Whatever makes you happy

My colleague Paul Frijters presented the annual Fred Gruen lecture last night. I never knew Fred Gruen, but he was a powerhouse in the ANU’s research school, and is one of those who firmly believed that economics should always strive to be relevant to the policy debate. (For more about his career, click here).

Paul Frijters is a superb colleague to have – a researcher who has a view on every aspect of economics, always gives fast feedback on a paper, attends every seminar, and knocks on all our doors to take us all off to lunch each day. Paul spoke on happiness research and the Easterlin paradox (the contention that above a certain threshold, more GDP doesn’t make us happier). It’s a sexy topic, and the venue was packed. I enjoyed chatting afterwards with Fred’s sons, David and Nicholas (of Troppo fame).

However, my reading of the literature is that Paul is wrong. Rafael Di Tella and Robert MacCulloch have two recent papers showing that rising GDP boosts happiness for rich countries. So Paul and I have a bet going. When the 2005 World Values Survey reports its results for individuals’ life satisfaction, we’ll take the country averages for every country surveyed in the previous wave (1995-2000), whose GDP per capita exceeds US$15,000. My contention is that we’ll still see a rise in average happiness. Paul’s contention is that there will be no significant difference between the two surveys (he also wins if 2005 is lower than 1995-2000).* We should know the answer sometime late next year.

Update: Nicholas Gruen has written a Wikipedia entry on Fred Gruen.

* Formally, where LS is the mean life satisfaction score for country j in year t, we’ll run the regression:

LSjt = (Country indicator)j + B(Year)t + ejt
(using data from countries in the Integrated 1995-2000 wave, and the 2005 wave of the WVS, and excluding nations whose GDP per capita is below US$15,000)

Andrew wins if B>0 at the 10% level of significance. Paul wins otherwise.

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6 Responses to Whatever makes you happy

  1. Paul says:

    I hereby confirm the bet. Andrew too is a great colleague to have: always willing to share his data files to anyone who comes knocking and even willing to run analyses for people out of sheer kindness.

    As to the famed articles by Rafael Di Tella and Robert MacCulloch Andrew invokes, I am afraid he misreads their position: their essential technique is to run regressions of happiness on GDP without explicitly allowing for adaptation effects (i.e. they do not include long lags of GDP). This means that all the feed-back effects proposed by Easterlin, most of the psychologists in this field (Diener, Suh, Schwartz), and many economists in this field (Kayard, Van Praag, Veenhoven, Kahneman, etc.) are not included. These feedback effects, which essentially entail individuals slowly getting used to higher incomes which implies any happiness gain from more income is short-lived, then show up as ‘unanticipated sudden drops in happiness occuring in the same period’. If you would hence believe the Di Tella and McCulloch papers Andrew refers to literally, then you’d have to believe that happiness has risen with GDP, but has miraculously for the same set of countries stayed virtually the same because of ‘unknown negative shocks occuring in all those places’. Those authors themselves are highly aware of this issue and have indeed called attention to this very possibility, for instance in their 2004 work with John Haisken De New on adaptation effects in income.
    Let the data hence decide this round,


  2. Paul Samuelson and Julian Simon would be proud.

  3. Did Paul have a novel reason for believing that the happiness figures would be flat?

  4. Andrew Leigh says:

    Paul, the main countervailing factor they point to (see p25 of the second Di Tella & MacCulloch paper) is rising unemployment in Europe. (Others are rising crime, divorce rates and economic openness, though the effects of these are much smaller.) So they argue that Europe’s growth would have made it much happier, if only the other indicators hadn’t risen. Which suggests that rather than taking the Hamiltonian approach of disavowing growth, we should use the money to help lower joblessness. EITC, anyone?

  5. Mike Pepperday says:

    It was a very professional presentation yesterday. But I’d like to rain on the parade a bit.

    The proposition that economic growth has no point because past $20K it doesn’t increase happiness is unsatisfying. Is this newfound economic interest in the pursuit of happiness economics following American fashion?

    Of course people want their kids to be happy. Who’d want the opposite? Citing it is glib. But as Fraser would probably say, life wasn’t meant to be happy.

    A few days ago there was a TV program about the fight against the Mafia in Sicily. Where does happiness fit into the story of Falcone and Borsellino and the Sicilian Mafia? A fatuous suggestion, no?

    Do you, Paul, or you, Andrew, do what you do in order to be happy? Does anyone? John Braithwaite talked about challenge.

    We earn more money, we buy a new 4WD and our increased happiness is ephemeral. Well, so what. We might not know where we’re going but our driving society is not going to sit back and content itself with $20K a year each so we can eat and sleep and copulate like other animals. I’ll bet hunter-gatherers are happy. Why don’t we frolic in sylvan glades and live on berries and fruit?

    The race between falling reproduction and rising consumption is not persuasive. No matter how few of us there are, we will use up the planet’s resources. And to want fewer kids is to be against motherhood. It’s not a viable social option.

    Happiness – bah! For the wanderers among the stars of this revelation – secular enlightenment, capitalist democracy – life is to strive to seek and not to yield.

  6. Sinclair Davidson says:

    Sorry Andrew. I think Paul will win – not because he is right, but I reckon that regression is biased against you. (I haven’t read the happiness literature – life is too short, and that sort of thing makes me unhappy). Depending on your exact hypothesis, I would have thought the use of interactive dummies, or a GDP change variable would have to come into your equation. Alternativily (perhaps) a quadratic term would be appropriate. Afterall, happiness in high income economies are going to experience (I suspect) diminishing returns to increases in GDP (more food is better than stavation but how many plasma TVs can you have?). So given a misspecified equation (based on what you’re saying the bet is about), I predict a Paul victory.

    Anyway, what is it that you’ve bet?

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