately, our current means of spacecraft launch are all very carbon-intensive. We will need to invent nuclear engines that don’t leave fallout so that we can launch with them from the ground.) Like all trade, the mutual imports and exports between Earth and Mars will benefit both societies.

But unless we change course dramatically as a society, interplanetary trade will make one problem even worse, and that is inequality. I am having trouble foreseeing an interplanetary trade system that doesn’t involve making the middlemen who own the shipping and networking companies rich even beyond the wildest dreams of today’s plutocrats. We will witness the birth of humanity’s first trillionaires, individual men (and let’s face it, probably men, unless we figure out gender equality too) who own as much as not just entire countries, but as entire large First World countries. The GDP of France today is $2.8 trillion per year; the CEO of Aresoy or MarsNet could well make more than that on dividends. Of course, that provides him a great incentive to start the project now—but what will it mean for our societies when one person can buy a spaceship as casually as we would buy a cup of coffee?

What makes a nation wealthy?

JDN 2457251 EDT 10:17

One of the central questions of economics—perhaps the central question, the primary reason why economics is necessary and worthwhile—is development: How do we raise a nation from poverty to prosperity?

We have done it before: France and Germany rose from the quite literal ashes of World War 2 to some of the most prosperous societies in the world. Their per-capita GDP over the 20th century rose like this (all of these figures are from the World Bank World Development Indicators; France is green, Germany is blue):

GDPPC_France_Germany

GDPPCPPP_France_Germany

The top graph is at market exchange rates, the bottom is correcting for purchasing power parity (PPP). The PPP figures are more meaningful, but unfortunately they only began collecting good data on purchasing power around 1990.

Around the same time, but even more spectacularly, Japan and South Korea rose from poverty-stricken Third World backwaters to high-tech First World powers in only a couple of generations. Check out their per-capita GDP over the 20th century (Japan is green, South Korea is blue):

GDPPC_Japan_KoreaGDPPCPPP_Japan_Korea


This is why I am only half-joking when I define development economics as “the ongoing project to figure out what happened in South Korea and make it happen everywhere in the world”.

More recently China has been on a similar upward trajectory, which is particularly important since China comprises such a huge portion of the world’s population—but they are far from finished:

GDPPC_ChinaGDPPCPPP_China

Compare these to societies that have not achieved economic development, such as Zimbabwe (green), India (black), Ghana (red), and Haiti (blue):

GDPPC_poor_countriesGDPPCPPP_poor_countries

They’re so poor that you can barely see them on the same scale, so I’ve rescaled so that the top is $5,000 per person per year instead of $50,000:

GDPPC_poor_countries_rescaledGDPPCPPP_poor_countries_rescaled

Only India actually manages to get above $5,000 per person per year at purchasing power parity, and then not by much, reaching $5,243 per person per year in 2013, the most recent data.

I had wanted to compare North Korea and South Korea, because the two countries were united as recently as the 1945 and were not all that different to begin with, yet have taken completely different development trajectories. Unfortunately, North Korea is so impoverished, corrupt, and authoritarian that the World Bank doesn’t even report data on their per-capita GDP. Perhaps that is contrast enough?

And then of course there are the countries in between, which have made some gains but still have a long way to go, such as Uruguay (green) and Botswana (blue):

GDPPC_Botswana_UruguayGDPPCPPP_Botswana_Uruguay

But despite the fact that we have observed successful economic development, we still don’t really understand how it works. A number of theories have been proposed, involving a wide range of factors including exports, corruption, disease, institutions of government, liberalized financial markets, and natural resources (counter-intuitively; more natural resources make your development worse).

I’m not going to resolve that whole debate in a single blog post. (I may not be able to resolve that whole debate in a single career, though I am definitely trying.) We may ultimately find that economic development is best conceived as like “health”; what factors determine your health? Well, a lot of things, and if any one thing goes badly enough wrong the whole system can break down. Economists may need to start thinking of ourselves as akin to doctors (or as Keynes famously said, dentists), diagnosing particular disorders in particular patients rather than seeking one unifying theory. On the other hand, doctors depend upon biologists, and it’s not clear that we yet understand development even at that level.

