Economic Growth and Subjective Well-Being

Growth - Navigator to happiness?

It should always go in one direction: higher, faster, further. We owe much of the tech­nological progress of our time to this mantra. While 36% of Germans owned a smartphone in 2012, the proportion rose to over 81% in 2019.¹ But does it always have to be more money, does the life satisfaction of a society increase when its econ­omy grows? This debate is certainly not new; almost every pupil should write a paper in social science class on whether the gross domestic product could be a suitable in­dicator of prosperity. In recent years, the call for a new indicator of prosperity has become louder and louder. For example, the Prime Minister of New Zealand, Jacinda Ardern, announced last year that in the future she would pay more attention to the standard of living of her citizens than to economic strength alone. She justified the paradigm shift by saying that despite solid growth of 3% and an unemployment rate of 3.9%, New Zealand had a high rate of homelessness and one of the highest suicide rates. Also, 27% of children lived in poverty.² Ardern is gradually changing its budget to follow the OECD's "Better Life" recommendations. Priority will now be given to government spending that strengthens mental health, promotes digital development and a sustainable economy, and reduces child poverty and inequalities.³ "This budget is a game-changing event"⁴, says Richard Layard, Professor at the London School of Economics who is an expert on life satisfaction across populations. The globally pre­vailing development model in the form of continuous economic growth is also scep­tically questioned by some German economists. The president of the German Insti­tute for Economic Research (DIW), Prof. Marcel Fratzscher, also advocates the pursuit of so-called "qualitative growth".⁵ The state should try to reduce inequality and pro­mote climate protection through targeted investments. This paper will examine the discourse on whether growth leads to greater life satisfaction. First, the historical data on growth and its significance are examined, and then two opposing positions on the question of whether growth brings more happiness are elaborated and ana­lysed. In the end, we will assess to what extent we should and can orient ourselves to these findings in the future.

What was the relationship between growth and prosperity in the past?

If one looks at the growth figures and compares them with the social progress of an economy, correlations can be identified in certain areas. For example, the statistics show a significant negative correlation between growth and infant mortality in the economies. In 2019, India recorded an infant mortality rate of 35.2 per 1000 new­borns with a GDP of $6500 per capita, while the prosperous industrialised country of Germany, with a GDP almost nine times higher ($53,800/capita), only has an infant mortality rate of 3.46 per 1000 children. Similarly, significant correlations can be ob­served in the expected life expectancy and the literacy rate. In Afghanistan, a devel­oping country with an economic output of $2200/capita, the life expectancy of new­borns in 2019 was about 64.1 years and the literacy rate for women over 15 years was 29.8%. In the same year, the life expectancy of newborns in Germany was 80.1 years and the literacy rate was over 99.9 %.⁶ It follows that a person's basic needs are better met in richer countries than in the countries of the global South. But it gets exciting when you look at the literacy rate in Germany. Can future growth have an impact on the literacy rate or, more broadly, on education, or will a saturation point be reached in society at some point? After all, the literacy rate can no longer increase. It is also questionable whether life expectancy can be increased with even more growth. In the USA, life expectancy has shrunk in recent years despite growth⁷ and as already mentioned, New Zealand also has a problem with its high suicide rate de­spite good growth figures. In the following, the position of the happiness economist Richard Easterlin is elaborated on whether a higher income makes a society happier.

Easterlin Paradox

Richard Easterlin, Professor of Economics at the University of Southern California, has been investigating the relationship between income and happiness as part of his re­search since 1974. It became known, in particular, with his article "Does Economic Growth Improve the Human Lot?".⁸

Easterlin's argues that there is no significant correlation between income and subjective well-being. He posits that a correlation can only be proven in the short term. In the long term, i.e. over more than 10 years, the happiness of an economy would not increase any further.⁹ He first proves this thesis with a study conducted by the General Social Survey (GSS). This survey has been asking the American population about their life satisfaction since 1972. Figure 1 shows what proportion of the Amer­ican population was "very happy" with their life situation. During the 40 years between 1972 and 2014, there was no significant increase in the number of satis­fied Americans. Yet

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Figure 1 Percent Very Happy, General Social Survey, United States, 1972 – 2014

GDP tripled during the same period. Consequently, it can be concluded that satisfac­tion in the USA has not grown along with the growth in economic output.¹⁰ However, it remains questionable whether this finding only applies to the USA or can also be applied to other economies. With the US figures, one could argue that growth could be strongly unevenly distributed so that only the most satisfied Americans benefited from further growth.

