Plain Sense Economics

Two blog posts, one by Justin Wolfers, writing in the Freakonomics blog, and another by David Leonhardt in the New York Times, report on Stevenson and Wolfers’ research on the relationship between income and happiness. This is a great example of a complaint non-economists have about economists, where the latter keep finding situations which prompt the phrase, “On the other hand…”

A quick recap… Generally we might assume that as a country’s income goes up, so does the happiness or general satisfaction of the residents of that country. In other words, greater real per capita GDP means higher income, which means a greater standard of living, and thus more contentment.

Reasonably enough, this straightforward connection bothers those who believe that contentment can come from sources other than income and standard of living. Leonhardt summarizes past research on this point – in particular what became known as the Easterlin paradox. Easterlin found, after studying data in Japan, that rapid growth in income in that country did not result in increases in satisfaction. Easterlin concluded that the absolute level of income wasn’t the principal driver of satisfaction – but instead it was someone’s income relative to their peers. If they got richer than their friends, their satisfaction went up.

Now, two Penn economists – Stevenson and Wolfers – have done some new studies and explored some of Easterlin’s old data. Their conclusion? That absolute income is, after all, more important.

You can make your own conclusions by following the links to these articles, and beyond. What is important is to think critically about what increases in real GDP mean to our country, and the degree to which we should seek continued growth in that measure.