Does the economy affect our happiness?

Economist, Shane Oliver, recently compared the songs of artists from the 1950s and 1960s with those of today and found his impressions aligned with a University of Innsbruck finding that songs have become “gloomier” and “angrier”.

He concluded that pursuing happiness is at the centre of human existence and that happiness is good for us. Happy people live longer, are healthier, more resilient, more creative, are better leaders, and are more sociable. 

But from an economics perspective, does the surge in material prosperity that much of the developed world has experienced over recent decades lead to greater happiness? 

Dr Oliver’s research led him to conclude that happiness levels have fallen. 

This is illustrated in the United States, where he compared the percentage of people who say they are “very happy” against real GDP per person. 

“As income has gone up over the last 50 years, happiness has fallen,” he said. 

It’s a similar picture for Australia, although we only have happiness data (from the World Happiness Report) for the past 20 years. 

Stagnant or falling happiness is confirmed by rising trends in crime rates, depression diagnoses, suicide rates, and drug abuse, apparently. 

However, there is a link between income and happiness. At low levels of income, extra income can have a big positive impact on happiness. But for countries where individuals have income above a certain level (around US$50,000), extra income has little impact.

The 2024 report found happiness could be found in rich countries. Finland ranks first as the happiest country. Australia ranks 10th with the US at 23rd. Lebanon and Afghanistan rank at the bottom at 142nd and 143rd. 

In rich countries, variations in income across countries have little impact on happiness. 

According to Oliver, other findings from the happiness studies include: 

• Rich people are happier than poor people, but this does not mean that society as a whole becomes happier as aggregate income for everyone rises. 

• People compare themselves to others (“keeping up with the Joneses”) in determining their happiness, so if average incomes rises they may feel no happier. 

• Women tend to report higher life satisfaction than men, but also experience more negative emotions, suggesting they are less happy.

• Married men are happier than unmarried men, but it’s less clear for women with some studies showing the opposite. 

• Younger people in the US, Canada, Australia, and New Zealand are the least happy age group. This is a major change from 20 years ago which may be due to the rise of social media giving rise to increased anxiety and depression among the young, particularly young girls. Poor housing affordability may also be a factor. 

• Progressives are sadder than conservatives, possibly because they are more empathetic and focussed on a more negative world view. 

• Physical and outdoor leisure, shopping, reading books, seeing relatives, listening to music, and attending sporting and cultural events are associated with higher happiness. Time spent on the internet and TV is not. 

• People in individualistic societies are happier and freedom to make life choices contributes to happiness. 

• People adapt to their situation. There is evidence that we are born with a genetically pre-set level of happiness to which we return after good events (such as winning the lottery) and bad (like having an accident). 

Dr Oliver says there are two schools of economic thought about happiness: 

1. It is up to the individual to learn how to become happy and is not a matter for government. 

2. Economic policy needs to be refocused on broader measures of wellbeing such as Gross National Happiness. You could boost happiness by: 

• Taxing excessive work, as it doesn’t lead to happiness 

• Redistributing income because inequality leads to envy and keeps people on the “hedonic treadmill” 

• Reducing the focus on competition and rivalry 

• Spending more money on public goods such as parks 

• Refocussing on community 

• Limiting advertising to avoid creating demand for goods & services we don’t need. 

Dr Oliver observes the latter option would have big implications for investors, as these policies would lead to slower profit growth and lower returns from growth assets. 

He is also sceptical about government policy targeting happiness: 

• Happiness is very hard to measure and impossible to define objectively. This can be used to justify religious or ethnic persecution and can be used to advance authoritarian aims. 

• Just because we get used to something doesn’t mean we should stop doing it. Policies to increase happiness by cutting work effort or income by redirecting people to other activities may flounder as those activities have the same problems as money – that is, people just get used to them. 

• Prosperity may not be boosting happiness but it’s doubtful stagnation will. Policies to reduce work effort may reduce happiness by suppressing a sense of achievement. Oppression of individual advancement may explain low happiness in socialist countries. 

• Restricting choice in favour of mandated happiness guidelines may actually reduce happiness. Evidence suggests that freedom to make life choices contributes to happiness. 

Dr Oliver concludes that US Founding Father Thomas Jefferson was on to something when he wrote in the Declaration of Independence that all people had the right to “Life, Liberty, and the Pursuit of Happiness” with the implication that happiness is something only we can pursue.