Happiness Is a Big Fat Paycheck

A new study's surprising conclusion about what money can buy.
  • ---Shares

If you went out into the street and asked people at random how happy they were, what do you think you would find? That the healthy are happier than the sick? True, although not by as much as you might think. Young people are happier than the middle-aged and the old? False-happiness is remarkably stable over the life cycle. Religious people are happier than nonbelievers? True, at least according to researchers in happiness economics, a rapidly growing field that relies on opinion surveys rather than on government statistics to measure well-being and trace its causes.

In April, at the Brookings Institution in Washington, two enterprising young economists from Wharton, Betsey Stevenson and Justin Wolfers, addressed the age-old question of what money can and can't buy. Drawing on a wide variety of surveys, the duo claimed that rich people are happier than poor people, rich countries are happier than poor countries, and as countries get richer they get happier. Within weeks, newspapers around the world had picked up on the findings, and Wolfers was appearing on CNBC to brief viewers.

Why all the fuss? Stevenson and Wolfers' paper runs counter to a large body of evidence suggesting that, especially in rich countries, economic growth has failed to translate into greater subjective well-being. In the United States, the first happiness surveys were carried out at the end of World War II. Sixty years later, despite the fact that people's inflation-adjusted incomes have quadrupled, reported happiness levels have hardly budged.

The U.S. isn't alone. "In China, between 1990 and 2004, per capita income went from 5 percent of the U.S. level to 16 percent," says Richard Easterlin, an economist at the University of Southern California and one of the founders of the happiness school. But happiness over that period stagnated. "Life satisfaction, if anything, seems to be declining. India, Chile, Turkey, Ireland-all of them show little or no improvement in happiness or well-being despite rapid economic growth.'

Stevenson and Wolfers argue that countries like these are exceptions to the rule. "Our results suggest that economic growth is a very powerful force for raising well-being," Wolfers says. "It is not true that only income matters, but on average it looks like economic growth is good for happiness, even in rich countries."

The new paper galvanizes an important debate about the purpose and effectiveness of economic policy-and about what has been the economic status quo for more than six decades. Governments around the world, including the U.S., have long made maximizing the gross domestic product-a measure of all the goods and services produced in the economy-their overriding economic goal.

The problem, if you buy into the argument of Easterlin and his followers, is that the endless pursuit of higher G.D.P. is largely self-defeating. People in nations with higher G.D.P.'s don't get continuously happier. As a result, governments might be better advised to concentrate on things that actually do have an impact on happiness, such as maintaining stable families and friendly communities, reducing joblessness, providing adequate health care, and guaranteeing more personal freedom. In his 2005 book, Happiness: Lessons From a New Science, Richard Layard, one of Britain's leading economists and a member of the House of Lords, advocated just such a policy shift, saying, "We should monitor the development of happiness in our countries as closely as we monitor the development of income."

I asked Layard if the promotion of happiness is a practical agenda. "Oh, yes," he replied. "We're very busy at it here in Britain." Many British government departments already have well-being divisions, and the Office for National Statistics, which tracks Britain's G.D.P., is gathering more information about subjective well-being. Last year, the British government, led by Gordon Brown, allocated more taxpayer money for mental health programs, which can have a big impact on reported happiness.

Other European countries are following Britain's lead. Frustrated with what he called "the growing gap" between official economic statistics and daily reality, French president Nicolas Sarkozy recently appointed a high-level commission to explore ways of quantifying happiness and well-being. The European Commission is also working on new economic indicators that will incorporate nonmonetary factors such as environmental progress into economic decisionmaking.

Here in the U.S., though, the happiness school has made less headway. "The political establishment is much more pro-economic growth, and it doesn't like this subjective well-being stuff," Easterlin says. "There is a feeling it is promoting welfare-state ideas such as families, health, and other human concerns." Also, despite the survey evidence, many economists refuse to accept that money and happiness don't go together. "People who have more income have more opportunities," Alan Krueger, a Princeton economist and an authority on the measurement of well-being, said. "How can you find that they are less happy? To an orthodox economist, it doesn't make sense."

