Download HAPPINESS ECONOMICS What is happiness economics?

7/26/2011
School of Economics, UQ: Schools Day 2011
“Whenweplotaveragehappinessversusincome in
agivencountryatagiventime,weseethatrich
peopleareinfactmuchhappierthanpoorpeople.
Dr Jason Potts
It’sactuallyanastonishinglylargedifference.
HAPPINESS ECONOMICS
There’snoonesinglechangeyoucanimaginethat
wouldmakeyourlifeimproveonthehappiness
scaleasmuchastomovefromthebottom5 percent
ontheincomescaletothetop5 percent.”
‐ RobertFrank,Happinesseconomist,2005
What is happiness economics?
‘Economic growth should not be a government’s primary concern.’
• beyond ‘ordinal utility’
• subjective wellbeing & economic correlates
1 A revolution in economics?
– With Big new findings!
– & with new happiness Policy?
‐ Andrew Oswald, Happiness Economist, 1997
2 Or a dubious pseudo‐science?
3 Or really nothing new?
In the beginning was…
Happiness economics is more ambitious
Happiness psychology
social welfare & behavioural economics
Evolved human minds
Positive psychology
happiness economics
happiness policy
Self‐help books
Economic policy interventions to maximize aggregate happiness
In which individuals better understand & help themselves
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The issues & controversy…
• Measures of SWB & alternative economic indicators
• The ‘Easterlin paradox’
• Hedonic treadmill?
How to do happiness economics
1. Measure ‘happiness’ Use Subjective Well‐Being (SWB) surveys
2. Look for economic correlates
3. Develop new policy (21, 12)…
• Radical new policy proposals
This is politically charged!
Measuring Subjective Well‐Being
‘The aim of today’s happiness crusade seems to be to politicise the quest for self‐fulfilment. This shift in government policy, towards attending to individuals’ emotional needs, is seen as a step up from traditional redistributionist social policies’
• Subjective well‐being survey questions
– Happiness: “Taking all things together, would you say you are: very happy; quite happy; not very happy; not at all happy.”
– Life satisfaction: “All things considered, how satisfied are you with your life as a whole these days?” [1=Dissatisfied – 10=Satisfied]
– Satisfaction ladder: “Here is a ladder representing the ‘ladder of life’. Let's suppose the top of the ladder represents the best possible life for you, and the bottom, the worse possible life for you. On which step of the ladder do you feel you personally stand at the present time? [0‐10 steps].”
• This creates a cardinal measure
Frank Furedi
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Why is this new/controversial?
• Economists don’t like cardinal measures
• We prefer ordinal ‘revealed preference’
• i.e. we trust data on what you do, not what you say
• But happiness economics is based on this survey data as the ‘independent variable’…
Let’s do happiness economics
1. How happy are you? (1‐5)
2. Socio‐demographic & economic correlates
–
Age, occupation, married, children, politics, etc
–
Unemployment, inflation, income, etc
3. Map variation in happiness to variation in independent variables

T‐series, X‐section or comparative analysis
4. Inference & policy recommendations
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findings
Main focus is on happiness & income
• richer people are happier
• through time, they are not
• Data from Gallup polls since 1950s, 180+ countries
– ‘Easterlin paradox’
Unemployment & inflation makes us unhappy
Inequality = unhappy, but freedom = happy
Leisure is good
We adapt to most things
• more income really is good… a controversial finding (?!)
Cross-sectional Happiness-Income Relationship in the GSS
Within‐Country: USA
Each point aggregates happiness in a GSS income category in a year
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The latest research…
Happiness: Ordered probit index
Estimated for each income category*year
•
•
•
•
• Data seems robust to measure/aspect of SWB .75
• Finds that happiness and income do correlate, and beyond $15k
• Uses log scale! And reviews questionnaires B
B
.25
0
-.25
• Wolfers and Stevenson (2011, NBER & U. of Penn., USA.)
T
T
TTT T
TT
T T TT
TT
T
T TTT
T
TT
T
B
.5
B
B
B
B
BB
B
BB
B
-.5
B
-1
B
B
500
B
B
B
-.75
B
B
B
B
1000
B
Happiness = -2.224 + 0.210*log family income [se=0.007]
2000 4000 8000 16000 32000 64000 128000 256000
Real Family Income ($2005, log scale)
Incomes are midpoints of income categories.
Points labelled T and B have imputed incomes, due to top- or bottom-coding, respectively.
DotStevenson & Wolfers, Economic size is proportional to population in that income category
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Growth and Happiness
Is this true?
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Comparing within‐ and between‐
country estimates
Or is this?
Stevenson & Wolfers, Economic Growth and Happiness
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Eurobarometer: Nine countries
.25
$16k
$32k
$32k
.5
.25
y = -0.55 + 0.06 * log(GDP) [se=0.06]
Correlation = 0.14
$8k
$16k
$32k
.25
.5
United Kingdom
y = -2.47 + 0.25 * log(GDP) [se=0.09]
Correlation = 0.38
$8k
$16k
$32k
-.5 -.25 0
.25
.5
Netherlands
$32k
y = -7.10 + 0.71 * log(GDP) [se=0.10]
Correlation = 0.76
$8k
$16k
This finding is robust to alternative measures of ‘happiness’
$32k
West Germany
.25
$16k
$16k
Italy
.5
y = -4.51 + 0.45 * log(GDP) [se=0.09]
Correlation = 0.64
$8k
y = 0.56 + -0.06 * log(GDP) [se=0.14]
Correlation = -0.05
$8k
-.5 -.25 0
.25
.5
Ireland
-.5 -.25 0
-.5 -.25 0
.25
.5
France
y = -6.20 + 0.62 * log(GDP) [se=0.08]
Correlation = 0.74
$8k
y = -1.35 + 0.14 * log(GDP) [se=0.04]
Correlation = 0.39
$8k
$16k
$32k
-.5 -.25 0
$32k
-.5 -.25 0
.25
$16k
-.5 -.25 0
-.5 -.25 0
y = 3.84 + -0.38 * log(GDP) [se=0.18]
Correlation = -0.36
$8k
Greece
.5
Denmark
.5
Belgium
-.5 -.25 0
Life Satisfaction: Ordered probit index
Deviation from country average
.25
.5
Growth in Life Satisfaction and GDP in Europe
y = -0.50 + 0.05 * log(GDP) [se=0.12]
Correlation = 0.07
$8k
$16k
$32k
Real GDP per capita, PPP (2000 $ US; Log scale)
Stevenson & Wolfers, Economic Source: Eurobarometer,
Growth and Happiness
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1973-2007. Solid dots=1973-89;
Hollow dots=1990-2007.
