NOV 25

24: NOV 25 - Reading Day - No class meeting

Assigned

• McMahon, C6, “Liberalism and Its Discontents” (331-343)
• Aspen Institute discussion of Easterlin Paradox: Wolfers, Gilbert, and Frank (about 40 minutes) [1]
• Clive Crook, "The Measure of Human Happiness" (3) (comments on Aspen Institute video)

Reference Point for Easterlin Paradox

• The Easterlin Paradox states that at a point in time happiness varies directly with income, both among and within nations, but over time the long-term growth rates of happiness and income are not significantly related. The principal reason for the contradiction is social comparison. At a point in time those with higher income are happier because they are comparing their income to that of others who are less fortunate, and conversely for those with lower income. Over time, however, as incomes rise throughout the population, the incomes of one's comparison group rise along with one's own income and vitiates the otherwise positive effect of own-income growth on happiness. Critics of the Paradox mistakenly present the positive relation of happiness to income in cross-section data or in short-term time fluctuations as contradicting the nil relation of long-term trends.

https://www.iza.org/publications/dp/13923/the-easterlin-paradox#:~:text=The%20Easterlin%20Paradox%20states%20that,the%20contradiction%20is%20social%20comparison.

Aspen Institute discussion of Easterlin Paradox

• Gilbert - people deny money buys happiness, but they often behave as if they believe it does.

• Justin Wolfers - Wharton -
• Does Money buy Happiness? States paradox controversially as, "Raising GDP does nothing for well being and we shouldn't do it."

• Data from Gallup polls (ladder of life - best and worst life you can have) (H-L)- SWB (as life satisfaction). He uses "happy". Log scale - Everyone agrees on this.
• Easterlin Paradox - Characterized as three claims:

• 1. Within societies richer people are happier (Hl) than poorer.
• 2. Richer countries no happier than poor (Easterlin p. 20: "Richer countries are typically happier than poorer countries"); So, when he provides data about this, he looks like he's refuting Easterlin. -1:00 -Argh!
• 3. As a society gets richer, it's people don't get happier (pretty rough statement here, rather polemical) Here's how Easterlin puts in p. 23 "There is no systemic relationship between the trends in happiness (Hs) and income trends."

• Easterlin explains this by reference and relative position. Claims the Easterlin is saying "Give up on growth" (!)

• Argument against social comparision explanation.
• Claims the income threshold is $15,000. (!) $82K in our crash course. Defined by Easterlin curve. Compares Japanese, US, and European data. Claims the Japanese survey is corrupted by changing questions. Uses Life Satisfaction scale to explain European data. Cheap trick. US: Does show happiness flat. Claims the surveys aren't capturing the rich people.
• Happiness rises with the log of income. -53.00. Interprets the log issue as "Median income in US hasn't risen, so no surprise that Hs hasn't risen.

• Agrees that positional (relative income) does matter. "I don't have theories, I have facts." Argh!
• New Data on relative position: "Rich guy in poor county happier" thesis. Claims that if this were true, we'd all move to Mexico. Argh!
• "New Data" on Hs: Richer countries happier (Hs) than poorer. Not a new result! Argyle reports on this. Not H&W news!!
• Happiness Economics agenda isn't new. In recession, happiness economics matches GDP focus. True, Easterlin says this is one of the zigzags - short time intervals. Happiness gap is narrowing for African Americans. Probably non-economic changes. Acknowledges that economic surveys have some subjectivity as well. Happiness is what politicians do.

• Bob Frank - Cornell - Acknowledges that Easterlin said that about GDP, but disagrees. Absolute income does matter. Life expectancy, institutions better, makes sense to be in richer country.
• His claims: Money does buy happiness, but not as much as it could because of the way we spend it. (Consistent with Paradox.) Historical point, Smith understood non-economic factors. Not just invisible hand. Tversky and Khaneman - behavioral economics addresses non-rational behavior, sub-Happiness maximizing. His claim: These are minor shortfalls in our potential for happiness.
• From Darwin. Traits that help the individual may harm the group. Antlers: Good for one, Dumb for all. Individuals cant solve the problem on their own. Brains didn't evolve for happiness. Brains make you unhappy to motivate behaviors. Happiness is a the fleeting state. Adaptation (say to disability) doesn't preclude us from wanting something better (mobility).
• Hockey players and helmets. They vote for helmet rules, but gain the advantage of not having a helmet. Antlers again. Not cognitive error (Behavioral econs) or lack of competition (Smith). Collective action problem.
• "People care about relative consumption more in some domains than others. Leads to expenditure arms race for positional goods. These arms races take resources from non-positional goods. Expenditure cascades. Ex: extravagant weddings, birthday parties. -30mins
• Bigger mansions are smart for one, dumb for all. If everyone had bigger mansions, they would deliver less happiness.
• plugs his 2011 book, The Darwin Economy. recommends taxing consumption rather than income and capital gains.
• Bottom line: The source of market failures from positional goods and expenditure cascades can't be addressed by standard economic models (Smith or Khaneman).

• Q&A -25mins: Frank poses question about getting good education. Relative income matters alot in US.

• McMansion problem: If it were a problem, no one would want a small house in Aspen and it would be lower priced than any house in the US. Argh!
• Frank - Responds to school example by saying we make a judgement about life trajectory that overrides short term bummer of being the average student. Likewise for immigration.
• Neat idea that top earners in firms pay a "premium"