Happiness & Public Policy

Harvard’s Ed Glaeser essay in this month’s Cato Unbound is fresh this morning. He says lots of interesting things, but I thought I’d pick out this bit, which concerns my pet issues:

A belief in the value of liberty flows strongly through mainstream neoclassical economics. Economists frequently speak about an aim of maximizing utility levels, and this is often mistranslated as maximizing happiness. Maximizing freedom would be a better translation. The only way that economists know that utility has increased is if a person has more options to choose from, and that sounds like freedom to me. It is this attachment to liberty that makes neoclassical economists fond of political liberty and making people richer, because more wealth means more choices.

There is a recent wave of scholarship suggesting that the government can help individuals be happy by reducing their choices. While happiness may be a very nice thing, it is neither the obvious central desiderata for private or public decision-making. On a private level, I make decisions all that time that I expect to lower my level of happiness, because I have other objectives. On a public level, I can’t imagine why we would want to privilege this emotion over all other goals. A much better objective for the state is to aim at giving people the biggest range of choices possible, and then let people decide what is best for them.

Excellent. I sometimes call Glaeser’s argument, and arguments like it, ”the economist’s folk theorem for the morality of growth.” You end up with things like the “Easterlin Paradox,” if you get confused about the meaning of “utility” and think bigger choice sets are supposed to entail greater happiness. But Glaeser isn’t the least bit confused. I find his version of the economist’s folk theorem enormously compelling.

My piece on happiness and economic growth in this month’s non-American Prospect has escaped from behind the paywall and is now available for your cost-free reading pleasure. I have to say I’m pretty psyched that my kitten-strapped-to-a-guillotine-connected-to-a-bicycle analogy came through intact:

The fact that average self-reported happiness has not risen with average incomes does not imply that there is no point in becoming richer. A steady rate of growth may be necessary to keep happiness and other good things at a high stable level. (Imagine a guillotine, on which a kitten is strapped, connected to a bicycle that must be pedalled ever more quickly to keep the blade aloft. Slow down, and the kitten gets it.) In The Moral Consequences of Economic Growth, Harvard economist Benjamin Friedman argues that steady economic growth “fosters greater opportunity, tolerance of diversity, social mobility, commitment to fairness and dedication to democracy”—a list I doubt any politician would come out against.

I assure you that it all makes sense in context.

If you happen to be a subscriber to the Prospect (the British one), you can read my article on why politicians who say they care about happiness have got to care about economic growth and economic freedom. Otherwise, you can read the first 2.5 paragraphs. I’ll let you know if they make it free for non-subscribers.

It is shocking to discover just how much of the debate over politics and policy rests on semi-arbitrary government standards for measuring things. For example, if you believe the Consumer Price Index speaks with absolute authority, then you will believe obviously absurd things, like the idea that real wages have stagnated. Virginia Postrel has a nice short essay in Forbes [free reg. req.] on this aspect of the mismeasurement of economic progress. If Bureau of Labor Statistics true-believers are right, then

… you have to wonder who’s buying all those flat-screen TVs, serving precooked rotisserie chicken for dinner or organizing their closets with Elfa systems. “Anybody who thinks things are getting worse should go to Best Buy and notice the type of people who go to Best Buy,” says economist Robert J. Gordon of Northwestern University.

Gordon is the author of a much-cited study showing that from 1966 to 2001 real income kept up with productivity gains for only the top 10% of earners. What the pessimists who tout his study don’t say is that, while Gordon does find that inequality is increasing, he’s convinced that the picture of middle-class stagnation is false.

“The median person has had steadily improving standards of living,” he says. But real incomes have been understated. The problem lies in how the U.S. Bureau of Labor Statistics calculates the cost of living.

Similarly, the American Enterprise Institute’s Nicolas Eberstadt has a terrific essay on the bizarre and inaccurate method by which the government calculates the poverty rate in the new Policy Review. Eberstadt shows that the official poverty statistics often get things backwards, indicating that poverty is getting worse when it is in fact getting better according to a number of other noncontroversial measures of economic well-being:

The official poverty rate is incapable of representing what it was devised to portray: namely, a constant level of absolute need in American society. The biases and flaws in the poverty rate are so severe that it has depicted a great period of general improvements in living standards — three decades from 1973 onward — as a time of increasing prevalence of absolute poverty. We would discard a statistical measure that claimed life expectancy was falling during a time of ever-increasing longevity, or one that asserted our national finances were balanced in a period of rising budget deficits.

