During their lifetimes the amounts that many people contribute in taxes and receive in benefits from the government are of broadly equal magnitude. In my view this churning is not benign, but in this piece I want to focus on poverty alleviation. How should help be given to those needy people who have not paid much tax in the past and who may never be in a position to make sufficient tax contributions to fully repay the cost of the welfare assistance they receive?
First we need to consider why taxpayers should be providing assistance to needy people. It can be argued that private charity would not be sufficient because of a free-rider problem. I am distressed by the existence of poverty and I gain a benefit if I see it alleviated – even if I make no voluntary contribution myself to the alleviation of poverty. This means that a case can be made for the government to compel me to make an appropriate contribution through taxation. Milton Friedman advanced this argument in the early 1960s (Capitalism and Freedom, 1962, p 190). The argument has recently been endorsed by Mark Harrison (The outcomes of income transfers’, New Zealand Business Roundtable, 2007).
One of the problems with this argument is the absence of any mechanism to identify free-riders. Welfare payments are funded from taxes that are imposed in accordance with more or less objective criteria that take no account of the fact that some taxpayers have conscientious objections to helping people they consider to be undeserving. That leaves us with a dilemma since we can hardly assume that the coercion involved in redistributive taxation has only trivial effects on the well-being of these conscientious objectors.
As I see it, the best way to begin to escape from this dilemma is to ensure that welfare assistance is consistent with human flourishing, so that the numbers dependent on it diminish over time. It is, perhaps, conceivable that if welfare assistance is sufficiently effective in alleviating poverty then at some time in the future the remaining problem could be small enough to be dealt with adequately through voluntary contributions.
A great deal has been written about the adverse effects of unconditional welfare assistance. (For recent discussions, see Mark Harrison’s paper cited above, pages 49-57 and Helen Hughes, Lands of Shame, The Centre for Independent Studies, May 2007, Chapter 7). The psychologist, Nathaniel Branden, has summed up the issues as follows:
“There are social philosophies and policies that encourage independence, and there are others that encourage dependence. The average person is not so autonomous that he or she will generate the appropriate attitudes in a culture that is rewarding the opposite” (A culture of accountability).
Although it is paternalistic to attach conditions to welfare assistance, in my view such conditions can be consistent with both freedom and human flourishing. They are consistent with freedom because people are free to reject offers of assistance if they don’t like the conditions attached to it. They can be consistent with flourishing because requiring needy people of working age to accept responsibility to help themselves can help them to achieve greater self-respect by becoming self-supporting.
Tuesday, April 22, 2008
Monday, April 21, 2008
How well do happiness surveys measure human flourishing?
As discussed earlier (What does flourishing mean?) the concept of human flourishing can be related to Abraham Maslow’s view that humans have a hierarchy of needs. It is possible to think in terms of a spectrum of outcomes: at one end of the spectrum individuals struggle to meet their basic survival needs; at the other end of the spectrum individuals have the satisfaction of having been able to fully develop and actualize their fullest potentialities and capacities. The happiness measured in surveys may thus be related to the satisfaction of various needs.
One possible difference between the happiness measured in surveys and human flourishing arises from the distinction between hedonic enjoyment (e.g. feelings of happiness, satisfaction, pleasure) and eudemonia or personal expressiveness (e.g. feelings of being alive, involved, fulfilled). Research indicates that when activities are rated high on eudemonia there is a high probability that they will also receive a high hedonic rating. However, when activities are rated high on hedonic enjoyment there is not such a high probability that they will receive a high rating on eudemonia. (See: Alan Waterman et al, ‘The implications of two conceptions of happiness ...’, Journal of Happiness Studies, 2008). It seems to me that this implies that some people who claim to be happy are not really flourishing.
Another relevant consideration is whether the satisfaction that people feel with their lives is lasting and justified. Charles Murray defines happiness as: “lasting and justified satisfaction with one’s life as a whole” ( In Pursuit of Happiness and Good Government,1988. This wording is close to the avowed ‘satisfaction with life as a whole’ measured in surveys. However, some people who claim to be satisfied may not experience “lasting and justified” satisfaction.
Do the responses that people give to survey questions asking about their satisfaction with life as a whole reflect their considered judgements? A framework developed by Chu Kim-Prieto, Ed Diener et al seems to shed some light on this ( ‘Integrating the diverse definitions of happiness ...’, Journal of Happiness Studies, 2005.) The framework views subjective well-being (SWB) as evolving in a sequence of four major stages: life circumstances and events; affective reactions to those events, recall of one’s reactions and global evaluative judgements about one’s life. The authors argue that an understanding of how people evaluate their lives requires knowledge of each of the stages because they are connected in an integral fashion.
The reports people that make about life satisfaction tend to be fairly stable over time because in making these judgements they apparently tend to use the same sources of information repeatedly (for example, family relationships) and the information itself tends to be somewhat stable. The judgements that individuals make thus presumably relate to the domains of life that they consider to be most important (chronically salient) unless they have been primed by situational factors to consider other matters.
Kim-Prieto et al point out that personality has an important influence at each of the four stages. There is evidence that it influences the events people experience (e.g. divorce), their emotional reactions to events, their memories of their reactions and the information they are likely to select when constructing judgements about life as a whole.
However, the influence of personality extends beyond personal traits. Research undertaken by Dan McAdams indicates that we all tend to create ‘life stories’ that integrate our reconstructed past, perceived present and anticipated future. These qualities of these life stories can have an important influence on reports of subjective well-being. (See, for example: Jack Bauer, Dan McAdams and April Sakaeda, ‘Interpreting the Good Life: Growth memories in the lives of mature, happy people’, Journal of Personality and Social Psychology, 2005).
To sum up, the responses that people give when asked to make global assessments of life satisfaction should not be lightly dismissed as being of little relevance to human flourishing. These responses may often reflect judgements that people have made about domains of life that are particularly important to them.
One possible difference between the happiness measured in surveys and human flourishing arises from the distinction between hedonic enjoyment (e.g. feelings of happiness, satisfaction, pleasure) and eudemonia or personal expressiveness (e.g. feelings of being alive, involved, fulfilled). Research indicates that when activities are rated high on eudemonia there is a high probability that they will also receive a high hedonic rating. However, when activities are rated high on hedonic enjoyment there is not such a high probability that they will receive a high rating on eudemonia. (See: Alan Waterman et al, ‘The implications of two conceptions of happiness ...’, Journal of Happiness Studies, 2008). It seems to me that this implies that some people who claim to be happy are not really flourishing.
Another relevant consideration is whether the satisfaction that people feel with their lives is lasting and justified. Charles Murray defines happiness as: “lasting and justified satisfaction with one’s life as a whole” ( In Pursuit of Happiness and Good Government,1988. This wording is close to the avowed ‘satisfaction with life as a whole’ measured in surveys. However, some people who claim to be satisfied may not experience “lasting and justified” satisfaction.
Do the responses that people give to survey questions asking about their satisfaction with life as a whole reflect their considered judgements? A framework developed by Chu Kim-Prieto, Ed Diener et al seems to shed some light on this ( ‘Integrating the diverse definitions of happiness ...’, Journal of Happiness Studies, 2005.) The framework views subjective well-being (SWB) as evolving in a sequence of four major stages: life circumstances and events; affective reactions to those events, recall of one’s reactions and global evaluative judgements about one’s life. The authors argue that an understanding of how people evaluate their lives requires knowledge of each of the stages because they are connected in an integral fashion.
The reports people that make about life satisfaction tend to be fairly stable over time because in making these judgements they apparently tend to use the same sources of information repeatedly (for example, family relationships) and the information itself tends to be somewhat stable. The judgements that individuals make thus presumably relate to the domains of life that they consider to be most important (chronically salient) unless they have been primed by situational factors to consider other matters.
Kim-Prieto et al point out that personality has an important influence at each of the four stages. There is evidence that it influences the events people experience (e.g. divorce), their emotional reactions to events, their memories of their reactions and the information they are likely to select when constructing judgements about life as a whole.
However, the influence of personality extends beyond personal traits. Research undertaken by Dan McAdams indicates that we all tend to create ‘life stories’ that integrate our reconstructed past, perceived present and anticipated future. These qualities of these life stories can have an important influence on reports of subjective well-being. (See, for example: Jack Bauer, Dan McAdams and April Sakaeda, ‘Interpreting the Good Life: Growth memories in the lives of mature, happy people’, Journal of Personality and Social Psychology, 2005).
To sum up, the responses that people give when asked to make global assessments of life satisfaction should not be lightly dismissed as being of little relevance to human flourishing. These responses may often reflect judgements that people have made about domains of life that are particularly important to them.
Does big government constrain economic growth?
Different studies come up with different findings on the effects of size of government on economic growth. It seems to me, however, that the weight of evidence favours the view that big government is detrimental to economic growth.
In a recent paper Morris Altman suggests that “moderate amounts of ... big government are not ... bad for the economy” (see here). The paper examines the relationships between the various components of economic freedom indexes and economic growth. The results show that some components of these indexes (e.g. secure property rights) have a strong relationships with economic growth, but there is no obvious relationship between the size of government and economic growth.
These findings about the size of government are contrary to the findings of other studies, including the recent paper "Big, not better", by Keith Marsden. The findings are also contrary to research that I have undertaken myself (initially for the New Zealand Business Roundtable).
