The best place to begin is with the misery index. What is the misery index? No, it isn’t a measure of the average happiness level of economists. The misery index is the sum of the inflation rate and the unemployment rate. The concept was apparently created by Arthur Okun in the 1960s (see here) but it wasn’t the best idea he ever had. (Arguably, Okun’s best idea was the ‘leaky bucket’ metaphor. Redistribution of income from the rich to the poor is like carrying water in a leaky bucket. Some of the contents of the bucket is lost in transit. More information can be found here.)
The problem with the misery index is that it assumes that a percentage point increase in inflation creates just as much misery as a percentage point increase in unemployment. That assumption might make some sense if we had no information about the relative amounts of misery caused by inflation and unemployment, but that is not the case.
The results of happiness research suggest that unemployment has large negative effects on satisfaction with life. Research suggests that an increase in annual income of over $40,000 (over and above unemployment benefits) would be required to give Australian males who are unemployed the same probability of experiencing high life satisfaction as someone who is employed. The corresponding income increase for women was estimated to be about twice as large (for reasons unknown). Larger required income differences have also been estimated for other countries (see Nick Carroll, ‘Unemployment and psychological well-being’, Economic Record, Sept. 2007).
Happiness research suggests that although inflation has significant negative effects on satisfaction with life these effects are smaller than the effects on unemployment. Using a large European data base, Justin Wolfers has estimated that a percentage point of unemployment causes about 5 times more unhappiness than a percentage point of inflation (‘Is business cycle volatility costly’, International Finance, 2003, here).
If we can assume that a similar ratio applies in Australia, would this mean that the Reserve Bank would have to be crazy to contemplate policy action that would reduce inflation by a percentage point if this was likely to result in an increase in unemployment of 2 percentage points? No. In order to do this calculation properly it is necessary to take into account the duration of these expected effects of policy actions. If the reduction in inflation is expected to be permanent and the increase in unemployment is expected to last for only one year, the policy action would make sense. A clever politician might even be able to sell such an outcome to the public as “the recession we had to have”.
The obvious point is that if the Reserve Bank is able to demonstrate its resolve to prevent inflationary expectations from taking hold it will be able to avoid resorting to the unpalatable option of inducing a recession in order to reduce inflation. Unfortunately, the Bank is under pressure from some economists to view recent increases in inflation as having been “imported” and hence to take no action against them. I don’t know how anyone can argue that inflation can be imported in a country that has a floating exchange rate - but that may not mean much because I still count myself among those who think that “inflation is always and everywhere a monetary phenomenon”.
Tuesday, July 1, 2008
Thursday, June 26, 2008
How important is the right to choose?
This is a story about Mathew and Mark, identical twins, who were separated at birth and still do not know of each other’s existence. My story begins when both felt a little unhappy most of the time – not depressed, just not happy. In terms of the objective circumstances of their lives there was no obvious reason why they should be unhappy. Jill, who happened to meet Mathew and Mark by chance and figured out that they must be identical twins, felt that their unhappiness was largely genetic. Jill actually had the expertise to make such a judgement because she was a neurologist who conducted research on happiness.
Jill decided that rather than arrange a meeting between Mathew and Mark she would keep them ignorant of each other and use them as subjects in her research on the electrical stimulation of certain parts of the brain to induce feelings of pleasure. So, she befriended both men and arranged to have apparatus for electrical stimulation of their brains installed in their favourite chairs without their knowledge. (Don’t ask me how this might work. I don’t know.) Without asking their permission Jill stimulated the brains of both men while they were relaxing in their favourite chairs.
After this, both men spontaneously reported to Jill that something wonderful had happened to them. From out of nowhere, they said, they had begun to experience pleasurable feelings that were better than any feelings that they had ever felt before – better than the pleasure of fine food or wine, better than the esteem of friends and even better than the pleasure of sex.
As she had planned all along, Jill told Mathew that she had caused his pleasurable feelings through brain stimulation, while suggesting to Mark that what had happened to him must be “just one of those things”.
When Jill told Mathew that her experiment was the source of his pleasure, he was not amused. He said that he felt that he had been manipulated and that his trust had been betrayed. Even though he would have readily participated in the experiment if asked to volunteer, he viewed Jill’s failure to ask an inexcusable breach of his autonomy. He told Jill to leave and not return, and she did as she was asked. After a week or two Mathew’s life returned to normal and he became his old unhappy self once again.
By contrast, Mark continued to receive the brain stimulation and never learned about the source of the pleasure he experienced. You could say he lived happily ever after – because he remained in ignorance that the pleasure he continued to experience was the result of Jill’s surreptitious intervention.
It seems to me that this story, which I have just made up, demonstrates that freedom to choose is more important than happiness. Mark is unquestionably happier than Mathew, but it is reasonable to predict that if he knew that his happiness was the result of Jill’s manipulation he, like Mathew, would make an informed choice to be unhappy rather than to continue to be manipulated by a person who does not respect his autonomy.
I made up the story after reading an article by Yew-Kwang Ng, who taught me just about everything I know about welfare economics in 1971. Yew-Kwang suggests that the technology of electrical brain stimulation to increase happiness is well known and that its widespread use would increase happiness enormously. He wonders why this technology has not already been developed for common use. Yew-Kwang also contemplates the use of genetic engineering to increase happiness. (‘Happiness studies’, Economic Record, June 2008).
It seems to me that the crucial point is that people should be free to choose whether to use such technologies. It is not clear, however, that those who put happiness ahead of everything see the right to choose as having a great deal of importance. Yew-Kwang Ng writes: “The satisfaction of my (even if informed) preferences as such has no normative significance for me; it is important only because, in most cases, it makes me (and/or others) happier, directly or indirectly” (“Efficiency, Equality and Public Policy”, 2000, p 53). This makes me wonder whether Yew-Kwang would consider that Mathew in my story acted irrationally by foregoing his chance of greater happiness in order to get the manipulative Jill out of his life.
Jill decided that rather than arrange a meeting between Mathew and Mark she would keep them ignorant of each other and use them as subjects in her research on the electrical stimulation of certain parts of the brain to induce feelings of pleasure. So, she befriended both men and arranged to have apparatus for electrical stimulation of their brains installed in their favourite chairs without their knowledge. (Don’t ask me how this might work. I don’t know.) Without asking their permission Jill stimulated the brains of both men while they were relaxing in their favourite chairs.
After this, both men spontaneously reported to Jill that something wonderful had happened to them. From out of nowhere, they said, they had begun to experience pleasurable feelings that were better than any feelings that they had ever felt before – better than the pleasure of fine food or wine, better than the esteem of friends and even better than the pleasure of sex.
As she had planned all along, Jill told Mathew that she had caused his pleasurable feelings through brain stimulation, while suggesting to Mark that what had happened to him must be “just one of those things”.
When Jill told Mathew that her experiment was the source of his pleasure, he was not amused. He said that he felt that he had been manipulated and that his trust had been betrayed. Even though he would have readily participated in the experiment if asked to volunteer, he viewed Jill’s failure to ask an inexcusable breach of his autonomy. He told Jill to leave and not return, and she did as she was asked. After a week or two Mathew’s life returned to normal and he became his old unhappy self once again.
By contrast, Mark continued to receive the brain stimulation and never learned about the source of the pleasure he experienced. You could say he lived happily ever after – because he remained in ignorance that the pleasure he continued to experience was the result of Jill’s surreptitious intervention.
It seems to me that this story, which I have just made up, demonstrates that freedom to choose is more important than happiness. Mark is unquestionably happier than Mathew, but it is reasonable to predict that if he knew that his happiness was the result of Jill’s manipulation he, like Mathew, would make an informed choice to be unhappy rather than to continue to be manipulated by a person who does not respect his autonomy.
I made up the story after reading an article by Yew-Kwang Ng, who taught me just about everything I know about welfare economics in 1971. Yew-Kwang suggests that the technology of electrical brain stimulation to increase happiness is well known and that its widespread use would increase happiness enormously. He wonders why this technology has not already been developed for common use. Yew-Kwang also contemplates the use of genetic engineering to increase happiness. (‘Happiness studies’, Economic Record, June 2008).
