Discussion of Angus Deaton, “Wellbeing: Measurement and Concepts”

Charles I. Jones Stanford GSB

Discussion of Deaton on “Wellbeing” – p.1/17 PPP Problems

Discussion of Deaton on “Wellbeing” – p.2/17 International Comparisons of Welfare

• Penn World Tables ◦ National Accounts across space and time ◦ More than 8000 citations in Google Scholar!

• Key inputs ◦ National accounts data (United Nations) ◦ Comparable prices (International Comparison Program) – From just 10 countries in 1970 – To 146 in 2005 and 180 in 2011

• Essential to answering many questions and disciplining many theories ◦ How large are the income gaps between countries? ◦ Are these gaps growing or shrinking?

Discussion of Deaton on “Wellbeing” – p.3/17 But not (yet) without problems...

• Robert Summers: “You always look better riding someone else’s horse!” ◦ China’s GDP is 60 percent larger if we use China’s prices rather than US/Intl prices for the comparison. ◦ What about chaining?

• Angus Deaton: ◦ Standard errors for PPP’s based on the goods sampled can be large (30 percent for China and India) ◦ With Heston: Why did China’s real GDP fall by 40% after the introduction of 2005 PPPs? (urban prices, methods) ◦ Deaton on 2005 ICP: “The new numbers ‘reshape’ the world...”

Discussion of Deaton on “Wellbeing” – p.4/17 (continued)

• Alwyn Young (2012): ◦ Half the constant price national accounts data for sub-Saharan Africa (1991–2004) was missing ◦ 1/3 of countries reported no constant price data at all ◦ Explores improvements using micro data from the Demographic and Health Surveys

• Johnson, Larson, Papageourgiou, Subramanian (2009): ◦ Robustness of research to new versions of PWT? ◦ Only 9 of 13 studies they examine are robust ◦ Successive versions of PWT “forget” earlier benchmarks

• Feenstra, Inklaar, Timmer, et al: PWT 8.0 coming soon

Discussion of Deaton on “Wellbeing” – p.5/17 Per capita GDP, 2000

PWT Version 6.2 6.3 7.0

United States 100 100 100 Sweden 73 69 78 Hong Kong 79 83 73 Singapore 86 90 98 Brazil 21 21 20 South Africa 24 22 15 China 12 10 7.4 India 7.7 6.8 4.7 Kenya 3.7 5.0 2.9 Mean absolute deviation between 6.3 and 7.0 is 25 percent!

Discussion of Deaton on “Wellbeing” – p.6/17 Beyond GDP

Discussion of Deaton on “Wellbeing” – p.7/17 Extending Welfare Comparisons

• Large literature: ◦ Nordhaus and Tobin (1972)

◦ Deaton (1997, 2005), Deaton and Zaidi (2002)

◦ Becker, Philipson, Soares (2008)

◦ Fleurbaey (2009), Fleurbaey and Gaulier (2009)

• Recent work with Pete Klenow... ◦ Use a “standard” utility function to combine consumption, leisure, life expectancy, and inequality

◦ Consumption equivalent units

Discussion of Deaton on “Wellbeing” – p.8/17 Welfare and Income Are Correlated 0.95 in 2000

Welfare, λ

Luxembourg Sweden U.S. 1 France Norway Malta Hong Kong Ireland Czech Rep. Singapore Costa Rica South Korea 1/4 Tunisia Chile Bahamas Bosnia / Herz. Mexico Malaysia Jordan Venezuela Albania Russia Moldova 1/16 Vietnam China Tajikistan South Africa India Bolivia Uzbekistan Djibouti Yemen Haiti Botswana 1/64 Namibia Benin Cote d‘Ivoire Madagascar Lesotho Ethiopia Nigeria 1/256 Tanzania Zimbabwe Sierra Leone Guinea−Bissau Central African Republic Rwanda Somalia Zambia 1/1024 1/64 1/32 1/16 1/8 1/4 1/2 1 GDP per person (US=1)

