Economics of Happiness: An Interview with Richard Easterlin

USC Professor Richard Easterlin

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“There’s a fair proportion of economists that will dismiss this out of hand as heresy,” Richard Easterlin, renowned “father” of the economics of happiness and namesake of the controversial Easterlin Paradox, told me. “But on the other hand, as you know, the Sarkozy Report came out about 2008.”

The Report by the Commission on the Measurement of Economic Performance and Social Progress (2008), or, as Easterlin put it, the “Sarkozy Report,” was a speculative paper commissioned by Nicolas Sarkozy, then-president of France, “to identify the limits of GDP as an indicator of economic performance and social progress … [and] assess the feasibility of alternative measurement tools.” Tasked with reporting on these initiatives was Nobel laureate Joseph Stiglitz, with close advisement from fellow Nobel laureate Amartya Sen and Neo-Keynesian economist Jean-Paul Fitoussi.

Easterlin best articulated the significance of the Sarkozy Report in his widely popular response paper “Policy Implications of the Sarkozy Report” (2010). The paper delineated four primary economic measurements contained in the report:

  1. Production (GDP)
  2. Economic well-being (material living level)
  3. Overall well-being (of which economic well-being is one of eight components)
  4. Well-being of current vs. future generations (“sustainability”)

It should come as no surprise that Easterlin, who has dedicated the greater part of his academic career to the economics of happiness, would mark the third item as the Sarkozy Report’s most substantive contribution. In fact, this report is a familiar document to students of his economics of happiness course at USC due to its significance as a milestone for the happiness and well-being branches of behavioral economics.

Having begun research on the topic of subjective well-being (SWB) in the early 1970s, Easterlin found true validation in an international effort to explore policy implications of the economics of happiness.

“It was indicative of the fact that there really has been a major paradigm shift where economists increasingly are willing to listen to what people say. Sometimes it’s just political attitudes,” said Easterlin. “But as I said, it has taken off. So it’s really been, from my point of view, quite surprising, but at the same time rewarding because it makes me feel like people are paying attention to this, and this is very important.”

Throughout his academic career, Easterlin has faced criticism from voices across mainstream economics, informed by the disciplinary dictum that “economists don’t care about what people say, [they] only observe what people do.” For example, unemployment data – which Easterlin views as a self-reported, falsifiable metric – remains unimpeachable in the established paradigm of economics.

“You inherit it, and you don’t question it,” Easterlin said. “But new things come along, and you question them pretty severely if they run counter to the paradigm as happiness did. Not just in terms of its relationship to economic growth, which made it doubly hard to understand, but simply because it was accepting what people had to say about their well-being.”

Easterlin’s rejection of the academic status quo manifested itself in his declaration of the Easterlin Paradox, which challenged one of the fundamental tenets of economics: that more money leads to higher happiness. In the short run, Easterlin found that higher income does indeed correlate to a higher level of happiness; however, after acknowledging available data on the long-run relationship between happiness and income, he found no significant positive correlation. Easterlin’s explication of the inconsistency between cross-sectional and long-run time series data brought him fame and put his research at the center of charged debates between economists, behavioral and classical.

The research that Easterlin has conducted is highly empirical, constructed with data compiled over decades from multinational populations. For example, Easterlin has challenged notions that transitions from Soviet-style socialism to capitalism increases life satisfaction. While data from social scientist Hadley Cantril, author of “Soviet Leaders and Mastery over Man,” showed that there is a massive decline in life satisfaction following the collapse of a socialist nation, his research failed to include later-released data showing that life satisfaction existed at “fairly high happiness” leading up to the collapse. This suggests that it was not the socialist system per se that decreased life satisfaction, but rather political factors that compromised the stable period of high happiness. Of course, political factors are related to economic systems, but in Easterlin’s reckoning, whichever economic system maximizes the dimensions of SWB should be pursued.

“I didn’t start out with the view that socialism had any redeeming features or that the welfare state was a superior situation. As the evidence has accumulated, it’s becoming increasingly meaningful,” Easterlin said. “At the individual level, evidence seems to suggest at the extent you sacrifice your family and your health to make money, intuitively it’s not going to do much for your happiness. Whereas to the extent you try to achieve a reasonable balance, you know, put a lot more weight on your family life, exercise … the happier you’re going to be. But what we can do is have economic growth in which the incremental resources, instead of being left to the individual via consumer sovereignty as to how they are used, are determined much more by governmental intervention. Healthcare policy, schooling, maternity leave, paternity leave, provisions for old people – that is sort of a cradle-to-grave welfare policy you have in Scandinavia. They have high rates of growth as the Western world goes – Scandinavia is as good or better than most countries, including the U.S.”