Journalists unfortunately tend to take government numbers as gospel, and therefore end up communicating to the public a badly distorted picture of the state of our economy and society. And far too often intellectually savvy commentators who ought to know better repair to government statistics as if they are pure data, untainted by systematic methodological bias. However, far from a neutral picture of empirical economic reality, we get a funhouse mirror. I don’t think there is any intentional bias in these measurement methods. But there sure is ideological resistance to replacing them with more empirically adequate measures. Things really are getting better all the time, but “reality-based” economic measures might get in the way of some people’s pet policies. And we can’t have that! I think we’ll eventually get better official methods for measuring real income and poverty, but not without a fight.

[cross-posted from Cato@Liberty]

The politics of happiness research just got a bit more interesting. British Conservative leader David Cameron is now campaigning on a happiness platform. In a speech at a conference organized by Google in Hertfordshire, Cameron said,

It’s time we admitted that there’s more to life than money, and it’s time we focused not just on GDP, but on GWB—General Well-Being.

This is interesting because up until now, the politics of “well-being” have been primarily a welfare-liberal or social democratic phenomenon. So why the happiness schtick for the Tories? Why now? The Financial Times editorial page says:

Read more

In Vegas at the APEE meeting, Larry White gave me his paper “Is There an Economics of Interpersonal Comparisons?,” Advances in Austrian Economics 2a (1995): 135-51, which is really outstanding. Larry does a great job cutting through all the confusion about the various sense of utility, etc. So, since actuality implies possibility, I know it’s possible for economists not to be at all confused about what “economics” does an doesn’t say. But the last three papers I just read (by significant figures in economics) simply refuse to not be confused.

For example, Easterlin writes: “In contrast, economics places particular stress on the importance of life circumstances to well-being, particularly one’s income and employment situation.” I hadn’t realized that economics includes a theory of well-being! (Economics says income and employment have a lot to do with utility; it is not a part of the theory that utility is what makes a life go well.) Easterlin here is working into a contrast between setpoint-adaptation theory with his aspiration readjustment theory. Which is fine. But there is nothing about economic theory that is inconsistent with setpoint-adaptation theory. See for example Becker and Rayo’s paper “Evolutionary Efficiency and Mean Reversion in Happiness” which elegantly and ingeniously models adaptation using orthodox analytical tools without fuss. So why bring it up? Easterlin is really saying that adaptation is not part of economic folk theory. Which is correct, but maybe not relevant? Anyway, I think I’m just about to give up. Pointing out the difference between economic theory and regularities in opinion among economists isn’t hairsplitting. (Imagine political philosophers confusing regularities of opinion among political philosophers for a theory. Oh no, wait!) But it’s tiresome, and after a while, I start to feel like I am hairsplitting.

Economic Policy and the Level of Self-Perceived Well-Being: An International Comparison by Tomi Ovaska and Ryo Takashima, the Journal of Socio-Economics 35 (2006) 308-325.

An excellent econometric paper.

Best part:

Contrary to the findings on political freedom, economic freedom was found to be statistically significant in nearly all estimations, and of the positive sign. Furthermore, the relationship between SWB and economic freedom depicted in Fig. 2 largely held, unlike that for income, after controlling for alternative explanations of well-being. For instance, when the economic freedom index average in the sample rises from 5.76 to 6.34, the happiness levels rise from 3.01 to 3.07. The effect on life satisfaction is identical. The results suggest that people unmistakably care about the degree to which the society where they live provides them opportunities and the freedom to undertake new projects, and make choices based on one’s personal preferences. Compared to the GDP per capita measure, the index of economic freedom – personal choice, freedom to compete and the security of privately owned property as its core components – turned out to be about four times as important, as measured by elasticities. This indicates that the newly found interest of economics and of policymakers in measures of institutional quality is well placed. Based on the regression results, economic freedom holds some promise in serving as one of the policy tools that could be potentially used to increase the SWB of a nation’s population.