Discussion of Deaton on “Wellbeing” – p.9/17 But Welfare typically differs from Income by about 46%

The ratio of Welfare to Income 1.4 Sweden France Malta Greece Germany Japan Albania Bosnia / Herz. U.K. 1.2 Israel Austria Cyprus Jordan Macedonia Canada Costa Rica Switzerland 1 Bulgaria Slovenia United States Tunisia Hong Kong Moldova Sri Lanka Portugal Egypt Mauritius Norway Hungary Tajikistan Romania 0.8 Vietnam Nicaragua Ireland Estonia Puerto Rico Luxembourg Philippines Chile Pakistan South Korea Yemen Mexico 0.6 India Brazil Ghana China Iran Malaysia Bangladesh Thailand Venezuela Singapore Nepal Bolivia Russia 0.4 Madagascar Haiti Bahamas Guyana Niger Cambodia Gambia Turkmenistan Ethiopia Djibouti 0.2 Tanzania Kenya Guinea South Africa Somalia Nigeria C.d‘Ivoire Rwanda Zimbabwe Botswana 0 Zambia 1/64 1/32 1/16 1/8 1/4 1/2 1 GDP per person (US=1)

Discussion of Deaton on “Wellbeing” – p.10/17 Consumption-equivalent welfare: Rich countries

——— Decomposition ——— Welfare Log Life λ Income Ratio Exp. C/Y Leis. Ineq.

KVIIRWEVIYRHIVP]MRKHEXE U.S. 100.0 100.0 0.000 0.000 0.000 0.000 -0.000 77.0 0.762 0.798 0.640

Sweden 97.7 69.8 0.335 0.165 -0.038 0.089 0.120 79.6 0.734 0.829 0.413

Sgpore 39.1 82.9 -0.752 0.059 -0.581 -0.192 -0.039 78.1 0.426 0.742 0.698

Discussion of Deaton on “Wellbeing” – p.11/17 Consumption-equivalent welfare: Emerging markets

——— Decomposition ——— Welfare Log Life λ Income Ratio Exp. C/Y Leis. Ineq.

U.S. 100.0 100.0 0.000 0.000 0.000 0.000 -0.000 77.0 0.762 0.798 0.640

China 5.7 11.3 -0.690 -0.287 -0.088 -0.147 -0.168 71.4 0.698 0.754 0.863

S.Africa 4.3 21.6 -1.609 -1.382 0.122 0.096 -0.445 56.1 0.861 0.832 1.140

Discussion of Deaton on “Wellbeing” – p.12/17 U.S. Economic Growth by Inequality

Thousands of 2005 chained dollars 2560 1280 640 Average income of the Top 0.1% 320 160 80 Average income of the Bottom 99.9% 40 20 Growth Rates since 1950: 10 Pre−1980 Post−1980 Top share 0.68 6.36 5 Bottom share 2.25 1.69 2.5 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Year

Discussion of Deaton on “Wellbeing” – p.13/17 Happiness

Discussion of Deaton on “Wellbeing” – p.14/17 Happiness

• Difficult for a growth economist to imagine that absolute levels do not matter ◦ Over history ◦ Between poor and rich countries

• Relative comparisons may matter as well ◦ Not “instead” ◦ Flow utility bounded for many “conventional” specifications – life expectancy crucial for lifetime welfare – relative comparisons may be more salient at high levels of consumption for flow of welfare

Discussion of Deaton on “Wellbeing” – p.15/17 Flow Utility u(c) for γ > 1

Utility

u c c1−γ ( ) = 1−γ for γ > 1

Consumption, c

Discussion of Deaton on “Wellbeing” – p.16/17 In conclusion

Many fascinating and important issues remain to be worked out regarding the measurement of well-being!

Discussion of Deaton on “Wellbeing” – p.17/17