Brookings: Topics - Quality-of-Life Issues

Facing Mainland China: Taiwan’s Future Challenges

Richard C. Bush III — Wed, 10 Apr 2013 00:00:00 -0400

Editor's Note: The following speech was delivered at Tamkang University in Taiwan on April 10, 2013.

It is a great pleasure to have the opportunity to speak at Tamkang University. I was first on your campus almost thirty years ago when I was working as a staff member in the US Congress and my boss, the late Congressman Steve Solarz spoke here. I have probably made visits since then but really can’t remember when they were. In any event, it’s great to be back. Thank you, Dean Dai, for that kind introduction. It’s always good to see Professor Lin, who was a visiting fellow at the Brookings Institution in the first year I worked there.

The topic I picked for my speech today is “Facing Mainland China: Taiwan’s Future Challenges.” Actually, Taiwan has faced challenges stemming from the Mainland for a long time, actually for more than six decades. But the challenges today and in the future are more complex and consequential than ever before. The choices for Taiwan will be difficult, and it is important that they be made well. To avoid making choices is also a choice.

Actually, it’s a bit presumptuous for an outsider to try to give advice to the citizens of another country, particularly a democratic country, on the challenges they face and how to face them. In a profound way, that really is their business. And I readily acknowledge that my own country is having great difficulty meeting its formidable challenges. But my ties to Taiwan were first formed almost forty years ago, and have only grown over time. I care very much what happens to this island and its people. So I hope you will permit me to make a few observations on my topic. I won’t talk for too long, because I want plenty of time for questions.

To begin, it is worth noting that Taiwan would face some difficult challenges even if China were not such an important factor. That is because Taiwan, like some other places in East Asia, has entered a transition in its social and economic development that requires new policy models. Even if China did not exist, these challenges would press Taiwan.

In addition, Taiwan’s economy is increasingly post-industrial and is finding it harder to remain both competitive in the global economy and provide good jobs and good wages for all. Income inequality is trending upward. The unemployment rate was higher in this past decade than it was in the 1990s (1-3 percent). The central government budget has been basically flat over the last few years, government debt is growing, but the tax burden of Taiwan citizens is fairly light (58^th among a group of 65 more advanced countries). The island has already begun to move, correctly, to a knowledge-based economy, but there a still a large number of small, inefficient, family operations. And for a knowledge-based economy, its companies will need people with the right kinds of skills, which probably requires reform of the education system.

If these challenges weren’t enough, demography makes them much more difficult. Taiwan’s total population will peak relatively soon, probably in 2025. The working age population will decline from 74 percent of the total today to around 67 percent in 2025; the elderly’s share of the population will increase from 11 percent today to 20 percent. That means that smaller numbers of workers will be supporting more and more old people. By 2060, half the population (workers) will be supporting 40% of the population (retirees). To make this specific, the students in this room will have to pay for the pensions and health care of your professors after they retire. And as long as young people either don’t get married or don’t have children, that situation will continue.

So even if China did not exist, Taiwan would face tough choices as a society: choices between economic prosperity on the one hand and social welfare—for the old and the young—on the other. But China does exist. It provides Taiwan with opportunities, to be sure. Many of you young people may work on the Mainland. But China is a source of insecurity for Taiwan, and so an added challenge. So the task for the island’s leaders and citizens will be to balance their desire for security, prosperity and welfare.

Let me turn now to the various challenges that Mainland China poses for Taiwan.

The first and fundamental challenge is Beijing’s ultimate objective regarding Taiwan, what it calls “peaceful unification” under the one country, two systems formula. In effect, it wishes to have Taiwan become a special administrative region of the People’s Republic of China, with a status essentially the same as Hong Kong and Macau.

Now Taiwan has always said “no” to one country, two systems (1C2S), and there is little public support for it. It’s important, however, that Taiwan people have a substantive foundation for their opposition rather than be opposed for opposition’s sake. To my mind, there are at least two reasons. The first that there are a serious conceptual differences between Beijing and Taipei over whether Taiwan is a sovereign entity in two important respects: first, the island’s international role, and second, cross-Strait relations. Essentially, this is the issue of the Republic of China, and there is a broad consensus here that the ROC does exist, while Beijing’s formal view is that the ROC hasn’t existed since the founding of the PRC. For Hong Kong and Macau, 1C2S granted a “high degree of autonomy” but not sovereignty. Beijing remains the exclusive sovereign. To my mind, this disagreement over sovereignty is rather fundamental.

The second reason is what 1C2S would mean, hypothetically, for Taiwan’s democracy after unification. Hong Kong is important here as well. When crafted the Hong Kong political system over twenty years ago, through the Basic Law, it skewed the electoral process in ways that made it difficult—or impossible—for individuals and political forces it does not like to come to power. We of course don’t know whether China, as part of a unification deal, would seek to change Taiwan’s political system so that it has the same effect as in Hong Kong. If it did, however, the DPP, which today is a significant portion of Taiwan sentiment, would be marginalized.

But that is just my view. What’s important is how Taiwan citizens and leaders think about this.

When the results of the 2012 presidential elections were announced on the evening of January 14^th last year, President Ma Ying-jeou said that he would “safeguard the sovereignty of the Republic of China with my life.” That’s a strong statement, and I am pretty sure that President Ma knows what he means by it. But I believe that Taiwan as a whole could broaden and deepen its understanding of the sovereignty concept. In this regard, it would be particularly useful for each of the major political parties to come to their own internal consensus and then work on a cross-party consensus.

So Challenge Number One is Beijing’s current ultimate goal, unification under 1C2S. That option – and it’s an option only – creates Challenge Number Two. That challenge is the possibility that as the ROC government negotiates with Beijing today, it may make concessions that undermine its claim of sovereignty when it comes to resolving the fundamental cross-Strait dispute. Note that Beijing has a similar challenge: as it negotiates with Taipei today, it wishes to avoid making concessions that undermine 1C2S.

This challenge has been around a long time – for both sides. It is one reason that cross-Strait relations were so difficult from the early 1990s until 2008, to the point that the United States occasionally feared that the two sides might slide toward a conflict that neither intended. This short term-long term problem remains today. Some in Taiwan say that the Ma Administration has damaged Taiwan’s sovereignty in the way it negotiated various economic agreements like ECFA without specifying exactly how. My own analysis concludes that the Ma Administration has not negotiated badly and has preserved Taiwan’s position on this key issue. But it will become important if and when the two sides begin discussions on political and security talks, because sovereignty is an inherently political issue. Which is one reason why those talks are so difficult to start, and may not start anytime soon.

Challenge Number Three is different. It concerns not the content of cross-Strait negotiations but how Beijing seeks to promote its goals concerning Taiwan. Here we need to think about how China is pursuing its objectives regarding Taiwan, and I find it useful to distinguish analytically between two different ways or paradigms: the paradigm of mutual persuasion and the paradigm of power asymmetry, which is different.

Essentially, the paradigm of mutual persuasion is a shared approach of negotiation, persuasion, incrementalism, and mutual adjustment. I would argue that this is the approach that the two sides have followed since Ma Ying-jeou took office. It is part of what Beijing understands by its concept of peaceful development. It is in Taiwan’s interest that mutual persuasion continue (also, I would argue, it is in China’s and America’s interest).

The paradigm of power asymmetry is different. Here, China would exploit the growing power gap with Taiwan – economic, diplomatic, military, and so on – by pressuring Taiwan to accept a resolution of the fundamental dispute more or less on its terms, and even though many in Taiwan would be unhappy about submitting in this way. But listen to how one influential PRC scholar of cross-Strait relations has put the matter: “The severe asymmetrical balance of power between mainland China and Taiwan is a fact that no one can change. Moreover, this problem . . . will continue to increase, a situation that Taiwan needs to handle pragmatically and calmly.” We can speculate on what the scholar means by “pragmatically and calmly.”

Why would Beijing decide on a shift in paradigm? First of all, it might do so if it decided, based on its perceptions or misperceptions, that a future Taiwan government was moving towards de jure independence, and if it could not get Washington to restrain Taipei.

But let us assume, purely for purposes of discussion, that the KMT remains in power, why then might Beijing decide to shift to a strategy of pressure and intimidation? This would happen, I speculate, if it became impatient and decided that Taiwan would never move from the status quo to unification. We have seen hints of that impatience in Chinese suspicions that President Ma’s true objective was “peaceful separation” with a “two Chinas” or “one China, one Taiwan” character. And recall that one of the circumstances specified in the 2005 anti-secession law is that “possibilities for a peaceful reunification should be completely exhausted.”

Now I actually don’t think that China will lose patience in the foreseeable future – for the rest of President Ma’s second term, perhaps. I believe that the PRC officials responsible for the conduct of cross-Strait relations are realistic about the views of the Taiwan public and the limits that places on the Taipei government. They seem to believe that time is on Beijing’s side. On the other hand, I don’t know what “new thinking” Xi Jinping may have concerning Taiwan policy, and recent statements by PRC officials urge movement on political issues. So it’s impossible to know whether Beijing’s patience will last indefinitely. No-one should assume that it will.

Note that when I talk about a Chinese strategy of pressure and intimidation, I don’t mean the use of force or even the explicit threat of force. In a situation of power asymmetry, the stronger power need not act overtly to compel the weaker power. In the Taiwan case, Beijing might conclude the very fact that Taiwan is quite dependent on the Mainland economically and the mere existence of its increasingly robust military capabilities will be sufficient to secure Taipei’s submission more or less on its terms.

Obviously, a pressure strategy would create a great challenge for Taiwan. It would. I think, create intense pressure on Taiwan’s leaders and turmoil among the public. The political system would be under tremendous strain.

So what should Taiwan do about this situation? This is my final challenge, the challenge of self-strengthening. It is really a set of challenges. And Taiwan isn’t the only country that needs to strengthen itself from within. In my view, frankly speaking, there is a lot that the United States must do to strengthen itself from within in order to rebuild the pillars of national power that have permitted it to play a dominant role in world affairs since World War II.

I have already referred to the first of these self-strengthening challenges. It is to maintain and enhance Taiwan’s global economic competitiveness in spite of the demographic shift. This requires the continued building of a knowledge-based, innovation-driven economy, and all that this implies for education, financial markets, and the level of government regulation. It requires that the Mainland side properly protects the intellectual property owned by Taiwan companies.

But economic self-strengthening also requires liberalizing its economic ties with all its major trading partners, not just China. To liberalize with China alone runs the risk of being too dependent on the Mainland. Liberalizing with all major trading partners will require eliminating some protectionist barriers, but the structural adjustment that this stimulates will work to Taiwan’s benefit. In fact, this is the policy of the Ma Administration.

I have also suggested that n terms of fundamental policy, it is a good idea for Taiwan to foster a clearer sense of what it means to say that Taiwan or the ROC is a sovereign entity, not just for its role in the international system but also regarding cross-Strait relations and the domestic political system. This will ensure that if and when political and security talks come, Taiwan’s negotiators will no what aspects of sovereignty are relatively minor and can be conceded and which are so important that they must be defended at all costs. One part of this self-strengthening will be public education so voters understand along with officials.

