Last week we wrote about the deepening "dialogue of the deaf" on economic growth in Israel. Pro-growth elements continue, with full justification, to extol Israel's solid record of economic growth since the introduction of far-reaching reforms. Social responsibility groups continue, again with full justification, to decry the ignominious increase in economic inequality during the same period.
Harry Truman once longed for a "onehanded" economist instead of the usual specimens who could only tell him "on the one hand, and on the other hand." But to the Israeli public it must often seem the opposite: all the prominent economic advocates are one-handed, but all of them have either a left hand only or a right hand only.
Of course, it is impossible to completely resolve this dichotomy. There is a fundamental question of values involved in deciding how much importance we want to grant to growth, and how much to equality. Still, since virtually all of us want growth, and virtually all of us are disturbed by glaring inequality, it seems we should be able to do a little better in terms of finding a way to combine the two considerations and measure our overall economic performance. The truth is that some very prominent economists have studied the problem of creating a measure of "inequality-adjusted growth." One was developed by Nobel Prize winner Amartya Sen.
These measures are gaining increasing prominence and attention.
At the risk of being a bit arcane, I want to discuss one measure that I think has the unusual promise of becoming an accepted measure of "inequality-adjusted growth."
Instead of giving equal weight to every additional shekel added to the standard of living, we give equal weight to every proportional increase in the standard of living.
According the current, absolute measure of growth, a shekel added to Shari Arison's budget makes the same contribution to our national welfare as one given to poverty-rights crusader Viki Knafo's. Now, I don't begrudge Shari Arison her standard of living one bit, but I do think that most of us feel that the contribution to our "collective" standard of living is greater when the shekel accrues to a poorer household. At the same time, we wouldn't want a national well-being measure to give more weight to one citizen than to another - Shari Arison's well-being isn't more important than Viki Knafo's, but it isn't less important either.
A fair solution is to measure proportional increases in well-being. We are equally happy for Shari or for Viki to double their current standard of living. This is the measure I favor, which is achieved by taking the so-called "geometric mean" of income or consumption, instead of the standard "arithmetic mean." This measure has been gaining credibility lately.
In the annual "Going for Growth" report of the Organization of Economic Cooperation and Development, considered an exclusive club of highly developed economies, the growth of member countries was compared when various adjustments were made for inequality. One of the adjustments published was the one we are advocating. (The report makes use of a more general version of this measure developed by economist Serge Kolm, but one of the variants corresponds to the simple geometric mean.)
Another modification I advocate is to use consumption spending instead of income as the criterion for standard of living. Incomes are poorly measured, highly variable, and often people who earn them never get to enjoy them. (Aforementioned Shari Arison, for example, is a prominent philanthropist.)
If we apply this measure to Israel, we discover that the give-back due to increasing inequality is actually not too bad. Average growth in consumption spending is 7.8% from 1992/93 to 2004, while the "proportional growth" index, or geometric mean, grew 7.1%. The proportional measure grew less because increasing inequality caused us to "give back" some of the growth, but not too much. In other words, the increase in inequality was not so great that it limited growth to a narrow population growth - growth was broad enough so that most income levels benefited.
It's clear that no single number can characterize a country's economic performance. But there are easily calculated numbers which do a much better job of capturing our intuitive ideas of genuine progress of society as a whole.
The Center for Business Ethics is advocating a series of changes in how we measure progress. We call this project the "Livability Index" project - creating indicators that reflect a world that is more livable by human standards and not merely according to arbitrary accounting principals. One simple and valuable step would be to measure "inequality-adjusted welfare" using a proportional-growth measure or some similar adjustment.