Happiness and growth

1. Angus Deaton Princeton University October 2010 Happiness and growth

2. Self-reported well-being • Asking people how they feel, about their lives, their emotions, etc. (SWB) • Lots of different questions • Attractive because it is the respondent’s own experience • Not poverty (say) as filtered through PPP conversions, World Bank’s choice of a poverty line, and many other “expert” judgment • Is there really an expertise in the judging of poverty?

3. The argument • SWB measures have cast doubt on the value of higher income, especially in rich countries • Doesn’t make people happier • And happiness is what matters • I will outline the main arguments • And then try to persuade you that they are wrong • That growth is GOOD, even in rich countries • None of this is settled ground, and these are MY opinions • Which, of course, are correct

4. An argument against SWB • “A person who has had a life of misfortune, with very little opportunities, and rather little hope, may be more easily reconciled to deprivations than those raised in more fortunate and affluent circumstances. The metric of happiness may, therefore, distort the extent of deprivation, in a specific and biased way. The hopeless beggar, the precarious landless laborer, the dominated housewife, the hardened unemployed or the over-exhausted coolie may all take pleasures in small mercies, and manage to suppress intense suffering for the necessity of continuing survival, but it would be ethically deeply mistaken to attach a correspondingly small value to the loss of their wellbeing because of this survival strategy.” • Sen, Economics and ethics, 1987, 45-6.

5. Is this right? • It is an argument about adaptation • Or of “False consciousness” • But it is in part an empirical question about SWB measures • If SWB does what Sen says, should abandon it. • But perhaps it does not behave this way? • Or perhaps some measures do, and others do not • I will return to this issue at the end

6. SWB versus growth • Easterlin paradox is the grand-daddy (1974) • Countries do not get happier as they get richer • People should stop being materialistic, and become. . . . [insert favorite alternative] • Within countries, richer people are happier • Argument is that this shows that relativeincome is important • So high taxes on earnings will not make us worse off • Over time, either relative income too, or other things are getting worse • World is going to hell in a hand-basket • But no empirical evidence for this, rather the reverse

7. More SWB against growth • Adaptation is also a possibly important • Stuff makes you happy, but not for long • People never understand this, and keep being fooled • Across countries, income matters only in poor countries • Beyond some level of GDP, no relationship between income and happiness • Once basic needs are met, income doesn’t matter • Going to argue these arguments are all problematic • Start with this last

8. Happiness and GDP:in the eye of the beholder?

9. Denmark 8 Finland Norway Venezuela Saudi Arabia USA Costa Rica Italy Spain 7 Brazil UK Mexico Japan Czech Rep. Emirates Singapore Pakistan Argentina Greece Taiwan Kuwait 6 India Korea Mean life satisfaction Hong Kong Puerto Rico Russia 5 China 4 Bulgaria Georgia Chad Benin Togo 3 0 10,000 20,000 30,000 40,000 GDP per capita in 2003, 2000 PPP chained dollars, PWT 6.2

10. Denmark 8 Finland Norway Venezuela Saudi Arabia USA Costa Rica Italy Spain 7 Brazil UK Mexico Japan Czech Rep. Emirates Singapore Pakistan Argentina Greece Taiwan Kuwait 6 India Korea Mean life satisfaction Hong Kong Puerto Rico Russia 5 China 4 Bulgaria Georgia Chad Benin Togo 3 0 10,000 20,000 30,000 40,000 GDP per capita in 2003, 2000 PPP chained dollars, PWT 6.2

11. The law of diminishing marginal utility of money Straighten up and fly right!

12. 8 7 6 Average ladder 5 4 3 0 5000 10000 15000 Income (BC transform=1)

13. 8 7 6 Average ladder 5 4 3 0 200 400 600 800 1000 Income (BC transform=0.6)

14. 8 7 6 Average ladder 5 4 3 20 40 60 80 Income (BC transform=0.3)

15. 8 7 6 Average ladder 5 4 3 6 7 8 9 10 11 Log Income (BC transform=0)