Diplomatically, Taiwan should ensure that its relationships with its most important diplomatic partners are strong and positive. This includes, of course, the United States and Japan, but also the principal countries of Western Europe. In this regard, I am pleased to report that relations with the United States have improved in recent years.

Militarily, Taiwan should skillfully enhance the deterrent capabilities of Taiwan’s armed forces. By this I mean raising the costs and uncertainties for Beijing if it were ever to mount an intimidation campaign, which at least implies a willingness to use force. Here, I associate myself with the Obama Administration which, in the words of one official, believes that “Lasting security cannot be achieved simply by purchasing limited numbers of advanced weapons systems. Taiwan must also devote greater attention to asymmetric concepts and technologies to maximize Taiwan’s enduring strengths and advantages.”

Finally, there is the question of the political system. Frankly, I believe that Taiwan’s political system tends to focus on relatively superficial issues – such as the security of President Ma’s daughter – rather than on the fundamental challenges that face the island. Politicians are aided in this tendency by this mass media.

Now, I understand that this is a structural problem, created not by individual politicians or media companies but by the nature of competition within both the political and media world. I also believe that Taiwan is better off having a democratic system than something else, in part because it creates a challenge for Beijing – that if it wishes to achieve its political goals concerning Taiwan, it will have to satisfy a broad spectrum of public opinion. And I realize that reforming a political system is very hard to do. Just look at the similar problems that exist in the United States. But it is Taiwan’s political system that will be the mechanism by which self-strengthening occurs in the other areas I have mentioned. So if that mechanism is not strong and effective itself, everything else will be difficult. The fundamental question is, are the people of Taiwan being well served by their political system.

None of these forms of self-strengthening will be easy, particularly in a divided polity. But they are areas where a broader and deeper Taiwan consensus will buoy Taiwan’s psychological confidence and reduce the chances of PRC pressure in the first place. In this regard, young people have a special role to play, for the simple reason that over the long term, you have the most at stake. On the other hand, for Taiwan to remain divided and forego the opportunity for self-strengthening only increases the island’s vulnerability. And it will be young people who have the most to lose.

My final question, Question 8, is what are the implications of all of this for the United States? You may have seen the policy brief of mine that Brookings issued recently, so I will just summarize its conclusions.

First of all, the fact that stabilization has only gone part way and could stall should allay any American fears that, in effect, Taiwan will “abandon America” for the sake of its relationship with China.

Second, it would be unwise for the United States to “abandon Taiwan” for the sake of its relationship with China. I and other scholars have offered several compelling reasons why this is so (as long, of course, as Taiwan desires American support):

First of all, Although Taiwan has at times been the most important source of U.S.-China differences, it is not the only one. Frictions over maritime East Asia and North Korea are examples. So conceding to Beijing on our security relationship with Taiwan would not necessarily foster a more friendly China.
Second, U.S. allies and partners—Japan, the Republic Korea, and others not necessarily in the Asian region—have much at stake in Washington’s future approach to Taiwan. Simply put, a United States that would abandon Taiwan could abandon them too.
Third, whatever China says, U.S. arms are actually not the reason that Beijing has been unable to bring Taiwan “into the embrace of the Motherland.” More to the point, China has not been able to persuade Taiwan’s government and public to accept its “one country, two systems” formula. If China were to make an offer that was actually to Taiwan’s liking, Taipei would not refuse that offer because of U.S. arms sales.
Fourth, there have been points in the past when the United States has acted in ways that placed Taiwan in a vulnerable position. Most or all of those occurred before the people of Taiwan had any say in their future, as they clearly do now. I hope that we don’t repeat this unfortunate history.

Finally, how a status quo United States and a reviving China cope with each other will be played out over the next few decades in a series of test cases. North Korea, maritime East Asia, and Iran are a few of them. Taiwan is another. Should the United States concede to China on Taiwan, the lessons that Beijing would learn about the intentions of the United States would likely discourage its moderation and accommodation on other issues like North Korea or maritime East Asia; in that respect, America’s friends and allies are right. Continuity of U.S. policy toward Taiwan will not guarantee that China’s actions in other areas will support the status quo, but it increases the likelihood that it will. Conversely, a China that addresses its Taiwan problem with creativity and due regard to the views on the island says something positive about what kind of great power the PRC will be. A more aggressive approach, one that relies on pressure and intimidation, signals reason for concern about its broader intentions. In this regard, Taiwan is the canary in the East Asian coal mine.

Authors

Richard C. Bush III

Publication: Tamkang University

Image Source: © Reuters Photographer / Reuters

Obesity, Prevention, and Health Care Costs

Ross A. Hammond — Fri, 04 May 2012 00:00:00 -0400

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Editor's Note: For Campaign 2012, Alice Rivlin wrote a policy brief proposing ideas for the next president on America’s health care system. The following paper is a response to Rivlin’s piece from Ross Hammond. Tom Mann also prepared a response arguing that Americans must accept the reality of today’s political polarization and challenge Washington to offer tangible solutions to the nation’s most urgent problems.

Alice Rivlin highlights the twin health care challenges facing America and the next president: covering the uninsured while curbing unsustainable increases in health care costs and their impact on the debt. She provides a compelling argument for how to address these challenges through health care legislation. I would like to focus here on the role that investment in public health and prevention can play as a complementary strategy for controlling health care spending.

Perhaps the most pressing public health challenge for the United States today is the epidemic of overweight and obesity, which is linked to an array of costly and debilitating health consequences. According to data from the National Center for Health Statistics, two in three American adults are now overweight, including one in three who are obese. A recent study also found that almost one-third of children and adolescents are overweight or obese. These rates are even higher among ethnic minorities, rural populations, and those with low income or education. The health risks associated with obesity reported by the Institute of Medicine include a much higher incidence of cardiovascular disease, diabetes, several cancers, hypertension, high cholesterol, asthma, osteoarthritis, and liver disease.

Not surprisingly, then, the obesity epidemic is a major driver of health care costs in the United States, and the costs may continue to increase significantly in the future if it is not controlled. The increased health risks for major disease that come with obesity carry not only a high social price tag but also a high economic one—relative medical costs for the obese are estimated to be 36 to 100 percent higher than for Americans of healthy weight. A 2009 study found that childhood obesity alone is responsible for $14.1 billion in direct medical costs annually. By some estimates, nearly 21 percent of all current medical spending in the United States is now obesity related. A significant proportion of these medical costs is paid by Medicaid and Medicare, and one recent analysis concluded that total Medicaid spending would be almost 12 percent lower in the absence of obesity. Beyond direct medical spending, additional costs from obesity are driven by increased rates of disability and by reduced productivity.

The impact of obesity on health care spending is likely to increase in the coming years unless further preventative steps are taken. Although recent data suggest that obesity rates may now be leveling off after a period of very rapid growth, the epidemic in children is especially worrisome because most obese children become obese adults. Childhood obesity means more chronic disease will begin earlier in life for more people—driving up lifetime costs considerably. For example, type 2 diabetes (for which obesity is a particularly strong risk factor) occurred primarily in adults until recently, but the Centers for Disease Control report that it is now beginning in childhood for more Americans. A recent report in the Journal of the American Medical Association estimates that one-third of all children born in the United States today (and one-half of all Latino and African American children) will develop type 2 diabetes in their lifetime. Even if the epidemic does not worsen, these costs are likely to prove an unsustainable burden on the health system given the long-term growth of the federal debt.

Keeping the costs of obesity from overwhelming the health care system will require a renewed focus by the next president on obesity prevention. This has the potential to contain costs much more effectively than the mere treatment of obesity-related chronic health conditions. Early childhood can be an especially important period—once obesity develops, a powerful set of physiological processes and behavior patterns make it challenging to reverse. From the perspective of health care costs, early prevention can produce substantial savings. According to an analysis in the American Journal of Public Health, as little as a 5 percent reduction in the prevalence of diabetes and hypertension would save almost $25 billion annually in medium-term health care costs.

Prevention is important, but designing effective prevention efforts remains challenging. The drivers of the obesity epidemic are complex and multifaceted, so there is likely no single solution. Continued investment in research on effective prevention strategies is needed, especially in support of what the Institute of Medicine and National Institutes of Health refer to as new “systems” approaches. Indeed, it may be critical to coordinate policy across many domains and levels of scale in order to see a rapid change in the obesity epidemic. To be most effective, prevention efforts must focus not just on educating individuals or on changing environments, but on doing both together.

The next president should take several steps to address the major public health challenge of obesity and help avoid the unsustainable health care costs it will generate:

Renew the emphasis on prevention efforts. Prevention is especially important, given the role of childhood influences in the development of overweight and the challenge of reversing obesity once entrenched.
Increase investment in public health research to develop an evidence base that supports the design and testing of powerful new prevention strategies for the future. As the scientific community emphasizes, innovative approaches are greatly needed to continue to improve how policy addresses the complex drivers of obesity.
Coordinate public policy across domains and agencies. Many policy areas “outside” of health—including education, housing, transportation, agriculture, and tax policy—have strong effects on public health and obesity. A more systemic approach that takes into account connections across these areas should be a central element in an effective obesity prevention strategy.

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Ross A. Hammond

Image Source: © Lucas Jackson / Reuters

Getting Drugs to the Marketplace Faster

Mark B. McClellan and Ellen Sigal — Fri, 20 Apr 2012 11:59:00 -0400

Science is progressing at a rapid pace. The human genome sequence has been completed and evidence on how diseases occur at the molecular level is growing by the day. Researchers and clinicians have been steadily working to use this data to make personalized medicine become a reality. However, with all of this new information, these prospective breakthroughs aren't yet reaching patients as quickly as needed. In the coming year alone, cancer will claim the lives of over 550,000 Americans. To address this incredible burden, and to ensure that patients have access to the most beneficial treatments, the process for turning these scientific insights into safe and effective treatments needs to accelerate as well.

Our progress in understanding the specific pathways of disease has identified hundreds of new targets for potentially life-saving drugs that hold the potential to treat individual patients much more effectively.

The result of this understanding is an emerging paradigm shift for the development of new medicines. This paradigm is beginning to yield drugs that may have much more of a positive impact on the lives of these patients than traditional therapies.

The regulators at the FDA must be fully engaged in this shift in development, which may involve a sharpening focus on particular subsets of a disease. When a new drug or drug combination shows extreme activity very early, like these new targeted agents are capable of doing, new approaches are needed that focus on the most efficient mechanisms to get a potential medical breakthrough to the relevant patients—and that may require significant revisions in the way such drugs are tested for safety and effectiveness under the FDA's oversight.

Over the past year, our organizations—Friends of Cancer Research and the Engelberg Center for Health Care Reform at Brookings—have convened a series of workshops to explore potential scientific strategies that FDA and drug researchers could use to address this new paradigm. We found that FDA and the scientists involved in product development have already taken a number of promising steps to respond to these new trends in medical product development. Working with FDA, we also identified some critical further steps to make sure that the development and regulatory processes for breakthrough drugs are aligned with the rapid progression of science.

