When GDP Misleads: Inferring Living Standards from the Value of a Statistical Life -- by Philip Trammell, Charles I. Jones

Real GDP per person is a widely used proxy for living standards, but it can be a poor welfare measure when new goods or quality improvements matter, when nonmarket goods are significant, and when preferences are nonhomothetic --- all of which are true in practice. We propose an alternative that is robust to these concerns: under weak conditions, the growth rate of the value of a statistical life (VSL), together with standard Euler-equation objects, identifies the growth rate of lifetime utility. The intuition is that people routinely trade off consumption against mortality risk, and their willingness to pay for small risk reductions reveals the value of remaining lifetime utility. Implementing this approach for the United States suggests that lifetime utility may have risen by more than a factor of five since 1940, whereas conventional consumption-based calculations using a stable log/CRRA flow utility imply much smaller gains, on the order of a doubling. This calculation is sensitive to measures of the growth rate of the VSL, the rate of time preference, and the interest rate. For example, if the correct interest rate is 4 percentage points higher than the T-bill rate, then lifetime utility would be measured to have declined by more than half since 1940.