If you believe Stevenson and Wolfers, the traditional focus on G.D.P. makes eminent sense. Using new data from a 2006 worldwide survey by Gallup, they find the correlation between income and life satisfaction is 0.82, which seems impressive. (One represents perfect correlation; zero is none.)

In a discussion session following Stevenson and Wolfers' presentation of their paper at Brookings, Nobel Prize winner Gary Becker praised the paper warmly, and former Treasury Secretary Larry Summers, who is now back at Harvard, said it had appended the conventional wisdom of the happiness school.

But is that really the case? Gallup asked people to imagine themselves on a ladder with steps numbered from zero to 10, with the bottom of the ladder representing "the worst possible life for you" and the top representing "the best possible life for you." The respondents were then asked to say which step they were standing on. If you instruct people to think about the best possible and worst possible lives they could be living, you are surely inviting them to compare their living standards with those of people elsewhere. This methodological quirk alone could easily explain why residents of poor countries report low scores and residents of rich countries report high ones, and it wouldn't have anything to do with money making people happier.

The Gallup survey is just one of many. Others show a much weaker link between income and life satisfaction. Using data from the World Values Survey, which dates back to 1980, Stevenson and Wolfers couldn't identify any statistically significant relationship between movements in G.D.P. and changes in life satisfaction. "I can't say I'm absolutely certain that greater growth in income causes greater happiness," Wolfers concedes. "And you can't say for certain that greater growth doesn't produce greater happiness."

Maybe not, but I can say for sure-because Wolfers and Stevenson confirm it-that as people and countries grow richer, each extra dollar of income buys less and less additional happiness. A $100 rise in average income in Jamaica, for example, has three times the impact on measured happiness as a $100 increase in the U.S. Moreover, other economists, including John Helliwell of the University of British Columbia, have shown that nonmonetary factors like working conditions appear to have a much bigger impact on happiness than income. "What we really care about is how big the effect of income is on well-being," Helliwell says. "The answer is it's small relative to other things."

Why is the relationship between money and happiness so complicated? Rivalry and jealousy provide a large part of the answer. What many people care about most is not the dollar amount of their income but their income relative to the income of others in their peer group. As H.L. Mencken put it many years ago, wealth is any income that is $100 more a year than the income of your wife's sister's husband. A recent example comes from the former East Germany. During the 1990s, living standards there rose sharply, but reported happiness fell. The likely explanation: After decades of belonging to the decrepit Soviet bloc, East Germans began comparing themselves with West Germans.

Also, as people become richer, they quickly grow accustomed to bigger houses, more powerful cars, and better-made clothes, but their possessions don't make them much happier. We humans are trapped on a hedonic treadmill. The faster we try to get ahead, the quicker we end up back where we started. Studies show that even lottery winners, after an initial period of adjustment, don't become much happier.

Fortunately, Helliwell and other researchers-even taking into account rivalry and habituation-have identified some things that make people feel better, such as getting married, being employed in a secure job, having a full social life, and playing an active role in the democratic process. Not very long ago, quality-of-life issues like these were largely beyond the purview of economics, and I, for one, was of the mind that economists should stick to things they know about, like inflation and interest rates. After delving into the happiness literature, I've changed my view.

In poor countries, where billions are struggling to eke out an existence, economic growth is the only route out of poverty and degradation. In rich countries, though, it may be time to supplement G.D.P. with other measures of progress. In his book, Layard calls on governments to promote family-friendly policies like flexible work hours and more parental leave and subsidize organizations that promote communities, such as sports leagues and good public schools. With more research and a bit of imagination, economists should be able to augment this list. What could be more important than promoting happiness and well-being? As utilitarian philosopher Jeremy Bentham pointed out two centuries ago, the answer is nothing. John McCain and Barack Obama, take note.

Visit Portfolio.com for the latest business news and opinion, executive profiles and careers. Portfolio.com© 2007 Condé Nast Inc. All rights reserved.