Economic Growth and Well Being....

What's the Link Between Economic Growth and Well-Being?
by Laura Rowley
Thursday, December 23, 2010


As countries get wealthier over time, do their citizens get happier? In other words, does more money equal more happiness? The answer seems to be a point of contention among academics and also depends on how you define happiness.

First, a new study of 54 lesser-developed and transitional countries finds happiness does not rise in tandem with economic growth. While it's true that rich people tend to be happier than poor people, and people in more affluent nations report higher levels of happiness, when you track the data in one country over a period of time, higher income doesn't bring greater levels of happiness, according to the study published last week in the Proceedings of the National Academy of Sciences.

The research was conducted by University of Southern California economist Richard Easterlin, who first discovered the phenomenon in the 1970s by studying developed nations such as the U.S. and Japan. He found that big jumps in growth were accompanied by only marginal increases, or declines, in reported happiness. This became known as the "Easterlin Paradox."

"If you look across countries and compare happiness and GDP (gross domestic product) per capita, you find that the higher the country's income, the more likely it is to be happier," Easterlin told the Web site LiveScience. "So the expectation based on point-in-time data is if income goes up, then happiness will go up. The paradox is, when you look at change over time, that doesn't happen."

In this update of his previous work, Easterlin and his colleagues examined 10 and 34 years of happiness survey data from 17 Latin American countries, 17 developed countries, 11 Eastern European countries transitioning from socialism to capitalism and nine-less developed countries. None showed a relationship between economic growth and happiness. Even in China, where per capita income has doubled over the last decade, happiness levels haven't moved at all, the researchers report. Similar economic gains in South Korea and Chile show no correlation with reported happiness levels.

With incomes rising so rapidly in these countries, where are the elevated levels in well-being you'd expect to find?

Not so fast, say Justin Wolfers and Betsy Stevenson, economists at the Wharton School of Business at the University of Pennsylvania. In their recent paper with Ph.D. candidate Daniel Sacks, they studied 140 countries and found that "as countries experience economic growth, their citizens' life satisfaction typically grows, and that those countries experiencing more rapid economic growth also tend to experience more rapid growth in life satisfaction."

Why do the two studies come to opposite conclusions? One problem is that surveys define happiness in several ways. One takes into account feelings, or "daily affect," represented by questions such as "how much did you smile yesterday?" Another is an assessment of life satisfaction, which typically asks people to rank where they stand on an imaginary ladder with "best possible life" at the top and "worst possible life" at the bottom. There's also a "purpose in life" test designed to measure an individual's experience of meaning and purpose in their lives.

The "best possible life" assessment correlates most closely with income. For instance, recent research by Princeton psychologist Daniel Kahneman and economist Angus Deaton found that while more money buys happy feelings, the effect plateaus at around $75,000 in income, while life satisfaction continues to rise with income.

Wolfers suggests that the data in Easterlin's analysis are noisy because it incorporates several different happiness questions. By contrast, Wolfers, Stevenson and Sacks focused on life satisfaction, but to do so, dropped from their analysis a number of countries that didn't have survey data centered on that aspect of well-being.

"Wolfers loses a lot of Latin American countries from his sample," says Carol Graham, senior fellow with the Brookings Institution, who also studies well-being. "If you are interested in the relationship between growth and well-being, you could also argue that dropping a huge number of countries that are of the most interest is also questionable. Every single model is based on assumptions intended to deal with limitations in the data, and you can have very different opinions about whether those assumptions are correct." She says the results can also shift depending on the sample of countries and the time period used.

Graham's own work, for example, has found that Afghans score higher than the world average for daily affect and lower than average on the best possible life ladder. "While naturally cheerful and able to make the best of their lot, the Afghans also know that the best possible life is outside Afghanistan," Graham wrote in a recent blog post about the Easterlin-Wolfers dust-up.

In a season given to self-reflection, the studies provide food for thought when pondering the keys to individual happiness. If you find your well-being has grown over time with your income, as Wolfers and company suggest it should, you can boost it even further by giving generously. Recent research of 136 countries found that using financial resources to help others is consistently associated with greater happiness.

Alternatively, if your happiness has waned because of an income decline, don't ruminate on the loss. Negative feelings make it harder to see the big picture, research shows. Consciously shift your attention to activities that are engaging and meaningful.

On the other hand, if your income has improved over the years and you don't experience a leap in well-being, it's likely the "hedonic treadmill" at work. We get excited about a purchase, then adapt to the things we acquire, and seek more. So it's frightfully easy to adjust to jumps in income; instead of enjoying a bigger paycheck, suddenly we need every dime we make.

There are a few ways to get off the hedonic treadmill. First, avoid comparisons. A number of scholars suggest that it's how we measure up to our peers that matters most to happiness (and thanks to sites like Facebook, it's easier than ever to see how others are doing and judge ourselves against people we haven't seen since the eighth grade).

Graham found this in studies of well-being in China: "When you look rural respondents and ask them to assess their financial situation, they will compare themselves to themselves a year ago. When you ask a migrant urban worker, they automatically look at the reference norm for other people in the new city they just moved to. So their income may have quintupled, but they look at how much other people have."

Second, slow down your hedonic adaptation by spending money on experiences rather than things, and spread them out. You'll get more pleasure out of three or four short vacations than two weeks away each year.

Finally, invest time in things that research has found are critical to well-being: family, friends, your health, your spiritual life, work or hobbies you love. Savor that wealth by taking the time to express gratitude.

And have a happy holiday.