Money Matters

In both senses of the term!

The NY Times has an article by David Leonhardt that takes on the conclusions of a 1974 study by Richard Easterlin that concluded that beyond the initial happiness that a modest income rise to cover basic needs, additional money does not buy additional happiness.

People in poor countries, not surprisingly, did become happier once they could afford basic necessities. But beyond that, further gains simply seemed to reset the bar. ... Relative income — how much you make compared with others around you — mattered far more than absolute income, Mr. Easterlin wrote.

But new research undercuts the Easterlin conclusions:

Betsey Stevenson and Justin Wolfers argue that money indeed tends to bring happiness, even if it doesn’t guarantee it. They point out that in the 34 years since Mr. Easterlin published his paper, an explosion of public opinion surveys has allowed for a better look at the question. “The central message,” Ms. Stevenson said, “is that income does matter.” ...

If anything, Ms. Stevenson and Mr. Wolfers say, absolute income seems to matter more than relative income. In the United States, about 90 percent of people in households making at least $250,000 a year called themselves “very happy” in a recent Gallup Poll. In households with income below $30,000, only 42 percent of people gave that answer.

Here's a graphic (larger size) from the Stevenson and Wolfers report as presented on the NY Times site:



In his article, Leonhardt, notes that he talked to both parties as well as Nobel Laureate Daniel Kahneman to try and understand the apparantly inconsistent results. The bottom line:

Economic growth, by itself, certainly isn’t enough to guarantee people’s well-being — which is Mr. Easterlin’s great contribution to economics. In this country, for instance, some big health care problems, like poor basic treatment of heart disease, don’t stem from a lack of sufficient resources. Recent research has also found that some of the things that make people happiest — short commutes, time spent with friends — have little to do with higher incomes.

But it would be a mistake to take this argument too far. The fact remains that economic growth doesn’t just make countries richer in superficially materialistic ways.

If you want an account of this research from -- so to speak -- the "horses's mouth", then here is a blog entry by Justin Wolfers on the Freakonomics web site that explains the research. Wolfers give two reasons why his new study corrects the results of the earlier Easterlin study. First:

What explains these new findings? The key turns out to be an accumulation of data over recent decades. Thirty years ago it was difficult to make convincing international comparisons because there were few datasets comparing rich and poor countries. Instead, researchers were forced to make comparisons based on a handful of moderately-rich and very-rich countries. These data just didn’t lend themselves to strong conclusions.

Moreover, repeated happiness surveys around the world have allowed us to observe the evolution of G.D.P. and happiness through time — both over a longer period, and for more countries. On balance, G.D.P. and happiness have tended to move together.

And second:

There is a second issue here that has led to mistaken inferences: a tendency to confuse absence of evidence for a proposition as evidence of its absence. Thus, when early researchers could not isolate a statistically reliable association between G.D.P. and happiness, they inferred that this meant the two were unrelated, and a paradox was born.

Justin Wolfers followed this up with another blog entry and provided the following graphic:


He makes the point about the data underlying this graphic:

There is an incredibly high correlation between average levels of happiness and average incomes — greater than 0.8. ... Thus, a 10 percent rise in income in the United States appears to increase happiness by about as much as a 10 perecent rise in income in Burundi.

And from a fourth installment of the Wolfers blog, there is this graphic which nicely sums up how happiness increases with income: