A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Jones, Charles I. Article Life and growth NBER Reporter Provided in Cooperation with: National Bureau of Economic Research (NBER), Cambridge, Mass. Suggested Citation: Jones, Charles I. (2013) : Life and growth, NBER Reporter, National Bureau of Economic Research (NBER), Cambridge, MA, Iss. 2, pp. 17-19 This Version is available at: http://hdl.handle.net/10419/103247 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. 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Jones* During the twentieth century, life functions — of the kind that economists After all, some new technologies save expectancy in the United States rose use to study asset pricing, the labor-lei- lives — new vaccines, new surgical tech- from less than 50 years to 77 years, sure tradeoff, and macroeconomic fluc- niques, anti-lock brakes, and pollution while average incomes rose by about tuations — already contain a key ingredi- scrubbers. Other technologies threaten a factor of 7. Which change was more ent that can deliver this type of “income lives — pollution, nuclear accidents, valuable? William Nordhaus famously effect” in health spending. In essence, global warming, the rapid global trans- posed this question to his friends and consumption runs into strong dimin- mission of disease, and bioengineered colleagues about a decade ago: which ishing returns during any given time viruses. When technological change would you rather have, the health care period. These diminishing returns cause involves life and death as well as just system in 2000 but the average income the value of life to rise disproportion- higher consumption, how is our under- in 1900, or the reverse? Based on this ately as we get richer, so that economic standing of economic growth affected? informal survey and on a range of other growth naturally tilts spending toward Can the diminishing returns to con- evidence, Nordhaus argued that the two preserving life. Put more coarsely, as we sumption affect the direction of techno- changes were about equally important. get richer, which is more valuable: an logical change itself? 5 The rise in longevity in the twentieth additional flat-screen TV, another smart To begin, consider what might be century was just as valuable as the more phone, or additional days of life to enjoy called a “Russian roulette’’ model of eco- standard measure of economic growth.1 our already high standard of living? 3 nomic growth. Suppose the overwhelm- Motivated in part by this observation, Quantitative analysis of this mech- ing majority of new ideas are beneficial a number of my recent research papers anism suggests that these effects can be and lead to growth in consumption. explore the interplay between the value substantial. For example, our baseline However, there is a small chance that a of life and economic growth. model indicates that it could be efficient new idea will be dangerous and cause to spend as much as 33 percent of GDP substantial loss of life. Do discovery and The Value of Life and the on healthcare by 2050, and even more economic growth continue forever in Rise in Health Spending in later years, assuming that economic such a framework, or should society growth continues. While this particular eventually decide that consumption is Health spending was about 5 per- number is subject to a range of uncer- high enough and stop playing the game cent of GDP in the United States in tainty, the more general point is that it of Russian roulette? 1960 and has risen to more than 17 per- could be economically efficient for soci- The answer to this question hinges cent in recent years. Importantly, this ety to spend ever-larger amounts of our on the extent of diminishing returns to increase is not just a U.S. phenomenon: GDP on life preservation as incomes consumption, just as in the research on health spending as a share of GDP is ris- continue to grow. This obviously intro- health spending. In particular, for stan- ing in every OECD country for which duces important questions about the dard preferences, it turns out that the there is data over this time period.2 nature of the financing of health expen- diminishing returns are strong enough While part of the increase in the United ditures at such high levels.4 Still, the that growth is affected. In the simple States is surely due to particular institu- point remains: it may well be that much Russian roulette example, once the deci- tional features of the U.S. economy, the of the rise in health spending is a byprod- sion maker is sufficiently rich, it can be fact that the health share is rising across uct of economic growth — as we get optimal to stop research all together. a broad range of countries suggests that richer, life is increasingly one of the most The risks of a disaster may outweigh the deeper economic forces may be at work. valuable goods we can purchase. possible gain in consumption as life gets My research with Robert Hall on increasingly valuable. this topic observes that standard utility Life and Growth Of course, there are many technolo- gies whose main purpose is explicitly to *Jones is a Research Associate in the NBER’s If economic growth produces an save lives. What if researchers can invent Program on Economic Fluctuations and income effect that tilts an economy’s cures for cancer and safer transporta- Growth and a Professor of Economics at spending toward health care, a natu- tion? In this case, one can show that the Stanford University’s Graduate School of ral question arises: can this structural research process itself is affected. As soci- Business. His Profile appears later in this change in turn have feedback effects on ety (endogenously) gets richer, the direc- issue. the nature of economic growth itself? tion of technological change is affected. NBER Reporter • 2013 Number 2 17 The returns to inventing life-saving ideas just 51.0 years in South Africa. Such dif- example, we find that each of these dif- rises relative to the return to inventing ferences surely have a substantial impact ferences add more than 10 percentage new consumption goods and research on standards of living. However, they points to their welfare measure. Whereas shifts toward saving lives. are captured only imperfectly, if at all, GDP per person in France and Germany Evidence from R and D spending in conventional measures such as GDP in 2007 was about three fourths of the and patenting suggests that this kind of per person. The third project related to U.S. level, this gap is essentially elimi- shift has been observed during the last 40 life and growth that I discuss here exam- nated when the broader measure of wel- years. On the R and D side, the empiri- ines a broader measure of economic wel- fare is considered. Western Europe as cal measures are far from perfect. For fare that incorporates differences in life a whole moves from 76.4 percent of example, not everything that an econo- expectancy.7 the United States in terms of GDP per mist or business person would consider It has long been appreciated that person all the way up to 95.3 percent to be R and D is counted as such in the GDP is an imperfect welfare measure. In in our consumption-equivalent welfare data, and the classification of R and D the 1970s, Nordhaus and James Tobin measure. according to whether the goal is to save made progress in constructing a “Measure Our third finding is that the oppo- lives versus to provide new consump- of Economic Welfare” that included lei- site happens when one looks at devel- tion or investment goods is imperfect. sure, household work, and urban disa- oping countries. Relative to the United What we can say is that the fraction of menities. The United Nations Human States and Western Europe, these coun- R and D that is health-related rose from Development Index adds together GDP tries tend to have lower life expectancy, around 7 percent in 1960 to more than per person, literacy rates, and life expec- higher inequality, and sometimes less lei- 25 percent in 2006 in the United States. tancy to create an index number. More sure. China, for example, loses ground A similar increase is also observed for recently, economists including Amartya when compared to the United States OECD countries. On the patent side, Sen, Joseph Stiglitz, Gary Becker, Tomas on each of these dimensions: its GDP Jeff Clemens documents that the fraction Philippson, Rodrigo Soares, and Marc per person in 2007 was 12.6 percent of of patenting devoted to medical equip- Fleurbaey have made progress on this that of the United States, but its wel- ment and pharmaceuticals rose from 4 question.8 fare is only 5.0 percent of ours.