Stevenson and Wolfers' Flawed Happiness Research
To review, in 1974 USC professor Richard Easterlin found that within a given country people with higher incomes were more likely to report being happy. However, between developed countries, the average reported level of happiness did not vary much with national income per person. Similarly, although income per person rose steadily in the United States between 1946 and 1970, average reported happiness showed no long-term trend and declined between 1960 and 1970. Theoretically, utility is generally assumed to be increasing at a decreasing rate (eg, log(x)). So, if you have twice as much GDP/capita, you should be happier, but in practice it doesn't seem to work this way. I agree with Easterlin, and the relative-status utility function is the key to my book, The Missing Risk Premium. Utility as Stevenson-Wolfers see it is a necessary and sufficient condition for an omnipresent risk premium, that is, it exists in a symmetric if--then relation (if one exists then the other does). Yet, the risk premium seems to show up in only three places, and is usually missing (thus, my book title), if not going the wrong way. Furthermore, evolution favors a relative utility function as opposed to the standard absolute utility function, and the evidence for this is found in ethology, anthropology, and neurology. Economists from Adam Smith, Karl Marx, Thorstein Veblen, and even Keynes focused on status, the societal relative position, as a motivating force in individual lives (this was before mathematical utility functions in the 1950s made the profession ignore relative position). So, this isn't just a crazy idea championed by a wacky Easterlin guy, or just wacky me.
Stevenson and Wolfers are married coauthors, and they have published at least three papers on the topic, all refuting the Easterlin finding. Wolfers states 'most economists have our view, that there is no Easterlin paradox and there probably never was.' I'm sure he is correct, that most economists share his views, but only because they always have: if economist used a relative utility function many (most) seminal models would become ambiguous, and the whole field loses much of its foundation. Interviewer Russ Roberts is the Merv Griffin of economics interviewers--agreeable to a fault--and so never presses them on what specifically causes the Easterlin crowd to see things so differently. As Stevenson is now part of the prestigious yet irrelevant Counsel of Economic Advisors and Wolfers has more affiliations than your average CFA (University of Michigan, Brookings, CAMA, CEPR, CESifo, IZA and NBER), these two represent best practices in economics. It would be useful to see what the 'best of the best' do when applying their laser-logic.
First, there's the paper that made this May's American Economics Review, Subjective Well‐Being and Income: Is There Any Evidence of Satiation? Here they document two things. First, that cross-sectionally, higher GDP/capita generates higher happiness. Strangely, they find that the income-happiness effect is at least twice as strong among richer countries, which no one thinks is true (the effect should decrease as wealth increases), and further using one set of data the effect of income on happiness is negative. The authors note, however, that this is merely because of one country, the Phillipines. Strange that 2 of the 5 observations here were significant in the direction no one argues is true. If this was the effect of one single country, could such an explanation be responsible for the positive effect for the rich countries? The data look disputable (one chart shows Denmark and Norway above Italy and Spain, which would be unusual). That said, by itself it does support their assertion.
Their second set of findings concern cross-sectional data within a country. Easterlin did not dispute this, however. Given positional goods like mates and lakefront property, relative wealth should matter. Thus, S-W spend a lot of time refuting findings that looks somewhat relevant to the Easterlin Paradox, and definitely supportive of their view, but if you are a smart economist you should understand this is irrelevant to anything but a caricature of the Easterlin idea. I don't think they are fools or consciously disingenuous, just really good at playing the game: they have convinced themselves that their academic confabulations are objective science as opposed to tendentious rhetoric. This doesn't move the debate forward, but it does help their status in their tribe, which is what most economic research is really about and why you don't have to follow most of it.
So, what about the original Easterlin note, that among developed countries, where people are more worried about obesity than malnutrition, as GDP/capita rises we aren't getting happier? Well, Sacks, Stevenson, and Wolfers (2013) adress this point directly, and show this chart, where happiness is on the y-axis (vertical), and log GDP normalized for country and 'waves'. Now, 'waves' is the name for the particular set of years a specific survey tended to use identical phrasing and protocols, which usually last a handful of years, thus each such set was assigned a fixed-effect. Here is the resulting data, and their 'effect' in the line just in case it isn't obvious to you.
When an economist tells you a symmetric ovoid contains a highly significant trend via the power of statistics, don't believe them: real effects pass the ocular test of statistical significance (ie, it should look like a pattern). Here's another view of the data we are interested in--change in log(GDP)/capita over time within a country--versus change in happiness, using a variety of surveys:
Again, for each its happiness on the y-axis, income on the x-axis. S-S-W add little lines trying to show a pattern that they are sure is there.
Now, two can play this game, as from 2010 Easterlin and co-authors have data with similar blobs, but they draw downward-sloping lines over them.
I think it's best to say, no relation, and to stop drawing lines on blobs.
In any case, the biggest problem with the Sacks, Stevenson and Wolfers analysis is that they estimate a short-term relationship between life satisfaction and GDP, rather than the long-term relationship. Surely over an economic cycle, say between 2007 and 2009, or 1999 and 2002, income is correlated with general anxiety in the predictable way. Only over decades does the null effect of income on happiness arise, and this is basically taken out via 'wave-fixed-effects', which are basically time-dummies for 5-year groupings.
While I think people who aren't fighting for basic necessities are focused primarily on status and the things it can buy, I don't think this implies we should be indifferent to growth. That would be the naturalistic fallacy, that 'is' implies 'ought.' We should aspire higher than envy, which paradoxically seems to elevate greed, but really just forces us to be grateful for things like the internet, strawberries in winter, and five-blade razors that we take for granted once everyone has them. I note many writers I otherwise admire, usually libertarian leaning, are quite averse to the Easterlin conclusion, thinking it will lead us to adopt a luddite policies because growth would not matter in such a world (see Ron Bailey here, or Tim Worstall there).
The key is that while I admit that my relatively impoverished grandfather was probably as happy as I am, I'm also very glad I live now: growth is good in spite of my envious homunculus. Further, as productivity growth is the natural consequence of free minds and markets, flattening growth means not merely focusing on 'more important things' but rather squelching freedom, and liberty is more important than equality because it's feasible while allowing a great deal of the latter. In contrast, true equality is only possible via force because people are not equal in effort or ability. I mean, how would one prevent Larry Ellison or LeBron James from being richer than everyone else? The only way would be to destroy new companies or merit-based systems, why the worst rise to the top in hierarchies based on non-pnl signals, with examples from smarmy politicians, clueless executives in large regulated corporations, and of course genocidal socialists.
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