The difference in findings seems to be associated with the use of different data sets. The data set used by Altman includes both high and low income countries whereas the studies that have found a negative relationship between big government and economic growth (the ones that I am most familiar with anyway) use an OECD data set (which excludes low income countries). I am not sure how it is possible to explain why some low income countries manage to have high economic growth rates despite big government. Perhaps big government in these countries is more closely linked to productive investment (e.g. high levels of public spending on infrastructure) rather than to patronage or income transfers, as in high-income countries with big government and low growth.
My study used data for 21 OECD countries, initially covering the period 1960 to 1997 (How much government?, New Zealand Business Roundtable, 2001, Appendix 3, pp 83-87). I have just updated the results to cover the period to 2006, with very little change occurring in estimated coefficients. In the most basic form of the model the rate of economic growth in each period (approximately a decade) is the dependent variable and size of government (general government total outlays as a percentage of GDP) at the beginning of each period is the explanatory variable. (In the updated version there are 5 observations for each country i.e. 105 observations in total.) The use of initial size of government means that we can be fairly sure that the direction of causation runs from size of government to GDP growth, rather than vice versa.
Results for a simplified version of the model are shown in the chart below.
In a recent paper Morris Altman suggests that “moderate amounts of ... big government are not ... bad for the economy” (see here). The paper examines the relationships between the various components of economic freedom indexes and economic growth. The results show that some components of these indexes (e.g. secure property rights) have a strong relationships with economic growth, but there is no obvious relationship between the size of government and economic growth.
These findings about the size of government are contrary to the findings of other studies, including the recent paper "Big, not better", by Keith Marsden. The findings are also contrary to research that I have undertaken myself (initially for the New Zealand Business Roundtable).
The difference in findings seems to be associated with the use of different data sets. The data set used by Altman includes both high and low income countries whereas the studies that have found a negative relationship between big government and economic growth (the ones that I am most familiar with anyway) use an OECD data set (which excludes low income countries). I am not sure how it is possible to explain why some low income countries manage to have high economic growth rates despite big government. Perhaps big government in these countries is more closely linked to productive investment (e.g. high levels of public spending on infrastructure) rather than to patronage or income transfers, as in high-income countries with big government and low growth.
My study used data for 21 OECD countries, initially covering the period 1960 to 1997 (How much government?, New Zealand Business Roundtable, 2001, Appendix 3, pp 83-87). I have just updated the results to cover the period to 2006, with very little change occurring in estimated coefficients. In the most basic form of the model the rate of economic growth in each period (approximately a decade) is the dependent variable and size of government (general government total outlays as a percentage of GDP) at the beginning of each period is the explanatory variable. (In the updated version there are 5 observations for each country i.e. 105 observations in total.) The use of initial size of government means that we can be fairly sure that the direction of causation runs from size of government to GDP growth, rather than vice versa.
Results for a simplified version of the model are shown in the chart below.
(The regression result shown in the chart is:r = 5.6 – 0.076G Adj R squared = 0.27
(0.5) (0.012)
where r = rate of growth in GDP (% per annum) and G = total government outlays as a percentage of GDP. )
The chart shows clearly that big government is associated with lower growth rates in OECD countries. The results suggest, for example, that were New Zealand to contract the size of its government to be about the same as for Australia (a reduction in total government outlays from 41 percent of GDP to 34 percent) this would result in an increase in economic growth rate of about 0.5% per annum. This might not appear to be a large increase in growth rate, but for a middle-income country like New Zealand it could amount to the difference between catching up to average income levels of high-income countries and struggling to avoid falling further behind.
Saturday, April 19, 2008
What should we make of survey results showing no increase in happiness as income rises?
The issue I want to address is whether survey results showing little or no increase in happiness as incomes rise in high income countries mean that further economic growth is not worth having in those countries. I will assume that the observation of no increase in happiness as incomes rise cannot be attributed to factors such as changes in income distribution. (For a reference discussing this possibility with regard to the U.S. see here.)
First we should clarify the relationship between increases in income and increase in happiness in economic terms. It seems to me that in terms of economic theory what a person would be doing in comparing his happiness at different times would be analogous to calculating the change in value of his/her assets by discounting the future flows of income they are expected to produce. In computing his happiness level this person would ignore the past and just consider the expected future flows of goods of all kinds and the satisfaction that he/she and his/her family will derive from them.
How relevant are the happiness and satisfaction concepts measured in surveys to this concept of happiness as the discounted present value of the future? If surveys can be viewed as akin to barometers which measure how people are feeling about the direction of events affecting their well-being, they have some relevance. But if incomes just keep rising as expected, people will not necessarily record higher levels of satisfaction.
