Explaining Southern California's economy

As China gets richer, its people don't get happier

Chinese students look at a newspaper out

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Chinese students look at a newspaper outside an employment fair in Hefei, in east China's Anhui province. China's economy has been booming. But are it's citizens really happy?

I've written about Richard Easterlin here before. He's a noted economist and professor at the University of Southern California who's often credited with pioneering "happiness" as a worthy subject for economists to study. He even has an economic concept named after him, the so-called "Easterlin Paradox," which is reasonably well summarized at Wikipedia: "[W]ithin a given country people with higher incomes are more likely to report being happy. However, in international comparisons, the average reported level of happiness does not vary much with national income per person, at least for countries with income sufficient to meet basic needs."

So rich people in a society say that they're happier than poor people, but when you compare countries, richer countries aren't any happier than poorer countries. [This isn't exactly right: you have to take time into account, because rising income does make people happier, but over time it reaches a point where it doesn't. See the Update below.]

Easterlin has been talked about as a possible Nobel Prize candidate. What interests me so much about the man is that he's managed to find himself smack in the middle of an economic debate about both his research, which he's been engaged in since the 1970s, and whether Gross Domestic Product (GDP) is still a good measure of a country's success and well-being. Happiness economics is taken much more seriously these days, especially after the financial crisis, as the dominant postwar economic orthodoxy is being questioned.

It isn't just all about Keynesians versus free-marketeers, or the Ivy League's "saltwater" economists versus the University of Chicago's "freshwater" economists. As a number of bloggers and commenters have pointed out, the big schools of economic thought within capitalism have been duking it out for years now. Paul Krugman on one side, Niall Ferguson on the other. And yet, the global economy continues to limp along. 

So maybe economics isn't properly, as John Lanchester recently put it in the London Review of Books, the "study of capitalism." And fortunately for Easterlin — whom I'm unseriously dubbing a "sunshine" economist because he's in L.A., studies happiness and doesn't fit into the saltwater-freshwater paradigm — these questions are being asked at precisely the moment he's releasing some new research one of the free market's global success stories: China.

Titled "China's life satisfaction, 1990-2010," Easterlin's new article was co-authored with Robson Morgan, Malgorzata Switek, and Fei Wang and was published this week by the "Early Edition" of the Proceedings of the National Academy of Sciences. It follows a 2010 article in the same publication, titled "The happiness-income paradox revisted," in which Easterlin defended and extended the original Easterlin Paradox finding. Of particular concern to Easterlin and his co-authors was a 2008 paper written by Betsey Stevenson of the University of Pennsylvania and one of economics' rising stars, Justin Wolfers, also of Penn. That paper effectively transformed the discussion into something of a data war, with Stevenson and Wolfers examining a much greater range of responses to happiness inquiries than Easterlin was originally working with, as well as re-examining some of the base data from their perspective as "empirical" economists.

You can watch Wolfers talk about the debate here. He's both witheringly smart and more than a tad smug, so you've been warned.

Anyway, Easterlin contends that efforts to downgrade the Easterlin Paradox to a "conjecture" fail because they produce conclusions about short-term rather than long-term happiness. In other words, as economies rise and fall, short term, people's happiness can also go up, or go down, but when GDP rises, happiness rises — and in theory should rise over the long term. Not so, says Easterlin. Long term, happiness basically flattens out, or even declines.

This might sounds like a very microscopic debate over an esoteric topic, but it's actually very important because it questions two important foundations of modern capitalism and market economies: that GDP growth is always and everywhere a good thing; and that because GDP growth is always and everywhere a good thing, it's worth developing market-oriented economies worldwide.

If, however, you accept that the Easterlin Paradox is real, then you can — and I emphasize can, because Easterlin himself doesn't directly advocate this — move toward the controversial notion of "uneconomic growth" or "steady state" economics, which asks us not necessarily to follow the Marxists and topple capitalism, but to reconsider its claims of delivering universal long-term benefits to go along with the...you know, wild fluctuations in the business cycle, serial creation of asset bubbles and disregard for depleting natural resources and causing unaccounted-for damage to the environment.

Now Easterlin has considered China and the impact that its economic boom has had on the "subjective well-being" of its people. The conclusion isn't going to make Wolfers...um, happy:

China has essentially followed the life satisfaction trajectory of the central and eastern European transition countries—a U-shaped swing and a nil or declining trend. There is no evidence of an increase in life satisfaction of the magnitude that might have been expected to result from the fourfold improvement in the level of per capita consumption that has occurred.  

And it gets worse:

An initially highly egalitarian distribution of life satisfaction has been replaced by an increasingly unequal one, with decreasing life satisfaction in persons in the bottom third of the income distribution and increasing life satisfaction in those in the top third. 

And even worse! Because in China:

...life satisfaction has declined noticeably as material aspirations have soared and concerns have arisen about such critical matters as finding and holding a job, securing reliable and affordable health care, and providing for children and the elderly. Clearly, life satisfaction is the more comprehensive and meaningful indicator of people’s life circumstances and well-being....[O]ur data suggest an important policy lesson, that jobs and job and income security, together with a social safety net, are of critical importance to life satisfaction. 

Easterlin and his co-authors don't make this leap, but you could obviously apply their conclusions to the developed world, where in the U.S. and Europe unemployment continues to be a major problem and the social safety net is being attacked by advocates of austerity measures, ironically as a means to restore the missing GDP growth rates that will allow embattled Western economies to recover.

But if you confine things to China, you can find additional support for the idea that a blind allegiance to GDP growth isn't an automatic formula for a happy population. In China, this has real policy implications, as what is after all still a single-party, command-and-control state needs very robust GDP growth — which has been running higher than 8 percent for much of the past decade — to tamp down social unrest. Or so China observers tend to believe. But what if that fourfold increase in per capita consumption doesn't keep people from being happy enough to call for government change? 

In that case, happiness economics starts to seem a lot less soft-focus that it might have in the past.

UPDATE: I had a nice follow-up conversation with Easterlin, who pointed out that I didn't quite describe the Paradox correctly. As he explained, "The Paradox is a contradiction between the cross section relation of happiness and income and the time series relation — positive in the cross section (whether within or among countries) and nil in the time series (as in the U.S. and China." What this means is that rising incomes are correlated with happiness, even when you compare countries, but over time, your reach a point where the correlation breaks down.

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