Fiscal policies and fundamental beliefs in theories of government clearly divide those aligned with Easterlin and those who fare libertarian or right-of-center. But to Easterlin, there’s no mistaking it: a healthy work-life balance determines high quality of life, and Scandinavian economic systems provide the healthiest work-life balance recordings, and thus, the happiest reported populations.

When asked which measures could be taken to foster research conducted in his field, Easterlin focused on empirics.

“We still need a lot more specifics and data about policies that are conducive to happiness, [like] family policies,” said Easterlin. “So my feeling is that [the future] is trying to get better insight into those things, and probably also into broader questions on civil rights. And I think it’s interdisciplinary. I think you need to know something about political science, and that’s where the commodification of labor comes in.”

Easterlin concluded: “You know I think with all these studies, people need to be attuned to them and educated [on them] in order to make holistic statements about what happiness and welfare are about, and I feel we are progressing.”

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To read more about welfare economics, Easterlin suggests:

The Oxford Handbook of the Welfare State

Edited by Francis G. Castles, Stephan Leibfried, Jane Lewis, Herbert Obinger and Christopher Pierson

“Produced entirely by political scientists. Not one economist in that one or sociologist. But it’s indicative that the study of the welfare state is much more a private thing in the field of political science. [Additionally, it addresses] the political socialization process, and other psychological mechanisms.”

I would also suggest:

Happiness, Growth, and the Life Cycle

by Richard Easterlin

The Uneven Costs of Raising the Federal Minimum Wage

Is what’s fair for a Californian feasible for an Alabaman?

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In major cities like Los Angeles and Chicago, local hourly minimum wage levels have reached $12.00 and $11.00, respectively. They depart drastically from the minimum wage levels set by the federal government, which have stagnated since the $0.70 increase to $7.25 in 2009. The minimum wage discussion has become a hot-button political issue, with Republicans arguing that national wage increases would be destructive to the American economy and should be decided at the state level. Democrats have taken a strikingly different opinion, pushing for $15.00 federal minimum wage, which would increase the current federal minimum by over 50 percent. Those two stances don’t seem reconcilable, but in trying to find a solution, should we choose to focus on politics or economics?

In economic terms, the minimum wage is defined as the lowest legal hourly wage an employer must pay his employee. Classic microeconomic theory states that equilibrium wage will be determined where the workers’ demand and supply intersect. A minimum wage is most influential as a price floor above the equilibrium wage, but it is most efficient when it coincides with this market-determined wage, allowing worker supply to best meet worker demand and subsequently minimizing unemployment levels. However when rapid, non-market induced changes in minimum wage are forced by the government, there can and will be significant economic consequences.

Professor Alan B. Krueger of Princeton University argues that dramatic federal wage increases such as to $15 would be “counterproductive,” putting our economy into “unchartered waters.” Due to sparse and incremental federal minimum wage raises the throughout the 2000s, economists cannot gauge the consequences of an increase to $15 with certainty. A higher unemployment rate is one possible effect, and we should not downplay the possibility of other long-term economic costs.

In response to the federal government’s reluctance to increase the minimum wage, state governments have taken on the responsibility, resulting in wage levels more likely to help low-wage workers than hurt them. When high wages are implemented in economies that cannot support them, low-wage workers face the consequences of reduced hours and substantial layoffs to make up for lost profits. Specifically, we are seeing effects of such increases in cities like Seattle, where newly implemented wage legislation has already demonstrated negative economic consequences for workers. University of Washington Economics Professor Mark Long states that due to drastic wage increases in Seattle “the net amount paid to low-wage workers declined instead of increased.” More dramatically, an increased minimum wage can catalyze automation in some sectors, with the potential to replace low-wage workers jobs. Gradual increases that allow for economic price adjustments to occur at the state level will buffer the negative effects of wage hikes and better protect low-wage workers’ jobs. Additionally, federal wage levels may not be able to properly compensate for purchasing power differences amongst states. In cities like Los Angeles where cost of living is considerably higher than in cities such as Des Moines, nationwide wage increases would not be the most effective way to take account for these variations in purchasing power.

