Raising your children

Thanks to Darwin Barton

There’s something to be said for raising your kids on a daily basis and that’s what I’m working on doing. A few years back my husband and I made the tough decision for me to quit my job and it’s been really nice, actually, since we’re able to have me watch the kids all day while he works. I love him to death but I wish he made a bit more money only because our life has changed dramatically in the last few years. We’ve not cut back on certain things like home alarm systems and the organic produce we like to buy but others like trash pickup and things like that had to go to make room for our new lifestyle. I don’t feel bad about it though because it means I get to be with the kids and do what I like to do which just makes me feel good about how I’m living my life. I know the kids appreciate being able to have their mom around!

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Does the OECD's 'better life index' sound like fun?

I am not sure the OECD’s better life index is meant to be fun. But I have had some fun playing with it. The index is interactive. The fun comes from giving different weight to 11 different criteria (or topics as they are described by the OECD) and then observing how this affects rankings of well-being of OECD countries.

The criteria used in the index are: housing, income, jobs, community (individuals’ perceptions of the quality of their support networks), education, environment (air pollution by tiny particulate matter), governance (voting and transparency), health, life satisfaction, safety (assaults and homicide) and work-life balance (working mothers, total hours worked and leisure).

Under the default setting, with all criteria being given equal weight, the countries that come out on top are Australia, New Zealand, Canada and Sweden. If you suppress all criteria other than income, Luxembourg is a long way ahead of the field, followed by the United States and Switzerland. The income measure used in the study (reflecting household financial income and wealth) has Australia in 14th place and New Zealand in 25th place.

The substantial difference between the outcomes of these weighting systems is interesting. In a previous post I observed that all well-being indicators tend to tell similar stories about well-being levels in different countries. The two observations are actually consistent. My research covered a larger number of countries, including many poor countries as well as the wealthy democracies of the OECD. Well-being indicators tend to tell a similar story when wealthy countries are compared with poor countries, but can tell different stories when wealthy countries are compared to each other.

Equal weighting of a range of indicators and a focus on income alone seems to me to be equally arbitrary approaches to well-being comparisons. Well-being is obviously affected by factors other than income, but it would be difficult to argue that all relevant factors are equally important. Value judgments have to be made to determine appropriate weights. An appropriate weighting system might be derived by conducting surveys to obtain weights reflecting the values of people in different countries. Alternatively, surveys could be used to obtain weights reflecting the values of people with different political views in particular countries, or across the whole of the OECD.

In the absence of such survey evidence, I have looked at the rankings for three somewhat extreme political groups drawn from my own imagination: Scrooges, Socioholics and Warm Fuzzies. As I imagine them, all three groups perceive governance and safety as being important to well-being. The Scrooges add income as the only additional factor. The Socioholics add housing, jobs, education and health in addition to income. The Warm Fuzzies exclude income and all the additional factors added by the Socioholics, but replace those factors with community, environment, life satisfaction and work-life balance.

So, which countries come out on top of the welfare rankings according to the values of these three political groups?

Scrooges: The countries that come out on top are Australia, Luxembourg and the United States. New Zealand is placed about 8th, behind Sweden, Austria, Canada and UK.

Socioholics: Australia and Canada come out on top, followed by New Zealand and the United States.

Warm Fuzzies: Australia, Denmark and Sweden are on top, followed by New Zealand, Canada and Norway.

What do I get out of this? My main observation is that Australia seems to come out fairly well, whatever coloured political lenses you use. The well-being of New Zealanders also looks fairly good, particularly if you adopt either a Socioholic or Warm Fuzzy perspective.

Having had some fun, the more serious question that comes to mind is whether a focus on the OECD’s well-being indicators (and other similar constructions) is likely to distract political attention away from much-needed economic reforms to improve the economic strength of some economies. For example, if well-being indicators suggest that people in some lovely country (New Zealand comes to mind) tend to enjoy living standards substantially higher than other countries with comparable per capita GDP levels, there may be a tendency for the government of that country to become complacent about establishing conditions more favourable to further improvement of living standards.

How Painful is Economic Reform?

