Justin Wolfers kindly responded to my recent post.  His thoughts, reprinted with his permission.

Interesting, fun, provocative, and well written.  Your math looks to be right to me.

Some thoughts:

1. I’m not sure that controlling for confounds necessarily would reduce the causal effect of income.  (My prior is similar to yours, but I haven’t thought through the issue enough).

2. I actually think 0.35 is pretty big.  Said another way, it’s big enough that it can explain why people in Burundi are at 3.5/10 on a happiness scale, and Americans are at 8/10.  My interpretation is that big gaps in happiness are easily explained by big gaps in income.  So why do we interpret things differently?

a. I think raising happiness by a standard deviation is huge.  Basically I see incredibly miserable people and incredibly happy people all around me.  Moreover, if you think there’s measurement error in happiness, then the standard deviation in measured happiness is even bigger (and you are talking about raising someone’s measured happiness by one measured standard deviation).

b. The other way of saying this is that it doesn’t matter that the effect of income on happiness is “small”: if there exist massive disparatives in income, then a small coefficient can have a big effect.  And I think there exist massive disparaties in income (and these largely explain the massive disparaties in happiness).

3. In my careful moments, I see my data as a shocking refutation of whether money has no effect on happiness.  In my less-guarded moments, I see it as a refutation of whether money has little effect on happiness.

4. Your final thought experiment (“an extra \$820,585” is clever).  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.  How many people would move from being “depressed” to OK? (If, for argument’s sake, depressed = bottom 5% in 1900, then depressed = % of people with z-score less than 1.6.  Shift that distribution 1 standard deviation to the right, and the proportion who are depressed = % of people with z-score+1 less than 1.6, which is 0.5%. So we would nearly eliminate depression.)

But, as always, really interesting stuff, and great fodder for the blog.

One more thought: The claim made by some that money matters less than we think and hence we should focus less on it, always struck me as important, and plausible, and one that my evidence is silent on.

J.