The problem with measuring economic well-being

7th August 2012

In prerecorded remarks to an international conference of economists in Cambridge, Massachusetts, the Fed Chairman said that it is clear many people are still struggling even though some of the metrics are moving in the direction of the recovery.

Bernanke said that aggregate statistics can sometimes mask important information.  "For example, even though some key aggregate metrics–including consumer spending, disposable income, household net worth, and debt service payments–have moved in the direction of recovery, it is clear that many individuals and households continue to struggle with difficult economic and financial conditions."

"Exclusive attention to aggregate numbers is likely to paint an incomplete picture of what many individuals are experiencing."

According to Bernanke, we should therefore increase the attention paid to microeconomic data, which better capture the diversity of experience across households and firms.  Above all, economists should seek better and more-direct ways of measuring economic well-being.

Indeed, alternative measures of well-being are being developed around the world and have begun to inform official statistics and have started to be discussed in policy debates, he said.

"An interesting and unique case is the Kingdom of Bhutan, which abandoned tracking gross national product in 1972 in favor of its Gross National Happiness index based on a survey that incorporates these types of indicators."

"Taking the measurement of well-being in a cross-country framework, the Organisation for Economic Co-operation and Development (OECD), as part of its OECD Better Life Initiative, has created a "better life index" that allows a side-by-side comparison of countries according to various quality-of-life indicators that could, at least in principle, be followed over time."

Meanwhile, on the back of Bernanke's speech, U.S. treasuries snapped a two-day decline on the hopes that the Chairman's assessment of the economy means he is open to increasing bond purchases to spur growth.

Bloomberg Businessweek says that the central bank has already bought some $2.3 trillion of mortgage and Treasury debt since the financial crisis in 2008 in the form of two rounds of so-called quantitative easing to cap borrowing costs. It's now in the process of swapping shorter-term Treasuries in its holdings with those due in six to 30 years to put downward pressure on long- term borrowing costs.

"If Bernanke thinks they should do something to support the economy, it will put downward pressure on yields," said Kei Katayama, who buys U.S. government debt in Tokyo for Daiwa SB Investments Ltd., which manages the equivalent of $63.6 billion. "That makes it very difficult to sell."

The full text of Bernanke's remarks can be read here.


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