Income, Wealth, Happiness, and Ideological Convenience
By David Henderson
1. I start by saying that I’m skeptical about how informative it is to ask people how happy they are and then to compare across countries. Here’s what Wolfers, and co-authors Daniel Sacks and Betsey Stevenson write:
The Gallup World Poll measures subjective well-being with the question: “Please imagine a ladder with steps numbered from zero at the bottom to ten at the top. Suppose we say that the top of the ladder represents the best possible life for you, and the bottom of the ladder represents the worst possible life for you. On which step of the ladder would you say you personally feel you stand at this time?”
I would bet that the best possible life that a high-income person could imagine would be more luxurious than the best possible life that a low-income person could imagine. Ask a person from Haiti, for example, where he puts himself in the range of possibilities and there is a good chance that a randomly chosen Haitian won’t consider the possibility of moving to the United States and, even in a lowly position, making an income that is a multiple of his current income. What that would suggest is that the Haitian, considering his possibilities, would rank his happiness higher than an American would in the unlikely case that the American is making the same income as the Haitian.
Notice that if the bias is as I have stated, this actually strengthens the Sacks, Stevenson, and Wolfers result because they find, even with this bias based on each surveyed person’s range of imagined possibilities, that people in higher-income countries are, on average, more satisfied (happier?) than people in lower-income countries. That would mean that Bryan’s criticism would have less force than he thought.
2. I don’t understand why Sacks et al measure income rather than wealth. If we’re talking about possibilities, isn’t wealth a more important measure? They could answer that they can get much better data on income than on wealth and that, especially for cross-country comparisons, income and wealth are highly positively correlated. If that is their answer, that is satisfactory.
3. I spent most of my time in thinking about this mulling over one of Bryan’s closing statements:
The view that money has a major effect on happiness is ideologically convenient for me.
At first, I thought I understood. We free-market economists often argue that this or that government spending program, tax, or regulation reduces real income. If implicit in our analysis is the idea that the lower people’s real income, the less happy they are, then it strengthens our case against the particular government spending program, tax, or regulation. So if, as Bryan thinks, the correlation between real income and happiness is very slight, this argument goes away. Also, one of the taxes we rail most against, because we think it profoundly unfair, is the progressive income tax, which takes a much higher percent of income from higher-income people. But if doing that hardly reduces high-income people’s happiness at all, then one argument against a proposal to take more of their income loses much of its force.
But then I thought further and I think it doesn’t undercut the free-market ideology at all.
First, let’s consider the income tax issue noted above. When government takes more of high-income people’s income, one of the rationales it gives is redistribution: it will either give some of this income to lower-income people or take less from lower-income people than it would have taken. Either way, the real income of lower-income people is slightly higher than it would have been. But if, as Bryan claims, it takes a huge increase in income to raise people’s happiness much, then this redistribution will hardly affect the happiness of low-income people. So that argument for redistribution loses much of its force. While the costs on the happiness side are low, the gains of happiness are low too.
Second, consider incentives. Let’s say that the Sacks et al results become widely viewed and persuasive. If that happens, the elasticity of supply of labor would increase. Why work 10% harder for 8% more real income when your happiness increases imperceptibly? So the supply-siders’ argument against high marginal tax rates would become even stronger. This would not be “ideologically convenient” for co-author Betsey Stevenson’s big boss, Barack Obama, who has carried on a crusade for raising high-income people’s marginal tax rates.
Third, consider the policy issue on which Bryan Caplan is most passionate: open borders. In his reply to Bryan, Justin Wolfers writes:
But it is just as interesting of a thought experiment in the opposite direction: If I raised your income from $3,000 (roughly the average income in the US at the turn of the century) to $50k, I would increase your happiness by one standard deviation.
The $3,000 number is interesting because it is approximately the real income of people in poor countries whom Bryan (and I) would love to allow into the United States. There would be some downsides. In particularly, the real incomes of relatively unskilled U.S. workers might fall somewhat. But this small fall in income would reduce their happiness almost unnoticeably (again, assuming Caplan and Wolfers are right about the estimated equation linking happiness and real income) while the gain to new American immigrants, as Wolfers notes, would be huge. This strikes me as “ideologically convenient” for Bryan’s most important policy issue.