Recently, to ensure that FDA can actively and quickly engage, Senators Bennet (D-Colo.), Hatch (R-Utah) and Burr (R-N.C.) introduced a bill in the Senate to establish a Breakthrough Product Designation.

The Breakthrough Product Designation has two main goals: 1) to reduce the total development time and cost of the most promising "breakthrough" treatments; and 2) to minimize the number of patients that would be given a "control" regimen or a currently available treatment that doesn't work well. This legislation does not alter current FDA standards and any new drug would continue to be required to fully demonstrate both safety and efficacy.

Upon designation, the FDA and the drug sponsor would engage in intensive interactions to collaboratively construct and agree upon a development strategy for the drug. This could include the use of a variety of innovative clinical trial designs, or specific strategies for accumulating further evidence on the breakthrough drug after it is approved.

In order to be most effective, the Breakthrough Product designation would be given as early as possible, so that the sponsor and FDA can discuss ways to condense traditional, often lengthy multi-phase trials into rigorous and efficient protocols to cut that time down. This designation would allow FDA to prepare for and implement a consistent strategy for potentially revolutionary medicines. It would signal to developers that, for the most promising products to battle severe illness and disease, the FDA will actively marshal these products through the course of development—and would help them identify the most efficient ways to develop their drugs.

Authors

Mark B. McClellan
Ellen Sigal

Publication: The Hill

Comments on the Material Well-Being of the Poor and the Middle Class since 1980

Gary Burtless — Tue, 25 Oct 2011 16:17:00 -0400

On October 25, 2011, Gary Burtless provided comments to the paper "The Material Well-Being of the Poor and Middle Class since 1980" by Bruce Meyer and James Sullivan at the American Enterprise Institute's event Are the Poor and Middle Class Actually Getting Poorer? Reassessing Prosperity Trends Since 1980.

Bruce Meyer and James Sullivan have spent a great deal of time and effort trying to persuade us that American living standards have improved over the past three decades. Further, living standards have improved not only at the very top of the income distribution, as everyone suspects, but also in the middle and at the bottom.

I hope Bruce and James have succeeded in persuading most of their readers, because they’re basically correct. It may seem odd for them to make this particular claim in the midst of the worse post-World-War-II slump, but maybe that is exactly the right time to make and defend such a claim.

People who think middle-income living standards have stopped rising, if they are well informed, are thinking of living standards over a fairly brief period – say, the last five or ten years, when living standards have been affected by a steep recession and anemic recovery. Alternatively, if they’re thinking about living standards over two or three decades, they are only thinking about the trend in living standards within fairly narrow slices of the population – unmarried men in their 20s and early 30s who have below-average schooling, for example, or groups that have been particularly hard hit in the recent slump.

Americans in the broad middle and at the bottom of the distribution have, on average, seen their real incomes and consumption improve over the past three decades.

Why is this claim so controversial? There are four main reasons:

A defective price index, which makes unwary observers think real incomes are climbing more slowly than they really are.
Household income measures that fail to account for shrinking household size. If median household income has remained unchanged (and I’m not saying it has), then shrinking household size means there is an increase in the amount of income per household member.
Incomplete measures of income, in other words, definitions that exclude or undercount sources of income particularly important at the bottom and in the middle of the income distribution than they are at the top.
Finally, inequality has unquestionably increased over the past 30 years (and in the past 10 years and 20 years). This means that average living standards have improved faster than median living standards. More of the economy-wide income gains have been enjoyed by Americans with a high perch in the income distribution; smaller fractions have been received by people in the middle and at the bottom.

Improvements in median living standards are nonetheless continuing, at least if we take a long enough perspective. The plain fact is, however, they are improving more slowly than they did in the first three or four decades after World War II. That is especially true if we focus solely on the past 11 or 12 years. Under any plausible measure of Americans’ income or consumption possibilities, gains in middle-class living standards have been slower in the recent past than they were in the earlier post-war period. You cannot put a happy face on a decade-long period that ends with the longest and worst economic slump of the post-war era. Rising inequality has certainly made things worse for many folks now in the middle and at the bottom. If the pain of the slump were more equally distributed across the nation’s households, many people would certainly feel better about progress in their living standards. But a deep slump combined with rising inequality will never be kind to either the poor or the middle class.

I brought 10 slides, and I now have a lot less than 10 minutes to go over them. They were created to defend the statements I just made and to lend support to the basic conclusions reached by Bruce and James.

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Gary Burtless

Image Source: Â© Shannon Stapleton / Reuters

Measuring Happiness and Opportunity Around the World

Wed, 28 Sep 2011 15:00:00 -0400

Event Information

September 28, 2011
3:00 PM - 4:30 PM EDT

Falk Auditorium
The Brookings Institution
1775 Massachusetts Ave., NW
Washington, DC

In recent years, a number of nations—from Bhutan to Britain, France, China and Brazil —have begun to incorporate measures of happiness into their benchmarks for national progress. Even in the United States— where the Declaration of Independence promises all citizens the right to “life, liberty, and the pursuit of happiness”— policymakers are beginning to consider the merits of measuring happiness. In her latest book, The Pursuit of Happiness: An Economy of Well-being (Brookings Press, 2011), Brookings Senior Fellow Carol Graham explores what we know about the determinants of happiness, across and within countries at different stages of development. She also examines both the promises and potential pitfalls of injecting the “economics of happiness” into policymaking.

On September 28, the Brookings Institution hosted a discussion with Carol Graham on her book and whether happiness can be a new marker for economic progress in the United States and across the world. Panelists included David Brooks, New York Times op-ed columnist; and Brookings Senior Fellow Isabel V. Sawhill. Brookings President Strobe Talbott provided introductory remarks. Carol Lancaster, dean of the Edmund A. Walsh School of Foreign Service at Georgetown University, moderated the discussion.

After the program, the panelists took audience questions.

Participants

Moderator

Carol Lancaster

Dean, Edmund A. Walsh School of Foreign Service
Georgetown University

Panelists

David Brooks

Op-Ed Columnist
The New York Times

Helping the Roma in Bulgaria: Recommendations to the Board of the America for Bulgaria Foundation

Ron Haskins — Fri, 19 Aug 2011 00:00:00 -0400

The Roma people, the largest minority group in Europe and in many European countries, trail other ethnic groups in almost every characteristic that defines well-being. Perhaps of greatest importance, the Roma are less educated than other ethnic groups. But they also suffer from excess health problems, high unemployment, poverty, and political weakness. The Roma population of Bulgaria is certainly no less disadvantaged than the Roma in other countries. An especially poignant example of Bulgarian Roma disadvantage is that the death rate among children under age 1, a prime indicator of children’s health in any nation, is 25 per 1,000 for Roma children as compared with 9.9 for children of Bulgarian ethnic origin. The mathematics of death almost before life gets started is a symbolic indicator of the Roma burden in Bulgaria. Similarly, research conducted for UNICEF by the University of York shows that the poverty rate among Roma children in Bulgaria is 92 percent, perhaps the highest poverty rate for any ethnic group in Europe. By contrast, the poverty rate among children of Bulgarian heritage is less than half as high at 43 percent.

It is not surprising, then, that over at least the past decade, the European Union (EU) and most European governments, joined by the Open Society Foundation, the World Bank, and other organizations, have created important initiatives to address all these problems. It is possible to think that now is an historic moment in which European governments and dominant ethnic groups, after eight or nine centuries of the most pernicious types of discrimination against the Roma, are finally, albeit often reluctantly, admitting the problems facing their Roma populations and their own role in creating and sustaining these problems. Equally important, most of the Central and Eastern European (CEE) governments, where discrimination against the Roma has been and continues to be particularly intense, are gradually adopting policies to address the problems.

To the extent that the moment of Roma opportunity has arrived, perhaps the most important force moving Bulgaria and other CEE nations in the direction of integration and inclusion is the EU. In the period leading up to the ascension of Bulgaria and other CEE nations to membership in the EU, all the new member states were required to meet a host of conditions required by the EU as the price of admission. Among these conditions were laws outlawing discrimination and requiring equality of educational opportunity. The CEE nations complied with the EU directive to pass such laws, but implementation of the laws in Bulgaria and other nations has been something less than aggressive.

Nor is EU ascension the only force driving the CEE nations to reduce discrimination against the Roma and other minorities. The Open Society, the World Bank, and a number of other private organizations, including several Roma nongovernmental organizations (NGOs), have initiated a sweeping program to promote inclusion of the Roma in the civil society of the CEE nations. Called the “Decade of Roma Inclusion” (2005-2015) the initiative is notable for getting all the CEE nations (plus Spain) to participate, to commit themselves to activities designed to promote inclusion and nondiscrimination, and to make a financial commitment to a fund administered by the World Bank to promote the initiative. As a part of the initiative, Bulgaria and the other participating nations originated ten-year action plans. The Bulgarian action plan, the purpose of which is to create a set of goals and activities that will promote Roma integration, includes proposals for education, health care, housing, employment, discrimination and equal opportunity, and culture.

An important part of the Decade program was the establishment of the Roma Education Fund in 2005. Eight nations (Canada, Greece, Ireland, Netherlands, Slovenia, Sweden, Switzerland, and the UK), as well as several international agencies including the Open Society, pledged a total of 34 million Euros to support Fund activities during the Roma decade. The major goal of the fund is to “support policies and programs which ensure quality education for Roma, including the desegregation of education systems.”

By joining the EU, Bulgaria and the other CEE nations brought themselves into a well-developed culture of inclusion and a complex system of interlocking laws and agencies that not only outlaw exclusion and discrimination, but provide funds to implement inclusion policies and to monitor the extent to which EU nations are aggressively implementing these laws. The laws and directives include the EU Charter of Fundamental Rights, the European Commission against Racism and Intolerance, the Racial Equality Directive, and several others. It would be a mistake to conclude that every EU member, even the original 15 EU nations with relatively more advanced economies and longer histories as democracies than the CEE nations, faithfully implement every component of the various legal requirements of being an EU member. Even so, EU requirements and funds have initiated both profound legal changes and a host of programs to increase the social, economic, political, and cultural inclusion of the Roma as well as studies and evaluations that bring some light to the actual situation of the Roma and other minorities in member nations. Given the all but inevitable distance between the laws on inclusion and discrimination the CEE nations passed in order to join the EU and the actual implementation of those laws, studies commissioned by various EU agencies and NGOs illuminate the gaps between policies and implementation.

An excellent example of such illumination is a 2006 study commissioned by the Economic and Scientific Policy program of the European Parliament. The report is a hard-hitting assessment of the status of Roma throughout Europe with regard to their legal status and socio-economic conditions. The latter category includes assessments of Roma exclusion from employment, education, social services, health care, and community integration. The upshot of the report is that although there may be some progress in these important areas of integration, the Roma are still a second-class group throughout the CEE nations. Seemingly, good laws have not yet produced good results. Laws may be changed, but changing human behavior and culture takes longer.

CEE governments and their defenders are reluctant to admit the lamentable lack of progress in Roma integration. In part for this reason, the European Commission, based on extensive evidence from evaluations, surveys, and news reports of often ferocious discrimination against the Roma, felt the need to publish “An EU Framework for National Roma Integration Strategies up to 2020” in April 2011. The need for a new framework is a clear signal that the EU Commission believes the CEE governments in general and Bulgaria in particular are not achieving the results the EU hoped for when it approved these nations for EU membership and is therefore trying to push the governments of these nations into further action.