Yesterday’s Experiences
Stevenson & Wolfers, Economic Growth and Happiness
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Recalled feelings and GDP
Stevenson & Wolfers, Economic Growth and Happiness
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The Easterlin paradox
richer
$, SWB
wealth
consumption
happiness
time
Through time…
Why is this problematic?
poorer
But at any point in time
Explanations of Easterlin paradox
• Income has tripled in past 50 years, but happiness has seemingly not changed
• Relative income hypothesis Implication: • economic growth doesn’t matter (?)
• Poor data • Adaptation (set‐point theory)
• Refocus policy away from growth & toward redistribution
But is this true??
1 Relative income
• ‘hedonic treadmill’ and ‘consumption externalities’
– “Work, effort, initiative and success are a form of ‘pollution’ on the relative status of others” Richard Layard
• Relative position in society matters, not absolute position
• Thus a zero sum game
2 adaptation
• We all have ‘set points’ we ‘regress’ to, whatever happiness ‘shocks’ happen
• Social learning and ‘bottom up’ adaptation may work better than top down control
– Many happiness economists admit this!
– Psychologists tells us happiness spreads on social networks
– Potts (2011) on +ve externalities
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3 Poor data/analysis
Freedom also correlates with happiness
• Stevenson and Wolfers (2008) • ‘as more data has become available, evidence that happiness rises with GDP per capita has started to accumulate’
Johns & Ormerod (2007) ‘Happiness, economics & public policy’ (IEA) – No information in the independent variable
• Random numbers as good
• Sampling error
That’s an ‘inconvenient truth’
Implications of Easterlin Paradox (I)
• “Why do national comparisons among countries and over time show an association between income and happiness which is so much weaker than, if not inconsistent with, that shown by within‐country comparisons?” –
Easterlin (1974)
– Reference‐dependent preferences
China
N Korea
Venezuela
Iran
• Relative income matters Cuba
S Korea
USA
– Other people’s consumption matters
results of a recent
government sponsored
happiness study…
Happiness points
Implications of Easterlin Paradox (II)
• Policy implications:
– Growth: “My results, along with mounting evidence from other time series studies of subjective well‐being, do on balance undermine the view that a focus on economic growth is in the best interests of society.” –Easterlin (2005)
– Public finance: If preferences are interdependent
 Pigouvian rationale for taxing labor supply / conspicuous consumption
• Habit formation = hedonic treadmill – Other period’s consumption matters
Stevenson & Wolfers, Economic Growth and Happiness
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Happiness economics policy
• Alternative economic indicators
• Steeply progressive income tax & luxury goods tax
• Redistribution, not growth
• Lots of Welfare
• Concern with ‘hedonic treadmill’/ relative status
• All very ‘leftist’
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Criticism of happiness economics
Criticism of happiness economics (cont.)
Johns & Ormerod (2007) ‘Happiness, economics & public policy’ (IEA) – No information in the independent variable
• Random numbers as good
• Sampling error
Wilkinson (2007) ‘In pursuit of happiness research’ (Cato)
– Conclusions don’t follow from premises
• preferential findings ‘left skewed’
• other interpretations of findings regarding freedom & growth
• Stevenson and Wolfers (2008) critique
– Econometrics was just wrong
• Social learning and ‘bottom up’ adaptation may work better than top down control
– Many happiness economists admit this!
– Psychologists tells us happiness spreads on social networks
– Potts (2011) on +ve externalities
Is it still bad economic policy if it makes you feel good?
National happiness index
• An alternative measure of economic performance
‘I hold a firm belief: We will not change our behavior unless we change the ways we measure our economic performance.’
– Sarkozy
• Shifts public policy to national happiness planning WHAT DO WE THINK OF THS?
Both thinking about aggregate happiness, not about sex
‘Metrics matter. What we measure affects what we do.’
‐ Stiglitz
“And I do worry. …
We should be careful of how we approach
[happiness] measures so that they don't become a socially domineering, social‐engineering mechanism to define what is good for us.”
“If you want fewer materialists, make more material readily available to people, at which point they’ll stop worrying about it so much and start worrying instead about happiness and the meaning of life.”
Will Wilkinson, CATO
‐ Jeffrey ‘Big Push’ Sachs!!
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happiness economics futures
1. National happiness indicators & policy
2. ‘Happiness signaling theory’ – (Potts 2011)
conclusion
• Happiness economics is controversial
• And important
• But only economists can participate in this debate…
• Study economics and learn about big new things that matter
Thank you
Bhutanese citizens 2009, circa free & universal health care since the alternative indicator ‘happiness revolution’ of 1976
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