In my last post I presented evidence that people in countries with relatively high growth rates tend to perceive that their lives are improving. This is one of the reasons why I reject the view that economic growth makes people unhappy and that so called ‘unhappy growth’ can explain the reluctance of some governments to undertake economic reforms.

This raises questions about the effects of economic reforms on perceived changes in the quality of life. Do people in countries undergoing economic reforms tend to perceive that their lives were better prior to the reforms? My initial thought was that this would depend on the success of the reforms in raising economic growth rates.

I have now attempted to test this view empirically. In the analysis the perceived improvement in quality of life over the last five years is calculated as the difference between the rating of life today and life 5 years ago using data from the Gallup World Poll. Regression analysis has been used to explain variation in perceived improvement in life for 104 countries in terms of economic growth rate over the five years to 2007, improvement in governance over the same period (the average change in the 6 World Bank governance indicators), change in regulatory quality (the World Bank governance indicator most closely related to reforms that increase economic freedom) and a variable reflecting the extent to which assessments that people in different countries make of their lives tend to differ from the ratings that would be expected on the basis of income levels.

The regression explains about 40 per cent of the variation in perceived improvement in life among the 104 countries. The results show:
• Economic growth has a positive effect on perceived change in quality of life.
• Improvements in governance have a positive effect
• Improvement in regulatory quality have a negative effect on perceived change in quality of life.
(These results pass the standard statistical test relating to standard errors of estimates. Anyone who wants to see the results is welcome to contact me by email.)

It is important for the negative impact of change in regulatory quality to be seen in context. Economic reforms are generally undertaken in the hope that they will result in improvements in quality of life through higher economic growth. The chart below shows that countries which undertook regulatory reforms generally had relatively high economic growth rates. There was only one country undertaking regulatory reforms which had a negative economic growth rate.

The green diamonds in the chart denote the 10 countries in which people had the greatest perceived improvement in their quality of life. The red diamonds denote the countries with the greatest perceived decline in quality of life. The green diamonds are generally associated with higher economic growth rates than the red diamonds.

The evidence seems to support my intuitions – which are probably similar to the intuitions of most other economists interested in public policy – about the painfulness of economic reforms. Reforms often involve removal of regulatory barriers that protect the incomes of some groups at the expense of the broader community. The people who experience these income losses tend to resist reforms and to perceive that their lives were better before they were undertaken. When reforms are successful in promoting economic growth, however, these perceived losses tend to be outweighed by the benefits to those who gain from the reforms. Ad hoc attempts to promote reform of particular regulations are likely to be less successful than reform programs that are sufficiently broad and persistent to enable a high proportion of the population to perceive that their lives have improved.

Does ‘Unhappy Growth’ Explain Failure to Adopt Economic Reforms?

Several researchers have noted that there is a tendency for average life satisfaction to be lower in the countries with high economic growth rates even though there is strong evidence that average life satisfaction is higher in countries with higher incomes. Carol Graham and Eduardo Lora have referred to this as the ‘paradox of unhappy growth’. In one recent paper Eduardo Lora (with Juan Camilo Chaparro) suggests that ‘unhappy growth’ may help to explain why some countries have been reluctant to adopt economic reforms that would lift economic growth rates (‘The conflictive relationship between satisfaction and income’, Nov. 2008).



This is an interesting view, but I doubt its validity. It seems to me that ‘unhappy growth’ could be a misnomer. Before explaining why I should try to summarise the authors’ explanations for ‘unhappy growth’. One explanation is in terms of an aspirational treadmill. Economic growth raises aspirations, so people experiencing high income growth may come to expect higher incomes and hence feel less satisfied with their current incomes than people experiencing low growth. The other explanation is that economic growth is often associated with structural changes that result in income losses to some groups as well as gains to others. As a result of loss aversion the average life satisfaction may decline while average income rises.



Both of these explanations seem plausible, but they leave us with a paradox. How can high incomes – which must have resulted from economic growth in the past – be associated with high average life satisfaction if economic growth reduces average life satisfaction?