The economic concept of happiness as the discounted present value of the future seems somewhat at odds with prevailing psychological theory relating to subjective well-being – although a reconciliation may be possible. The set-point model, which is pivotal in the field of subjective well-being (SWB), suggests that while people may initially react strongly to events affecting them, their SWB subsequently returns to a stable level (set point) determined by their personality predispositions.
In its original form the set-point model implied that no matter what benefits an increased flow of goods and services may provide to individuals in helping them to achieve their goals, it will not result in any long-term improvement in measured SWB. This view has been modified in the light of evidence that set points can change as a result of a variety of factors, including widowhood and unemployment. A recent study by Frank Fujita and Ed Diener using panel data for Germany covering 17 years of life satisfaction judgements showed that almost 9 percent of respondents changed 3 or more scale units (on a 10 point scale) from the first five year average to the final five year average. Nevertheless, the majority of respondents showed long term stability in life satisfaction between the beginning and end of this period ( ‘Life satisfaction set point: stability and change’, Journal of Personality and Social Psychology, 88 (1), 2005).
It seems to me that these changes in set-points may correspond to the kinds of changes a forward looking person might calculate in his/her happiness stocks when life does not turn out as expected. For example, people who suffer large losses on the share market often tend to become more pessimistic about the future and discount future earnings more heavily as result - and this pessimism may also be reflected in a decline in their happiness assessments. Similarly a period of unemployment may cause a person to be more pessimistic in valuing his/her human capital and this will be reflected in a decline in happiness assessments.
To sum up, it does not seem to me that there are strong grounds in terms of set-point theory to expect avowed happiness to continue to increase in high income countries in which economic growth has come to be expected as a normal part of life. However, the discounted present value of the future could be expected to continue to rise under those circumstances. In other words, a future in which incomes continued to rise could be expected to be valued more highly than one in which incomes were stationary.
Those who argue that economic growth is not worth having when it has little or no effect on set point levels might change their view if they considered whether they would also be prepared to argue against other things, for example marriage, on the same grounds.
First we should clarify the relationship between increases in income and increase in happiness in economic terms. It seems to me that in terms of economic theory what a person would be doing in comparing his happiness at different times would be analogous to calculating the change in value of his/her assets by discounting the future flows of income they are expected to produce. In computing his happiness level this person would ignore the past and just consider the expected future flows of goods of all kinds and the satisfaction that he/she and his/her family will derive from them.
How relevant are the happiness and satisfaction concepts measured in surveys to this concept of happiness as the discounted present value of the future? If surveys can be viewed as akin to barometers which measure how people are feeling about the direction of events affecting their well-being, they have some relevance. But if incomes just keep rising as expected, people will not necessarily record higher levels of satisfaction.
The economic concept of happiness as the discounted present value of the future seems somewhat at odds with prevailing psychological theory relating to subjective well-being – although a reconciliation may be possible. The set-point model, which is pivotal in the field of subjective well-being (SWB), suggests that while people may initially react strongly to events affecting them, their SWB subsequently returns to a stable level (set point) determined by their personality predispositions.
In its original form the set-point model implied that no matter what benefits an increased flow of goods and services may provide to individuals in helping them to achieve their goals, it will not result in any long-term improvement in measured SWB. This view has been modified in the light of evidence that set points can change as a result of a variety of factors, including widowhood and unemployment. A recent study by Frank Fujita and Ed Diener using panel data for Germany covering 17 years of life satisfaction judgements showed that almost 9 percent of respondents changed 3 or more scale units (on a 10 point scale) from the first five year average to the final five year average. Nevertheless, the majority of respondents showed long term stability in life satisfaction between the beginning and end of this period ( ‘Life satisfaction set point: stability and change’, Journal of Personality and Social Psychology, 88 (1), 2005).
It seems to me that these changes in set-points may correspond to the kinds of changes a forward looking person might calculate in his/her happiness stocks when life does not turn out as expected. For example, people who suffer large losses on the share market often tend to become more pessimistic about the future and discount future earnings more heavily as result - and this pessimism may also be reflected in a decline in their happiness assessments. Similarly a period of unemployment may cause a person to be more pessimistic in valuing his/her human capital and this will be reflected in a decline in happiness assessments.
To sum up, it does not seem to me that there are strong grounds in terms of set-point theory to expect avowed happiness to continue to increase in high income countries in which economic growth has come to be expected as a normal part of life. However, the discounted present value of the future could be expected to continue to rise under those circumstances. In other words, a future in which incomes continued to rise could be expected to be valued more highly than one in which incomes were stationary.
Those who argue that economic growth is not worth having when it has little or no effect on set point levels might change their view if they considered whether they would also be prepared to argue against other things, for example marriage, on the same grounds.
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