The richer you are, the happier you are?
Today’s column from Allister Heath cites recent research in the field of well-being economics to argue that the best way to promote happiness is to maximise economic growth. While positive to see economic commentators like Heath making use of well-being research, his article, which implies that well-being evidence supports "a single-minded obsession with expanding the economy” approach by government, is completely flawed. Not only does Heath ignore swathes of evidence regarding the factors that contribute to well-being, it is pretty clear that Heath doesn’t understand the research he was referring to.
Heath rightly points out at the beginning of his article that the relationship between growth and happiness has proved to be an ongoing puzzle for economists. There is clear evidence suggesting that within countries, richer people tend to have higher well-being than poorer people, and that citizens of richer countries tend to have higher well-being than those of poorer countries. But when observing changes over time, researchers have historically struggled to find links between a country’s growth and its citizen’s well-being.
In recent years, researchers have begun to find some evidence that economic growth might indeed correlate with slightly increasing well-being. Heath cites two papers by academics arguing this point (neither of which have been published in peer reviewed journals), and noted their findings.
Unfortunately for Health, these papers simply don’t provide any evidence to suggest that “the best way to promote happiness is to maximise economic growth”. In the Veenhoven paper, the average impact of growth on happiness is remarkably small (1% growth is associated with an increase of 0.003 of happiness on a scale of 0-10). And the impact is not uniform across countries – declines in happiness occurred during 41 of 100 instances where countries experienced modest levels of economic growth.
A much more sensible conclusion to draw from these papers and other well-being evidence that it is probably wrong to say that economic growth has no impact at all, but is likely that the natureof growth matters more than the quantityof growth. There are lots of factors known to have a significant effect on an individual’s well-being: having a job; family relationships; trust in others and public institutions; and a pleasant local environment. A “single-minded obsession with expanding the economy” at the expense of these other factors is likely to end up being bad for well-being – and disastrous for the environment too.
To the extent that growth has a positive impact on well-being, the distribution of income gains, and the impact on jobs are likely to be of utmost importance. The Sacks, Stevenson and Wolfers paper show how an income increase $1000 is likely to raise the well-being of poor person much more than the well-being of a rich person. A 1% GDP increase which raises the income of lots of low-income families is thus likely to boost a country’s well-being much more than growth which simply lines the pockets of a small number of rich people. Well-being studies show that the negative impact of unemployment often outweighs the loss of income, so growth that is associated with a rise in unemployment is likely to be detrimental for well-being too.
Heath is right that there is a need for job creation. But his argument that well-being evidence suggests that the Government should pursue single-minded economic expansion strategies is just wrong.