Thursday, October 20, 2011

Beyond GDP: Part III

I wrote a couple of posts a year ago on this subject (here and here) that you might want to read first. Now a year later, the whole idea of what constitutes human happiness and what economics and governments can do about it are in the news again. This from The Economist magazine (excerpt):

The joyless or the jobless
Should governments pursue happiness rather than economic growth?

IN 2006 Richard Layard, an economist at the London School of Economics, argued that unhappiness was a bigger social problem in Britain than unemployment. In the “Depression Report”, which he co-wrote, Lord Layard pointed out that more people were claiming incapacity benefits because of depression and other mental disorders than were on the dole…

…This month David Cameron, Britain’s prime minister, asked the Office of National Statistics to measure the country’s “general well-being”, as part of his promise to focus on GWB not just GDP.

Lord Layard has long argued that GDP is overrated as a gauge of a country’s well-being. Once an economy reaches an income per person of about $15,000 (measured at purchasing-power parity), economic growth ceases to add to happiness, he says. America, for example, is considerably richer than Denmark, but Americans are no more satisfied with their lives. His claim was echoed in “The Spirit Level”, a recent book by two British academics, Richard Wilkinson and Kate Pickett.

…Angus Deaton of Princeton University also doubts the claim. It is based, he points out, on charts similar to the one below (left-hand side), which plots national well-being against absolute levels of per person income. In the chart shown, each increment represents an extra $10,000. Sure enough, well-being rises steeply with income, then levels off, just as Lord Layard contends.

But all the chart really shows is that an extra dollar is worth less to the rich than to the poor. The interesting question is whether the same percentage increase in income means as much to a rich country as to a poor one. Economic growth, after all, is normally expressed in proportional terms: we say GDP grew by 1%, not by $1 billion. The chart on the right-hand side shows the same data plotted on a logarithmic scale, so that each increment represents a 100% increase in income per head. It shows that the relationship between income and well-being remains fairly steady, from the poorest countries to the richest.

This suggests that governments cannot afford to ignore growth, even if they seek the happiness of their citizens, rather than their prosperity. But is happiness, in fact, the right goal for governments?…

…But Ravi Kanbur of Cornell University points out that happiness is not always a good guide to policy. He retells the story of a Brahmin in colonial India who informed a Benthamite official: “I am ten times as capable of happiness as that untouchable over there.” Mr Kanbur contends that governments should “tax the millionaire in favour of the pauper, however great the millionaire’s capacity for happiness relative to the pauper.”...

...If people do not know what will make them happy (just as if they do not realise that smoking kills or calories fatten) governments could helpfully tell them what might. If people know what is best for them, but lack the self-discipline to choose it, some governments might also be tempted to nudge their citizens in the right direction…

…But sometimes people have the knowledge and the self-command to choose happiness, and they still fail to do so. That is the surprising finding of a recent study by Daniel Benjamin, Ori Heffetz and Alex Rees-Jones, three economists from Cornell University, and Miles Kimball of the University of Michigan. They persuaded hundreds of people to answer conundrums such as: would you rather earn $80,000 a year and sleep 7.5 hours a night, or $140,000 a year with six hours’ sleep a night?

About 70% of people said they would be happier earning less money and sleeping more. Likewise, almost two-thirds would be happier making less money and living close to their friends, rather than more money in a city of strangers. In response to another question, over 40% said they would be happier paying twice the rent to enjoy a shorter commute of ten minutes, rather than 45.

These findings support the notion that money isn’t everything. But ask people what they would actually choose, as opposed to what would make them happy, and their answers can sometimes surprise: 17% of those who say they would be happier sleeping for longer and earning less also say they would still choose the higher-paying job; 26% of those prizing short commutes over low rents would still take the cheaper home; and 22% of those who value friends over money would still move to where the money is.

Mr Cameron will therefore need to tread carefully. Even if voters believe that his policies will make Britain happier, they may still choose a party offering lower taxes and bigger subsidies. Money may not buy happiness. But why take the chance?

Plus you might want to read this commentary on the The Economist’s Free Exchange blog, which points to new OECD research as part of its Better Life Initiative.

My general impression is that Malaysians are already taking into account the “other things” in life. But – for now – the pursuit of income gains should probably continue to take precedence. There’s still a big bulk of the population who don’t earn enough to save, much less fund their retirement or afford some luxuries. Until we reach that stage, where relative poverty is more important than absolute poverty, then measuring happiness will remain a less useful barometer for policy.

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