For a while, the evidence supported it. Europe, the United States,
and Japan all appeared to flatline in happiness even as their economies
grew. Some poorer countries seemed just as happy as richer ones. The only
disagreement seemed to be the critical threshold. Estimates ranged
as low as $10,000 per year, and last September, economist Angus Deaton and
psychologist Daniel Kahneman found $75,000 annual income as the point beyond
which more money failed to "buy" more happiness. Whatever the case, it seemed that above
a threshold, happiness stopped growing with increasing income.
The paradox was resolved through evidence from psychology, which found that, like so many things, happiness was all relative. Happiness relative not only to the wealth of our neighbors, but also to the level of our aspirations. And both tend to increase as we get richer. As a result, we end up on a "hedonic treadmill," where more income
is continually required to stay at the same level of happiness.
Then, in 2008, economists Betsey Stevenson and Justin Wolfers upended that
view just as it was becoming accepted. They painstakingly converted incomes
to purchase price parity, normalized different scales for happiness, and
even re-interpreted survey questions in other languages. They then
reexamined Easterlin's claims and found that they didn't hold up. Their
conclusion: Absolute income matters. Life satisfaction continues to increase with greater income, after all.
Neoliberal economists cheered. Angus Deaton said wryly,
"As an economist I tend to think money is good for you, and am pleased to
find some evidence for that." Stevenson and Wolfers wrote triumphantly that their findings
"put to rest the earlier claim that economic development does not raise
subjective well-being," and all but broke out the green pom-poms to cheer for GDP.
Their research, however, also emphasizes something that most economists are
less eager to discuss. Central to Stevenson and Wolfers's analysis is the
use of a logarithmic scale to relate happiness to income. What correlates
with a fixed increment of happiness is not a dollar increase in absolute
income (e.g., an additional $1000), but a percentage increment (e.g., an
additional 100%). So, going from a $5000 annual income to $50,000 links with
as much additional happiness as going from $50K to $500K, or from $500K to
$5 million, or even from $5 million to $50 million.
To put it another way, as income rises, every additional dollar represents a
smaller increment of happiness. At one level, this is perfectly obvious. The first
increase of $45K -- from $5K to $50K -- would take a family from hunger and
homelessness to being well-fed in an apartment, probably with a TV to boot.
An additional $45K of income to $95K might allow for a few luxuries, but
certainly nothing close to the difference between starvation and the middle class!