In Richard
Layard’s book Happiness: Lessons from a
New Science, he discusses income inequality and how it affects people’s
levels of happiness. He begins by sharing that in the Third World there are
nearly 3 billion people living on under $2 a day (World Bank, 2000). Can you imagine how happy they would be if a
stork dropped an extra $1000 into their lap one evening? Hell, even here in
the First World how many of our fellow citizens could live better with an extra
$1000 in their wallet? The answer is the majority of us… but not all.
Over the period
of 14-months, Joyti De-Laurey, a secretary at Goldman Sachs in London, siphoned
off some £4.5 million from accounts of two people
she worked for and spent the money on herself. That’s £321,428.5
a month! What’s funny about this story is that neither of the victims noticed her
taking the money for over a year (Economist, April 2004, pg. 30).
Now why does this matter? Layard (2005) shared this story because it illustrates what nineteenth-century economists believed in their bones; that extra dollars make less difference if you are rich than if you’re poor. This is then reinforced by modern survey research that confirms this belief (Helliwell, 2003). We can examine how far extra income increases happiness for people at different points in the income scale, and we find that the benefit from extra income is indeed less and less the richer the person (2003). For the same reason, extra income makes more difference to happiness in poor countries than in rich ones (2005).
Now why does this matter? Layard (2005) shared this story because it illustrates what nineteenth-century economists believed in their bones; that extra dollars make less difference if you are rich than if you’re poor. This is then reinforced by modern survey research that confirms this belief (Helliwell, 2003). We can examine how far extra income increases happiness for people at different points in the income scale, and we find that the benefit from extra income is indeed less and less the richer the person (2003). For the same reason, extra income makes more difference to happiness in poor countries than in rich ones (2005).
From this
psychological reality it follows that if money is transferred from a richer
person to a poorer person, the poor person gains more happiness than the rich
person loses. So average happiness increases. Thus a country will have a higher level of average happiness the more equally its income is distributed
(Layard, 2005).
But, but but!… there is one siren argument that is often raised against policies to reduce income inequality. It comes from those who believe that taxation is a device to prevent social mobility. Basically, it will stop an ambitious youngster like myself from moving up from rags to riches. This is nonsense. The most classless societies in the world are those in Scandinavia, where taxes are high, basic education is good and there is a culture of mutual respect (Layard, 2005).
But, but but!… there is one siren argument that is often raised against policies to reduce income inequality. It comes from those who believe that taxation is a device to prevent social mobility. Basically, it will stop an ambitious youngster like myself from moving up from rags to riches. This is nonsense. The most classless societies in the world are those in Scandinavia, where taxes are high, basic education is good and there is a culture of mutual respect (Layard, 2005).
So why has American and other First World nations happiness levels
raised less than others when looking at income.
- Our norms have risen (as discussed in Anything You Can Earn, I Can Earn More: Two Tips about Happiness and Income).
- Our own experience in comfort has risen (also discussed in Anything You Can Earn, I Can Earn More: Two Tips about Happiness and Income).
- Other people’s incomes have risen while a majority of our incomes have stayed the same… those 1/10th of 1% people getting all the wealth you always hear about.
The central mechanism at work here that is holding back our happiness as a
nation is our habit of comparison (Layard,
2005). This is deeply rooted in our psychology.
Now look at the
following illustration:
A natural question is to ask which horizontal red line of the two is longest? Most people would say the one on the top. Why? Because, the top line appears longer when looking at the gaps created between the two sloping lines to the right and the left of it. Yet, in fact, both lines are the same length.
Moral
time: What this illustration shows along with the various
research studies on income and happiness is that we constantly distort our
perception of reality by making unhelpful comparisons. So, plain and simple, some
more “secrets to happiness” regarding this political race is to share unnecessary possessions and wealth and enjoy things as they are without
comparing them to something better. In other words, we don’t need to make America great again but rather share with each other what already makes America great.
Cheers.
References
Economist. (April, 2004). A billion shades of grey. Retrieved from http://www.economist.com/printedition/2014-04-26
Helliwell, J. (2003). Hows life? Combining individual and
national variables to explain subjective well-being. Economic Modelling, 20, 331-360.
Layard, R. (2005). Happiness:
Lessions from a new science. Penguin Books: London, England
World Bank. (2000). Attacking Poverty. Retrieved from
https://openknowledge.worldbank.org/handle/10986/11856