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The UN Reports on the “Real Wealth of Nations”

July 2nd, 2012 . by economistmom

real-wealth-of-nations-economist-file-063012

This week’s Economist magazine calls our attention to a United Nations report (the “Inclusive Wealth Report”) that compares the wealth of nations, looking beyond GDP:

“WEALTH is not without its advantages,” John Kenneth Galbraith once wrote, “and the case to the contrary, although it has often been made, has never proved widely persuasive.” Despite the obvious advantages of wealth, nations do a poor job of keeping count of their own. They may boast about their abundant natural resources, their skilled workforce and their world-class infrastructure. But there is no widely recognised, monetary measure that sums up this stock of natural, human and physical assets.

Economists usually settle instead for GDP. But that is a measure of income, not wealth. It values a flow of goods and services, not a stock of assets. Gauging an economy by its GDP is like judging a company by its quarterly profits, without ever peeking at its balance-sheet. Happily, the United Nations this month published balance-sheets for 20 nations in a report overseen by Sir Partha Dasgupta of Cambridge University. They included three kinds of asset: “manufactured”, or physical, capital (machinery, buildings, infrastructure and so on); human capital (the population’s education and skills); and natural capital (including land, forests, fossil fuels and minerals).

The highlights of the report are summarized in the graphic above, from the Economist story.  Note that even on this “beyond GDP” measure of wealth, the U.S. is still an economic leader–and China seems less of a challenger:

By this gauge, America’s wealth amounted to almost $118 trillion in 2008, over ten times its GDP that year. (These amounts are calculated at the prices prevailing in 2000.) Its wealth per person was, however, lower than Japan’s, which tops the league on this measure. Judged by GDP, Japan’s economy is now smaller than China’s. But according to the UN, Japan was almost 2.8 times wealthier than China in 2008 (see charts).

And given that human capital is by far our greatest asset…

Officials often say that their country’s biggest asset is their people. For all of the countries in the report except Nigeria, Russia and Saudi Arabia, this turns out to be true. The UN calculates a population’s human capital based on its average years of schooling, the wage its workers can command and the number of years they can expect to work before they retire (or die).

…the question that policymakers concerned about economic growth need to focus on, is, not just do we have a lot of human capital now, but are we continuing to make the most of our greatest asset, to assure continued strong growth in the future?  For all the measured human capital we have ready and willing to work, the fact that the U.S. unemployment rate is still high means that a lot of our human capital is currently “idle” and not translating into GDP.  Additionally, if our society fails to adequately support higher education, we could easily begin to fall behind in the human capital department over time.

In terms of  fiscal policy and what qualifies as “pro-growth” policy here in the U.S. (typically tax breaks for wealthy investors in physical capital), I think we need to better scrutinize our tax (cut) and spending programs to better direct our resources toward the investments most likely to pay off over time.  Economists’ preoccupation with current and aggregate GDP as a measure of economic well being may ironically be keeping us from being as truly “wealthy” as we could be.

6 Responses to “The UN Reports on the “Real Wealth of Nations””

  1. comment number 1 by: Patrick R. Sullivan

    ‘…the U.S. is still an economic leader–and China seems less of a challenger….’

    How is the advance of another country’s economy a ‘challenge’ to any other country?

  2. comment number 2 by: Jason Seligman

    … because Mr. Sullivan, it implicitly or explicitly demonstrates that the nation could do better, by way of example. It is not a zero-sum argument I do not think, but rather a challenge to the governance of the nation doing less well. We often read that China’s leaders see growth as the currency of legitimacy - - this Chinese sentiment tracks well with the way the idea is used herein, to my read.

    More to the point however, in the same sense in which Solow, Romer (Paul), MRW and some of the work since has focused on technology and human capital, the UN report does seem to indicate that while there is some trade-off between the three forms of capital, human capital is most useful to develop at this time in several leading nations.

    From my read, Diane’s point regarding fiscal policy can be thought of from the public sectors perspective as follows: supply side arguments regarding incentives would most profitably target human capital development (i.e. subsidizing education) over physical capital (i.e. accelerated depreciation) in terms of growing the tax base.

    That is interesting…

  3. comment number 3 by: Patrick R. Sullivan

    ‘… because Mr. Sullivan, it implicitly or explicitly demonstrates that the nation could do better….’

    In which case it’s a good thing for the challengee.

  4. comment number 4 by: Jason Seligman

    yes, I agree. We can all suck in our gut in front of a mirror once a day or so, but when the other guys outrun you at the track you know something about your general fitness no amount of vamping in front of a mirror can hide…

  5. comment number 5 by: Patrick R. Sullivan

    Of course, when you’re so far ahead of the other guys on the track you can afford to coast.

  6. comment number 6 by: B Davis

    Patrick R. Sullivan wrote:

    Of course, when you’re so far ahead of the other guys on the track you can afford to coast.

    As long as we’re running trillion dollar deficits, I don’t think that we can afford to coast too much. Like most Americans, I’ve gotten used to the fact that the U.S. has gone from being the world’s largest creditor nation to the world’s largest debtor nation. Still, it’s hard to explain why we should be depending on the savings of relatively poor nations like China to fund our massive deficits. Much of our perceived advantage may disappear quickly when and if we lose the dollar’s reserve status.