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Risk Adjusted GDP gaining steam

April 12, 2011

Maybe I spoke too soon – economists are starting to see the value of risk adjusted returns.  From the New Yorker:

The highlight of last year’s INET conference was a lecture on the failures of mainstream economics from Lord Adair Turner, Britain’s top financial regulator, who heads up the Financial Services Authority. (I was so impressed by Turner’s speech that I quoted it in the paperback edition of my book, “How Markets Fail: The Logic of Economic Calamities.”) Invited back to give another keynote address, Turner on Saturday evening stepped back from the financial crisis and talked about the policy implications of so-called “happiness economics.” As is now well known, surveys of individual well-being show that beyond a certain income threshold—about twenty thousand dollars a year—additional income and consumption produces little or no extra happiness. Countries get richer. Their residents earn more money and purchase more goods and services, but their reported levels of happiness stay pretty much the same. This is the so-called “Easterlin paradox”—named after Richard Easterlin, the American economist who first documented it. Betsey Stevenson and Justin Wolfers, two economists at Wharton, have recently queried its existence, identifying in the data a positive relationship between well-being and income. But even if you accept the findings of Stevenson and Wolfers, beyond a certain level the impact of additional income is very slight: in rich countries, most people are trapped on a “hedonic treadmill.”

In view of the Easterlin paradox and other research showing that people’s happiness falls sharply when their income drops or they lose their jobs, Turner argued that policymakers should do all they can to stabilize the economy and prevent recessions but concentrate less on increasing absolute growth rates. Whether the British economy grew over the next twenty years at an annual rate of 1.75 per cent or 1.9 per cent was a trivial question relative to preventing mass unemployment, Turner argued. This line of reasoning represented a return to the arguments of Keynes, Hansen, Modigliani, Samuelson, and others, who during the middle of the twentieth century placed macroeconomic stabilization at the center of economics. I pointed out to Turner in a brief conversation that it also represented a direct repudiation of Bob Lucas’s 2003 presidential address to the American Economics Association, in which he said the issue of stabilizing business cycles had been largely solved and economists should concentrate their efforts on growth.

A radical idea!  I hope they invite me next year to talk.  I’ll give a speech on risk adjusted GDP in different regulatory regimes, with a few FRED charts, some R regressions. It is pretty clear that increased regulation and high levels of economic didn’t stop most of the world from having a great 1950-1980 run, and caused most downturns to last a few short months.  I’ll then demonstrate empirical deadweight loss of the slightly more regulated regimes is nearly  non-existant.  From there, I’ll show that the total lost well-being for the few hundredths of a percent of lower growth is probably below statistical significance, and sums to a low number.

I’ll then demonstrate the  the severity of the recent recessions caused massive amounts of human misery in total. We can then create “risk adjusted” GDP – GDP divided by human misery due to recessions.

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  1. Tom Hickey
    April 12, 2011 at 10:23 pm

    Sounds great. Don’t wait for the invite. Make a video and put it up at YouTube and Google Video.

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