The Economics of Enough_ How to Run the Economy as if the Future Matters - Diane Coyle [19]
The Easterlin Paradox, along with the strong policy conclusions some researchers draw from it, has struck a chord. Robert Frank (in Luxury Fever) argued that high taxes should be used to discourage consumer spending, which won’t buy happiness. Barry Schwartz has written about The Paradox of Choice, whereby the great variety of goods and services available to Western consumers only makes us unhappy (despite the fact that consumers do buy a huge variety of products). The Kingdom of Bhutan has become an icon for its policy pursuit of Gross National Happiness, despite the country’s miserably poor human development indicators.
However, recently the evidence on growth and happiness has been persuasively reassessed. As described below, recent research strongly suggests that there is no paradox, as growth and happiness are in fact usually positively linked.
To me it always seemed odd to expect happiness to rise fully in line with GDP in the first place—not least because the fall in GDP associated with a recession always causes great unhappiness. Of course, higher incomes should make us happier on average but why would anyone expect GDP and happiness to rise in proportion to each other? Higher incomes make us taller on average too, but nobody would expect height to continue rising at the same pace as GDP.30 This instinct was articulated rigorously by Helen Johns and Paul Ormerod when they pointed out that the happiness measures used in the studies are derived from surveys that ask respondents to rate their happiness (or life satisfaction) on a scale with three or five choices. The way the figures are constructed means they simply cannot increase as much as GDP figures, which are constructed completely differently and do not have an upper limit. No firm conclusions can be drawn from empirical research that does not acknowledge this statistical issue.31
Several recent papers redo the empirical testing with due account taken of the very different character of the two variables. These look at the links between happiness measures and the logarithm of GDP (the log measure increases at an ever slower rate than the absolute measure).32 These economists find that in both cross-section and time-series data there is good evidence from a number of different datasets that happiness rises with GDP, and does so at a consistent rate. There are two caveats. First, the questions in surveys change over time, and different countries are included in surveys—so the time-series estimates are less precise than the cross-section ones, although they show the same kind of relationship. Second, there is one country where indeed there is no clear link over time between average GDP per capita and happiness, namely, the United States. In their paper, Betsey Stevenson and Justin Wolfers suggest that this is because the United States, almost uniquely, has become steadily more unequal over the decades for which we have the happiness survey data. The average of (the logarithm of) household incomes has been flat, in contrast to (the logarithm of) average GDP, so it should be no surprise that average happiness has not increased. This is an interesting and plausible hypothesis; I return to questions of inequality in a later chapter.
However, these authors conclude that the United States is an exception; in other rich countries such as Japan and the EU member countries, happiness has continued to rise in line with GDP. Stevenson and Wolfers conclude: “There appears to be a very strong relationship between subjective well-being and income, which holds for both rich and poor countries, falsifying earlier claims of a satiation point above which higher GDP per capita is not associated with higher well-being.”33 Other work is now coming down on the same side of the debate. For example, one paper reports rising happiness in forty-five of fifty-two countries for which times-series data are available (for the years 1981–2007) and links it to rising freedom