It seems to me that the crucial point is that people should be free to choose whether to use such technologies. It is not clear, however, that those who put happiness ahead of everything see the right to choose as having a great deal of importance. Yew-Kwang Ng writes: “The satisfaction of my (even if informed) preferences as such has no normative significance for me; it is important only because, in most cases, it makes me (and/or others) happier, directly or indirectly” (“Efficiency, Equality and Public Policy”, 2000, p 53). This makes me wonder whether Yew-Kwang would consider that Mathew in my story acted irrationally by foregoing his chance of greater happiness in order to get the manipulative Jill out of his life.
Sunday, June 22, 2008
Why doesn't the World Bank's growth commission admit that experts don't have all the answers?
Bill Easterly suggests (here) that the recently published report of the World Bank growth commission (here) answers the question of how to promote high growth rates by saying something like: “we do not know, but trust the experts to figure it out”.
Does the report really say or imply that? The report identifies some of the distinctive characteristics of high growth economies and asks how other developing countries can emulate them. It talks of the importance of: bringing in ideas, technologies and knowhow from the rest of the world; international trade and specialization; structural transformation through microeconomic processes of creation and destruction; and high national savings rates. The report also notes that an important characteristic of high growth economies is “an increasingly capable, credible and committed government”. It discusses the need to rely on markets to allocate resources efficiently, the role of market and regulatory institutions that underpin mature market economies, the need for investment in infrastructure, education and health, the need for social safety nets to protect the losers from economic change and the need for a commitment to equality of opportunity to give everyone a fair chance to enjoy the fruits of growth.
It would seem from this brief summary that the World Bank growth commission - with its 21 world leaders and experts, an 11-member working group, 300 academic experts, 12 workshops and a budget of $4 m - has actually come to some conclusions about how to promote economic growth. Arguably, there is not much advance here on what the World Bank was writing in the 1990s about “the east Asian miracle” or, for that matter, on what Adam Smith wrote in “Wealth of Nations” in 1776 - but findings about the characteristics of more successful economies are probably worth re-stating from time to time.
So, is Bill Easterly mistaken? Not at all. He makes the point that only two of the 13 high growth episodes the commission studied were ongoing. Yesterday’s growth failures are today’s successes (e.g. India) and yesterday’s successes (e.g. Brazil) are today’s failures. And he points out that much of this volatility is inexplicable and unpredictable.
The World Bank growth commission comes close to acknowledging their own ignorance of the art of policy making when they note that some countries have sustained high growth for quite long periods without the deep institutional underpinnings that define property rights and enforce contracts in mature market economies. Consider the following odd sequence of sentences: “Indeed, an important part of development is precisely the creation of these institutionalized capabilities. Even without them, growth can occur, and these institutions can co-evolve with the economy as it expands. However, we do not know in detail how these institutions can be engineered, and policy makers cannot always know how a market will function without them” (p 4).
All the authors of the report needed to add, before putting “the art of policy making” in the too hard basket, was some comment to the effect that the best advice an economist can give policy makers is to consider the incentives that their policies are likely to create.
However, the commission could not acknowledge that it does not have any expertise in advising the governments of developing countries about “the art of policy making”. It couldn’t resist making inane comments like: “Bad policies are often good policies applied for too long” (p 6).
Rather than trying to imagine what might have been going on in the minds of the experts who signed off on that particular pretence of knowledge, readers would be better served by pondering the following quote from Friedrich Hayek:
If man is not to do more harm than good in his efforts to improve the social order, he will have to learn that in this, as in all other fields where essential complexity of an organized kind prevails, he cannot acquire the full knowledge which would make mastery of the events possible. He will therefore have to use what knowledge he can achieve, not to shape the results as the craftsman shapes his handiwork, but rather to cultivate a growth by providing the appropriate environment, in the manner in which the gardener does this for his plants. ... The recognition of the insuperable limits to his knowledge ought indeed to teach the student of society a lesson of humility which should guard him against becoming an accomplice in men's fatal striving to control society - a striving which makes him not only a tyrant over his fellows, but which may well make him the destroyer of a civilization which no brain has designed but which has grown from the free efforts of millions of individuals. (Nobel prize lecture given in 1974, available here).
