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Wednesday, April 27, 2011

In Praise of GDP

About a year ago, EARTH magazine published an article, titled "Greening of the Gross Domestic Product".
The authors made the claim that GDP is a poor measure of a country's wealth, because it does not include externalized environmental costs.  This may be true, but the authors went a step further.   They said "....using GDP to measure a country's true wealth is remarkably poor at best, and highly damaging at worst."

But what do the data say?   Click the links!   These are really cool!
Data visualization on Gapminder shows that increasing wealth, measured by GDP, is correlated with nearly doubling human lifespan in almost every country on earth:

The data show stunning (>95%) reductions in child mortality as GDP rises: 
(Note the logarithmic scale for both child mortality and income.)

And perhaps most importantly, how fertility has fallen from 5 children per woman to about 2 children per woman (stable population!) as prosperity has risen, as measured by GDP.

A remarkable aspect of these relationships is that they hold for every nation in the data.   As shown in an earlier post*, per capita GDP even shows a strong positive correlation to integrity, as measured by the corruption index published by Transparency International.   Given high integrity, I would infer more effective governments in fair and free societies.

Imagine for a moment, that there was an economic indicator that showed the reverse correlation:  that as the indicator rose, human life expectancy was cut by half; child mortality increased twenty-fold; population growth rose from zero to doubling in every generation; and corruption flourished.   Would the authors dismiss such an indicator as remarkably poor and highly damaging?

Does there exist any other indicator, other than GDP, that is so useful in measuring the 
progress of a nation in improving the lives of its people?


Sunday, April 24, 2011

Executive Compensation

In 1976, the average CEO made 36 times as much as the average worker.   By 1993, the average CEO was paid 131 times as much as the average worker.   And by 2008, the average CEO was paid 369 times more than the average worker.*
Salary adjustments for CEO's are based on recommendations from compensation committees and compensation consulting firms (called "Ratchet, Ratchet and Bingo" by Warren Buffett), which compare one company's overpaid executive to other companies' overpaid executives.  The recommendations are enacted by Directors who were nominated by committees controlled by company management.

It is a simple process; quid pro quo.   Management chooses directors, directors reward management, and compliant directors may be chosen to serve on other boards.  It is institutionalized corruption.

Really, now.  Isn't it time that shareholders were allowed (or required!) to nominate candidates for the Board of Directors for publicly owned companies?

* Predictably Irrational, Dan Ariely, 2008.
Also, please see my previous post about corporate governance.