Are Americans pessimistic about the prospects for the next generation?

Gary Becker has recently written an interesting article on the Becker-Posner blog about polls suggesting that the majority of parents in the United States are not confident that their children will be better off economically than they are. He suggests that the best way to counter such pessimism is to promote faster economic growth.


The article made me feel slightly uneasy because I wrote something a few months ago suggesting that the poll results actually conflict with the view that Americans are pessimistic about the future for their children. Have I mis-read the poll results? How much have the poll results changed over the last year or so?

Scott Winship has recently considered the evidence of a variety of polls on his blog: here and here. In brief, the polls indicate that the proportion of Americans who think that their children will have better standards of living than themselves consistently exceeds the proportion who think their children will have worse standards of living. The margin tends to narrow during recessions but, even this year, the polls suggest that optimism is no lower than in the mid-1990s (see Pew Research Center poll results here).

Rather than trying to explain why Americans have become more pessimistic perhaps researchers should be trying to explain why Americans are still so optimistic.

Is a hung parliament a good election outcome?

It seems that neither Labor nor the Coalition have won a clear majority of seats in the House of Representatives in last week’s federal election, so Australia is to have a hung parliament. This means that a group of independents will decide which of the major parties forms government.


The message that some people are taking from the result, or lack of result, is that the electorate has become disenchanted with the major political parties. There are good reasons for people to be disenchanted with the major parties, but the electorate does not have a single mind that can become disenchanted. Even if a higher proportion of voters have voted for minor parties, it is possible to have a substantial proportion of the vote going to minor parties without a hung parliament. The hung parliament reflects the closeness of the votes for the major parties.

I think a hung parliament is the worst possible outcome we could have obtained. As I explained in an earlier post, it is difficult for electors to hold governments accountable for outcomes when parties go to the polls to seek endorsement of their policies and then, after the election, enter into negotiations to decide what policies the government will actually implement. It is possible that independents will use their power to obtain improvements in parliamentary procedures. It will be surprising, however, if we do not also see policies being adopted to advantage narrow interests – favouring regional groups or groups with particular environmental concerns – at the expense of the wider community.

Fortunately, a hung parliament happens rarely under the system of single member electorates that we have in the House of Representatives. This situation is unlikely to change even if independents take more seats from the National Party in future elections. The National Party – as a regionally based party – chooses to remain in a long-term coalition with the Liberals because it can pursue the objectives of its supporters more effectively that way rather than by exercising the balance of power. Even if the National Party was completely replaced by independents the voters who support them would generally expect their representative to favour the conservative side of politics.

It is normal for minor parties to hold the balance of power in the Senate because of the proportional representation system of voting for that chamber. This does not matter so much because of the strong tradition that governments are formed in the House of Representatives. Although minor parties that hold the balance of power in the Senate may be able to bring down governments by blocking budgets, they usually have reason to be fearful of the electoral consequences of doing this.

There is a fair chance that the next parliament will appear to work reasonably well even though the governing party does not have a clear majority. The independents and party leaders have strong incentives to appear to be trying to work well together to avoid an early election. Even the costly compromises that emerge may seem reasonable under the circumstances.

Some people may even suggest that the political system should be changed to bring about this kind of outcome all the time, as under the MMP system in New Zealand. Don’t be fooled. A hung parliament is like bad weather – it is something we have to put up with from time to time. We don’t have to like it!

Did the Labor Party own 'the light on the hill'?

Over the last few years quite a few political commentators have been saying that no-one really knows any more what the Australian Labor Party stands for. Some of them contrast modern Labor’s apparent absence of philosophical underpinnings with ‘the light on the hill’ that former prime minister, Ben Chifley, spoke of in 1949.


I imagined that Chifley must have been talking about the socialist objective – nationalisation of the means of production, distribution and exchange – that Australian Labor dispensed with a long time ago.

However, when I looked, what Chifley actually said about the ‘light on the hill’ seems to have much more contemporary relevance:

‘I try to think of the Labour movement, not as putting an extra sixpence into somebody's pocket, or making somebody Prime Minister or Premier, but as a movement bringing something better to the people, better standards of living, greater happiness to the mass of the people. We have a great objective - the light on the hill - which we aim to reach by working the betterment of mankind not only here but anywhere we may give a helping hand. If it were not for that, the Labour movement would not be worth fighting for’ (Speech by Ben Chifley at the ALP conference in 1949).

Now, if you leave out the mention of the ‘Labour movement’, that statement doesn’t seem to me to define anything peculiar to the Labor Party. If anything, it seems to have a Benthamite liberal flavour to it. I can’t see how the meaning of ‘greater happiness to the mass of the people’ could differ much from ‘the greatest happiness of the greatest number’. The ‘betterment of mankind’ sounds like a phrase that John Stuart Mill might have used. The internationalist flavour of ‘anywhere we may give a helping hand’ does not seem to me to express a sentiment that is peculiar to the Labor Party.

I don't think that Labor ever had sole ownership of Chifley’s light on the hill. Chifley made a great speech but it didn’t define what Labor stood for in the way that Menzies ‘forgotten people’ speech a few years earlier still defines a lot of what the Liberal Party stands for. The idea of ‘bringing something better to the people’ was just as much a Menzies objective as a Chifley objective. Today, it is just as relevant to Tony Abbott as to Julia Gillard.