Does the report really say or imply that? The report identifies some of the distinctive characteristics of high growth economies and asks how other developing countries can emulate them. It talks of the importance of: bringing in ideas, technologies and knowhow from the rest of the world; international trade and specialization; structural transformation through microeconomic processes of creation and destruction; and high national savings rates. The report also notes that an important characteristic of high growth economies is “an increasingly capable, credible and committed government”. It discusses the need to rely on markets to allocate resources efficiently, the role of market and regulatory institutions that underpin mature market economies, the need for investment in infrastructure, education and health, the need for social safety nets to protect the losers from economic change and the need for a commitment to equality of opportunity to give everyone a fair chance to enjoy the fruits of growth.
It would seem from this brief summary that the World Bank growth commission - with its 21 world leaders and experts, an 11-member working group, 300 academic experts, 12 workshops and a budget of $4 m - has actually come to some conclusions about how to promote economic growth. Arguably, there is not much advance here on what the World Bank was writing in the 1990s about “the east Asian miracle” or, for that matter, on what Adam Smith wrote in “Wealth of Nations” in 1776 - but findings about the characteristics of more successful economies are probably worth re-stating from time to time.
So, is Bill Easterly mistaken? Not at all. He makes the point that only two of the 13 high growth episodes the commission studied were ongoing. Yesterday’s growth failures are today’s successes (e.g. India) and yesterday’s successes (e.g. Brazil) are today’s failures. And he points out that much of this volatility is inexplicable and unpredictable.
The World Bank growth commission comes close to acknowledging their own ignorance of the art of policy making when they note that some countries have sustained high growth for quite long periods without the deep institutional underpinnings that define property rights and enforce contracts in mature market economies. Consider the following odd sequence of sentences: “Indeed, an important part of development is precisely the creation of these institutionalized capabilities. Even without them, growth can occur, and these institutions can co-evolve with the economy as it expands. However, we do not know in detail how these institutions can be engineered, and policy makers cannot always know how a market will function without them” (p 4).
All the authors of the report needed to add, before putting “the art of policy making” in the too hard basket, was some comment to the effect that the best advice an economist can give policy makers is to consider the incentives that their policies are likely to create.
However, the commission could not acknowledge that it does not have any expertise in advising the governments of developing countries about “the art of policy making”. It couldn’t resist making inane comments like: “Bad policies are often good policies applied for too long” (p 6).
Rather than trying to imagine what might have been going on in the minds of the experts who signed off on that particular pretence of knowledge, readers would be better served by pondering the following quote from Friedrich Hayek:
If man is not to do more harm than good in his efforts to improve the social order, he will have to learn that in this, as in all other fields where essential complexity of an organized kind prevails, he cannot acquire the full knowledge which would make mastery of the events possible. He will therefore have to use what knowledge he can achieve, not to shape the results as the craftsman shapes his handiwork, but rather to cultivate a growth by providing the appropriate environment, in the manner in which the gardener does this for his plants. ... The recognition of the insuperable limits to his knowledge ought indeed to teach the student of society a lesson of humility which should guard him against becoming an accomplice in men's fatal striving to control society - a striving which makes him not only a tyrant over his fellows, but which may well make him the destroyer of a civilization which no brain has designed but which has grown from the free efforts of millions of individuals. (Nobel prize lecture given in 1974, available here).
Friday, June 20, 2008
Can beliefs about inequality make people unhappy?
In recent posts I have been considering whether some of the findings by Arthur Brooks in “Gross National Happiness” apply to countries other than the United States (see: here, here and here). In this post I continue that theme and focus particularly on the effect of political beliefs on the extent to which people are made unhappy by income inequality.
Brooks observes that levels of happiness, beliefs about inequality and income mobility, and political allegiance tend to go together. Americans who think that income differences are too large (about half the population) are a lot less likely to believe that there is a great deal of upward mobility in the United States. Political liberals are a lot less likely than conservatives to believe that there is a lot of upward income mobility in America. Surveys also show that pessimists about income mobility are a lot less likely to be very happy than are optimists.
There is some evidence from published research relating to other countries that political views tend to influence the extent that inequality of income makes people unhappy. Research by Alberto Alesina, Rafael Di Tella and Robert MacCulloch suggests that in Europe the poor and those on the left of the political spectrum tick down their happiness scores when inequality is high, but in the United States the happiness of the poor and those on the left is largely uncorrelated with inequality. Rafael Di Tella and Robert MacCulloch also report the results of a 36 country study based on the World Values Survey which suggests that low income has less of an adverse effects the happiness of low-income people if it is accompanied by a belief that poor people have a chance of escaping from poverty in the country in which they live. (See: Di Tella and MacCulloch in ‘Some uses of happiness data in economics’, Journal of Economic Perspectives, Winter 2006, p 42).