The explanation of why political rights (i.e., voting rights) had a negative influence was interesting:

It turned out that though insignificant, political rights had negative sign while civil liberties had a positive sign. This may be a reflection that democracy is not ideal as a collective decision making mechanism. As one can see from the median voter model of public choice theory, only the median voter obtains satisfaction from political rights. In addition, unlike market exchanges, every majority voting decision can potentially create a relatively large number of losers, all those who were in minority. However, the positive sign of civil liberty indicates that regardless of political structure, civil liberties are essential for human beings across society.

They also note that general freedom is likely prone to adaptation. We take it for granted. Sound’s right to me.

Most of the literature on positional preferences emphasizes the downside. But what if the upside is bigger?

Becker and Murphy in Social Economics argue that without a taste for status, there would be too little entreprenuerial activity, because the expected monetary payoff of an entrepeneurial gamble would often be too small. However, if you add the expected status payoff to the monetary payoff, entrepreneuial gambles become rational. We would all be poorer if we didn’t have a taste for status.

Today, Tyler points to a number of papers by Rick Harbaugh. His “Falling Behind the Joneses: Relative Consumption and the Growth-Savings Paradox” is a beautiful example of the possible upside of positional preferences. Here is the introduction:

Consumers in rapidly growing economies should borrow against future earnings to smooth consumption, or at least should save at a lower rate than consumers in countries with stagnant or falling incomes. Instead, multi-country studies show a strong positive correlation between income growth and savings rates (Bosworth, 1993). Such a correlation could result from high savings rates inducing high growth rates (Lucas, 1998), but the pattern in most rapid-growth economies has been for rapid income growth to precede sharp increases in household savings rates. Of the possible explanations for this growth-savings paradox, the Duesenberry (1949) relative consumption model, which assumes utility comes from individual consumption relative to societal per capita consumption, seems an unlikely candidate. Rising incomes would appear to induce excessive consumption as consumers attempt to “keep up with the Joneses”. This notion is examined with a simple two-period model. Rather than increasing consumption, concern for relative consumption can induce a fear of falling behind which raises precautionary savings. As societal income growth increases this fear intensifies, allowing for a positive effect of growth on savings rates and potentially explaining the growth-savings paradox.

Benjamin Friedman argues that growth is a public good and, as is the nature of public goods, individuals will underinvest in it unless the government does something about, in this case by mandating or rewarding savings relative to consumption. Could it be that our fear of falling behind just is the “tax” that motivates investment in growth?

Magisterial is not a word to be thrown around lightly, but I suspect it applies to Benjamin Friedman’s The Moral Consequences of Economic Growth. (I’ve only been through the first 100 pages, but I don’t imagine it’s going to get any less impressive.) Friedman includes an important discussion of the relation between the comparative character of the effect of income on well-being and economic growth. It was, for me, the source of a satisfying “Aha!” moment.

Friedman notes that the effect of income on well-being depends mainly on two different kinds of comparisons. First, we compare our present circumstances to our past circumstances. If we’re better off economically than we used to be, we feel better off. Second, we compare our circumstances to those of other people. If we’re doing better than our imagined peer group, we feel better; if worse, then worse.

Friedman’s insight is that these two forms of comparison in some ways substitute for one another. If almost everyone is continuously doing better than they were before, due to a steady rate of growth, the satisfaction from intra-personal comparison mitigates the tendency to compare ourselves to others. However, if economy stagnates, and most are no better off economically than they used to be, the tendency to compare ourselves to others is heightened. And this, Friedman argues, has deleterious political and social consequences.

Here is what he says:

By continually giving people a sense of living better than they or their families have in the not very distant past, sustained economic growth reduces the intensity of their desire to live better than one another. Economic growth satisfies the form of people’s aspirations for “more” that is possible for everyone to fulfill. . .