When a political party doesn’t have a guiding philosophy voters are largely left in the dark about how it is likely to respond to the problems it will face in government, other than that it is unlikely to bite the hand that feeds it (trade unions in the case of the Labor Party). The policies that the parties take to an election tell only a very small part of the story of what they are likely to do in government. Tony Abbott has written books about his guiding philosophy (his latest was reviewed on this blog last year). Like him or loathe him, voters do at least know where Abbott is coming from.

I think Julia Gillard could probably give Labor something distinctive to stand for – something to move forward to – if she sets her mind to it either as prime minister or leader of the opposition. There could be the germ of a distinctive objective for a social democratic party in moving toward more equal opportunity for children in some of the things that Gillard has been saying about education. But those ideals, if they exist, remain hidden beneath endless outpourings of meaningless verbiage.

Does the law of diminishing returns apply to a sense of achievement?

The law of diminishing returns is, of course, the famous economic law that as you add additional units of one factor of production, holding other factors constant, then the additional increments of output produced tend to decline. The original story was about how much additional food could be produced by adding additional units of labour to a constant amount of land, other things being equal. It has been possible, of course, to avoid the Malthusian consequences of diminishing returns by making more use of capital equipment and using more efficient technology etc.


The law of diminishing returns was probably hardwired into my brain when I was studying economics as an undergraduate over 40 years ago. In any case, when I first saw a data set providing ratings of life satisfaction and of seven domains (standard of living, health, achieving, personal relationships, safety, community connectedness and future security) it seemed natural to expect that the law of diminishing returns would apply to each of those domains. So, for example, I expected the additional life satisfaction that accompanied an increase in rating on ‘achieving in life’ from 7 to 8 would be greater than that accompanying an increase in rating from 8 to 9. It turns out, however, that my expectations were wide of the mark - at least for the data set I was using (the Australian Unity quality of life data set, Survey 13, 2005, with useable data for 1,956 respondents). The relationships between the various domains of life satisfaction aren't actually much like the relationships between fertilizer applications and crop yields.

Some time last year I decided to try to use regression to find a simple production function (there I go again) that provided a good explanation of life satisfaction in terms of the seven domains. The estimated coefficients for factors other than ‘achieving in life’ were then used to hold the influence of these factors constant at their average values in order to examine how life satisfaction varies with changes in the ‘achieving in life’ rating.

I thought a Cobb-Douglas production function, which is probably the simplest form of production function incorporating diminishing returns, would probably be appropriate. But a simple linear production function better fitted the data. The functional form that I eventually settled on is a simple linear relationship that is anchored at the top end of the scale, so that if there is a rating of 10 on all 7 domains the predicted rating for life satisfaction must also be 10. The estimated coefficients for this restricted least squares regression were similar to those for ordinary least squares, but the restriction enables better use of available information (Adjusted R squared = 0.81 versus 0.51). The estimated coefficients were as follows (followed by standard errors in brackets):

Standard of Living: 0.309 (0.020)
Health: 0.055 (0.016)
Achieving: 0.272 (0.018)
Relationships: 0.160 (0.014)
Safety: -0.006 (0.018)
Community links: 0.076 (0.016)
Future security: 0.047 (0.018)
Intercept: 10 – 10*(.309+.055+.272+.160-.006+.076+.047) = 0.876 .

Now, we know that a linear production function is inconsistent with the law of diminishing returns. The model predicts, for example, that an increase in achieving rating from 7 to 8, will result in the same increase in life satisfaction rating (+0.272) as for an increase from 8 to 9. But this doesn’t necessarily mean that the estimated model fits the data well over the full range of variation in achieving ratings. One way to test this is to use the estimated coefficients to hold other factors are constant at their average values and to examine how remaining variation in life satisfaction is related to achieving ratings. The results are shown in the chart below.

It is evident from the chart that the linear model prediction of how life satisfaction varies with achieving tracks fairly closely the estimate of life satisfaction with variables other than achieving held constant. In other words we can be fairly confident that diminishing returns does not apply to achieving.

The chart also shows large gaps between the estimates of life satisfaction with variables other than achieving held constant and average life satisfaction levels. This reflects correlation between ratings on achieving and ratings on other variables. This could be because of causal relationships between various domains or because ratings on different domains are influenced by common factors such as personal disposition or temperament.

I’m reluctant to post the results of this little piece of research because I can’t claim any expertise in this area (and my ignorance might be fairly obvious to people who do have such expertise). But the results of this exercise seem to me to have some implications for the question that I raised in my last post about the appropriate balance between different domains such as achieving and relationships. The absence of diminishing returns to achieving does not mean that high achieving by itself is likely to give many people very high life satisfaction. That usually requires high ratings on relationships and on the other domains as well. But we shouldn’t assume that achieving and relationships are completely independent. There is higher positive correlation between relationship ratings and achieving ratings (0.4) than between relationship ratings and the ratings for any of the other domains.
Does this mean that high achievers find it easier to maintain good relationships with others? Or, does it mean that people tend to view maintaining good relations with others as an achievement?