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What Really Buys Happiness?

from the magazine

What Really Buys Happiness?

Not income equality, but mobility and opportunity Summer 2007
Economy, finance, and budgets

The United States is a rich nation getting richer. According to the U.S. Census, between 1993 and 2003 the average inflation-adjusted income in the top quintile of American earners increased 22 percent. But prosperity didn’t end with the top earners: those in the middle quintile saw their incomes rise 17 percent, on average, while the bottom quintile enjoyed a 13 percent increase. This isn’t a short-term phenomenon, either. In the 30 years leading up to 2003, top-quintile earners saw their real incomes increase by two-thirds, versus a quarter for those in the middle quintile and a fifth among the bottom earners.

Reason to celebrate? Not according to those who worry about rising
income inequality—the fact that the rich are getting richer faster than the poor are getting richer. The National Opinion Research Center’s General Social Survey (GSS) indicates that in 1973, the average family in the top quintile earned about ten times what the average bottom-quintile family earned. By 2003, that difference had grown to almost 15 times.

Rising inequality makes for good political fodder. “When I graduated from college, the average corporate CEO made 20 times what the average worker did. Today, it’s nearly 400 times,” said Virginia senator James Webb in his response to President Bush’s State of the Union address this year. “In other words, it takes the average worker more than a year to make the money his or her boss makes in one day.” Former North Carolina senator John Edwards, who sought the Democratic presidential nomination in 2004 and is seeking it again in 2008, based his first campaign almost entirely on the contention that we are “two Americas, not one: one America that does the work, another America that reaps the reward.”

Edwards is one of a group of liberal politicians, policymakers, and social activists who want to reduce economic inequality through greater taxation and redistribution of wealth. And their plan draws inspiration from a particular academic theory: that inequality is socially destructive because it makes people miserable. As a scholar working in the field of public policy, I have long witnessed hand-wringing about the alleged connection between inequality and unhappiness. What first made me doubt this prevailing view was not some new scholarly study but rather that when I questioned actual human beings about it, few expressed any shock and outrage at the enormous wealth of software moguls and CEOs. On the contrary, they tended to hope that their kids might become the next Bill Gates.

Were these people somehow unrepresentative of America? Or was the academic consensus wrong? I set out to discover which it was. What I found was that economic inequality doesn’t frustrate Americans at all. It is, rather, the perceived lack of economic opportunity that makes us
unhappy. To focus our policies on inequality, instead of opportunity, is to make a grave error—one that will worsen the very problem we seek to solve and make us generally unhappier to boot.

The egalitarians’ argument usually starts with the assertion that prosperity is all relative. So long as we are above the level of basic subsistence, they say, we care more about our financial position relative to others than about our absolute income. Experimental evidence, they continue, supports this claim. In one study, two-thirds of subjects said that they would be happier at a company where they earned $33,000 while their colleagues earned $30,000 than at one where they earned $35,000 while their colleagues earned $38,000. In another, 56 percent of participants chose a job paying $50,000 per year while everyone else earned $25,000, rather than a job paying $100,000 per year while others made $200,000—forgoing $50,000 per year simply to maintain a position of relative affluence. In a world of economic inequality, the egalitarians point out, some people have less than others—and as these studies seem to show, that very fact will make them unhappy, even if they are suffering no actual deprivation. The solution to their unhappiness is to impose greater economic equality.

Even though income inequality is rising, . . .

And the way to do that, of course, is to tax the haves and redistribute their income to the have-nots. Cornell economist Robert Frank, a major critic of income inequality, adds that such a move might not make the rich as unhappy as you’d think, since they tend to use their income on things they don’t really want or need.
“We could spend roughly one-third less on
consumption,” Frank writes, “and suffer no significant reduction in satisfaction.” Some egalitarians even make the astounding argument
that we should tax the economically successful in order to discourage them from working,
since their work will only make them richer and thus sadden the less successful. According to British economist Richard Layard, “If we make taxes commensurate to the damage that an
individual does to others when he earns more”—the damage to others’ happiness, that is—“then he will only work harder if there is a true net benefit to society as a whole. It is efficient to discourage work effort that makes society worse off.” Work, according to this postmodern argument—contrary to millennia of moral teaching—is no different from a destructive vice like tobacco, which governments sometimes tax in order to discourage people from smoking.

One of the many problems with the egalitarians’ line of reasoning is that it misinterprets the experimental evidence. The two famous
studies mentioned above don’t necessarily
mean, as the egalitarians claim, that people would be happier in a world of total equality. Rather, they suggest that in a world of inequality, people like having more than others
and dislike having less—even to the point
of neglecting their financial interests. How
people would react to a miraculously equal world is something that the studies don’t attempt to address.

But there is another, more fundamental,
reason that the arguments linking economic inequality to unhappiness are mistaken. If the egalitarians are right, then average happiness levels should be falling. But they aren’t. The GSS shows that in 1972, 30 percent of the population said that they were “very happy” with their lives; in 1982, 31 percent; in 1993, 32 percent; in 2004, 31 percent. In other words, no significant change in reported happiness occurred—even as income inequality increased by nearly half. Happiness levels have certainly shown some fluctuations over the last three decades, but income inequality explains none of them.

The same result holds at the individual level. We can judge inequality by looking at the difference between our incomes and those of others in our “reference group”: people similar to us in such respects as age, sex, and education. The further we are from the typical reference-group income, the more inequality we will perceive. And if we measure inequality this way, the GSS reveals the startling fact that inequality has no relationship at all with our happiness.