Following publication of the Framework, the Open Society released one of the most thorough and provocative reports on the situation faced by the Roma in Europe and strategies that should be adopted to attack the wide range of Roma disadvantages. Appropriately entitled “Beyond Rhetoric,” the Open Society report includes entire chapters on two issues that I will examine in more detail below.

First, the Open Society strongly recommends that nations collect ethnically disaggregated data. Logically enough, the report holds that it is impossible to document the effects of policy initiatives on the Roma and other groups unless outcome data, including measures of health, education, housing, employment, income, and death rates by age, are collected for individual ethnic groups. So important are ethnically disaggregated data that the report goes so far as to recommend that, if necessary, governments should change their statistical systems to “incorporate ethnic data components into regular statistical surveys.” A second recommendation that deserves special attention is the report’s emphasis on early childhood education and care. Virtually every report about the Roma emphasizes the vital importance of education in fighting Roma exclusion, but the Open Society report strongly recommends that nations implementing the EU Framework should “give urgent consideration” to establishing an early child development fund to “support innovative early development programs and allow for scale up of what works.”

Beyond these specific recommendations, the Open Society report emphasizes that the EU Commission stated explicitly in its Framework document that “member states do not properly use EU money for the purpose of effective social and economic integration of Roma. As if this judgment, which seems to represent the views of many EU agencies, the World Bank, the Open Society, and many Roma groups themselves, needed additional reinforcement, a United Nations expert on minority issues visited Bulgaria this summer and called upon the government to “turn its policies on Roma integration into concrete action.” She went on to give what seems to represent the views of all these groups on the flaws in the Bulgarian government’s approach to fighting Roma exclusion: “Many policies seem to remain largely only rhetorical undertakings aimed at external audiences – official commitments that are not fulfilled in practice.” The result, according to the UN expert, is that “all the evidence demonstrates that Roma remain in desperate circumstances at the very bottom of the socio-economic ladder.” In particular, she mentioned that the access of Roma children to quality education “remains overwhelmingly unfulfilled.”

If CEE nations are now entering a period in which governments will be working, often ineffectively or at a very modest pace, to improve the conditions of the Roma, judging by the efforts of other nations to reduce discrimination against minority groups and by the stately rate of progress so far in the CEE nations, it can be assumed that the fight for Roma equality in Bulgaria will be measured in decades. In the U.S., for example, the Civil Rights movement of the 1950s and 1960s was largely successful. By the mid-1960s, vital court decisions had dismantled major parts of the system of legal discrimination against blacks and the federal government had enacted programs to ensure voting rights and other fundamental rights to blacks. To enhance the legal war on poverty and discrimination, the federal government also initiated an army of social programs designed to boost the education, health, employment, housing, and political participation of the poor in general and blacks in particular. Yet today, nearly half a century after achieving legal rights and the initiation of large-scale government inclusion programs, blacks (and Hispanics) still trail whites by large margins in education, income, housing, poverty levels, and health. Although achieving significant progress against discrimination may require decades or generations, discrimination will not diminish until strong legal, economic, and social forces are mobilized against it. Expecting a long struggle cannot be a reason not to begin.

If the history of making substantial progress in overcoming ethnic discrimination in the U.S. can serve as a rough comparison to the situation of the Roma in CEE nations, several factors are going to be vital in the fight of the Roma to overcome discrimination and exclusion in Bulgaria and throughout Europe. These factors include an antidiscrimination plan, aggressive implementation of the plan by all levels of government, leadership by the Roma themselves, educational progress by Roma children and young adults, political activism by the Roma people, a media committed to accurate reporting and fairness, and a civil society that reflects underlying public opinion favoring integration and opposed to discrimination. Most of these factors appear to be present in Bulgaria, often in rudimentary and brittle form, but present and in many cases moving in the right direction nonetheless. The progress that is just now beginning can be greatly enhanced by the efforts of groups that have the resources, the will, and the vision to roll up their sleeves and help promote Roma inclusion.

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Ron Haskins

Family Planning Subsidies: Much Ado about Something

Isabel V. Sawhill and Adam Thomas — Tue, 12 Apr 2011 12:11:00 -0400

Last week’s inter-party feud over publicly funded family planning was pure political showmanship and had nothing to do with curbing abortions, cutting spending, or helping women and children. Here’s why.

First, family planning subsidies reduce the incidence of abortion. The Republican rider that became a bone of contention last week (and was stripped from the final budget agreement) would have ended federal support for Planned Parenthood, which provides women with contraception, pregnancy tests, screenings for cancer and sexually transmitted infections, and—yes—abortion services. However, the so-called Hyde Amendment prohibits federal funding for abortion under nearly all circumstances, and the approximately $320 million in federal support that Planned Parenthood receives each year pays for its other activities—most importantly, its contraceptive services.

Detractors argue that, as a result of the federal funding that the organization receives for those other activities, it is able to reallocate some of its resources to the provision of abortions. While some reallocation undoubtedly occurs, it is almost certainly overwhelmed by the reduction in abortions brought about by federal financing for the contraceptive services that Planned Parenthood provides. Subsidizing contraception is an effective way of reducing unintended pregnancies, which are responsible for virtually all abortions (40% of unintended pregnancies are terminated, whereas the same is true of only 3% of intended pregnancies). In several recent studies, we estimated that a $235 million expansion in publicly subsidized family-planning services would reduce the number of abortions each year by more than 40,000. In short, family-planning subsidies are an important tool for policymakers who are genuinely committed to reducing the number of abortions.

Second, subsidies for family planning more than pay for themselves. The pregnancies that are prevented by publicly financed contraception tend to involve low-income women who, if they were to become pregnant, would be disproportionately likely to claim government benefits (Medicaid, welfare cash assistance, food stamps, and so forth) for themselves and their families. Preventing these pregnancies—even if they are simply delayed until the women in question have improved their financial situations—saves taxpayers money. In the studies described above, we found that an expansion in subsidies for family planning services would likely save taxpayers more than five dollars for every one dollar that the government spends. Given the strong cost-saving properties of these subsidies, they ought to be particularly appealing to fiscal conservatives who are concerned about our yawning national debt and the burden that it will place on current and future generations of taxpayers.

Third, subsidized family planning is good for children and their families. Women who experience unintended pregnancies are less likely to graduate from college, have lower levels of labor-force participation, and are more likely to be unmarried than women who experience intended pregnancies. Similarly, children who were conceived unintentionally have lower levels of educational attainment and higher rates of infant mortality, and they are more likely to engage in criminal and delinquent behavior as they get older. By reducing the prevalence of unintended pregnancy, family-planning subsidies help to ensure that a larger share of children are raised in stable and healthy household environments by mothers and fathers who are ready to assume the responsibilities of parenthood.

In sum, subsidized family planning is a public-policy trifecta: it reduces the prevalence of abortion, it saves tax dollars, and it improves the lives of children and families. If this policy comes under fire once again, we hope that cool heads will continue to prevail. It would be a disservice to children, their families, and American taxpayers if family planning subsidies were relegated to the status of a political football that is one day kicked to the curb.

Authors

Image Source: © Carlos Barria / Reuters

March 2011: The Landscape of Recession: Unemployment and Safety Net Services Across Urban and Suburban America

Emily Garr — Thu, 31 Mar 2011 00:00:00 -0400

Three years after the Great Recession began in December 2007, 6.6 million people have been added to the ranks of the unemployed, and demand for assistance through the Supplemental Nutrition Assistance Program (SNAP, formerly known as food stamps) is at a record high. Although the U.S. economy officially entered its recovery nearly twenty months ago, in July of 2009, job growth continues to be slow and uneven. The unemployment rate remains high at nearly 9 percent—though this rate varies considerably across the country.

This paper, the third and final analysis in the Landscape of Recession series, tracks leading indicators of poverty and need across cities and their surrounding suburbs. Specifically, this edition assesses unemployment trends by community type from the beginning of the recession (officially December 2007) through December 2010. It also analyzes trends among food stamp recipients, between July 2007 and July 2010, the most recent county-level data available. These indicators offer an initial glimpse of how poverty might trend in 2010, following two years of widespread, but uneven, increases in poverty across city and suburban communities.

Between December 2007 and December 2010, 99 large metro areas accounted for more than two-thirds of the net increase nationwide in the unemployed population, with the bulk of those increases concentrated in suburbs. During that time, the number of unemployed in suburbs rose by 3.1 million, compared to 1.5 million in cities. By December 2010, the suburban unemployment rate trailed the city rate by less than one percentage point (8.9 percent in suburbs versus 9.8 percent in cities).
Metro areas in the interior West like Las Vegas, Stockton, Fresno, and Riverside experienced the highest increases in unemployment in the three-year period since the recession began. In these metro areas, unemployment rates in both cities and suburbs increased by more than 7 percentage points. In the year from December 2009 to December 2010, metropolitan unemployment rates fell in every broad U.S. region except the West.
Among suburban communities, higher-density and mature suburbs experienced the greatest growth in their unemployed populations . Older, denser suburbs saw their jobless populations more than double in the three years following the start of the recession. By December 2010, the unemployment rate in mature suburbs had surpassed the traditionally higher rates in low-density exurban communities (9.0 versus 8.9 percent).
Suburban counties were home to a growing share of the nation’s SNAP recipients between July 2007 and July 2010, but urban counties still account for more than 60 percent of metropolitan SNAP receipt. Suburban counties added 3.2 million SNAP recipients—an increase of 73 percent compared to 61 percent in urban counties. Faster enrollment gains in suburbs raised their share of metropolitan SNAP recipients from 36 percent in 2007 to 38 percent in 2010.

Twenty months following the official start of economic recovery, metropolitan communities across the country find themselves still struggling with high levels of unemployment and relying increasingly on services like SNAP. The demand for jobs and a social safety net—evident across cities and suburbs alike—is widespread, and will necessitate metropolitan-scale coordination to balance social and economic needs as the recovery progresses.

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Emily Garr

More on the Easterlin Paradox: A Response to Wolfers

Carol Graham — Wed, 15 Dec 2010 10:11:00 -0500

Justin Wolfers’ column titled “Debunking the Easterlin Paradox, Again” dismisses Richard Easterlin’s work as just plain wrong. I argue here, as I have elsewhere, that where you come out on the Easterlin paradox depends on the happiness question (and therefore the definition of happiness) that you use, as well as the sample of countries and the period of time.

Richard Easterlin finds no clear country-by-country relationship between average per capita GDP and life satisfaction (among wealthy countries), despite a clear relationship between income and happiness at the individual level within countries. Easterlin also found – and continues to find, based on methods different from Wolfers’ – an absence of a relationship between life satisfaction and long-term changes in GDP per capita.