The federal government can intervene in ways other than wage increases to help low-wage workers. Programs like the Earned Income Tax Credit (EITC) provide low-wage workers with a refundable tax credit, benefitting working class families with children who receive a larger credit than other workers. Economist Michael R. Strain writes, “earnings subsidies like the Earned Income Tax Credit makes sure the dollars we redistribute find their way to the working poor by explicitly targeting low-income households.” In 2013, EITC tax credits alone were able to lift 9.4 million Americans out of poverty. By incentivizing employment and complementing earnings, expanding programs like the EITC would help low-wage workers keep their jobs and remove wage pressure on businesses.

When we look at the minimum wage debate through an economic perspective the answer is clear: a minimum wage increase at the federal level could do much more harm than good to low-wage workers. State governments should oversee the minimum wage because they are better equipped to assess how the economic tradeoffs involved would affect their specific constituencies. Lawmakers must carefully evaluate how wage increases would impact the population of low-wage workers in their states and adjust them accordingly. By moderately increasing wages at the state level and supporting federal pushes for programs like the EITC, profits of low-wage workers can be maximized and economic costs can be minimized.

No Grounds to Stand On: Analyzing the Case Against Lil’ Bill

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The video was all over Facebook, trailed by hundreds of angry comments from USC students. The reason? “I’ve been asked to leave the campus,” says Aaron Flournoy in the clip. “It’s like an eviction so to speak.”

The word “eviction” glares in bright gold from its subtitle on the screen, as if daring someone to object to its usage. First covered by Annenberg Media on March 31 by Cole Sullivan, the story of Lil’ Bill’s Bike Shop has frequently been spun as an economic injustice, for reasons that have little economic justification.

Lil’ Bill was being “evicted” from campus, because Solé Bicycles was becoming a vendor for USC Village. Solé and the university had agreed to sign a non-compete clause, preventing USC from allowing a competitor like Lil’ Bill to sell bikes on campus with a business move that has been virtually banned from California, except in three circumstances:  

  1. When one business acquires another
  2. When a partnership is dissolved
  3. Limited Liability Companies (LLCs)

USC isn’t acquiring Solé. The two had no preexisting partnership, and are not involved in an LLC, so none of the three circumstances apply. Has Lil’ Bill been illegally targeted?

When asked to elaborate on the specifics of the non-compete in an email exchange, David Donovan, Associate Director of USC Transportation, who has previously addressed media inquiries regarding the Village, declined to respond. Even so, studying the case history of non-competes in California may offer an answer.

An exception to California’s strict criteria for non-competes emerged in Campbell v. Board of Trustees of Leland Stanford Junior Univ., 817 F.2d 499 (9th Cir.1987), where the court ruled against Stanford’s contract preventing a professor from reproducing a psychological test he developed. Campbell states that contracts “where one is barred from pursuing only a small or limited part of the business, trade or profession” are valid, and that the burden of proving whether a contract fully bars business is up to the plaintiff.

This statement became known as the “narrow-restraint” clause, and has since been applied to several other cases. It might be Solé’s justification behind implementing a non-compete clause, which would not fully bar Lil’ Bill from his profession of fixing bicycles. In fact, in Boughton v. Socony Mobil Oil Co., the Ninth Circuit upheld the narrow-restraint clause to allow a non-compete that prevented the use of land for a competitor’s business, rather than prevent the competitor from carrying out business.

The only problem? In 2008, the California Supreme Court overturned the “narrow-restraint” clause in Edwards v. Arthur Andersen LLP, claiming that “if the legislature had intended the statute to apply only to unreasonable or over-broad restraints, it could have included language to indicate so.” While the Court in Edwards agreed with the Boughton decision, the Court argued that restricting use of land did not qualify as a non-compete. Furthermore, California lawyer David Trossen points out that the court claimed Boughton did not offer any guidance on evaluating non-compete, suggesting that using Boughton as a precedent for justifying a non-compete would be risky for Solé.

Yet Solé must have felt threatened enough by Lil’ Bill to risk a non-compete clause. After all, according to the Daily Trojan, Lil’ Bill and his family have been serving the USC community for 40 years. Surely, those 40 years gave enough of a foundation for them to gain significant market power and become a monopoly within the USC community. Perhaps Solé meant to kill Lil’ Bill’s market power.

