Seven years ago, my mentor Tyler Cowen did an interview with The Atlantic entitled, “Why I’m a Happiness Optimist but Economic Pessimist.” His point: Though GDP growth has been disappointingly low for decades, the internet does give us tons of free, fun stuff. The more I reflect on the Paasche price index, though, the more I’m convinced that Tyler’s picture is exactly upside-down. At least in the First World, the sensible position is economic optimism combined with happiness pessimism.
How so? To repeat, we should not take the ultra-optimistic Paasche calculations of GDP at face value, but neither should we dismiss them. The judicious position is that U.S. growth has been excellent, though not astronomical. Even so, we’re way richer than we were in 1990. Yet sadly, Americans’ measured happiness has barely changed. We have abundance, but not bliss.
What’s going on? Well, we already knew that income has a very modest effect on happiness. But when you upwardly revise your estimate of prosperity, you automatically downwardly revise your estimate of the effect of prosperity on happiness. Such is life.
When I insist that standard measured sharply underestimate economic growth, it’s easy to accuse me of motivated reasoning. Before you make this accusation, however, consider the whole picture. What possible agenda could I advance by simultaneously claiming that GDP has greatly increased, but brought us little joy?
So what’s the real story? Simple: I look at the world and see great economic growth. I take a second look at the world and see that money doesn’t buy happiness. Then I report my observations. This picture isn’t ideologically convenient for me. But when I put ideology aside and stare at the world, this picture is what I see.
READER COMMENTS
Joshua Woods
Apr 3 2019 at 2:03pm
Doesn’t GDP affect happiness via its affect on life expectancy? If we remain at the same happiness but get an extra 25% in life expectancy (let’s say 60 to 75) that seems like a decent amount of extra happiness to me.
Matt Osterndorf
Apr 4 2019 at 5:21pm
The effect of increasing GDP per capita on life expectancy is pretty modest after you hit around $10,000 (PPP) or so.
John Hall
Apr 3 2019 at 2:33pm
Before getting too caught up on Paasche, I think it’s important to reflect Jeffrey Hummell’s excellent comment on your earlier Paasche blog post that real GDP is calculated using Fisher chain weights. He’s also right that it strengthens your key point that “I say both sides should be more broad-minded.” Chain weighting incorporates both Paasche and Laspeyres.
It also might be worthwhile to distinguish between the GDP price index and the implicit GDP deflator (effectively the ratio of nominal GDP to real GDP).
Mori Kopel
Apr 3 2019 at 2:37pm
> Seven years ago …
Since your posts aren’t dated this doesn’t give the context you want it to. Seven years ago from when?
Joshua
Apr 3 2019 at 4:26pm
I’m not a fan of the new format, but the date is in the lower left section of the header.
MarkW
Apr 3 2019 at 7:18pm
We measure income on an unbounded scale but happiness on a bounded 1-5 or 1-10 scale. The very measures of happiness assume and encourage thinking in relative terms (e.g. something like from 1-10, how happy am I right now compared to the happiest or most miserable I could possibly be given current conditions). People don’t compare to 1990 or 1970. Many people aren’t old enough, and of those who are, most don’t remember daily conditions all that well. Researchers might have asked people in the 19th century to rate their happiness, gotten similar results to now, which would lead us to the absurd conclusion that not having multiple children die of infectious diseases before reaching adulthood has no effect on happiness.
William Bromberg
Apr 4 2019 at 8:42am
It probably doesn’t unless you have experienced the deaths or at least were in the next generation, hearing first hand stories. Going backwards would decrease happiness of course — until that was accepted as the new normal, probably in 2 generations. Nathanson in “Shame and Pride” points out that the affect of happiness is basically the reaction to a sudden lessening of mental tension (which does much to explain hedonic adaptation). So unless you purposely cultivate a mindset of gratitude for progress by meditating on how bad things were or could be (a la Stoicism) you are just as happy now as you would be then and vice versa.
Todd Ramsey
Apr 4 2019 at 8:57am
Studies show that at the low end of the world income spectrum, prosperity does “buy” happiness.
We can increase total happiness by pursuing policies that increase economic growth. Policies that increase prosperity in developed countries can help increase total happiness in less-developed countries: witness World Vision, Give Directly, or the Gates Foundation.
Until the entire world is fed, clothed, sheltered, and cared for medically, we can improve total happiness by increasing prosperity.
Mike W
Apr 4 2019 at 10:20am
So what’s the real story? Simple: I look at the world and see great economic growth. I take a second look at the world and see that money doesn’t buy happiness. Then I report my observations. This picture isn’t ideologically convenient for me.
That seems to be a comparison between a quasi-objective measure and a totally subjective measure to arrive at an obviously motivated conclusion. And just because you can’t identify your motivation doesn’t mean there isn’t one.
My personal lived observations would seem to be more valid: Those with more money are happier than those with less.
Ramagopal
Apr 20 2019 at 3:08am
“My personal lived observations would seem to be more valid: Those with more money are happier than those with less.”
Perhaps people prefer to be wealthy even if it means being unhappy than to be poor but happy.
In India where I live an affluent person living in luxury may be unhappy because of a bad marriage, poor health, not having kids or having kids who turn out to be very troublesome, or because of ugly fights within the family about how the wealth is to be shared.
A poor person may be happy because she has a family and kids who care for her. However the affluent person would not dream of trading places.
My hypothesis is that in India money is sought after even if it makes one unhappy. May be because wealth enables us to choose the life we want to live , including a life of perjury.
Thaomas
Apr 4 2019 at 1:46pm
The push-back against the growth slowdown idea is, I think, mainly a push-back against the idea that income inequality has increased and that consequently some public policies might need to be changed, some even, in a non-Libertarian direction.
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