Different well-being questions measure different dimensions of “happiness”, and, in turn, they correlate differently with income (something they themselves show at the end of their last paper, and admit that the relationship between income and well-being is complex). The best possible life question – which Justin Wolfers and Betsey Stevenson primarily use in the first work, and also in the second – asks respondents to compare their life today to the best possible life they can imagine for themselves. This introduces a relative component, and, not surprisingly, the question correlates most closely with income of all of the available subjective well-being questions. Life satisfaction, which they use in the second work, also correlates with income more than open-ended happiness, life purpose or affect questions, but not as closely as the best possible life question.

Wolfers and Stevenson used the most recent and extensive sample of countries available from the Gallup World Poll, and, as the measure of “happiness”, the best possible life question therein, and challenged the Easterlin paradox. In more recent work, with Stevenson and Dan Sacks (2010), referenced in this blog, the authors look at the relationship between life satisfaction and economic growth, based on the World Values survey and GDP levels and the best possible life question, based on the Gallup World Poll. They isolate a clear relationship between life satisfaction and GDP levels, and their statistical analysis is spot on.

Recent studies by Kahneman and Deaton (2010), and Diener and colleagues (2010), for example, find that happiness in a life evaluation sense (as measured by the best possible life question) correlates much more closely with income than does happiness in a life experience sense (as measured by affect or more open ended happiness questions). This holds within the United States (Kahneman and Deaton) and across countries (Diener et al.).

My own work on Latin America, with Soumya Chattopadhyay and Mario Picon, tested various questions against each other and finds a similar difference in correlation, with affect and life purpose questions having the least correlation with income and the best possible life question the most. My work on happiness in Afghanistan found that Afghans were happier than the world average (on par with Latin Americans) as measured by an open ended happiness question, and 20 percent more likely to smile in a day than Cubans. Yet they scored much lower than the world average on the best possible life question. This is not a surprise. While naturally cheerful and able to make the best of their lot, the Afghans also know that the best possible life is outside Afghanistan.

Thus the conclusions that one draws on whether there is an Easterlin paradox or not in part rest on the definition of happiness, and therefore the question that is used as the basis of analysis. Wolfers and co-authors find a clear relationship between GDP levels and life satisfaction and best possible life – clearly important dimensions of well-being. Yet in the same paper they find much less clear relationships when they use happiness, affect and life purpose questions.

There is also the question of the sample of countries, and whether one is examining cross section or time series data. The most recent debate with Easterlin is about the trends over time rather than cross-sectional patterns. Dropping the transition economies, as Easterlin does, may be a mistake, as Wolfers contends. But it is also important to recognize the extent to which including a large sample of countries that experienced unprecedented economic collapse and associated drops in happiness alters the slope in the cross-country income-happiness relationship (making it steeper). Wolfers also criticizes Easterlin for relying on financial satisfaction data for his Latin American time series sample (because there is not enough life satisfaction data); financial satisfaction correlates closely, but not perfectly, with life satisfaction. Easterlin’s technique allows for the inclusion of a much larger sample of middle income developing countries, a sample of countries that one can imagine is very important to the growth and happiness debate. Wolfers and co-authors use far fewer Latin American countries because comparable life satisfaction data is limited. Either approach is plausible and, as with all work with limited data, is not perfect. But I would not go as far as calling one or the other “plain wrong”.

Finally, there is the simpler question of giving credit where credit is due. We would not be having this debate, nor would we have a host of analysis on well-being beyond what is measured by income, had Easterlin not triggered our thinking on this with his original study of happiness and income over three decades ago (and his patient and thoughtful mentoring of many economists since then). In the big picture of things, Easterlin had the idea.

Authors

Carol Graham

Image Source: © Jorge Silva / Reuters

Debunking the Easterlin Paradox, Again

Daniel Sacks and Justin Wolfers — Mon, 13 Dec 2010 11:10:00 -0500

I’ve written here before about my research with Betsey Stevenson showing that economic development is associated with rising life satisfaction. Some people find this result surprising, but it’s the cleanest interpretation of the available data. Yet over the past few days, I’ve received calls from several journalists asking whether Richard Easterlin had somehow debunked these findings. He tried. But he failed.

Rather than challenge our careful statistical tests, he’s simply offered a new mishmash of statistics that appear to make things murkier.

For those of you new to the debate, the story begins with a series of papers that Richard Easterlin wrote between 1973 and 2005, claiming that economic growth is unrelated to life satisfaction. In fact, these papers simply show he failed to definitively establish such a relationship. In our 2008 Brookings Paper, Betsey and I systematically examined all of the available happiness data, finding that the relationship was there all along: rising GDP yields rising life satisfaction. More recent data reinforces our findings. Subsequently, Easterlin responded in of papers circulated in early 2009. That’s the research journalists are now asking me about. But in a paper released several weeks ago, Betsey, Dan Sacks and I assessed Easterlin’s latest claims, and found little evidence for them.

Let’s examine Easterlin’s three main claims.

1. GDP and life satisfaction rise together in the short-run, but not the long-run. False. Here’s an illustrative graph. We take the main international dataset — the World Values Survey — and in order to focus only on the long-run, compare the change in life satisfaction for each country from the first time it was surveyed until the last, the corresponding growth in GDP per capita. Typically, this is a difference taken over 18 years (although it ranges from 8 to 26 years). The graph shows that long-run rises in GDP are positively associated with growth in life satisfaction.

This graph includes the latest data, and Dan generated it just for this blog post. In fact, Easterlin was responding to our earlier work, which showed each of the comparisons one could make between various waves of this survey: Wave 1 was taken in the early ‘80s; Wave 2 in the early ‘90s; Wave 3 in the mid-late ‘90s; Wave 4 mostly in the early 2000s. And in each of these comparisons, you see a positive association — sometimes statistically significant, sometimes not.

What should we conclude from this second graph? Given the typically-significant positive slopes, you might conclude that rising GDP is associated with rising life satisfaction. It’s also reasonable to say that these data are too noisy to be entirely convincing. But the one thing you can’t conclude is that these data yield robust proof that long-run economic growth won’t yield rising life satisfaction. Yet that’s what Easterlin claims.

2. The income-happiness link that we document is no longer apparent when one omits the transition economies. Also false. One simple way to see this is to note that in the first graph the transition countries are shown in gray. Even when you look only at the other countries, it’s hard to be convinced that economic growth and life satisfaction are unrelated. To see the formal regressions showing this, read Table 3 of our response. (Aside: Why eliminate these countries from the sample?)

Or we could just look to another data source which omits the transition economies. For instance, the graph below shows the relationship between life satisfaction and GDP for the big nine European nations that were the members of the EU when the Eurobarometer survey started. Over the period 1973-2007, economic growth yielded higher satisfaction in eight of these nine countries. And while we’re puzzled by the ninth — the increasingly unhappy Belgians — we’re not going to drop them from the data! And if you think Belgium is puzzling, too, then we’ve done our job.

3. Surveys show that financial satisfaction in Latin American countries has declined as their economies have grown. Perhaps true. But how are surveys of financial satisfaction relevant to a debate about life satisfaction? And why focus on Latin America, rather than the whole world? In fact, when you turn to the question we are actually debating — life satisfaction —these same surveys suggest that those Latin American countries which have had the strongest growth have seen the largest rise in life satisfaction. This finding isn’t statistically significant, but that’s simply because there’s not a lot of data on life satisfaction in Latin America! (Given how sparse these data are, we didn’t report them in our paper.)

What’s going on here?

Now it’s reasonable to ask how it is that others arrived at a different conclusion. Easterlin’s Paradox is a non-finding. His paradox simply describes the failure of some researchers (not us!) to isolate a clear relationship between GDP and life satisfaction.

But you should never confuse absence of evidence with evidence of absence. Easterlin’s mistake is to conclude that when a correlation is statistically insignificant, it must be zero. But if you put together a dataset with only a few countries in it — or in Easterlin’s analysis, take a dataset with lots of countries, but throw away a bunch of it, and discard inconvenient observations — then you’ll typically find statistically insignificant results. This is even more problematic when you employ statistical techniques that don’t extract all of the information from your data. Think about it this way: if you flip a coin three times, and it comes up heads all three times, you still don’t have much reason to think that the coin is biased. But it would be silly to say, “there’s no compelling evidence that the coin is biased, so it must be fair.” Yet that’s Easterlin’s logic.

There’s a deeper problem, too. The results I’ve shown you are all based on analyzing data only from comparable surveys. And when you do this, you find rising incomes associated with rising satisfaction. Instead, Easterlin and co-authors lump together data from very different surveys, asking very different questions. It’s not even clear how one should make comparisons between a survey (in the US) asking about happiness, a survey (in Japan) asking about “circumstances at home,” surveys of life satisfaction in Europe based on a four-point scale, and global surveys based on a ten-point scale. Easterlin’s non-result appears only when comparing non-comparable data.

If you want to advocate against economic growth — and to argue that it won’t help even in the world’s poorest nations — then you should surely base such radical conclusions on findings rather than non-findings, and on the basis of robust evidence.

A final thought

Why not look at the levels of economic development and satisfaction? The following graph does this, displaying amazing new data coming from the Gallup World Poll. There’s no longer any doubt that people in richer countries report being more satisfied with their lives.

Is this relevant? Easterlin argues it isn’t — that he’s only concerned with changes in GDP. But the two are inextricably linked. If rich countries are happier countries, this begs the question: How did they get that way? We think it’s because as their economies developed, their people got more satisfied. While we don’t have centuries’ worth of well-being data to test our conjecture, it’s hard to think of a compelling alternative.

Authors

Daniel Sacks
Justin Wolfers

Publication: The New York Times Freakonomics blog

Image Source: © Omar Sobhani / Reuters

Challenges Associated with the Suburbanization of Poverty: Prince George's County, Maryland

Martha Ross — Wed, 08 Dec 2010 00:00:00 -0500

Martha Ross spoke to the Advisory Board of the Community Foundation for Prince George’s County, describing research on the suburbanization of poverty both nationally and in the Washington region.

Despite perceptions that economic distress is primarily a central city phenomenon, suburbs are home to increasing numbers of low-income families. She highlighted the need to strengthen the social service infrastructure in suburban areas.

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Martha Ross

Identifying Areas With Inadequate Access to Supermarkets

Alan Berube — Tue, 19 Oct 2010 11:02:00 -0400

When my wife and I relocated from D.C.’s Logan Circle to Capitol Hill five years ago, the most tumultuous change in our lifestyle (aside from my not being able to walk to Brookings every day) concerned the much farther distance we’d have to travel to the nearest supermarket. We had the luxury of shopping at a very nice, if spendy, grocery store about two blocks from our home, which meant that we often did “just-in-time” dinner shopping on the way home from work. Now we were moving to a house where the distance to the nearest supermarket was 1.5 miles, not so walkable at 7 pm.

Did we live in a “supermarket desert?” On the one hand, Capitol Hill is a pretty densely populated part of D.C., so 1.5 miles felt like a long way. And while the Hill is an economically diverse area, it’s large with significant pockets of affluence. On the other hand, like a lot of our neighbors, we own a car. So while nightly trips to the supermarket were out, it was hardly an onerous trip on the weekends.

