David R. Henderson  

Income, Wealth, Happiness, and Ideological Convenience

Wolfers Responds on Happiness... 1.6%, Not 97%, Agree that Huma...

I've had to think long and hard before writing this response to Bryan Caplan's post about income and happiness and Justin Wolfers's response.

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.

COMMENTS (11 to date)
MingoV writes:
... But this small fall in income would reduce their happiness almost unnoticeably...
Once again we read the impossible belief held by supporters of open borders: it won't cost us any money to let in millions of poor people. Somehow they will arrive and instantly be transported to a place of work, instantly be housed and clothed, instantly be fed, instantly receive health care, instantly learn English, and instantly have their children attend school. And none of this is supposed to cost local, state, and federal taxpayers a dime.

The reality is that these millions of arrivals will be shunted to the equivalent of refugee camps (funded by taxpayers). Mexican immigrants may be able to move into locales with good support. The poor from other nations will not be as fortunate. Most poor immigrants will not get full-time jobs of any type. Most hiring of immigrants from the camps will be similar to that of part-time migrant laborers in the 1950s. Poor immigrants may be better off than when they lived in Somalia or a rural Indian village, but they won't be on the path to prosperity.

Eric Falkenstein writes:

When you ask people if they would rather live in a world where they make $120k, everyone else $200k, or they make $110 and everyone makes $100k. Most choose the poorer world where they are relatively richer, but still a poorer world.

Status is a 'human universal', found in all cultures. Greed is not. Subsistence desire is a human universal, but this is different than mere wanting more dollars irrespective of others. Tribal interest often is greater than mere selfish interest, especially when applied to politics, which is about constructing norms, mores, and institutions.

I'm a libertarian, and realize libertarians hate relative status utility functions. It hurts their end game as Libertaria no longer appears as an obvious optimum, and envy rationalizes radical redistribution. I think the solution is, as the Founder's knew, to accept human baseness when constructing institutions, but realize there is more to individuals than themselves; they thought of it as being 'deists.'

Humans are more than just envy, we have bigger battles. For example, note that the spread of lactose tolerance suggests it was not spread via mere outbreeding by lucky individuals, but by the decimation of non-lactose tolerant groups in warfare. Group selection is real, it occurs above the individual, and is counter to Dawkin's Selfish Gene hypothesis; selection occurs at multiple levels.

Humans have multiple instincts, just as Ray Jackendoff suggests we have 'multiple values.' These are 1) survival (minimum income), 2) status (envy), and 3) what's good for the tribe. The latter is why we don't want to move to Haiti or Mexico and be queen bees in a crappy society. Good tribes dominated just as Rome dominated for so long because they had a modicum of liberty, and England dominated in the 19th century because of their common law. It's natural to want to be part of a winning tribe.

Andrew_FL writes:

@Eric Falkenstein-I'm not a libertarian and I hate comparing utility across persons because it's bad economic theory. It has nothing to do with the consequences that follow there from, it's just that it fundamentally misunderstands both the concepts of utility and value.

Lee Waaks writes:

David Henderson writes: "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 this assumes that consuming capital won't lower real wages.

Eric Falkenstein writes:

andrew_fl: What's your alternative?

David R. Henderson writes:

@Lee Waaks,
Good point. And taking into account the destruction of capital and the lower real wages that result, my point is even stronger. I know you know this: I’m pointing it out to other readers.

Pajser writes:
"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."

The best is not the same thing as the happiest. For instance, middle aged professors have better (in sense above), but less happy lives than their students.

Interpersonal comparison of utility. The bag of potato has greater value to starving family than to obese family. If theory cannot produce such claim, then theory is limited.

Pajser writes:

Also, if happiness is modeled as a + b · ln(income), b > 0 then total happiness is maximized with egalitarian distribution.

TeeJaw writes:

The relationship between wealth and happiness is not straightforward. It depends upon other attributes of the person possessing the wealth. For some more wealth will enhance their happiness and for some others it will be the catalyst for the complete destruction of their happiness.

Andrew_FL writes:

@Eric Falkenstein-I'm sorry, I don't understand your question.

Jim McCabe writes:

There's a major missing consideration here as it relates to income and happiness, which is the difference in general life satisfaction related to earning income, rather than receiving it as a grant, gift or entitlement. I think Charles Murray's latest book covered the data on this, but measuring the effects of differential levels of income doesn't account for the difference between earning more and just receiving more. I would venture that the latter, rather than improving one's happiness, would simply confirm (or create) the suspicion that one was receiving less than one should have been previously, and therefore be taken with less satisfaction, especially if one suspects that still more is available. This impacts both ends of the equation- seeing one's earned income forcibly reduced by taxation may have a larger greater negative effect on happiness than the positive effect of the same money redistributed to lower-income folks, whose curve may flatten fairly quickly.

Add to that the fact that some substantial portion of the money taxed will not be directly redistributed, and will instead be eaten by the bureaucracy, and you have an even bigger dent- the dead weight loss between the amount taken and the amount distributed. In fact, taxation is probably one the best ways to reduce happiness via reducing income, as it has the potential to lead to a lot of spending that high-income earners deem wasteful or ineffective or immoral, depending on their view of welfare/defense/any other federal spending. So I think it's a much more complex relationship than just income up = happiness up.

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