GDP and the Economics of Happiness (Transcript)
Public Affairs Forum
April 18, 2012
An interview with Carol Graham, senior fellow, Brookings Institution
Ed English: Hi, I'm Ed English with the Federal Reserve Bank of Atlanta. And how do we measure the success of an economy? A common measure is to look at GDP [gross domestic product]. What does the GDP really tell us about the overall welfare of the population that the number represents? That leads us to our guest today, Carol Graham from the Brookings Institution. We are going to talk about a relationship about a very popular commodity, happiness, with relation to economies. So first off, what is the value of studying happiness as it relates to economies?
Carol Graham: Well, basically the study of happiness, or reported well-being, is the use of survey methods and metrics to capture what matters to people's well-being. That includes income and the kinds of things that economies produce, but it also includes things that the GNP [gross national product] doesn't measure or capture as well. Things like health, leisure, friendships, people's capacity to lead a fulfilling life, people's differences between genders in terms of levels of well-being, all kinds of things, the effects of change on happiness, the effects of uncertainty, the effects of commuting time on well-being. We can measure a whole range of things that provide information that complements what is in the GDP or GNP and, I think, at times makes us think a little differently about it; it certainly doesn't intend to replace it.
English: So, in terms of setting policy, you would contend that happiness is very much an important part of setting policy?
Graham: It's entered into the policy realm with institutions like the OECD [Organisation for Economic Co-operation and Development] calling for better life measures. We now have a National Academy of Sciences panel deliberating well-being metrics for our statistics—I'm part of that panel—and then the British government has already implemented well-being metrics in its national statistics.
So the question is, then, what role do they play in the policy realm? I'm not convinced that we have any one measure of happiness that we should try and use as a benchmark that we should be benchmarking policy toward. I think what we do have is ways to measure different components of our citizens' well-being, and we can use that information to see how particular policies might affect those elements of well-being. We can use those metrics to complement what traditional cost-benefit analysis yields.
I can give you an example of that from Britain, where the British government had a proposal to close all rural post offices, because rural post offices are, if you can imagine, not very efficient, they don't deliver much mail, it's expensive to deliver it...so we're trying to cut budgets, let's close them. Well-being metrics showed that the visit to the rural post office was the most important part of most people's lives in isolated rural communities, particularly the elderly. We know a lot about social contact and longevity and other things, and so closing rural post offices could have had a very unintended negative effect on well-being that we wouldn't have known otherwise.
English: Given that this is a relatively new focus, what's the biggest challenge in measuring, you mentioned commute times and some other things, but are there things that you measure that are a little bit softer, harder to quantify than others?
Graham: Do people have meaningful work or do they have purpose in their lives, those are more difficult things to quantify, and yet to me they're very important things when we think about well-being in the sense of life fulfillment, people having agency to control their lives. The bigger challenge in my view is the fact that if you just ask people an open-ended happiness question they may emphasize different things as they answer that question depending on how much agency or capacity they have to control their lives.
One example of why there is a conundrum is some work I did in Afghanistan. I did the first study of happiness there and found that people in Afghanistan, despite the terrible conditions they live in, reported to have higher happiness levels than the world average and smiled more often the day before than did people in Latin America, which is pretty remarkable. Yet when you ask people in Afghanistan, "How does your life compare to the best possible life you can imagine?" they scored much lower than the world average.
So this goes to the point that people in adversity or with very limited capacities may simply emphasize the simpler components of life because that's all that they have versus if you ask them about their capacities to lead a more fulfilling life or how their life compares to a best possible life, then they'll answer very differently. So that's both a measurement challenge, but it's also a philosophical challenge if we think about which definition of well-being or happiness should we be concerned with both as social scientists and as policymakers.
English: Well, it seems like you have talked about adaptability and how that can skew, and that would seem to be consistent with what you were just saying how just because people are in different situations they adapt to what those situations are, so what can you say about adaptability?
Graham: Well, one of the things we find is that people adapt both to adversity and to prosperity. People can adapt to conditions that seem quite abysmal by most people's standards and report to be happy or at least relatively happy, and people can have tremendously wealthy conditions and have adapted to having those and simply expect more. But one of the things that we find is that people are much better able to adapt to unpleasant certainty than they are to uncertainty. People can't cope with uncertainty very well, they can't adapt to it, so change is typically an unhappy process.
We have something called the "paradox of unhappy growth" where we find that even though on average people are happier in countries with higher levels of GDP per capita, that people tend to be less happy in countries that are growing very, very rapidly. This is not the U.S. growing 2.5 versus 2 percent. This is Brazils and Chinas where you're talking about 5 percent, 6 percent, 8 percent rates of growth, and they're very unsettling. They often come with inequality, with changing rewards to different skill sets, a lot of keeping up with the Joneses' effects, and all those processes seem to be negative for happiness, at least in the short term.
English: Another thing you have talked about is the relationship between happiness and crime. What can you tell us about that?
Graham: As to crime, that's also a story of adaptation. I can give you an example from my own experience. I was born in Peru in Latin America and I grew up there. And particularly there were periods previously where there was more crime than there is now, but you thought nothing of taking your jewelry off when you walk in the street and putting your briefcase in the trunk so that somebody doesn't break into your car and steal it...doesn't make you particularly unhappy, you're used to it, you adapt to it. But if I had to do that in Washington D.C., where I work, that would really annoy me because I don't expect it to be that way.
So a lot of the negative effects of crime as well as corruption has to do with what the norms of crime and corruption are and what people expect. If there is a lot of crime around you, and you're a crime victim, it doesn't surprise you and also you don't feel particularly stigmatized. I think it also helps explain when you see tolerance, societal tolerance for bad equilibrium, bad governance, bad norms of health, high levels of crime and corruption, because everybody adapts and you need some sort of visible change to make people react and seek change. And as we know, seeking change is a frightening prospect for most people.
English: That's true. The United States compared to other parts of the world in happiness...are we happier?
Graham: There's a general levels effect and it's much better to be in a wealthier country not just because it s a wealthier country, but wealthier countries have better public goods, and better health care, and better environments, and all kinds of other things. You have some poorer countries like Costa Rica that have wonderful democracy and great environment and good health care and guess what, they're the happiest country in Latin America. Then you have other countries like Iraq or Belarus who are always at the bottom and they have terrible government, bad public goods, and are very poor, too.
The United States is relatively happy but it's not as happy as other countries of roughly similar income levels like the Scandinavian countries. The U.S. is probably about in the middle there, but I think that the U.S. is also a much more heterogeneous country, we're very diverse, and so we're going to have less homogenous way of responding to these questions. We've got high levels of inequality, we have big differences in the way that people live around the country.
English: Carol, thanks so much for your time today.
Graham: Thanks, Ed. It was a pleasure to be here.
English: That concludes this edition of PA Forum.