There are, however, many communities nationwide in which that trip to the supermarket is a long one, and most have much lower incomes than the Hill. That’s the conclusion from new research we conducted with help from The Reinvestment Fund (TRF), a community development financial institution and research organization based in Philadelphia. TRF played a lead role in designing and implementing the Pennsylvania Fresh Food Financing Initiative, a program that provides grants and low-cost capital to facilitate the location of new supermarkets and fresh food retailers in that state’s underserved communities. That initiative is now the model for several other state and local programs, as well as the inspiration for a major new federal budget initiative that seeks to improve community health and economic development outcomes through supermarket attraction and expansion.

With TRF, we looked at 10 metro areas across the country, ranging in size from Jackson, Miss. to Los Angeles. Unlike a lot of previous research that attempted to identify “food deserts,” TRF’s analysis looks at factors beyond distance to a supermarket that matter for access, including a community’s population density and level of car ownership. And it uses household income and expenditure data to help pinpoint the communities that have a significant untapped local demand for supermarkets.

Across the 10 metro areas, about 1.7 million people (5 percent of total population) live in low- and moderate-income communities that are significantly underserved by supermarkets. African Americans, children, and very low-income families are over-represented in these areas. Greater Los Angeles alone accounts for half a million of the underserved; and in the Cleveland metro, more than one in nine residents lives in a low-supermarket-access community. Estimates suggest that upwards of $2.6 billion annually in grocery expenditures may “leak” out of these communities due to a lack of nearby supermarkets.

The real upside of this research project is that all of the results are viewable online, through TRF’s PolicyMap service. So local economic development officials, neighborhood-based organizations, retailers, and others can examine the location and characteristics of low-supermarket-access areas in their own communities. On Capitol Hill, the analysis suggests that we’re pretty well served. Lots of car owners, and it’s really not that far to the store. Cross the Anacostia River, however, and it’s another story altogether. Pinpointing and describing the untapped opportunities for supermarket development is hopefully a first step toward reducing market obstacles to higher-quality, lower-cost food options for residents of communities like Ward 7 and Ward 8 nationwide.

Authors

Alan Berube

Publication: The Avenue, The New Republic

Image Source: © Sarah Conard / Reuters

How Marriage Survives During the Recession

Justin Wolfers — Wed, 13 Oct 2010 09:39:00 -0400

The recession has taken a toll on the institution of marriage, we keep hearing. Last month, for instance, when it was reported that the proportion of Americans aged 25 to 34 who are married fell below the proportion who have never married, it was quickly attributed to the economic downturn. Young adults, according to this narrative, have less money to spend on a wedding and are less eager to enter into a lifetime commitment during times of uncertainty.

Again last week, when a report from the Pew Research Center noted that, for the first time, college-educated 30-year-olds were more likely to have been married than were people the same age without a college degree, the news was interpreted as another side effect of the recent recession. After all, the downturn has been especially hard on young men with no college degree.

But if you look at marriage in the United States over the past century, this interpretation doesn’t stand up. Marriage and divorce rates have remained remarkably immune to the ups and downs of the business cycle. Unfortunately, the marriage statistics are easy to misread.

It’s misleading to count the wedding rings among people in their 20s and early 30s, because the median age at first marriage in the United States has risen to 28 for men (from 23 in 1970) and 26 for women (from 21 in 1970). The fact that these folks aren’t married now doesn’t mean they won’t marry — many of them just aren’t there yet.

Look instead at 40-year-olds, and you see that 81 percent have married at least once. Yes, this number used to be higher — it peaked at 93 percent in 1980 — but, clearly, marriage remains a part of most people’s lives. These statistics are not a perfect barometer either, however, because they reflect weddings that were celebrated years earlier.

To most accurately track marriage rates, you need to focus on the number of wedding certificates issued. In 2009, the latest year for which we have data, there were about 2.1 million marriages in the United States. That does represent a slight decline since the recession began. But it’s the same rate of decline that existed during the preceding economic boom, the previous bust and both the boom and the bust before that.

Indeed, the recent modest decline in marriage continues a 30-year trend. And even as the number of marriages falls, divorce is also becoming less prevalent. So a greater proportion of today’s marriages will likely persist 30 years into the future.

This is not to say that marriage looks the same today as it always did — over the past several decades, there has been a tremendous shift in married life.

It used to be that a typical marriage involved specialized roles for the husband and wife. Usually he was in the marketplace, and she was in the home, and this arrangement led to maximum productivity.

But today, when families have easy access to prepared foods, inexpensive off-the-rack clothing and labor-saving technology from the washing machine to the robot vacuum cleaner, there’s much less benefit from either spouse specializing in homemaking. Women, now better educated and with greater control over their fertility, are in the marketplace, too, and married couples have more money, more leisure time and longer lives to spend together. Modern marriages are based not on the economic benefits of playing specialized roles but on shared passions.

This new model of “hedonic marriage” has had an effect on who marries, and when — as research I have conducted with my better half, the economist Betsey Stevenson, has documented. In the old days, opposites attracted; an aspiring executive groom would pair up with a less-educated bride. And they would wed before the stork visited and before the couple made the costly investment of putting the husband through business school.

But today, that same young executive would more likely be half of a power couple, married to a college-educated woman who shares his taste in books, hobbies, travel and so on. Indeed, marriage rates for college-educated women rose sharply through the 1950s and ’60s, and have remained remarkably stable since. These women tend to marry after they have finished college and started their careers.

The decline in marriage, it turns out, is concentrated entirely among women with less education — those who likely have the least to gain from modern hedonic marriage.

This is not to say that the economic downturn has had no effect at all on domestic life. Census data show that the number of unwed couples living together rose sharply last year. With rents high and jobs hard to come by, it’s no surprise that people are doubling up.

Still, given that the marriage rate remains on trend, the rise in cohabitation isn’t coming at the expense of marriage. Instead, many young couples who might otherwise merely be dating are moving in together. Some of them, no doubt, will eventually marry. Truly, the recession has not torn young couples apart; it has pushed them closer together.

Authors

Justin Wolfers

Publication: The New York Times

Image Source: © Shannon Stapleton / Reuters

Subjective Well-Being, Income, Economic Development and Growth

Daniel W. Sacks, Betsey Stevenson and Justin Wolfers — Fri, 01 Oct 2010 16:11:00 -0400

Abstract
We explore the relationships between subjective well-being and income, as seen across individuals within a given country, between countries in a given year, and as a country grows through time. We show that richer individuals in a given country are more satisfied with their lives than are poorer individuals, and establish that this relationship is similar in most countries around the world. Turning to the relationship between countries, we show that average life satisfaction is higher in countries with greater GDP per capita. The magnitude of the satisfaction-income gradient is roughly the same whether we compare individuals or countries, suggesting that absolute income plays an important role in influencing well-being. Finally, studying changes in satisfaction over time, we find that as countries experience economic growth, their citizens‘ life satisfaction typically grows, and that those countries experiencing more rapid economic growth also tend to experience more rapid growth in life satisfaction. These results together suggest that measured subjective well-being grows hand in hand with material living standards.

Introduction
Does economic growth improve the human lot? 1 Using several datasets which collectively cover 140 countries and represent nearly all of the worldes population, we study the relationship between subjective well-being and income, identifying three stylized facts. First, we show that within a given country, richer individuals report higher levels of life satisfaction. Second, we show that richer countries on average have higher levels of life satisfaction. Third, analyzing the time series of countries that we observe repeatedly, we show that as countries grow, their citizens report higher levels of satisfaction. Importantly, we show that the magnitude of the relationship between satisfaction and income is roughly the same across all three comparisons, which suggests that absolute income plays a large role in determining subjective well-being.

These results overturn the conventional wisdom that there is no relationship between growth and subjective well-being. In a series of influential papers, Easterlin (1973, 1995, 2005a, 2005b) has argued that economistse emphasis on growth is misguided, because he finds no statistically significant evidence of a link between a countryes GDP and the subjective well-being of its citizens. This is despite the fact that Easterlin and others (e.g. Layard 1980) have found that richer individuals in a given country report higher levels of well-being. Researchers have reconciled these discordant findings, together called the Easterlin Paradox, by positing that well-being is determined by relative, rather than absolute, income. By this view, individuals want only to keep up with the Joneses. If true, the Easterlin Paradox suggests that focusing on economic growth is futile; when everyone grows richer, no one becomes happier. A related concern, voiced for example by Di Tella and MacCulloch (2010) is that subjective well-being adapts to circumstance. If correct, this argument implies that long run growth makes people no better off because their aspirations and expectations grow with their income. A third concern is that, even if well-being rises with income for the very poor, individuals eventually reach a satiation point, above which further income has no effect on well-being (Layard 2005). Yet in this paper, we present evidence that well-being rises with absolute income, period. This evidence suggests that relative income, adaptation and satiation are of only secondary importance.

Subjective well-being is multifaceted; it includes both how happy individuals are at a point in time and how satisfied they are with their lives as a whole (Diener 2006). In section II we briefly discuss relevant background information on the measurement of subjective well-being. Throughout this paper, we focus on life satisfaction, which is the variable that is both most often measured, and that has been the focus of much of the existing literature (even as economists have often referred to these satisfaction questions as measuring \happiness..) Although life satisfaction is the focus of this paper, we consider a variety of alternative measures of subjective well-being and show that they also rise with income.

In section III we demonstrate that richer individuals are more satisfied with their lives, and that this finding holds across 140 countries, and several datasets. Across each of these countries, the relationship between income and satisfaction is remarkably similar. Our graphical analysis suggests that subjective well being rises with the log of income. This functional form implies that a 20 percent rise in income has the same impact on well-being, regardless of the initial level of income: going from $500 to $600 of income per year yields the same impact on well-being as going from $50,000 to $60,000. This specification is appealing on theoretical grounds because a standard assumption in economics is that the marginal impact of a dollar ofincome is diminishing. Indeed, estimating well-being as a function of log income fits the data much better than the simple linear function of income emphasized by previous authors, and this hold whether we are making comparisons across individuals, across countries, or over time. All of our formal analyses therefore involve the log of income rather than its level, although we present scatter plots and non-parametric fitted values to allow the reader to assess the functional form for herself.

In section IV, we turn to the cross country evidence. Using larger data sets than previous authors have examined, we find an economically and statistically significant relationship between average levels of satisfaction in a country and the log of GDP per capita. The data also show no evidence of a satiation point: the same linear-log satisfaction-income gradient we observe for poor and middle-income countries holds equally well for rich countries; it does not flatten at high income.

Whereas Easterlin (1974) had argued that the relationship between well-being and income seen within countries was stronger than the relationship seen between countries, and that this provided evidence for the importance of relative income, our evidence undermines the empirical foundation for this claim. Instead, we show that the relationship between income and well-being is similar both within and between countries, thereby suggesting that absolute income plays a strong role in determining well-being, and relative income is a less important influence than had been previously believed.

In section V we turn to the time series evidence. While the within- and between- country comparisons cast doubt on the Easterlin Paradox, they do not by themselves tell us whether economic growth in fact translates into gains in subjective well-being. This question has challenged researchers for some time because of a lack of consistent time series data on subjective well-being. We analyze the time series movements in subjective well-being using two sources of comparable repeated cross-national cross-sections. Each data sets spans over two decades and covers dozens of countries.

