Governments shouldn't worry about happiness

Helen Johns and Paul Ormerod from the Institute of Economic Affairs (a London-based free-market think tank) make an interesting contribution to the ongoing debate about the implications of happiness research for public policy. (Paper available at http://www.iea.org.uk/files/upld-book416pdf?.pdf).

Some commentators have suggested that governments should adopt the overall policy goal of maximising ‘gross national happiness’. Johns and Ormerod challenge that idea, showing that it would have some pretty perverse results.

One of the commonly cited findings of the happiness research is that increasing GDP has not led to higher levels of reported happiness. Johns and Ormerod show that not only is reported happiness not correlated with income; it is also not correlated with a range of other factors that would be expected to lead to increased happiness. For example, falling crime rates don’t increase happiness. Increased life expectancy doesn’t increase happiness. Rising income inequality doesn’t increase (or reduce) happiness. Increasing female earnings relative to male earnings doesn’t increase happiness. They also found that increased government spending doesn’t increase (or reduce) happiness (see figure to left, reproduced from Johns and Ormerod, p. 35).

Ultimately the reason that GDP, crime rates, female wages and government spending are not correlated with reported happiness is that in the surveys used to measure happiness, people are asked if they are ‘not happy’, ‘quite happy’ or ‘very happy’. You would expect that there would be a fair bit of stickiness in the results over time. Basing policy on such a poor-quality indicator would be a disastrous idea for all of us. Ultimately governments would find that they are pretty much powerless to increase happiness over its long-run average.

Rather than trying to pursue some indicator (like reported happiness, or Australia’s ‘ranking’ against other OECD countries), policy should be based on first principles. That is, governments should only intervene where there is a demonstrated market failure, and government intervention is reasonably expected to make things better.
As for happiness, rather than pursuing ‘gross national happiness’, I like the wording of the American Constitution, which enshrines people’s right to ‘life, liberty and the pursuit of happiness’. This recognises that not everybody is going to be happy all the time, but they should be allowed to do what they think will make them happy. Policy makers should never infringe on people’s right to pursue what they see as their own best interests, so long as they are not doing any harm to anybody else.

Ozonomics by Andrew Charlton

Andrew Charlton is 28 years old and has one of those CVs that makes you jealous. He was a Rhodes Scholar, has worked at the OECD and United Nations, and has spent the last couple of years at the London School of Economics. He has co-written several academic papers and a book with Nobel laureate Joseph Stiglitz, and his second book Oznomics was launched in Sydney last night by Labor leader Kevin Rudd. Clearly he’s an intelligent, ambitious young man, and judging by the thrust of Oznomics he has a well developed sense of social justice.

Oznomics is one of a series of recent books about economics written for non-economists. Charlton approaches the questions that people have about economics with one very particular goal: to show that the prosperity that Australia has enjoyed over the past decade is not solely due to the economic management of the Howard/Costello ‘dream team’.

On the way, Charlton skewers a number of myths about economics and the economy. First off, he tells us what economics isn’t. Economics isn’t very concerned with daily fluctuations in gold prices, share prices, and the value of the Australian dollar. In fact, Charlton argues, there are really only three issues that matter in economics: productivity, jobs and equality.

On productivity, Oznomics is uncontroversial. Charlton echoes Paul Krugman’s sentiment that productivity isn’t the only thing matters, but in the long run it is just about the only thing that matters. He is of the opinion that in Australia’s national debate, productivity doesn’t get enough attention.

On jobs, Charlton does a good job of de-bunking the myths perpetuated by ‘sandbaggers’ – people who would erect trade barriers to try to keep out the rising tide of the global economy. At the same time, he clearly opposes the ‘market fundamentalism’ of the Howard government’s WorkChoices policies.

On equality, Oznomics cites the growth of the gap between the lowest paid and the super-rich CEOs and sports stars, and argues that ‘conspicuous consumption’ for status is a zero-sum game that makes us all worse off (if everyone buys their fiancés a big diamond ring, big diamond rings are no longer a sign of status).

Oznomics then sets out the benefits of free markets – chiefly their ability to respond quickly to what people want. However Charlton challenges what he sees as dogmatic ‘market fundamentalism’ that considers that markets are always superior to government at providing services. He gives a couple of Mike Moore-esque examples of private companies doing a poor job of what he seems to think should be done by governments (contractors in Iraq and the failings of the US health system), and states that:

‘In Australia there are many examples of “deregulatory overreach”, where economic reform has ended up causing more inefficiencies than it has eliminated’ (p. 98)

Charlton cites the privatisation of the Commonwealth Employment Service and the subsequent poor outcomes for the long-term unemployed as an example of ‘deregulatory overreach’.

Ozonomics then moves on to the substantive matter of the book: the myth of Howard and Costello as ‘economic superheroes’. First Charlton outlines some of the major economic reforms of the Hawke/Keating era (floating the currency, the prices and wages Accord, the first microeconomic reform). Charlton correctly argues that these reforms have contributed to Australia’s economic performance of recent years.

The rest of the book is devoted to debunking six economic ‘myths’ perpetuated by Howard, Costello and their supporters. These myths (and Charlton’s rejoinders) are:

Myth 1: Budget deficits lead to higher interest rates.
Charlton: The market for funds is so large, and budget deficits relatively so small that the effect of budget deficits on interest rates is miniscule.

Myth 2: Government debt is irresponsible. Howard and Costello have done us a great service by paying down ‘Labor’s $96 billion debt’.
Charlton: The debt has been paid off by selling off public assets. Essentially public debt has been replaced by private debt.