Or perhaps the justification was even simpler. USC faces strong incentives to favor Solé’s non-compete over Lil’ Bill. The university financially benefits from Solé paying rent for a venue in the Village. Furthermore, in 2028, when USC Village will be used to host the Summer Olympics, Solé will reap additional profit from sales to competing athletes. Meanwhile, Lil’ Bill’s venue takes up a parking spot on USC’s property for free. Even if the financial loss of favoring Lil’ Bill were discounted, USC could face the legal cost of facilitating an illegal business. In a Daily Trojan interview, David Donovan said that “the city of Los Angeles has identified [Lil’ Bill’s] shop as an illegal business because it is operating out of parking lot and occupying a handicap space.”

But what do Lil’ Bill’s losses matter? They are excluded from the contract, as a negative externality–that is, a cost that signers of the contract cause, but are not held accountable for. And it is not enough to ask Lil’ Bill to give up his business and work for Solé, and call it accountability. When companies make decisions about their community, without the community’s legal ability to negotiate, the law itself ought to be reevaluated to consider the existing community businesses as stakeholders. To do otherwise, would be an economic injustice.

“Trumped-Up Trickle-Down” and What It Means

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In the first general election presidential debate, Republican nominee Donald Trump proposed one of his only concrete policies as a candidate: to cut taxes across the board, including a reduction in the corporate income tax rate from 35 percent to 15 percent. Democratic nominee Hillary Clinton called it “Trumped-up trickle-down,” alluding to Ronald Reagan’s so-called trickle-down economic policies of the 1980s. According to economist Heinz Arndt, the expression “trickle-down” implies a vertical flow from rich to poor that happens of its own accord. Tax cuts for higher-income individuals are meant to boost economic growth, as those individuals invest and spend the money saved on taxes. The corresponding increase in capital will create a need for more jobs, as higher investment means higher demand for goods and, eventually, an increase in wages. The same principle holds for giving tax cuts to corporations. If a corporation’s taxes are cut, the idea is it will use that money to either hire more workers or pay current workers more. In essence, the well-endowed will have more wealth to “trickle down” to lower economic classes.

In theory, it’s not a bad policy; in practice, it hasn’t worked. In the 1980s, Reagan proposed huge tax cuts across the board, especially for the highest-earners. The outcome of this policy was that the U.S. national debt roughly tripled during Reagan’s term, and income growth shifted from the bottom classes to the top classes. As you can see from the graph below, the Reagan tax cuts boosted income growth for the top 10 percent of income earners, while the bottom 90 percent of earners saw their income growth decline after the 1980s. This means that the highest earners earned even more, while income growth for the lowest earners slowed and eventually declined. Under Trump’s proposed tax cuts, this process is likely to repeat itself, widening the wealth and income gaps even more.

Graph 1

According to a study by the Tax Justice Network, money that the wealthy accumulate through tax cuts is more likely to be moved to an offshore bank account than reinvested in the national economy. Corporate tax cuts may be used to give top executives bonuses or to fund the relocation of businesses to developing nations. While divesting from the American economy has the potential to make goods cheaper, the second plank of Trump’s proposed fiscal policy – extreme protectionism – would make his trickle-down tax cuts even worse.

Trump seeks to impose a 45 percent tariff on all imported products from China to the United States, meaning that any product coming from China will be marked up an extra 45 percent. Trump’s intention is to discourage companies from moving their factories to China, and instead open or maintain their factories in America. Except trade is incredibly beneficial to both countries involved. Trade allows countries that have a comparative advantage (meaning it is cheaper to produce one good compared to another in that country) to specialize at what they are best, whether it be abundant natural resources or a highly skilled labor force. Comparative advantage is why Southeast Asia produces most of America’s clothing and America produces most of the world’s high-tech products.

The reason we import products from China is that it is cheaper to import them than to produce them domestically. China’s comparative advantage in certain industries means that they can hire more workers and pay them less, making the final goods cheaper for American consumers. Imposing a tariff on all goods from China would effectively raise domestic prices, which would defeat the purpose of lowering taxes. For example, nearly 50 percent of U.S. imports from China are machinery and electronics, meaning a 45 percent tariff would make a large portion of consumer goods more expensive. Without an increase in wages, this increase in the price level would diminish the purchasing power of everyday Americans.