When an economy stagnates, however, the importance people attach to living better than others against whom they naturally compare themselves is more intense. The fact they cannot do so, or at least on average cannot, then takes on heightened importance in their eyes. The resulting frustration generates intolerance, ungenerosity, and resistance to greater openness to individual opportunity. . .

Mobility, either economic or social, is inherently threatening because it means the possibility of movement either up, or, more to the point, down, compared to the prevailing norms of the society as a whole. But when the average income for an economy is stagnant, people who allow others to get ahead of them are not only falling behind in relative terms but also losing ground compared to their own past living standard. They lose out from the perspective of both benchmarks. When an economy is growing, however, and per capita income is rising, those who fall behind compared to others can still be moving ahead–and if growth is sufficient, moving ahead solidly–by the standard of their own experience.

If Friedman is right about this, and I suspect he is, then this is an exceedingly important argument. A number of happiness-centric economists argue that because increasing wealth has little positive effect on happiness, due to adaptation and comparison, we shouldn’t worry about implementing policies that would reduce, or even stall, economic growth just as long those policies are increasing happiness. But if slowing or stalling growth itself heightens the negative effects of social comparison, we have a powerful argument against such policies on the very grounds that they are supposed to be justified.

I highly recommend this book.

This crisp New Yorker article by James Surowieki on the differences between American and Western European labor policies very pithily sums up the hazard of top-down policy to get folks to work less and relax more:

In the American model, then, you work more hours and use the money you make to pay for the things you can’t do because you’re working, and this creates a demand for service jobs that wouldn’t otherwise exist. In Europe, those jobs don’t exist in anything like the same numbers; employment in services in Europe is fifteen per cent below what it is in the U.S. Service jobs are precisely the jobs that young people and women (two categories of Europeans who are severely underemployed) find it easiest to get, the jobs that immigrants here thrive on but that are often not available to immigrants in France. There are many explanations for the estimated forty-per-cent unemployment rate in the banlieues that have been the site of recent riots, but part of the problem is that voluntary leisure for some Europeans has helped lead to involuntary leisure for others. The less work that gets done, the less work there is to do. Helping some people get off the labor treadmill can keep many people from ever getting on the treadmill at all. [emphasis added]

From Juan Non-Volokh, this humdinger:

BJØRNSKOV, et al, “The Bigger the Better? Evidence of the Effect of Government Size on Life Satisfaction around the World”

ABSTRACT: This paper empirically analyzes the question whether government involvement in the economy is conducive or detrimental to life satisfaction in a cross-section of 74 countries. This provides a test of a longstanding dispute between standard neoclassical economic theory, which predicts that government plays an unambiguously positive role for individuals’ quality of life, and public choice theory, that was developed to understand why governments often choose excessive involvement and regulation, thereby harming voters’ quality of life. Our results show that life satisfaction decreases with higher government spending. This negative impact of the government is stronger in countries with a leftwing median voter. It is alleviated by government effectiveness - but only in countries where the state sector is already small.

Semi-rhetorical question: If this sort of result keeps coming out of the data, as the data improves, how fast will statists develop grave methodological worries about happiness research? And how fast will limited government types start seeing something in it?

I find it extremely frustrating that economists, who like to color themselves intellectually rigorous folk, insist on confusing people about the meaning of words. Here’s Robert Frank in Luxury Fever:

In economist’s parlance, it is customary to speak not of happiness, but of utility. The analogous construct in the psychological literature is subjective well-being, a composite measure of overall life satisfaction. For present purposes, little will be lost if we view both expressions as being roughly synonymous with satisfaction.

The problem is that is “customary” for economists to speak not of happiness, but of utility, in a most confusing and haphazard fashion. Conceptually, happiness has nothing to with utility in economics, nor does subjective well-being, or subjective satisfaction. Utility is way of representing an ordering of preferences. It simply isn’t a psychological concept, nor a value concept, nor does it imply either. A utility function is just a little machine in which you can put an ordering ofpreferences, a pair of alternatives, and have something that somebody decided to call a “utility” assigned to each alternative, the most preferred getting the greater utility.