Instead I want to take a step back, and ask a more fundamental question: What do we mean by prosperity?

My hope is that if we can better understand what it is we are trying to achieve, we can also better understand the steps we need to take in order to get there.

Thus far it has sort of been “I know it when I see it”; we take it as more or less given that the United States and the United Kingdom are prosperous while Ghana and Haiti are not. I certainly don’t disagree with that particular conclusion; I’m just asking what we’re basing it on, so that we can hopefully better apply it to more marginal cases.


For example: Is
France more or less prosperous than Saudi Arabia? If we go solely by GDP per capita PPP, clearly Saudi Arabia is more prosperous at $53,100 per person per year than France is at $37,200 per person per year.

But people actually live longer in France, on average, than they do in Saudi Arabia. Overall reported happiness is higher in France than Saudi Arabia. I think France is actually more prosperous.


In fact, I think the United States is not as prosperous as we pretend ourselves to be. We are certainly more prosperous than most other countries; we are definitely still well within First World status. But we are not the most prosperous nation in the world.

Our total GDP is astonishingly high (highest in the world nominally, second only to China PPP). Our GDP per-capita is higher than any other country of comparable size; no nation with higher GDP PPP than the US has a population larger than the Chicago metropolitan area. (You may be surprised to find that in order from largest to smallest population the countries with higher GDP per capita PPP are the United Arab Emirates, Switzerland, Hong Kong, Singapore, and then Norway, followed by Kuwait, Qatar, Luxembourg, Brunei, and finally San Marino—which is smaller than Ann Arbor.) Our per-capita GDP PPP of $51,300 is markedly higher than that of France ($37,200), Germany ($42,900), or Sweden ($43,500).

But at the same time, if you compare the US to other First World countries, we have nearly the highest rate of child poverty and higher infant mortality. We have shorter life expectancy and dramatically higher homicide rates. Our inequality is the highest in the world. In France and Sweden, the top 0.01% receive about 1% of the income (i.e. 100 times as much as the average person), while in the United States they receive almost 4%, making someone in the top 0.01% nearly 400 times as rich as the average person.

By estimating solely on GDP per capita, we are effectively rigging the game in our own favor. Or rather, the rich in the United States are rigging the game in their own favor (what else is new?), by convincing all the world’s economists to rank countries based on a measure that favors them.

Amartya Sen, one of the greats of development economics, developed a scale called the Human Development Index that attempts to take broader factors into account. It’s far from perfect, but it’s definitely a step in the right direction.

In particular, France’s HDI is higher than that of Saudi Arabia, fitting my intuition about which country is truly more prosperous. However, the US still does extremely well, with only Norway, Australia, Switzerland, and the Netherlands above us. I think we might still be biased toward high average incomes rather than overall happiness.

In practice, we still use GDP an awful lot, probably because it’s much easier to measure. It’s sort of like IQ tests and SAT scores; we know damn well it’s not measuring what we really care about, but because it’s so much easier to work with we keep using it anyway.

This is a problem, because the better you get at optimizing toward the wrong goal, the worse your overall outcomes are going to be. If you are just sort of vaguely pointed at several reasonable goals, you will probably be improving your situation overall. But when you start precisely optimizing to a specific wrong goal, it can drag you wildly off course.

This is what we mean when we talk about “gaming the system”. Consider test scores, for example. If you do things that will probably increase your test scores among other things, you are likely to engage in generally good behaviors like getting enough sleep, going to class, studying the content. But if your single goal is to maximize your test score at all costs, what will you do? Cheat, of course.

This is also related to the Friendly AI Problem: It is vitally important to know precisely what goals we want our artificial intelligences to have, because whatever goals we set, they will probably be very good at achieving them. Already computers can do many things that were previously impossible, and as they improve over time we will reach the point where in a meaningful sense our AIs are even smarter than we are. When that day comes, we will want to make very, very sure that we have designed them to want the same things that we do—because if our desires ever come into conflict, theirs are likely to win. The really scary part is that right now most of our AI research is done by for-profit corporations or the military, and “maximize my profit” and “kill that target” are most definitely not the ultimate goals we want in a superintelligent AI. It’s trivially easy to see what’s wrong with these goals: For the former, hack into the world banking system and transfer trillions of dollars to the company accounts. For the latter, hack into the nuclear launch system and launch a few ICBMs in the general vicinity of the target. Yet these are the goals we’ve been programming into the actual AIs we build!

If we set GDP per capita as our ultimate goal to the exclusion of all other goals, there are all sorts of bad policies we would implement: We’d ignore inequality until it reached staggering heights, ignore work stress even as it began to kill us, constantly try to maximize the pressure for everyone to work constantly, use poverty as a stick to force people to work even if people starve, inundate everyone with ads to get them to spend as much as possible, repeal regulations that protect the environment, workers, and public health… wait. This isn’t actually hypothetical, is it? We are doing those things.

At least we’re not trying to maximize nominal GDP, or we’d have long-since ended up like Zimbabwe. No, our economists are at least smart enough to adjust for purchasing power. But they’re still designing an economic system that works us all to death to maximize the number of gadgets that come off assembly lines. The purchasing-power adjustment doesn’t include the value of our health or free time.

This is why the Human Development Index is a major step in the right direction; it reminds us that society has other goals besides maximizing the total amount of money that changes hands (because that’s actually all that GDP is measuring; if you get something for free, it isn’t counted in GDP). More recent refinements include things like “natural resource services” that include environmental degradation in estimates of investment. Unfortunately there is no accepted way of doing this, and surprisingly little research on how to improve our accounting methods. Many nations seem resistant to doing so precisely because they know it would make their economic policy look bad—this is almost certainly why China canceled its “green GDP” initiative. This is in fact all the more reason to do it; if it shows that our policy is bad, that means our policy is bad and should be fixed. But people have allowed themselves to value image over substance.

We can do better still, and in fact I think something like QALY is probably the way to go. Rather than some weird arbitrary scaling of GDP with lifespan and Gini index (which is what the HDI is), we need to put everything in the same units, and those units must be directly linked to human happiness. At the very least, we should make some sort of adjustment to our GDP calculation that includes the distribution of wealth and its marginal utility; adding $1,000 to the economy and handing it to someone in poverty should count for a great deal, but adding $1,000,000 and handing it to a billionaire should count for basically nothing. (It’s not bad to give a billionaire another million; but it’s hardly good either, as no one’s real standard of living will change.) Calculating that could be as simple as dividing by their current income; if your annual income is $10,000 and you receive $1,000, you’ve added about 0.1 QALY. If your annual income is $1 billion and you receive $1 million, you’ve added only 0.001 QALY. Maybe we should simply separate out all individual (or household, to be simpler?) incomes, take their logarithms, and then use that sum as our “utility-adjusted GDP”. The results would no doubt be quite different.

This would create a strong pressure for policy to be directed at reducing inequality even at the expense of some economic output—which is exactly what we should be willing to do. If it’s really true that a redistribution policy would hurt the overall economy so much that the harms would outweigh the benefits, then we shouldn’t do that policy; but that is what you need to show. Reducing total GDP is not a sufficient reason to reject a redistribution policy, because it’s quite possible—easy, in fact—to improve the overall prosperity of a society while still reducing its GDP. There are in fact redistribution policies so disastrous they make things worse: The Soviet Union had them. But a 90% tax on million-dollar incomes would not be such a policy—because we had that in 1960 with little or no ill effect.

Of course, even this has problems; one way to minimize poverty would be to exclude, relocate, or even murder all your poor people. (The Black Death increased per-capita GDP.) Open immigration generally increases poverty rates in the short term, because most of the immigrants are poor. Somehow we’d need to correct for that, only raising the score if you actually improve people’s lives, and not if you make them excluded from the calculation.

In any case it’s not enough to have the alternative measures; we must actually use them. We must get policymakers to stop talking about “economic growth” and start talking about “human development”; a policy that raises GDP but reduces lifespan should be immediately rejected, as should one that further enriches a few at the expense of many others. We must shift the discussion away from “creating jobs”—jobs are only a means—to “creating prosperity”.