Counterparties: But are you happy?

By Ben Walsh
October 3, 2012

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One of the most common economic assumptions is that, broadly speaking, economic growth makes us all happier. Grow GDP, the argument goes, and we all get more stuff, and more stuff makes us happier. But a recent paper, as Izabella Kaminska writes, says “economists [may] be considering too narrow a set of determinants of well-being”.

The Chairman of the FSA, the UK’s chief financial regulator, Adair Tuner (lead author of the eponymous 2009 review into the financial crisis) has been even more direct in his criticism, once calling most financial activity “socially useless“. Robert Skidelsky writes that Turner’s new book, Economics after the Crisis, attacks three basic economic tenets:

The first is that the object of policy should be to maximize Gross Domestic Product per head; the second, that the primary means of doing this is to create freer markets; the third, that increased inequality is acceptable as long as it delivers superior growth. The attack is devastating, leaving little of the policy edifice of the past thirty years standing.

Turner is not alone on the first point. None other than Fed Chairman Ben Bernanke has endorsed including well-being and quality of life into economic measurement. Joseph Stiglitz has gone so far as to call the obsession with GDP a “fetish“. The OECD has championed its “Better Life Index“, under the brave assumption that humans should be provided with things like housing and a clean environment.

There’s some recent evidence that supports the Happiness School of Economics. China’s GDP has quadrupled in the last twenty years, but economics professor Richard Easterlin says that happiness hasn’t increased with it: “If anything, [Chinese] are less satisfied than in 1990, and the burden of decreasing satisfaction has fallen hardest on the bottom third of the population in wealth”. China is not alone: over the last forty years, happiness has fallen in countries where income has increased.

Easterlin is not a newcomer to this issue — he’s been studying the connection between economic growth and happiness since the 1970s. His work is the basis of the so-called Easterlin Paradox, the idea that rich countries don’t get happier when they get richer.

Most of the recent gains in GDP have gone to the rich, and Kevin Drum’s short version of the financial crisis points to the direct role of inequality in causing the meltdown. Meanwhile, Martin Wolf, also pointing to recent economic research, wonders if we can continue to assume that indefinite growth is possible at all. “For most of history, next to no measurable growth in output per person occurred”, he notes. — Ben Walsh

On to today’s links:

Mitt Romney quietly announces a good tax idea - Bloomberg

Billionaire Whimsy
The most influential billionaire in politics – and his misleading claims about entitlements - LAT

Meet the woman who took the fall at JPMorgan - NYT
“If there’s a villain in this story, then, it’s not Iksil or Macris or anybody in London: it’s Jamie Dimon” - Felix

Never underestimate Wall Street’s ability to overestimate Washington - Capital Gains and Games

How does a currency drop 60% in 8 days? Just ask Iran - Matt O’Brien

Strangely Existential
“The joy of profit” just isn’t the same at big banks these days - Bloomberg
No really cares about which brokerage they use anymore - Reuters

Mortgage refi applications are absolutely surging - Calculated Risk

Unintended Consequences
Currency wars as global stimulus - FT Alphaville

Marc Andreessen: Why we’re investing in Rap Genius - Rap Genius

IMF: It’ll take a decade for the global economy to recover from the financial crisis - Reuters

You can’t make money in commodities anymore by just buying what the Chinese are buying - WSJ

Popular Myths
If you believe in Chinese efficiency, you probably haven’t lived there - Time

Niche Markets
NYC’s wholesale district: “a hub in a vast global network of junk” - Planet Money

The Atlantic has comments enabled for an article written in 1870 - Michael J. Altman
Jerry Seinfeld’s hilarious letter to the NYT on the usage of the word “really” - NYT
The FT is likely for sale after Pearson CEO steps down - Bloomberg
What Nate Silver reads - Atlantic Wire


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Mitt Romney quietly announces a good tax idea – it’s a very good idea (I don’t know if I ever used the words “good idea” and Mitt Romney” in the same sentence), but it will never fly with his base. Which is why he quietly announced it. And if Obama supports it, he will be attacked by supporters of Romney, who will quickly disavow himself of the idea.

Posted by KenG_CA | Report as abusive

GDP is fine; its value as a welfare proxy is dubious, though I’m not sure you’ve made the case for it. (I’m still wary of using “happiness” as something necessarily to be maximized by policymakers, either.) In particular, if the Fed were to start trying to target nominal something, GDP or GNP would make sense; the idea that the fed should loosen policy because happiness is too low is questionable, the idea that it should tighten because happiness is excessive is ludicrous. GDP, especially nominal GDP, is a measure of economic activity that is mediated by the exchange of money, and there’s some reason for thinking that the regulation of the amount of money (in whatever sense) should follow the lead of the amount of it that’s needed. So, this may be nitpicking, but GDP is fine; it’s its misuse that is problematic.

Posted by dWj | Report as abusive

Economic numbers are so “virtual” now. The US used to be a manufacturing/agricultural economy so GDP was rather more tangible. So much of what we consider gdp gain or loss now is based on service that doesn’t add any real societal benefit. Look at how much the financial services industry contributes to GDP. Look at how much Facebook contributes. Look how much legal services contribute. These things don’t employ that many people (relatively speaking) and they don’t make our lives better. Even manufacturing, which still contributes a lot to GDP, is mostly outsourced now. All of these things benefit very, very few people but that GDP number is something that is supposed to represent progress for us all.

Posted by spectre855 | Report as abusive

Its nice that economists are only 50 years behind what is obvious to the thinking man. GDP, pshawwww.

If everyone stops watching TV and instead go take walks in the park and likes that more and is healthier, but there is less overall need for labor so everyone works 39.8 hours instead of 40 hours we are not somehow “worse off” just because there is less stuff.

Economists have become so enthralled by their models and what they can measure that they have lost touch with what they are actually doing (allocating goods and labor efficiently).

Posted by QCIC | Report as abusive

GDP is fine for capturing economic transactions, but that is about it. If I earn $50 for an hour’s work, pay $20 in taxes, and pay somebody $30 to mow my lawn, then I’m economically no better off than if I had decided to mow the lawn myself (except that I don’t enjoy it). Yet the GDP jumps by at least $80 in that convoluted transaction.

Two-earner households, even in the middle class, outsource many activities that were once performed in-house. Child care, cooking, home maintenance and cleaning… There are some benefits to this system (especially to those who earn much more working than they pay for the help), but it increases GDP by more than it increases economic well-being.

Would be interesting for an economist to go back and add in the “mommy wages” over the decades (but please use something realistic rather than the inflated figure you see publicized on Mother’s Day). Has GDP really risen as much as we think?

I know we wouldn’t be nearly as wealthy today if we had earned more instead of de-monetizing part of our income for a decade.

Posted by TFF | Report as abusive

@TFF – you raise a good point, and that’s something I’ve wondered about myself. I believe there’s a factor that goes the other way, however, in thinking about whether GDP growth fully picks up the impact of new technologies and improvements in product quality.

For the former, it’s questions like, in looking at GDP in 1900 vs. GDP today, how do you take into account goods and services such as air travel, central A/C and heating, computers (etc. – the examples are nearly endless) that couldn’t be bought for any price in 1900?

For the latter, I’ll automobiles as an example. I don’t believe that GDP comparisons fully capture, say, the vastly greater reliability of a car being built now vs. a car that was built in 1970.

Posted by realist50 | Report as abusive

*mention automobiles as an example

Posted by realist50 | Report as abusive