In analyzing the time series data we can subject the relative income hypothesis to a test: if notions of a good life change as the income of onees fellow citizens grow, then we should see only a modest relationship between growth in satisfaction and growth in average income, relative to our point-in-time estimates. We present economically and statistically significant evidence of a positive relationship between economic growth and rising satisfaction over time, although limited data mean that these estimates are less precise than are those from the within- or between- country regressions. The magnitude of the estimated gradient between satisfaction and income in the time series is similar to the magnitude of the within- and between-country gradients. These results suggest that raising the income of all does indeed raise the well-being of all.

Finally, in section VI we turn to alternative measures of subjective well-being, showing that they too rise with a countryes income. We find that happiness is positively related to per capita GDP across a sample of 69 countries. We then show that additional, affect-specific measures of subjective well-being, such as whether an individual felt enjoyment or love, or did not feel pain, are all higher in countries with higher per capita GDP. Our finding that subjective well-being rises with income is therefore not confined to an unusual data set or a particular indicator of subjective well-being.

Taken together, these new stylized facts suggest that subjective well-being, however measured, rises with income. Other recent papers have noted this as well. Deaton (2008) finds that individuals in richer countries have both higher levels of subjective well-being and better health. Stevenson and Wolfers (2008), performing an analysis parallel to this one.albeit using slightly different methods2.report similar findings to those described here, and discuss in detail why previous researchers failed to identify the strong link between subjective well-being and income.

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Authors

Daniel W. Sacks
Betsey Stevenson
Justin Wolfers

Publication: The World Bank, Working Paper

Adaptation amidst Prosperity and Adversity: Insights from Happiness Studies from Around the World

Carol Graham — Tue, 13 Jul 2010 11:23:00 -0400

Abstract: Some individuals who are destitute report to be happy, while others who are very wealthy report to be miserable. There are many possible explanations for this paradox; Carol Graham focuses on the role of adaptation. Adaptation is the subject of much work in economics, but its definition is a psychological one. Adaptations are defense mechanisms; there are bad ones like paranoia, and healthy ones like humor, anticipation, and sublimation. Set point theory—which is the subject of much debate in psychology—posits that people can adapt to anything, such as bad health, divorce, and extreme poverty, and return to a natural level of cheerfulness. Graham's research from around the world suggests that people are remarkably adaptable. Respondents in Afghanistan are as happy as Latin Americans and 20 percent more likely to smile in a day than Cubans. The findings suggest that while this may be a good thing from an individual psychological perspective, it may also shed insights into different development outcomes, including collective tolerance for bad equilibrium. The author provides examples from the economics, democracy, crime, corruption, and health arenas.

INTRODUCTION:

When I sell liquor, it's called bootlegging; when my patrons serve it on Lake Shore Drive, it's called hospitality. (Al Capone)

In the past few years there has been a burgeoning literature on the economics of happiness. While the understanding and pursuit of happiness has been a topic for philosophers—and psychologists—for decades, it is a novel one for economists. Early economists and philosophers, ranging from Aristotle to Bentham, Mill, and Smith, incorporated the pursuit of happiness in their work. Yet as economics grew more rigorous and quantitative, more parsimonious definitions of welfare took hold. Utility was taken to depend only on income as mediated by individual choices or preferences within a rational individual's monetary budget constraint (revealed preferences). Most economists shied away from survey data (expressed preferences), under the assumption that there is no consequence to what people say, as opposed to the concrete trade-offs that are posed by consumption choices. This focus on revealed preferences has been a powerful tool for answering many economics questions. Yet it does not do a good job of explaining a number of questions. These include the welfare effects of institutional arrangements that individuals are powerless to change; choices that are made according to perceptions of fairness or other principles; situations where individuals are constrained in their capacity to make choices; and seemingly non-rational behaviors that are explained by norms, addiction, and self-control. Happiness surveys provide us with a novel metric. Traditional approaches also do not do a good job of explaining why some individuals with very little capacity to consume are very happy, while others with a very great capacity are miserable.

In this paper I focus on the latter question and build on research that I have done on happiness across the world, in very poor and in very rich countries (Graham 2009). It departs from my earlier research (Graham 2005) on how the usage of novel metrics to assess the well-being of individuals can (or cannot) contribute to our understanding of development questions; and in this is distinct in its focus on the role of adaptation. Adaptation may shed insights on particular development outcomes, such as societies stuck in bad equilibrium, with high levels of poverty, corruption, and other negative phenomena, with most citizens reporting relatively high levels of happiness. I provide examples from countries and regions around the world—a much broader developing country representation than the previous research—and from a number of domains, including macroeconomic growth, democracy, crime, corruption, and health.

While adaptation is a topic of many economic studies, its roots are in a psychological definition. Adaptations as defined by Anna Freud are unconscious thoughts and behaviors that either shape or distort a person's reality. A simpler definition is that they are defense mechanisms. There are unhealthy ones like paranoia and megalomania, which make reality tolerable for the people enjoying them, and there are neurotic defenses employed by "normal" people, such as dissociation and memory lapse. "Healthy" or mature adaptations include altruism, humor, anticipation, and sublimation (Wolf Shenk 2009).

People can adapt to almost anything: bad health, divorce, poverty, unemployment, and high levels of crime and corruption. Indeed, some psychologists believe that individuals can adapt back from almost any negative event to their natural set point of cheerfulness. Adaptation is seemingly a very good thing—a human defense mechanism.

My studies of happiness around the world suggest that the human race is tremendously adaptable. People in Afghanistan, for example, are as happy as Latin Americans and are 20 percent more likely to smile in a day than are Cubans. The poor in Africa are more hopeful than the rich, and the poor in poor countries in Latin America assess their health better than the poor in rich countries in Latin America. Kenyans are more satisfied with their health systems than are Americans, and victims of crime in crime-ridden cities across the world are less happy about being crime victims than are crime victims in much safer places. What can we make of this?

In this paper, I argue that the ability to adapt is indeed a good thing from an individual happiness and psychological perspective. But this same human defense mechanism may shed insights on how some societies stay stuck in bad equilibrium—such as high levels of corruption, bad governance, or bad health—for prolonged periods of time, while much more prosperous ones continue to go from good to better equilibrium.

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Authors

Carol Graham

Publication: The World Bank Research Observer

How Important is Infrastructure? A Look at its Economic Impact in a Globalized World

Thu, 10 Jun 2010 10:00:00 -0400

Event Information

June 10, 2010
10:00 AM - 12:30 PM EDT

Saul/Zilkha Rooms
The Brookings Institution
1775 Massachusetts Avenue, NW
Washington, DC 20036

Although the conventional wisdom on infrastructure is that it is a key ingredient in a country’s economic success, the relationship between infrastructure and growth is unclear and often misunderstood. Exactly how important is infrastructure to a country’s economy and how is it measured? Should a larger role for financing these investments be given to the private sector, particularly in developing nations?

On Thursday, June 10, the Economic Studies and Global Economy and Development programs at Brookings hosted an event to discuss the nature and role of infrastructure, including rigorous economic analysis to discern to what extent infrastructure can boost overall productivity and raise living standards. Speakers reviewed the most efficient ways to finance infrastructure spending as well as the strengths and weaknesses of the public and private sectors in infrastructure provision and management. Karen Dynan, Brookings vice president and co-director of Economic Studies, welcomed participants. Presentations by national and international experts were followed by a panel discussion led by Nonresident Senior Fellow Warwick McKibbin.

After the program, panelists took audience questions.

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How Important is Infrastructure? A Look at its Economic Impact in a Globalized World

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Participants

Panelists

Moderator: Warwick J. McKibbin

Nonresident Senior Fellow, Economic Studies, Global Economy and Development

Timo Henckel

Research Fellow, Centre for Applied Macroeconomic Analysis
Australian National University

Sonja Lyneham

WorleyParsons

Luis Servén

Research Manager, Macroeconomics and Growth in the Development Research Group
The World Bank

Douglas Brooks

Principal Economist, Macroeconomics and Finance
Research Division, Economics and Research Department
Asian Development Bank

The Financial Crisis’ Effects on the Alternatives for Public Pensions

Douglas J. Elliott — Tue, 20 Apr 2010 09:21:00 -0400

The recent financial crisis dramatically changed the situation of public pension plans and the alternatives available to them going forward. Most obviously, the funding levels of these plans are considerably worse now than during the bubble. Asset values have declined substantially, even taking account of the sharp rebound in the financial markets since March of 2009. At the same time, reported liabilities have gone up as well, principally as a result of the passage of time bringing the remaining pension payments closer to the present day.

However, the crisis did not just create a one-time adjustment in values and funding levels. The investment alternatives for plans look different now than they did a few years ago. This is partly because they have changed and partly because we have learned lessons, or sometimes relearned them, about risks and returns from individual asset classes and about overall asset-liability management.

This paper reviews the various changes affecting public pension plans and draws some conclusions for their future . The key changes are in the following areas:

Lower asset values

Higher pension liabilities

Widening pension deficits

Higher perceived risks on investments

Larger risk premiums available on investments

Lower asset values

Public pension plans, like private ones, lost a substantial part of their value during the financial crisis. It appears that the public plans in the aggregate suffered investment losses of about 25% of total assets from September 2007 through March 2009. A large chunk of these losses were erased by the rebound in the markets since March 2009, but the net losses were still equal to about 15% of September 2007 assets as of the latest reported figures, which are for September 2009 . Financial markets have recovered somewhat further since then, but the dramatic gains in the rebound were already in place by September of last year, so these figures are reasonable rough estimates of the effects of the financial crisis.

The situation is even worse than those figures show on the surface, because pension funds are essentially walking on a treadmill. They need to earn an expected return each year in order to stay standing in place, since the value in today’s dollars of the pensions they have promised to pay goes up each year as those payouts come closer in time. The situation is analogous to inflation. The public pension funds may have lost 15% over two years on a “nominal” basis, but, if their target return was 8% a year , they lost 31% compared to their targeted level of investment value, excluding the effects of contributions and pension payments.

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Authors

Douglas J. Elliott

Americans' Mistrust of Government: Rational and Warranted, But Also Dangerous

William A. Galston — Tue, 16 Mar 2010 12:59:00 -0400

In an interview with Aaron Task of Yahoo! Finance, William Galston discusses the rising distrust Americans have in government.

Aaron Task: In a recent poll conducted by CBS News and the New York Times, only 19 percent of respondents say that they trust the government to do what is right all or most of the time. I’m joined now by William Galston who is a senior fellow at the Brookings Institution and a former advisor to President Clinton. Mr. Galston you recently wrote an FT op-ed piece about this. And you talked about how dangerous it is for a nation to have this low level of trust in its government. What are you most concerned about?

William Galston: Well, what I’m most concerned about is that during the next decade, Americans are probably going to be called upon to do some difficult things. We are going to have to consume less, we are going to have to save more, and we are going to have to deal with a public sector deficit that is threatening to run out of control and undermine the entire economy. This will be very difficult and if current levels of trust and confidence in government don’t improve, I don’t see how Americans can be persuaded to make sacrifices now for a better future which is one of the core responsibilities of government in such circumstances.