There is a simple explanation that dissolves this paradox. The observation of lower average life satisfaction in the countries with higher growth rates might just reflect the shorter time that the people in the countries with higher growth have had to accumulate the capital necessary to enjoy the fruits of their current income levels. Consider two countries which currently have similar per capita incomes, one of which has experienced rapid growth over the last couple of decades and one which has experienced low growth. It would be reasonable to expect that per capita net wealth would be lower in the high-growth country than in the low-growth country because people in the former country have had less opportunity to accumulate wealth from their current incomes. People with lower per capita net wealth could be expected to have poorer standards of housing and to feel less financially secure, so it is only to be expected that they would feel less satisfied with their lives. (This is similar to the explanation offered by Angus Deaton, namely that life satisfaction responds to the long-term average income, as in a permanent income model of life satisfaction. See: ‘Income, health and well-being around the world’).




There is some evidence that average life satisfaction is strongly influenced by net wealth. A study by Bruce Headey and Mark Wooden has shown, using Australian data, that wealth is at least as important to subjective well-being as is income (IZA Discussion Paper 1032, Feb. 2004).


There is also some evidence of a similar phenomenon with respect to education levels. Regression analysis suggests that there is a tendency for average education levels to be lower in countries with high growth rates, after controlling for income levels. This can be explained in terms of the time taken for accumulation of human capital. It would make no sense to attempt to explain it in terms of economic growth resulting in less education.


Finally, there is evidence in the following chart that people tend to perceive that their quality of life has improved in countries that have experienced relatively high growth rates. The perceived improvement in quality of life over the last five years can be calculated as the difference between the rating of life today and life 5 years ago using data from the Gallup World Poll. The chart plots perceived improvement in quality of life against per capita GDP growth rate for the period 2002-07 (based on rgdpl data from Penn World Tables) for 103 countries. The pink dots in the chart lie on a line fitted by regression.



The evidence of perceived improvements in quality of life in countries experiencing high economic growth rates is not consistent with the idea that economic growth makes people unhappy. I don’t accept that the failure of governments to adopt economic reforms can be explained by ‘unhappy growth’.

Does Economic Security Depend on Average Income Levels?

In an earlier post I suggested that there would be widespread agreement that a good society would provide members with a degree of personal economic security against potential threats to individual flourishing, including misfortunes such as accidents, ill-health and unemployment. (See: What are the characteristics of a good society?)

In suggesting that there would be widespread agreement about this I had in mind that nearly everyone would tend to be somewhat risk averse if they had to choose what kind of society to live in without any knowledge of their own personal circumstances. Rather than focusing exclusively on the median (or most likely) outcome of their choice I think nearly everyone would have some regard to what their quality of life might be like in various societies if they were to draw the short straw in terms of parentage, health, intelligence, good looks and good luck. (How people would actually respond to such a thought experiment is an empirical question. I recall reading somewhere that John Rawls’ difference principle has not been supported by empirical research, but this principle seems to assume extreme risk aversion applies to choices made behind a veil of ignorance. If any readers are aware of useful empirical research on this question I would be grateful to be made aware of it.)

It seems to me that the average income of people at the lower end of the income distribution is an appropriate measure of economic security because it relates directly to the quality of life that people are able to lead. This can be estimated for a wide range of countries using survey data on the percentage of national income or consumption of people in the lowest 10 percent of the income distribution. Another relevant indicator is survey data on the proportion of the population that have at times not had enough money to buy food that their family needed in the preceding 12 months.

The following table shows countries ranked by the average income level of people in the lowest 10 percent of the income distribution. Percentages with not enough food are also shown along with a range of other indicators of average well-being and institutional quality. As in similar tables in recent posts, the ratings of countries with performance in the top quartile for each indicator are shown against a green background, those for the second quartile are shown in yellow, the third quartile in orange and the fourth quartile in red. Indicators are defined below the table.

As would be expected, countries which rank highly in terms of average incomes of the bottom 10% tend to have the lowest percentage of people who claim that at times they did not have enough money to buy food. There are some interesting anomalies, however, at both ends of the spectrum. For example, the percentage claiming that they did not always have enough money for food were higher than would be expected in several high-income countries including the UK, Italy, Australia and New Zealand. Low-income countries in which the percentage claiming inadequate money for food was lower than expected included Nepal, Vietnam and India.