If I prefer the presence of a mouse in Paul Krugman’s kitchen over the absence of a mouse, and there is a mouse in Paul Krugman’s kitchen, then my preference is "satisfied" and I “get” more utility from this state of affairs than the alternatives, even if it in no way enters into my life or experience. The world being such that my highest ranked preferences are semantically satisfied, and that I am “getting” as much utility as possible relative to my ordering, logically has nothing at all to do with my subjective well-being.

As Lionel Robbins put it, just as economics was systematically expunging the psychological from economics:

So far as we are concerned, our economic subjects can be pure egoists, pure altruists, pure ascetics, pure sensualists or – what is much more likely – bundles of all these impulses.

That is to say, economics makes no substantive assumptions about the contents of preferences. It cares only for the form of preferences, namely, that they be consistent.

So why does Robert Frank, and almost everyone else in the economics profession, insist on keeping us all in a state of confusion? Contra Frank in the preceding page of Luxury Fever, economists qua rigorous appliers of utility theory, don’t think that being wealthier ought to make you happier. They think that a bigger budget gets you a more preferred bundle of goods, and more preferred means, by definition, more utility. But since utility is a not a subjective psychological state (since semantic satisfaction is not), no one should be surprised that having more utility won’t make you more anything, subjectively. The world could be exactly the way you prefer it, and you could be miserable, because you could prefer to be miserable.

The “paradox” of our being wealthier, but no happier, is a paradox only relative to a substantive psychological theory, which is what utility theory isn’t. Bentham did think that money was a proxy for pleasure, and that pleasure constituted happiness. So this would be a paradox for Bentham. But Bentham’s vulgar psychological egoism and hedonism are, as Robbins more or less points out, simply not a part of economic theory. And the paradox emphatically isn’t one for a modern utility theorist. The “paradox” is just proof that utility and happiness are non-identical, which didn’t need to be proved anyway, since the only identities in an axiomatic theory are definitional.

[Update: What is “semantic satisfaction”? It is the “fit” between the content of a propositional attitude and the world. In the case of a belief, if the content of the belief matches the world, then its “satisfaction conditions” are met. In the case of a preference, if the world matches the content of the preference, then its satisfaction conditions are met. This is not the “I can’t get no satisfaction” sort of satisfaction. Which is why preference satisfaction talk compounds the confusion over utility. It need not be satisfying to have one’s preferences satisfied, and so one’s utility may have no utility for creating utility, or, in other words, may be of little use in bringing pleasure.]

In my notebook I see my notes for the question that I asked Layard at the Brookings talk last week, and which I meant to blog. Here’s more or less what I said/asked.

Well, context first. . . Layard had promoted abandoning the theory of revealed preference as the basis of economic inquiry and policy analysis and recommended substituting his brand of normative hedonism/eudaimonism.

I said:

You said we should give up on the idea of theory of revealed preferences. I want to defend it, and hear your response.

Perhaps the fact that people behave in ways that don’t maximize their happiness is evidence that people don’t always demand happiness. This raises two points, one scientific and one political.

The scientific point: Social science based on taking a side in hotly contested arguments about the metaphysics of value doesn’t count as science.

The political point: In a pluralistic society where people have fundamental disagreements about the nature of value, taking a side and basing policy on one philsophical conception of value is inappropriate.

Layard’s answer? He seemed to me to avoid the question. He reiterated a point he had made earlier to the effect that we can’t tell what makes people happy by observing their revealed preferences, or that individual behavior when scaled up to the macro-level can have results that fail to maximize happiness, or some such thing. (If someone who was there can remember just what he said, please do correct me, or elaborate.) Whatever it was, he didn’t even approach the scientific and political points, which I think deserve to be taken seriously.

How would you respond?

I strolled up Mass Ave to Brookings this afternoon to hear Richard Layard speak on his new book Happiness. Layard, an unreconstructed Benthamite, is worried by the fact that, once a certain threshold in absolute wealth had been crossed, people’s self-reported happiness is correlated with their perception of their place in the distribution of income, i.e., by their relative wealth. Layard’s worry is that there is an arms race. Each of us tries to improve our relative position. But since everyone else is trying simultaneously to improve their relative position, very few end up succeeding in moving up relative to the others.