Overall, Donald Trump’s fiscal policy is comprised of two objectives that will do more to harm the economy in the long run than help it. It won’t create jobs, and it won’t raise wages. It will also make the rich richer and the poor poorer, enlarging the already vast wealth gap. Overall, Mr. Trump’s policies will benefit Mr. Trump personally more than they will benefit any average American who is so gladly voting for him. “Trumped-up trickle-down” economics is exactly what it says: a trickle-down policy on steroids.

Everbooked and Dynamic Pricing in the Share Economy

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We live in an era of sharing. Technological developments and online platforms allow people today to network and earn extra income by sharing assets they already have – their cars (Uber and Lyft), their household goods (Snapgoods), and even their homes and apartments (Airbnb, VRBO, and HomeAway). Collectively, this activity is known as the “share economy,” and it is rapidly growing. Participating in the share economy is simple: go online, or open an app, and in minutes you can find a ride or a place to stay for the weekend.

Founded in 2008, Airbnb allows users to rent a place to stay overnight in a private home or apartment. Having personally used Airbnb, I can attest to the benefits of renting a private place while on vacation it’s often less expensive than a hotel, there are more options to choose from, and staying in a private place has a “local feel.” As Airbnb advertises, “Don’t go there. Live there.” This online platform has proven very popular: Airbnb today is worth around $24 billion and has helped over 40 million people find a place to stay. As Airbnb’s rapid growth both in the United States and abroad continues, Airbnb landlords are taking advantage of data science in order to raise more revenue and secure a greater number of bookings. Recently, I had the opportunity to speak with David Ordal, the CEO of a Bay-Area startup known as Everbooked that assists Airbnb landlords with market analytics and a technique known as dynamic pricing.

Dynamic pricing involves continually adjusting prices to adapt to changes in demand that are detected through data analysis. American Airlines is credited with being the first company to adopt this technique; in the early 1980s, it began experimenting with “Super Saver” ticket prices that were adjusted based upon seat availability, demand, and how far in advance customers made reservations. The results were impressive – American Airlines’ revenues skyrocketed the next year. Dynamic pricing is now universal in the airline industry, and the hotel industry has used dynamic pricing for a long time as well. Ordal founded Everbooked in 2014 when he noticed that dynamic pricing was not widely used in the vacation rental industry. He saw an opportunity in bringing dynamic pricing and data analytics to landlords renting through Airbnb. “We do the same thing as airlines, but for a place to stay,” Ordal explained. Today, Everbooked operates in 3,322 cities across the United States and looks to expand internationally in the future.

Everbooked uses an algorithm to scan through market data in real time, searching for changes in various demand factors. “We look at different factors for demand, such as seasonal trends and weekend and weekday tracks,” Ordal said. He noted that, in some cases, weekdays actually see higher demand than weekends, often due to business travelers. In addition, the algorithm tracks Airbnb reservations in a given area and even examines local FAA air traffic data, which has proven to be a good metric for predicting how many people are traveling to and from a particular locale. When the algorithm detects something notable, it automatically updates users’ prices within hours of detection. The end result is that, by having their prices updated in real time, Airbnb landlords can earn an extra 14-38 percent in revenue each year.

“A lot of clients are professional landlords,” Ordal added. “We work with hosts who are more business-oriented. These are the people who really want to understand the market, who really want to understand analytics.” In addition to automatically updating clients’ prices, Everbooked also compiles huge amounts of data on rental units in various locales across the United States, allowing clients to compare their listings to those of other nearby Airbnb landlords. On the Everbooked website, an Airbnb landlord can see what types of listings they are competing against – whether homes, apartments, or condominiums – and the average prices for each of these types of listings throughout the year. Several histograms display which prices are the most common among various types of listings, as well as which types of listings are the most popular in a given locale. Everbooked also creates graphs to help clients determine the prices they should charge for extra guests, and provides up-to-date information on seasonal demand trends.

At one time, the benefits of dynamic pricing were limited to large, highly organized businesses. Today, with the rise of the share economy, that landscape is dramatically changing. Ordal thinks that someday dynamic pricing will become universal among vacation rentals. I agree – there are simply too many benefits to pass up.