HAPPINESS AND GROWTH

Angus DeatonPrinceton UniversityOctober 2010

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?

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

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.

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

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 relative income 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

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

HAPPINESS AND GDP:IN THE EYE OF THE BEHOLDER?

34

56

78

0 10,000 20,000 30,000 40,000

USA

Denmark

Russia

China

India

Pakistan

BrazilMexico

Korea

JapanUK

Finland

TogoBenin

Chad

VenezuelaCosta Rica

Hong Kong

Saudi Arabia

BulgariaGeorgia

Puerto Rico

Kuwait

Singapore

Taiwan

Emirates

GDP per capita in 2003, 2000 PPP chained dollars, PWT 6.2

Mea

n lif

e sa

tisfa

ctio

n

ArgentinaCzech Rep.

Spain Italy

Greece

Norway

34

56

78

0 10,000 20,000 30,000 40,000

USA

Denmark

Russia

China

India

Pakistan

BrazilMexico

Korea

JapanUK

Finland

TogoBenin

Chad

VenezuelaCosta Rica

Hong Kong

Saudi Arabia

BulgariaGeorgia

Puerto Rico

Kuwait

Singapore

Taiwan

Emirates

GDP per capita in 2003, 2000 PPP chained dollars, PWT 6.2

Mea

n lif

e sa

tisfa

ctio

n

ArgentinaCzech Rep.

Spain Italy

Greece

Norway

STRAIGHTEN UP AND FLY RIGHT!

The law of diminishing marginal utility of money

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Ave

rage

ladd

er

0 5000 10000 15000

Income (BC transform=1)

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0 200 400 600 800 1000

Ave

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ladd

er

Income (BC transform=0.6)

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20 40 60 80

Ave

rage

ladd

er

Income (BC transform=0.3)

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6 7 8 9 10 11

Ave

rage

ladd

er

Log Income (BC transform=0)

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6 7 8 9 10 11

Ave

rage

ladd

er

Log Income (BC transform=0)

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56

78

6 7 8 9 10 11

Ave

rage

ladd

er

Log Income (BC transform=0)

34

56

78

0 10,000 20,000 30,000 40,000

USA

Denmark

Russia

China

India

Pakistan

BrazilMexico

Korea

JapanUK

Finland

TogoBenin

Chad

VenezuelaCosta Rica

Hong Kong

Saudi Arabia

BulgariaGeorgia

Puerto Rico

Kuwait

Singapore

Taiwan

Emirates

GDP per capita in 2003, 2000 PPP chained dollars, PWT 6.2

Mea

n lif

e sa

tisfa

ctio

n

ArgentinaCzech Rep.

Spain Italy

Greece

Norway

34

56

78

6 7 8 9 10 11

Ave

rage

ladd

er

Log Income (BC transform=0)

34

56

78

6 7 8 9 10 11

Ave

rage

ladd

er

Log Income (BC transform=0)

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

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

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)

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”

.7.7

5.8

.85

.9

.2.3

.4.5

.6

10,000 20,000 40,000 80,000 160,000Annual household income, ($)

Frac

tion

expe

rienc

ing

nega

tive

affec

t. St

ress

, ang

er

negative affect

stress

positive affect

Frac

tion

expe

rienc

ing

posit

ive

affec

t

5.5

66.

57

7.5

10,000 20,000 40,000 80,000 160,000

Ladder of life

mea

n lif

e ev

alua

tion.

Sca

le fr

om 0

to 1

0

Annual household income, ($)

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

Best summaries

From many hundreds of press reports

Le Monde reminded us “Money is better than poverty, if only for financial reasons” (Woody Allen)

“Science proves poverty sucks” (gawker.com)

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

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

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!