President Obama Rejects The Easterlin Paradox

One way of reading part of this New York Times interview with President Obama is that he's implicitly rejecting the Easterlin Paradox. This paradox is the idea that richer countries and richer people aren't any happier than poorer ones so why bother with all that striving for economic growth? But here Obama is indeed rejecting that idea: for he's saying that while growth itself might not make us happier the things that growth eases do indeed do so.






Back to the beginning of the Easterlin thing. Essentially it's an observation that when you ask people how happy they are richer people don't seem to say they're happier than poorer, nor do people in richer countries say they are generally happier than those in poorer ones. People who have no money, or very little, do indeed say that they're miserable: but the no further increase in happiness thing does seem to kick in at quite low incomes, around and about $15,000 or so.

We could just treat this as an interesting little fact but what makes it important is the political use to which it is put. For we're all aware that there are indeed unfairnesses in our world. We're also, most of us at least, aware that fixing some of those unfairnesses will reduce future economic growth. To be absurd for a moment, 100% tax rates on incomes over $100,000 could be used to reduce unfairness, most certainly, but we all also tend to think that this would reduce that future economic growth.

However, if greater wealth doesn't make people happier, if we also assume that the greatest happiness is our goal (which it is, maximising utility is indeed what economics thinks the goal is), then we can just tax away because we don't care about that future economic growth. For it's not going to make people any happier anyway, while redistribution today will indeed make at least those who collect the redistribution happier. There really are people making this argument, my old professor, Richard Layard for one.

There's one flaw here, which is that Easterlin has been shown to be wrong. There is indeed declining marginal utility from higher incomes, that's not a surprise, but it doesn't decline to zero. But let's leave that aside for a moment. Look at what the President is actually saying there.

We know that societal racism reduces happiness. We know that unemployment reduces happiness, we know that gross inequality does, a lack of social and economic mobility does. And we've also got that linkage with economic growth: all of these problems will be more manageable, will be reduced, by the return of robust economic growth. That is, economic growth will make us happier by reducing the problems caused by a lack of economic growth. Which is, you'll note, a pretty good refutation of the idea that increasing wealth won't make us all happier.

One of the reasons I like this argument is simply that it conforms to a long held prejudice of mine. I don't actually think that it is the level of wealth that induces the happiness at all: I think that it's the rate at which it changes which does. Partly because people are just more optimistic when things look as if they're going to continue getting better but also for Obama's reason. Simply because economic growth leads to a reduction in those problems that so annoy us all, for there's a larger pot being created that soothes and balms any argument about who should get what piece of the pot.
