The pursuit of happiness starts with the economy

The policy structure most supportive of anexpanding economy deserves to be a central topic of debate in the forthcomingelection.   Although there is little academic agreement about how to achieve afast-growing economy (after the basics are in place, as they are in New Zealand), it seems uncontroversial to state that the size of the economy will remain a limitingfactor of our ability to pursue other social goals.

Nevertheless, the goal of increasing grossdomestic product (GDP) is still subject to a number of criticisms.   Some dealwith the methodology of GDP – the exclusion of any measure of non-renewableresource consumption, non-market work, environmental damage and otherexternalities.   These are fair points, but not normally relevant to the usageof GDP as a measure of progress over time or comparison to other economies.  

Another common criticisms include the factthat there is no allowance in GDP for things like income inequality or healthor education standards.   Although these objections are valid, no modern societywould ever make GDP growth the sole policy goal.

And the supposed trade-off between GDPgrowth and other social goals can often be baseless.   Higher levels of GDP percapita tend to be well-correlated with rising standards on measures of socialwell-being.   It should not be any surprise that richer nations can (and wantto) spend more on health, education, and social welfare.   In any case, investmentin health and education is usually considered to be a necessary prerequisitefor faster GDP growth.

There should be no confusion that higher GDPis a means to an ends.   We’re not increasing production for its own sake, but onthe basis that increased production leads to higher utility – econospeak forhigher life satisfaction or happiness.  

We can’t put a numerical value on totalutility, so we make the reasonable assumption that if people are free toproduce and consume what they want (as they are in a market economy), then anincrease in the aggregate amount of goods and services being produced is asolid indication that societal living standards are also rising.     

But this critical assumption has also comeunder fire as a consequence of a growing field of research that seeks to directlymeasure "happiness".   Happiness data is generally obtained via surveys that requirerespondents to rate their level of day-to-day happiness (commonly on a scalefrom 0 to 10).

The initial research into this topic producedsurprising results.   Although it is evident that within a country, richerpeople are happier (on average), it wasn’t clear that richer countries (in GDPper capita terms) were happier than poorer countries.  

Nor did it seem that over time, economicgrowth produced higher levels of happiness.   The USA, infamously, recorded noincrease in average happiness between 1972-2006, despite substantial GDP growthover that period.  

The result that income affected happinessat a point in time within countries, but not over time or between countries, iscommonly know as the "Easterlin paradox" (after the researcher who firstdocumented it).

The simplest hypothesis for this result isthat happiness is more dependant on relative status within a society thatabsolute status.   People become habituated to gains in income, and thuseconomic progress comes to resemble a "rat race".

This theory has prompted the suggestionthat societies would be better to follow policies more directly targetedtowards improving happiness directly, rather than pursuing the GDP growth whichwas previously assumed to be a good proxy.  

But happiness studies are not without theirown critics.   Obviously, self-reported happiness is a highly subjective measurewith no guarantee of comparability between different cultures (or differentgenerations).   These surveys are also a bounded measure of well-being, whereaspotential gains GDP are effectively unlimited, calling into question the logicof mapping one on to the other.       

It is also hard to reject the notion thatas a society we want future generations to have the wider range of lifestylesand economic possibilities available to them that comes with higher GDP, evenif we have reason to suspect that their self-reported happiness will remain anchoredto a baseline.    

Thankfully, however, the latest and mostcomprehensive survey of the happiness data has gone a long way to overturn theidea that economic growth is futile.   Using a wider range of datasources, Betsey Stevenson and Justin Wolfers have demonstrated that there is astrong association between GDP per capita and happiness across countries.

This relationship holds up (in fact, it is slightlystronger) even when only rich countries (GDP per capita of at least US$15,000)are considered.   It is not true that economic growth becomes unimportant forhappiness once the basics of economic development are catered for.

Furthermore, a more robust consideration of the available datasuggests that the US experience of unchanging happiness is an aberration,compared to steady happiness gains in Europe and Japan over recent decades.  (The US example is possibly explained by the unequal distribution of incomegains in recent decades).         

New Zealand already performs well in cross-countrycomparisons of happiness, holding its own against richer countries withcomparable cultural backgrounds.   Based on the best available evidence, the pursuitof a larger economy remains one of the surest ways to ensure ongoingimprovement in measured happiness for New Zealanders.   A simple estimatesuggests that a doubling of GDP per capita, all else equal, would make us thehappiest nation on earth – a goal that few should find serious fault with.      

 

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