The table shows that average incomes of the bottom 10% of the population depend strongly on the goose that lays the golden eggs – i.e. on the institutional factors that determine average income levels of the whole population. I do not intend to imply, however, that democratic institutions and income redistribution policies of governments play no role in supporting incomes of the bottom 10%. A regression analysis suggests that democratic institutions do tend to support average income levels of the bottom 10% of the population. Examples are evident in the table. Countries in which relatively low ratings on ‘Voice and accountability’ may help explain lower than expected incomes of the bottom 10% include Iran, Tunisia and Argentina. Countries in which relatively high ratings on ‘Voice and accountability’ may help explain higher than expected incomes of the bottom 10% include India and Mongolia.

Hint: Click on the table for a clearer picture.


Notes:
Income index for the poorest 10%: Index expressed as a fraction of estimated average income of the poorest 10% of families in Norway, the country in which the poorest 10% have the highest average income. Estimates based on share of income/expenditure of the poorest 10% of the population from Table M, HDR 2009 Statistical Tables, UNDP.

Not enough food %: The proportion of the population claiming that at times in the preceding 12 months they have not had enough money to buy food that their family needed. Survey data from the Gallup World Poll.

Average income index: Real GDP per capita (rgdpl) for 2007 from the Penn World Table, expressed as a fraction of per capita GDP in the United Arab Emirates, the country with highest per capita GDP. Source: Alan Heston, Robert Summers and Bettina Aten, Penn World Table Version 6.3, Center for International Comparisons of Production, Income and Prices at the University of Pennsylvania, August 2009.

Voice and accountability: Index compiled by the World Bank capturing perceptions of the extent to which a country’s citizens are able to participate in selecting their government, as well as freedom of expression, freedom of association and a free media.

Economic Freedom (Fraser): According to the Fraser Institute’s definition, individuals have economic freedom when property they acquire without the use of force, fraud, or theft is protected from physical invasions by others and they are free to use, exchange, or give their property as long as their actions do not violate the identical rights of others. Data from the 2009 report (for 2007).

Control of corruption: Index compiled by the World Bank capturing perceptions of the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as ‘capture’ of the state by elites and private interests. Quality of life index: Gallup World Poll data on “life today” (latest available) country averages, expressed as a fraction of the rating for Denmark, the country with the highest rating.

Social capital: A sub-index of the Legatum prosperity index which reflects how well people are engaged in social networks and relationships that are trustworthy and supportive.

What Makes a Planet Happy?

I find it hard to take seriously the concept of a happy planet. Is Earth happier than Mars? How would we know? It seems to me that only sentient beings can be happy, but that might just reflect the limited perspective of a sentient being. For all I know a rock might have a completely different perspective.

The happy planet index constructed by the New Economics Foundation (nef) doesn’t actually attempt to compare the happiness of different planets. What it attempts to do is to assess how happy our planet is with what is happening in different countries. I hope that makes you smile because if you take the happy planet index too seriously I think you are at risk of becoming unhappy – and that might make the planet unhappy!

The countries that are given the highest ratings in nef’s index are Costa Rica, Dominican Republic, Jamaica, Guatemala and Vietnam. These places don’t seem to me to offer the ideal of a good life for the people who live in them, even though many of these people say they are satisfied with their lives.

The authors claim that the results show that a good life is possible without “costing the earth”. Andrew Norton has pointed out that the results do not support this conclusion. Average happiness levels are relatively low in several countries that are ranked among the top 50 in the happy planet index.

As defined by the nef the happy planet index is a productivity measure. The numerator (or output measure) is happy life years, measured by multiplying average life satisfaction levels by average life expectancy. The denominator (or input measure) is a linear function of the average “ecological footprint”, which is a measure of the total amount of land required to provide all resource requirements plus the amount of vegetated land required to absorb CO2 emissions.

The basic idea seems to be that “the planet” becomes happier when people in a particular country become happier without using more “land” or when people maintain their current happiness level while using less “land”.

How do we know that this is what makes the planet happier? How do we know that the planet cares whether or not humans are happy?

My point is that the happiness of the planet only exists in the mind of the human who thought up the idea of the happy planet index. There is nothing wrong with trying to imagine what it would be like to be a planet that has feelings, but this is a game that anyone can play. Some people could imagine, for example, that the happiness of the planet will rise if more CO2 is produced. After all, CO2 is food for plants and planets like plants. Don’t they?

