A Bad Feeling About Inequality
The hot topic in economic policy discussions is inequality. Lots of kinds of inequality have been increasing in the U.S. -- income, wealth, housing, longevity and almost everything else. New data has caused economists and the public to become more alarmed about the extent of the rise, and has allowed people to start having a productive discussion about causes and solutions.
People on the political right, especially libertarians, are always asking why we should even care about inequality in the first place. That might sound insensitive, but it’s actually a very good question. We might worry about inequality because an unequal society grows more slowly, or is more politically unfair or corrupt, or even is less healthy. But one big reason is simply that we care about our fellow citizens, and about other human beings in general. When one person has much more than another, it just feels wrong to many people.
But if what we care about is human welfare, why are we looking at income or wealth inequality? These allow high consumption, but does consumption really bring people happiness? At low levels, it most certainly does -- not having enough to eat, or a roof over your head, or clean running water definitely causes a huge reduction to happiness. But once basic needs are met, the relationship between income, wealth and happiness becomes much less clear. One may influence the other, but there are many things besides income that matter a lot -- social status, career satisfaction, family, friends, romance and even how long people spend commuting.
If we dislike inequality because of an innate sense of fairness, then the most important kind of inequality might be a disparity in personal happiness. In fact, some new research supports the idea that inequality of well-being is critical to many people. In a recent paper entitled “The Welfare Costs of Well-being Inequality,” economists Leonard Goff, John Helliwell, and Guy Mayraz find that disparities in self-reported life satisfaction seem strongly correlated with a number of other important things. From their abstract:
Inequality of subjective well-being has a negative effect on life satisfaction considerably greater than does income inequality…This comparative result is stronger for those who report themselves as valuing equality…Social trust, which has been shown to support subjective well-being both directly and indirectly, is more fully explained by well-being inequality than by income inequality.
In other words, in regions where people are more unequal in terms of life satisfaction, they are also less satisfied with life on average, and they tend to trust other people less. Happiness disparities, even more than income disparities, mean that society feels like it just isn’t working for many people.
How should this finding inform our policies to fight inequality? One lesson is that income and wealth redistribution, though helpful, will probably not be enough. Although higher income definitely makes people happier on average, it is only one factor. And as income levels increase overall, income probably becomes less important as a determinant of satisfaction -- this is broadly consistent with the economics concept of diminishing marginal utility of wealth, meaning each additional dollar brings less pleasure than the one before it.
So when we’re thinking about ways to equalize happiness in the U.S., Japan or Europe, we should consider policies beyond redistribution. One thing research teaches us is that most people are pretty content, but a few are miserable. Thus, using government policy to help the most dissatisfied will yield the biggest benefits in terms of reducing inequality of well-being.
For example, since commuting does so much to diminish quality of life, we could encourage denser development and self-driving car technology, so that traveling to and from work takes less time and is less onerous. Health is another key to happiness, so we might want to invest in preventive medicine that helps people lead healthier lives instead of simply treating them once they become ill. Getting laid off is a big hit to well-being, so search services that help people rapidly find work might be a good investment.
The most important policy to fight unhappiness, however, is probably the most direct. Major depressive disorders afflict millions of Americans, and are probably the biggest killer of well-being. Including depression treatment in health insurance, and even subsidizing treatment, would be a frontal assault on unhappiness. A major reduction in depression would greatly boost equality of well-being.
So in addition to redistribution, U.S. policy makers should be thinking about what they can do to help our least happy citizens. We owe it to them.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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