Myth 3: Reforms to workplace relations have boosted employment and economic growth.
Charlton: The effects of getting rid of unfair dismissal laws are miniscule. WorkChoices was really an exercise in diminishing the power of unions.

Myth 4: Interest rates will always be lower under the Coalition.
Charlton: Interest rates have been low since 1996 due to low inflation and the actions of the Reserve Bank. Besides, it’s not interest rates that matter, it’s the total interest bill that people pay. People are now borrowing more (e.g. for more expensive houses), so are paying more in total to service their debts than in the late 1980s. He also takes the predictable shot at Howard’s performance as treasurer.

Myth 5: Something about house prices (this chapter is a garbled mess, not sure what it’s really saying).
Charlton: The housing boom is really just a great ‘intergenerational scam’ played out by Baby Boomers on the next generation.

Myth 6: The GST was a significant change to Australia’s tax system.
Charlton: Howard and Costello have been timid on tax reform. And anyway, we don’t need to worry about tax too much, as it’s part of a ‘social contract’ and people don’t mind paying tax.

So, there’s a run-down of the contents of Ozonomics. The question is, is it any good? Well, sadly it’s not, really. And I say ‘sadly’ because clearly Charlton’s ideas have gained some currency in the Labor party. Events of the last few weeks (Kevin Rudd’s mangled attempts to use productivity statistics; Kim Carr’s promise to ‘review’ tariff cuts; Rudd’s populist attacks on petrol and grocery price ‘gouging’) suggest that Rudd is a bit naïve when it comes to economic matters. On the surface, an Oxford educated Rhodes scholar should have been able to inject a little sense into Labor’s economic policy.

The problem is that while he debunks some persistent myths about the economy, Charlton falls for a few others that are just as bad. One myth that pervades Ozonomics is the ‘mercantalist myth’. Basically, this is the myth that Australia is like a big corporation, and ‘we’ are competing against the rest of the world. This myth shines through in phrases like ‘our national competitiveness’ (p. 114), and in references to Australia’s ‘ranking’ against the rest of the world.

The mercantilist myth is dangerous because it misses the point. Australia’s economic fortunes don’t depend on how successful Australian firms are in world markets. Australia’s economic fortunes (in the long run) depend on productivity. Instead of worrying about how we stack up against the rest of the world, Australian governments should be doing what they can to remove barriers to productivity growth. (For those wanting more, Paul Krugman does a good job of debunking the mercantilist myth in his 1994 article Competitiveness — A Dangerous Obsession, available at http://www.pkarchive.org/).

So what can governments do to increase productivity? Unfortunately Ozonomics has little to say. Charlton murmurs about education, innovation and infrastructure, but it’s motherhood stuff. Two possible areas of reform that could increase productivity in Australia are rejected: labour market deregulation and tax reform. According to Charlton, deregulating the labour will not do much to add to productivity (WRONG), and tax is an issue for crazy right-wingers to obsess over (nobody has ever explained to me exactly how it is ‘progressive’ for the government to waste vast sums of taxpayers money through welfare churning).

It seems that Charlton favours just pumping public money (our money) into education, innovation and infrastructure, and hoping for the best. He implicitly assumes that the government will get good results from its investments. That sounds nice in theory, but in practice governments waste money. They pork-barrel. They try to pick ‘winners’ that inevitably run a poor second to the private sector. And they soak up vast sums of money that could have gone to more efficient private investment.

As well as taking a mercantilist view of the economy and not offering anything much on the big question (productivity), Charlton is selective in the evidence he cites, and ignores vital counter-factuals. For example, he opposes cutting the conditions of employed people (WorkChoices), but doesn’t discuss the effects that this has on the unemployed (it keeps them out of the labour market). Nor does he mention that the best way to guarantee yourself a well-paid, secure job is not to get the government to protect you from evil employers: it is to get a set of skills that make you so valuable to your employer that they would not dream of treating you badly.

In rejecting privatisation, Charlton cites one example of a privatisation that did poorly by some people. The privatisation of the Commonwealth Employment Service may have reduced the support given to the long term unemployed, but there are far more examples of regulation and government intervention making us worse off than there are examples of deregulation making us worse off. Moreover, the fact that some groups lose out from privatisation and deregulation does not mean that the regulations should have been kept in place. All policies produce winners and losers. On average, the benefits of deregulation normally outweigh the costs. Isolated examples of ‘deregulatory overreach’ are not a convincing argument against deregulation.

On top of that, Charlton wastes time worrying about the biggest non-issue in economics: inequality. Sure, we may all find it offensive that there are kids starving in Africa while Posh Spice starves in a Malibu mansion, but the problem is not inequality – it’s poverty. Take Posh Spice out of the picture, and the fact that kids are starving in Africa is still offensive. Trying to ‘fix’ inequality through punitive taxation and income redistribution will achieve nothing. What we need to focus on is getting people out of poverty by equipping them with the skills to participate in a modern economy.

There are a lot more things I could say about Ozonomics, but this is getting too long (it is my first effort at a book review since high school). Suffice it to say that Andrew Charlton has his heart in the right place. I believe that he really does want higher productivity, more employment, better wages and all that good stuff. But I don’t think he knows how to get there.

The hippocratic economist

Welcome to the Hippocratic Economist. I am an Australian economist working in the public sector, and I have decided to start a blog to discipline myself into writing more. I chose the name 'Hippocratic Economist' because as a practicing policy economist, I think that the principle of 'first do no harm' is a pretty good starting point for policy makers. And also because all the good names are already gone.

I intend the content of this blog to be reviews of books (fiction and non-fiction), academic papers and interesting government publications. I will also be posting on economic policy issues. I might do the occasional music or film review.

Thanks for any comments you care to make.