16. 8 7 6 Average ladder 5 4 3 6 7 8 9 10 11 Log Income (BC transform=0)

17. 8 7 6 Average ladder 5 4 3 6 7 8 9 10 11 Log Income (BC transform=0)

18. Denmark 8 Finland Norway Venezuela Saudi Arabia USA Costa Rica Italy Spain 7 Brazil UK Mexico Japan Czech Rep. Emirates Singapore Pakistan Argentina Greece Taiwan Kuwait 6 India Korea Mean life satisfaction Hong Kong Puerto Rico Russia 5 China 4 Bulgaria Georgia Chad Benin Togo 3 0 10,000 20,000 30,000 40,000 GDP per capita in 2003, 2000 PPP chained dollars, PWT 6.2

19. 8 7 6 Average ladder 5 4 3 6 7 8 9 10 11 Log Income (BC transform=0)

20. 8 7 6 Average ladder 5 4 3 6 7 8 9 10 11 Log Income (BC transform=0)

21. Easterlin paradox • Betsey Stevenson and Justin Wolfers have argued that it is not as clear as you might think • At least, If you look at the data carefully • I will let Justin speak to that

22. Relative income • Do we really care about our neighbor’s income? • To the extent that we are indifferent between increasing our own income and decreasing our neighbor’s? • I do not have time to deal with this today • My belief is this is largely a technical problem • Mistaking local income for permanent income • What is really adaptation is mistaken for comparisons • Adaptation is still an issue • But you can’t tax people into dealing with it • Taxing externalities is OK, internalities not

23. A possible resolution • Not all SWB are the same: terrible confusion in much of the literature • Hedonic measures of emotion • Laughing, smiling, sad, happy (proper), angry, stress • Higher at weekends, no relation with education • Life evaluation • If 0 is the worst possible life, and 10 is the best possible life, where are you now • Same at weekends, strong relation with education • Living and experiencing your life versus thinking about it (Kahneman)

24. Kahneman and Deaton (2010) • Use Gallup 1,000 a day poll to look at the difference with respect to income • And other circumstances • 2008 and 2009, about 450,000 observations after deletions • Ladder is measure of life evaluation • “thinking about your life” • Positive affect, negative affect, and stress • “a lot of yesterday” • “living your life”

25. .6 .9 positive affect .5 .85 stress Fraction experiencing positive affect .4 .8 Fraction experiencing negative affect. Stress, anger .3 .75 negative affect .2 .7 10,000 20,000 40,000 80,000 160,000 Annual household income, ($)

26. 7.5 7 6.5 mean life evaluation. Scale from 0 to 10 Ladder of life 6 5.5 10,000 20,000 40,000 80,000 160,000 Annual household income, ($)

27. More on money • Being poor, even in the US, is really bad for you • Life circumstances, like being divorced, being alone, or having asthma • Are correlated with low hedonic affect • The size of the effect is much larger for the poor than for the non-poor • Even the improvement in affect that comes at weekends • Lower if you are poor

28. Best summaries • From many hundreds of press reports • Le Mondereminded us “Money is better than poverty, if only for financial reasons” (Woody Allen) • “Science proves poverty sucks” (gawker.com)

29. A conjecture • If we had ladder data over time, it would go up along with rising real incomes • Very limited adaptation • Possibly even a measure of capabilities or functionings • Hedonic measures are subject to adaptation, and largely reset to personality–determined levels • Do not increase as the economy grows • Empirical evidence for Easterlin is largely on the latter, or former with strong hedonic components • We have a few shreds of evidence on this, but too early

30. It’s too early to write off growth • Even in the “rich” countries • Where there is much money-based suffering • Let alone in poor countries, just because they are beginning to show symptoms of rich country problems • Like chronic disease

31. India v the West • In India, successful old men, world weary, become sadhus, give up their worldly possessions, take up their begging bowls, and head for Varanasi • In the West, successful old men (Lord Layard, Richard Easterlin, Derek Bok) tell other people to give up their worldly possessions!