In earlier posts I have noted that in most countries the happiness of lower income people tends to be closely related to the happiness of middle and upper income people in the same countries (here) and that the gap in happiness between upper and lower income people is not related in any clear and obvious way to differences in the extent of income inequality among different countries (here). I now want to report on some research in which I have attempted to assess whether political views influence the proportion of lower income people who are satisfied with life.
The research involved use of multiple regression to explain the proportion of lower income people who are satisfied with life in terms of: the proportion of upper income people who are satisfied with life, self-positioning on the political spectrum; differences in self-positioning on the political spectrum between upper and lower income people; the proportion of the population who believe that it would be a good thing if there was less emphasis on money; differences between upper and lower income people in the proportions who believe that it would be a good thing if there was less emphasis on money; an indicator of religious service attendance and a measure of income inequality (gini index). (Data used in the study were for 66 countries for the year 2000 and have been sourced from “Human Beliefs and Values” by Ronald Inglehart et al.)
The results suggest that the most significant variables explaining the proportion of lower income people who are satisfied with life are:
Brooks observes that levels of happiness, beliefs about inequality and income mobility, and political allegiance tend to go together. Americans who think that income differences are too large (about half the population) are a lot less likely to believe that there is a great deal of upward mobility in the United States. Political liberals are a lot less likely than conservatives to believe that there is a lot of upward income mobility in America. Surveys also show that pessimists about income mobility are a lot less likely to be very happy than are optimists.
There is some evidence from published research relating to other countries that political views tend to influence the extent that inequality of income makes people unhappy. Research by Alberto Alesina, Rafael Di Tella and Robert MacCulloch suggests that in Europe the poor and those on the left of the political spectrum tick down their happiness scores when inequality is high, but in the United States the happiness of the poor and those on the left is largely uncorrelated with inequality. Rafael Di Tella and Robert MacCulloch also report the results of a 36 country study based on the World Values Survey which suggests that low income has less of an adverse effects the happiness of low-income people if it is accompanied by a belief that poor people have a chance of escaping from poverty in the country in which they live. (See: Di Tella and MacCulloch in ‘Some uses of happiness data in economics’, Journal of Economic Perspectives, Winter 2006, p 42).
In earlier posts I have noted that in most countries the happiness of lower income people tends to be closely related to the happiness of middle and upper income people in the same countries (here) and that the gap in happiness between upper and lower income people is not related in any clear and obvious way to differences in the extent of income inequality among different countries (here). I now want to report on some research in which I have attempted to assess whether political views influence the proportion of lower income people who are satisfied with life.
The research involved use of multiple regression to explain the proportion of lower income people who are satisfied with life in terms of: the proportion of upper income people who are satisfied with life, self-positioning on the political spectrum; differences in self-positioning on the political spectrum between upper and lower income people; the proportion of the population who believe that it would be a good thing if there was less emphasis on money; differences between upper and lower income people in the proportions who believe that it would be a good thing if there was less emphasis on money; an indicator of religious service attendance and a measure of income inequality (gini index). (Data used in the study were for 66 countries for the year 2000 and have been sourced from “Human Beliefs and Values” by Ronald Inglehart et al.)
The results suggest that the most significant variables explaining the proportion of lower income people who are satisfied with life are:
- the proportion of upper income people who are satisfied with life (by far the most important);
- differences in self-positioning on the political spectrum between upper and lower income people;
- the proportion of the population who believe that it would be a good thing if there was less emphasis on money; and
- differences between upper and lower income people in the proportions who believe that it would be a good thing if there was less emphasis on money.
These results support the view that the impact that inequality has on the happiness of low income people is influenced by their political beliefs and their beliefs about the importance of money and material things.
(Research presented on this blog – as on any other blog - should be viewed with more caution than peer-reviewed research presented in academic journals. For quality assurance purposes I am prepared to make detailed results of research available to anyone who wants them and the data available to anyone who wants to replicate studies.)
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