But happiness does rise if people believe that their families have a chance of improving their standard of living. That belief is worth 12 percentage points in the likelihood of being “very happy.” The GSS asked respondents, “The
way things are in America, people like me and my family have a good chance of improving our standard of living—do you agree or disagree?” Those who agreed were 44 percent more likely than those who disagreed to say that they were “very happy,” 40 percent less likely to say that they felt “no good at all” at times, and 20 percent less likely to say that they felt like failures. In other words, those who don’t believe in economic mobility—for themselves or for others—are not as happy as those who do.

This important fact is another reason that the two studies cited above don’t show what the egalitarians think they do: they posit a static universe, a fictional place where incomes don’t change. Perhaps in a world where you have no opportunity for advancement, the most important thing about your income really is how it measures up to other people’s. But in the real world, our attitude about the future matters a great deal. In the 1990s, economist Andrew Clark found that the happiness of British workers
actually rose as their reference group’s average income rose relative to their own income—because they saw that rise as evidence of what they themselves could achieve. People take the average income in their group as a measure of their own potential. Rising inequality can even raise our happiness by demonstrating the success that our future may hold.

. . people's happiness hasn't declined.

Believing in mobility helps make people happy, then. But does mobility actually exist in the United States? The Left doesn’t think so. Liberals, including rich liberals, are far less likely than conservatives to see a better future for people who work hard. Just 26 percent of liberals with incomes above the national average believe that there’s a lot of upward income mobility in America, versus 48 percent of conservatives with below-average incomes. And 90 percent of the poorer conservatives said that hard work and perseverance could overcome disadvantage, versus 65 percent of the richer liberals. If a liberal and a conservative are exactly identical in income, education, sex, family situation, and race, the liberal will still be 20 percentage points less likely than the conservative to say that hard work leads to success for the disadvantaged.

It is small wonder, then, that conservatives tend to be happier than
liberals today. The 2004 GSS showed that 44 percent of people who identified themselves as “conservative” or “extremely conservative” were “very happy” about their lives; only 25 percent of self-identified liberals or extreme liberals gave that response. Conservatives believe that they live in a more promising country than liberals do, and that makes them happier.

But which side is right about economic mobility and opportunity? Liberals often cite research from past decades showing that some people face higher barriers to success than others. For example, in the early 1970s, a widely read book by Harvard’s Christopher Jencks asserted that schools couldn’t do much to fix income inequalities; deeper factors, such as discrimination or cultural problems, were largely to blame. If schools don’t bring the bottom up in America,
isn’t opportunity a myth?

Despite the limitations of our school system in improving the lives of the underprivileged, however, more recent studies show robust economic mobility in America. The U.S. Census Bureau, the Urban Institute, and the Federal Reserve have all pointed out that, as a general rule, about a fifth of the people in the lowest income quintile will climb to a higher quintile within a year, and that about half will rise within a decade. True, a significant proportion of people will fall over the same period. But the studies nevertheless put paid to the claim that economic mobility is in any way unusual. Millions and millions of poor Americans climb out of the ranks of poverty every year.

And those left behind, it’s important to note, will almost certainly not become happier if we redistribute more income. Indeed, they will probably become less happy. Policies designed to lower economic inequality tend to change the incentives of both the haves and the have-nots in a way that particularly harms the have-nots. Reductions in the incentives to prosper mean fewer jobs created, less economic growth, less in tax revenues, and less charitable giving—all to the detriment of those left behind. And redistribution can, as the American welfare system has shown, turn beneficiaries into demoralized long-term dependents. As Irving Kristol put it three years before the federal welfare reform of 1996, “The problem with our current welfare programs is not that they are costly—which they are—but that they have such perverse consequences for people they are supposed to benefit.”

Further, policies to redress economic inequality hardly affect true inequality at all. Policymakers and economists rarely denounce the scandal of inequality in work effort, creativity, talent, or enthusiasm. We almost never hear about the outrage that is America’s inequality in leisure time, love, faith, or fun—even though these are things that most of us value more than money. To believe that we can redress inequality in our society by moving cash around is to have a materialistic, mechanistic, and totally unrealistic understanding of the resources that we truly care about.

Finally, arguments against inequality legitimize envy. Americans may indeed have strong concerns about their relative incomes and may seek status as reflected in their economic circumstances. But to base our policies on the anxieties of those at the back of the status race is to bow before Invidia. A deadly sin is not, in my view, a smart blueprint for policymaking.

A more accurate vision of America sees a land of both inequality and opportunity, in which hard work and perseverance are the keys to jumping from the ranks of the have-nots to those of the haves. If we can solve problems of absolute deprivation, such as hunger and homelessness, then rewarding hard work will continue to serve as a positive stimulant to achievement. Redistribution and taxation, beyond what’s necessary to pay for key services, weaken America’s willingness and ability to thrive.

This vision promotes policies focused not on wiping out economic inequality, but rather on enhancing economic mobility. They include improving educational opportunities, aggressively addressing cultural impediments to success, enhancing the fluidity of labor markets, searching for ways to include all citizens in America’s investing revolution, and protecting the climate of American entrepreneurship.

Placidity about income inequality, and opposition to income redistribution, are evidence of a light heart, not a hard one. If happiness is our goal, those who promote opportunity over economic equality have no apologies to make.

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