Will Money Ever Bring You Happiness?

Written by Sintia Radu via US News in partnership with the University of Pennsylvania on 1/23/18

In 2014, a bestseller written by French economist Thomas Piketty called "Capital In The Twenty-First Century" looked at historical data on income and wealth and warned that inequality might spike over time if the rich see their wealth increase at a much faster rhythm than economic growth overall. The author also predicted that this might happen in the coming decades and damage societies that need to promptly step up and place new taxation on wealth.

New research by economists at the Federal Reserve Bank of San Francisco who analyzed data from 16 countries stretching from the late 1800s to 2015 suggests an even more alarming outcome. The study indicates that increased economic inequality is even more likely to occur in the next decades and is supported by data that shows that the return on wealth "has consistently been higher than the real GDP growth rate." Hence, the richer seem to be getting richer at a faster pace than entire nations.

Yet despite the bad news, not all data indicates that people will be pessimistic about their future if wealth continues to primarily cluster with the rich.

Happiness is a complicated concept and, throughout time, many have tried to explain its correlation with economic indicators. The question of money bringing happiness has been researched by economists and psychologists alike and while there has never been a consensus, experts say some general patterns can be identified.

"There is a positive correlation between, at a given time, wealth and subjective well-being even though the correlation is not strong," says Christopher Hsee, professor of behavioral science and marketing at the University of Chicago Booth School of Business. "Also, this correlation is particularly high for people in poor countries."

In other words, economists believe the poorer the people, the happier wealth makes them, as wealth for those who have little translates into covering more of the basic survival needs, such as food or shelter. Yet in wealthier, more developed countries the situation is far more complex, economists say, as needs get more sophisticated and people rely on things that can't be attained with money alone. These can include a healthy relationship, friendship, entertainment options, nice weather and so on.

"Simply stated, the happiness–income paradox is this: At a point in time both among and within nations, happiness varies directly with income, but over time, happiness does not increase when a country's income increases," according to the authors of a study at the University of Southern California.

Income inequality is critical issue resonating around the world, according to results from the 2018 Best Countries survey and rankings. One in four of the more than 21,000 global survey respondents said government leaders need to first address income inequality, ahead of issues such as climate change, immigration, gender inequality and the refugee crisis. Only terrorism drew more global support from the survey.

Happiness also seems heavily influenced by our wealth reference, which means that it matters less what you have, but what others around you have and how they compare to you.

"If you live in a city and you can drive a BMW and other people only drive Volkswagen, then you are happy and the people who drive Volkswagen are probably not that happy," Hsee says. "But if you are in another society where everybody only rides a bicycle, if you have a bike you are also happy. So it really doesn't depend on whether you drive a car which is much more expensive than a bicycle – it's all about the comparison."

Recent studies show that while life satisfaction might indeed increase along with economic performance, not everyone is happy simply because the indicators go up. For instance, research that examined 100 countries and was put together by Gallup, the Washington, D.C.-based global polling firm, showed that while gross domestic product per capita was constantly increasing in the U.K. in the past decade, people's happiness levels were going in the opposite directions. In the years preceding Brexit, happiness levels dropped as much as 15 percentage points.

The same thing happened in the U.S., where the economy grew from 2006 to 2016 while people reported declining rates of happiness; only 50 percent of survey respondents just before the presidential elections in 2016 said they were happy, compared to 66 percent in 2007.

The reasons for these differences is that people are not entirely rational and their perception on their daily lives is not always in sync with just the economy. Also sometimes people can expect change even though wealth steadily increases.

“The most famous national statistics – GDP [gross domestic product], household income and unemployment – focus on the rational side of what people do: what they spend, how much they make and whether they have a job," states the Gallup study. "This report quantifies the other 70% of what makes a great life – the emotional side."

While it’s hard to predict the impact of more economic inequality, economists warn that more than one factor needs to be considered and that everything is relative.

“If inequality means poor people would get poorer then I think on average people would be less happy because more people would live under poverty,” Hsee says. “On the other hand, if economic growth makes even the poor richer, but richer people richer at a faster rate, then it's possible that even poorer people will be happier because their absolute standards increase as well – or they might feel unfair.

Adds Hsee: "It's hard to predict the exact effect on happiness but it very much depends on whether everybody gets richer or some people get poor.”