We’ve all perhaps moved up in absolute wealth, but that doesn’t matter so much for our happiness once we’ve crossed the critical threshold. All we’ve done is made a futile rush for a higher relative position, and ended up no happier. But we could have been spending our time doing better things.

Layard suggested that higher taxes might be worth having because it would create a disincentive to work, and this might help create a truce in the relative position arms race, freeing everyone to pursue activities that would positively promote their happiness.

Blah. Blah.

First of all, maybe the lesson we should take from this is that people just value status, period, independent of its hedonic effects. That is, perhaps the value of status cannot be reduced to the value of happiness. Casual empiricism would seem to confirm that people behave in predictably hedonically non-maximizing ways in order to maximize status. And it seem to me that many people find it very difficult to release a privileged relative position, even if they recognize that maintaining the position is making them unhappy. (Source: VH1: Behind the Music).

Some people — pehaps many people — would, other things equal, prefer an additional unit of status over several additional units of happiness. And in arms races over relative position, some people do move up. As long as the arms race does not make you significantly less happy, then it can be worth the gamble to jump in and try to be one of the few folks who succeeds in pulling ahead.

(Suppose that you’re very likely to stay in the same spot if you get in the race. And that when people pull ahead, they pull way ahead, but when people fall behind, they fall only a little bit. So even if you’re more likely to fall behind than jump ahead, the upside can still look big.)

Additionally, it can very well be the case that people are generally less happy when they have a lower relative position, more happy when they have a higher position, but don’t value higher position because it will make them happier. They value higher position because it is higher position, and getting higher position tends to make us happy because we value it, and we are generally made happy by getting what we value.

OK, let’s shift gears. Suppose I have written a transcendently great poem. Yet it very complex, and not very accessible. That said, a fair number people take great pleasure in it. However, this pleasure is swamped by the disutility caused to people who, before reading my poem, had thought that they were potentially great poets, but now are made to despair by the realization that they will never attain the heights of my poetic accomplishment.

Have I done a good or bad thing by writing my poem? Obviously: a good thing. The poem is transcendently great! It’s aesthetic value has next to nothing to do with its effect on net utility. Why care if it makes some people feel bad in comparison? Well, there is no reason to care.

To change the example slightly, suppose my poem raises the bar on poem-quality, and all my competitors rush out to write poems that will be even better than transcendently great. However, the effect of this is sheer frustration. They can never do it; I’m just that good! And here they went and wasted all that time failing to write transcendently great poems when they could have been lying in the sunshine, getting massages, or freebasing Prozac. IS THIS A PROBLEM WE NEED TO BE WORRIED ABOUT?

If the greatness of my poem creates negative externalities, they need to be negative externalities we have reason to care about if we’re going to take them into account in policy making. Parfit or Scanlon, in an argument against the pure preference satisfaction theory, give the example of a person who prefers that Uranus has six moons over any other number of moons (or something like that). If it turns out that Uranus does have six moons, is that guy any better off in any sense that we have a reason to care about? Well Parfit/Scanlon don’t think so, and neither do I.

Similarly, if you are a small person, and my success makes you burn with pained resentment, do we have any reason to take your pained resentment into account when evaluating the value of my success. I think not. The problem here is your unreasonable reaction, not my success.

Back to the poetry arms race. Suppose all those lesser poets are made unhappy by their persistent failure to achieve at a trancendent level despite their years of mindbending labor. Should we conclude that the arms race was a bad thing? Obviously not if it led to the creation of a lot of poety which, if not transcendently great, is still great. Maybe the lesser poets can learn to take satisfaction in the value they’ve created, despite their subordinate position in the pantheon of poets. But if they can’t that’s their problem, not a social problem. Similarly, if folks fail to make any progress in the race for relative economic position, they will have still improved everyone’s absolute economic position, which is just good. They will also have produced many wonderful conveniences, objects of beauty, wonder, delight, and technical merit. They will have increased the sum of human knowledge. They will have opened up new avenues of possibility for human life.

Gentlemen, on your marks!