It would be possible for everyone on earth to have their own happy planet index that takes account of the things that they imagine that the planet might value. It would probably be preferable, however, to come down to earth and acknowledge that there is potential for everyone on the planet to vary in the extent to which they value various things that are important to them.

If nef’s happy planet index serves a useful purpose I think it is to remind us that surveys that measure our subjective well-being do not necessarily take into account all the things that are important to us. When we report how satisfied we are with life we take account of the things that are most salient to us at the time. We don’t necessarily take into account our own future well-being and the well-being of future generations of family members, let alone the well-being of other relatives and friends, the well-being of other humans, the well-being of animal pets, the well-being of other living things, or other matters that might be important to us.

Is the Quality of Life in New Zealand Overrated?

Some New Zealanders might say that this is a question that only an Australian could ask, but it seems to me to be a good way to raise the issue that I want to discuss. (I hope that when I look back on this in a few days time it will still seem like a good idea!)

The ratings that I am writing about are the ladder of life ratings from the Gallup World Poll – the top step of the ladder represents the best possible life and the bottom step represents the worst possible life. But I could be referring to any of a range of surveys that ask people to place a numerical rating on how happy they are or on how satisfied they are with their lives.

I do not intend to argue that New Zealanders have a peculiar propensity to over-rate their satisfaction with their lives. The issue I want to discuss is what it means when surveys show that New Zealanders are just as satisfied with their lives as people in the U.S. even though average incomes in NZ are only about two-thirds of the U.S. level. I propose to compare the impact of income differences and other factors on the survey measures of subjective well-being in order to enable readers to consider whether the impacts attributable to income differences provide an accurate measure of its impact on the quality of lives.

It is now possible to make fairly accurate comparisons of the impact of income and other factors on average ratings of subjective well-being at a national level. Recent research by John Helliwell, Christopher Barrington-Leigh, Anthony Harris and Haifang Huang has shown that a high proportion of differences in average life evaluations between countries can be explained statistically by differences in a relatively small number of variables reflecting social, institutional and economic circumstances of life (See Table 3, ‘International Evidence on the Social Context of Well-being’, Working paper 14720, NBER, 2009). The most important variables are income (log of per capita GDP), friends (the proportion of survey participants who have relatives or friends they can count on for help when they are in trouble), freedom (the proportion who satisfied with their freedom to choose what they do with their lives) and corruption ( responses to questions relating to whether corruption is widespread throughout government and business).

In the Figure below I have used these research results to show reasons why average survey measures of subjective well-being in several countries differ from the U.S. ratings.

The net differences from U.S. ratings are shown next to the label for each country. If you focus on New Zealand you can see that the perception of NZers that their country is relatively free of corruption outweighs the negative impact on survey responses of the fact that average incomes in NZ are substantially lower than the U.S. average.

If you consider that corruption is as big a problem in the U.S as, for example, in Greece, you might think that this provides an accurate depiction of the relative impacts of income differences and corruption on the quality of life in New Zealand and the U.S. However, when I look at the expert ratings of corruption levels in Transparency International’s corruption index, the U.S. doesn’t look too bad. The rating of the U.S. in this index (7.3) is lower than Denmark and NZ (both on 9.3) and Australia (8.7) but well above Italy (4.8) and Greece (4.7). (It is also interesting that Greeks do not perceive that their corruption problem to be any worse than that in he U.S. and that NZers do not perceive themselves to be as free of corruption as the Danes).

The point is that the influence of various factors on the survey ratings of quality of life depends on the way they are perceived. Americans are sensitive to corruption in their society and they don’t like it. The ratings are more like emotional responses than dispassionate evaluations. It seems to me that self-reports of how people feel about their lives tell us about their emotional state, which is an important influence on well-being but is not identical to it.

One way to test survey ratings is to ask ourselves to what extent we would be prepared to rely on them in making decisions affecting our own well-being. It seems to me that income may be more important to people when they make decisions affecting their our well-being than when they answer questionnaires about the quality of their lives. If you were in Europe contemplating a choice between moving your family to either the U.S. or NZ, would you consider the importance of differences in average income levels to be adequately reflected in survey ratings of the quality of life?

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