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Authors

William A. Galston

Publication: Yahoo! Finance

Happy Peasants and Miserable Millionaires: Happiness Research, Economics, and Public Policy

Carol Graham — Sat, 30 Jan 2010 00:00:00 -0500

Early economists and philosophers, such as Adam Smith and Jeremy Bentham, were serious about the study of happiness. Yet with the rise of quantitative methods in economics calling for more parsimonious definitions of welfare, happiness fell out of fashion, and utility became synonymous with income. Over a century later, in the mid-1970s, Richard Easterlin revisited the relationship between happiness and income. His findings uncovered what seemed to be a paradox; average happiness levels did not increase over time as countries grew wealthier, nor was there a clear relationship between average per capita GDP and average happiness levels across countries, once they achieved a certain minimum level of per capita income. This puzzle is known as the Easterlin paradox.

In recent years there has been a renewed debate about whether the Easterlin paradox holds, not least because an increasing number of economists have started to use happiness surveys to explore all kinds of questions. Recent studies by Betsey Stevenson and Justin Wolfers, and by Angus Deaton, based on new data from the Gallup World Poll, find a consistent log-linear, cross-country relationship between income and happiness, directly challenging Easterlin’s findings (see Stevenson and Wolfers 2008, and Deaton 2008). This has resulted in a heated and, at times, even acrimonious debate among economists.

Two right answers

Rather ironically, both sides of the debate may be correct. There are two reasons why:

One reason is substantive. On the one hand, it makes sense that people in richer countries are happier than those in destitute ones, whereas on the other hand, many things other than income contribute to people’s happiness, regardless of their level of income. Many of these things – like freedom, stable employment, and good health – are easier to come by in wealthier countries. Still, there is plenty of variance in the availability of these things even across countries with comparable income levels.
The other reason is methodological. The later studies use new data from the Gallup World Poll, which includes many more (un-weighted) observations from small poor countries in Africa and from the transition economies than did Easterlin’s original studies (as well as his more recent ones). The transition countries in particular have relatively low levels of happiness, in part as a result of happiness levels falling markedly with the painful structural changes that accompanied the collapse of centrally planned economies. Meanwhile, some of the sub-Saharan African countries have had flat or even negative rates of growth over time. Thus rather than a story of higher levels of income pulling up happiness at the top, it may be one of falling or volatile income trajectories pulling down happiness at the bottom.

How happy are you with your life?

There are also differences in the questions that are used to measure happiness. Easterlin’s work is based on the World Values survey, the US General Social Survey, and the Eurobarometro survey, among others, all of which use open-ended happiness or life satisfaction questions. Generally speaking, these questions ask, “how happy are you with your life?” or “how satisfied are you with your life?”, with possible answers ranging from “not at all” to “very” on a 4 or 5 point scale. The Gallup World Poll uses Cantril’s best possible life question, which is “please imagine a ladder with steps from zero to ten, if the higher the step, the best possible life, on which step of the ladder to you personally feel you stand?”

Both sets of questions are reasonable gauges of happiness, broadly defined, and both correlate in a similar manner with the usual variables. Research based on all of these questions finds that, on average, stable marriage, good health, and enough income are good for happiness (with how much income is enough varying across countries), and that unemployment, divorce, and economic instability are bad for happiness. Age and happiness have a remarkably consistent U-shaped relationship, with the turning point in the mid to late forties, at which point happiness increases with age, as long as health and partnerships stay strong. Indeed, I have studied this relationship in countries as diverse as the UK, Chile and Afghanistan, and it holds in all of them, with modest differences in the turning point. Among other things, this relationship reflects an alignment of expectations and reality as people “grow up”.

At the same time, there is some variance in the findings based on different questions. The best possible life question is more framed than the open-ended happiness questions, providing respondents with a relative component when they are asked to assess their lives. Mario Picon, Soumya Chattopadhyay, and I tested the questions against each other in the Gallup World Poll for Latin America, a region for which we had both sets of questions in the same survey. We found that the answers to the best possible life question correlate more closely with income – both across and within countries – than open-ended happiness questions (Graham, Chattopadhyay, and Picon in Diener et al. forthcoming).The difference is greater across countries than within them.

Thus, simply due to methodology – what sample of countries and which happiness questions are used – it is possible to come to different conclusions about the Easterlin paradox. The substantive question of what – beyond income – makes people happy is an additional and more complicated part of the story. Figure 1 presents findings from my previous research with Stefano Pettinato, based on an open-ended happiness question and a very simple linear specification of income. While the richer countries are, on average, happier than the poorer ones, there is no clear income and happiness relationship within each set of countries, making it impossible to draw a clear conclusion about the Easterlin paradox.

The figure drums home the point that wealthier countries are, on average, happier than destitute ones, but after that, the story becomes more complicated. Country level averages are influenced, among other things, by cultural differences in the way that people answer surveys, and these cannot be controlled for in the cross country comparisons in the way they are when we assess happiness across large samples of individuals within and across countries.

New research on people’s capacity to adapt

My more recent research on happiness around the world throws another monkey wrench into the equation (see Graham 2010). While the research confirms the stable patterns in the determinants of happiness worldwide, it also shows that there is a remarkable human capacity to adapt to both prosperity and adversity. Thus, people in Afghanistan are as happy as Latin Americans – above the world average – and Kenyans are as satisfied with their healthcare as Americans. Crime makes people unhappy, but it matters less to happiness when there is more of it; the same goes for both corruption and obesity. Freedom and democracy make people happy, but they matter less when these goods are less common. The bottom line is that people can adapt to tremendous adversity and retain their natural cheerfulness, while they can also have virtually everything – including good health – and be miserable.

One thing that people do have a hard time adapting to is uncertainty. For example, my latest research, with Soumya Chattopadhyay and Mario Picon based on daily records of around 1,000 Americans from January 2008, shows that average happiness in the US declined significantly as the Dow fell with the onset of the crisis. Average happiness fell 11% from 6.94 (on an 11 point scale) prior to the onset of the crisis, to a low of 6.19 on November 16, 2008. Yet when the market stopped bottoming out and some semblance of stability was restored in late March 2009, average happiness recovered much faster than the Dow. By June 2009 it was higher than its pre-crisis level: 7.15 on June 21 - even though living standards and reported satisfaction with those standards remained markedly lower than they were prior to the crisis. Once the period of uncertainty ended, people seemed to be able to return to previous happiness levels, while making do with less income or wealth (see Figure 2).

Indeed, people seem to be better at adapting to unpleasant certainty than they are to uncertainty. It is surely a good thing that most Americans have been able to adapt to the economic costs of the crisis and return to their natural happiness levels. And even better that the average person in Afghanistan can maintain cheerfulness and hope despite the situation they live in. While this capacity to adapt may be a good thing from the perspective of individual psychological welfare, it may also result in collective tolerance for conditions that would be unacceptable by most people’s standards. This may help explain why different societies tolerate such different norms of health, crime, and governance, both within and across countries. Without understanding these norm differences, it is very difficult to craft policies to improve health, living conditions, and governance structures.

Happy peasants and miserable millionaires

This capacity to adapt – and the mediating role of norms and expectations – poses all sorts of measurement and comparison challenges, particularly in the study of the relationship between happiness and income. Can we really compare the happiness levels of a poor peasant in India, who reports to be very happy due to low expectations or due to a naturally cheery character, with those of a successful and very wealthy CEO, who reports to be miserable – due to his or her relative rankings compared to other CEO’s, or to a naturally curmudgeonly character? This is something that I have called the “happy peasant and miserable millionaire problem” (or the happy peasant and frustrated achiever problem). On one level it suggests that happiness is all relative. On another it suggests that some unhappiness may be necessary to achieve economic and other sorts of progress. The examples of migrants who leave their home countries – and families – to provide better futures for their children, or revolutionaries who sacrifice their lives for the broader public good, come to mind. This also raises more difficult questions, such as whether we should tell a poor peasant in India how miserable they are according to objective income measures in order to encourage that peasant to seek a “better” life; or whether we worry more about addressing the millionaire’s misery or increasing the peasant’s happiness.

This happy peasant and miserable millionaire paradox also raises the question of the appropriate definition of happiness. What makes happiness surveys such a useful research tool is their open-ended nature. The definition of happiness is left up to the respondent, and we do not impose a US conception of happiness on Chinese respondents, or a Chinese definition on Chilean ones. The open-ended nature of the definition results in the consistent patterns in the basic explanatory variables across respondents worldwide, in turn allowing us to control for those variables and explore variance in the effects of all sorts of other things on happiness, ranging from crime rates to commuting time to the nature of governing regimes.

Fulfilment or contentment?

At the same time, as we think about happiness as a measure of welfare with relevance to policy – something that is increasingly in the public debate – then the definition does matter. Are we thinking of happiness as contentment in the Benthamite sense, or as a fulfilling life in the Aristotelian sense? There is still much room for debate. My studies of happiness around the world suggest that respondents’ conceptions of happiness vary according to their norms such as expectations and ability to adapt. Our priors as economists and policymakers likely suggest that some conceptions of happiness – such as the opportunity to lead a fulfilling life – are worth pursuing as policy objectives, while others – such as contentment alone – are not. Yet that choice entails normative judgements and a debate which we have not yet had.

At the very least, this conundrum will give economists food for thought – about happiness and income, and beyond – for several years to come. Moreover, despite the difficulty it poses for both method and economic philosophy, it will also force us to think deeply about what measures of human well being are the most accurate benchmarks of economic progress and human development.

References

Deaton, Angus. (2008), “Income, Health, and Well-Being around the World: Evidence from the Gallup World Poll”, Journal of Economic Perspectives, Vol. 22, 2.

Easterlin, Richard. (1974), “Does Economic Growth Improve the Human Lot? Some Empirical Evidence”, in Paul Delvin and Melvin Reder, Nations and Households in Economic Growth: Essays in Honor of Moses Abramowitz. New York: Academic Press.

Graham, Carol and Stefano Pettinato (2002), Happiness and Hardship: Opportunity and Insecurity in New Market Economies, Washington, DC: The Brookings Institution Press).

Graham, Carol. (2010), Happiness around the World: The Paradox of Happy Peasants and Miserable Millionaires, Oxford: Oxford University Press.

Graham, Carol, Soumya Chattopadhyay, and Mario Picon (2010), “Does the Dow Get You Down? Happiness and the U.S. Economic Crisis”, mimeo, The Brookings Institution, Washington, DC, January.

Graham, Carol, Soumya Chattopadhyay, and Mario Picon. (forthcoming), “The Easterlin and Other Paradoxes: Why Both Sides of the Debate May Be Correct” in Ed Diener, John Helliwell, and Daniel Kahneman, International Differences in Well-Being, Oxford: Oxford University Press.

Stevenson, Betsey and Wolfers, Justin. (2008), “Economic Growth and Subjective Well-Being: Re-Assessing the Easterlin Paradox”, Brookings Panel on Economic Activity, April.

Authors

Carol Graham

Publication: VoxEU.org