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Figure 2 Growth Rate of Life Satisfaction and GDP per Capita, 43 Countries, Data Adjusted for Compa­rability of SWB

This thesis is rejected by Easterlin in the same paper.¹¹ Easterlin evaluates the results for 42 other countries with a period time between twelve and 32 years. The countries include 21 industrialised, 14 developing, and eight emerging economies. Figure 2 shows a coordinate system with the annual growth rate per capita on the abscissa and the annual change in life satisfaction on the ordinate. The life satisfaction scale ranges from 1 to 10, with 10 representing the highest satisfaction.¹² If one applies a regression coefficient between these 42 countries, one gets a slope coefficient of 0.00097. This means that with a growth of one percent, life satisfaction increased by just under 0.001 points. According to the p-test, the slope does not deviate signifi­cantly from zero. These data also do not indicate a positive correlation. How can Eas­terlies findings be explained, that at one point in time higher wages are associated with higher life satisfaction, but in the long run no correlation can be detected? East­erlin explains the result with the adaptability of people. Although a higher income makes people happier at first, they get used to their life situation over the years. In­stead of maintaining the feeling of happiness for years, the individual's level of aspi­ration increases. As individual expectations increase over time, the satisfaction level remains unchanged after the adjustment.¹³ According to these findings, one could conclude that GDP is insufficient as an indicator of well-being.

It is important to note, however, that Easterlin restricts these findings of adaptation to pecuniary areas in particular. Adaptation does not (fully) take place in non-pecu­niary events. The economists Andrew Clark and Andrew Oswald have researched that people are more dissatisfied when they are unemployed and do not adapt to this situation, even if they are compensated for unemployment with money.¹⁴ However, the unemployment rate is higher in economically weak years than in stronger years. Economic growth is not only associated with lower unemployment but also with im­proved health care, increased life expectancy, and higher levels of education. At least up to a certain threshold value.¹⁵ Through these variables, life satisfaction is indirectly influenced by higher incomes. It seems that this area has not yet been conclusively researched. What we can take away from this data, however, is that most individuals fully anticipate the adaptation process when buying goods. Since people primarily focus on short-term benefits, they make irrational purchase decisions without the individual benefits increasing in the long term. This aspect is problematic if one real­ises that the information deficit in the purchase of goods leads to overconsumption and thus to a market failure.

In happiness economics, this topic has been the subject of controversial debate for decades, and various scholars dispute the so-called Easterlin Paradox.

Betsey Stevenson and Justin Wolfers, economists at the University of Penn­sylvania, analyze the development of happiness in their 2008 paper "Economic Growth and Subjective Well-Being: Reassessing the Easterlin Paradox".

Stevenson and Wolfers argue that there is a clear correlation between income and happiness, both internationally and intranational. They also argue that there is no saturation point in life satisfaction.¹⁶

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¹ Statista, Anteil der Smartphone-Nutzer in Deutschland in den Jahren 2012 bis 2019, 2020.

² Barkhausen, Neuseeland rückt mit dem ersten „Wellbeing Budget" Wirtschaftsindikatoren zurück, 2019.

³ Ruckriegel, Interdisziplinäre Glücksforschung -Erkenntnisse und Konsequenzen aus Sicht der Wirt­schaftswissenschaften, p. 16, 2020.

⁴ Graham-McLay: New Zealand's Next Liberal Milestone: A Budget Guided by 'Well-Being',2019.

⁵ Riedel: Marcel Fratzscher will, dass die Europäer die Pandemie als Weckruf begreifen. In seinem Buch verbindet er zur Problemlösung Ökonomie, Philosophie und Politik, 2020.

⁶ World Development Indicators, 2020.

⁷ F.A.Z: Lebenserwartung in den Vereinigten Staaten sinkt dramatisch, 2018.

⁸ Easterlin: Does Economic Growth Improve the Human Lot, 1974.

⁹ Easterlin: Paradox lost?, 2016, p. 3.

¹⁰ Easterlin (2016): p.6.

¹¹ Easterlin (2016): p.9.

¹² Ibid. p.9.

¹³ Easterlin: A Puzzle for Adaptive Theory, in: Journal of Economic Behaviour and Organization, 56, 4, 2005, S. 513-521.

¹⁴ Rätzel: Ökonomie und Glück, 2007, p.340.

¹⁵ Ibid. p.339.

¹⁶ Stevenson et Wolfers: Economic Growth and Subjective Well-Being: Reassessing the Easterlin Par­adox, 2008, p.2.