moneyincome

My article about the relationship between happiness and income, originally published on PolicyMic:

Over the past few decades, a remarkable field of inquiry that seeks to understand the relation between income and happiness has developed in economics and psychology departments. It has revealed that happiness and income are in fact correlated and that the fiscal policies a country enacts can have a considerable effect on the happiness and wellbeing of its citizens.

In light of the recent and widely reported 30% increase in the suicide rate for Americans ages 35 to 54, which occurred over the backdrop of stagnating wages and widening inequality caused by the Great Recession, the findings of this new field are especially germane. What’s more, if its findings are right, we ought to enact more liberal fiscal policies.

According to a 2010 study by Daniel Kahneman and Angus Deaton, two Princeton professors, which draws on data from over 450,000 participants, there are two aspects of happiness with which family annual income correlates. There is emotional wellbeing, which refers to “the frequency and intensity of experiences of joy, stress, sadness, anger, and affection that make one’s life pleasant or unpleasant,” and there is also life evaluation, which refers to the thoughts that one has when she thinks about her life as a whole. The former aspect of happiness captures our day-to-day experience, whereas the latter aspect captures how satisfied we are with our lives more generally.

Perhaps not surprisingly, Kahneman and Deaton found that both emotional wellbeing and life evaluation correlate positively with family annual income. But when income exceeds approximately $75,000 a year, emotional wellbeing plateaus. Thus the old adage that money can’t buy happiness is true if you make more than $75,000, but false otherwise.

Life evaluation, on the other hand, continues to correlate logarithmically with income beyond $75,000. What this means is that a doubling of any two incomes, wherever they fall on the spectrum, will produce equivalent gains in life evaluation.

Moreover, “in the context of income, a $100 raise does not have the same significance for a financial services executive as for an individual earning the minimum wage, but a doubling of their respective incomes might have a similar impact on both.”

If the findings of Kahneman and Deaton are true, then when income flows uninhibitedly to the top, we experience wasted utility, in the sense that a large portion of the money in our economy is distributed in such a way that it does not improve the quality of anyone’s life. Through a more progressive tax system, or through limitations on executive pay (like tethering the highest paid employee’s salary to a multiple of the lowest paid employee’s salary), this money could be used to substantially enhance vast numbers of lives of those at the middle and bottom of the spectrum, without at all lessening the emotional wellbeing and only slightly lessening the life evaluations of few at the very top.

For each American family that earns more than $10 million a year, for instance, there is roughly $9.925 million that does not produce greater emotional wellbeing for anyone, and although this extra $9 million will produce a higher score in life evaluation, such a family could sustain a very high score even if more than a couple million dollars of income were distributed elsewhere. Meanwhile, if 1,000 people near the bottom of the spectrum, making only $15,000, say, were to receive a pay raise of $2,000 more each year from that $2 million, then their quality of life would measurably and significantly improve.

In order to bend the curve of the suicide rate back down, I believe we ought to distribute more money at the top downward in some way, given the huge gains of total happiness and quality of life that would result — this would make more people’s lives worth living and make our country a better place. But many people, I believe, will disagree with me on various grounds.

One objection to the program I advocate is that the policies involved would damage the economy. If Congress passes legislation that increases the minimum wage or that limits executive pay by tethering the highest paid employee’s salary to a multiple of the lowest paid employee’s salary, for example, then the costs of running a business would increase and many employees would have to be terminated.

I believe that this can be a sound way of thinking under many market conditions. But the conditions of today’s market do not support this reasoning. There are, of course, scales to be balanced here. We want it to be easy for entrepreneurs to start businesses and we want there to be incentives for people to rise through the ranks and become more productive. At the same time, we want people to be able to rise through the ranks and we do not want those at the bottom and middle to live in perpetual penury. The fact that CEOs of America’s largest companies make 354 times more than the average American worker and the fact that the bottom 80% of Americans hold only 7% of the country’s wealth — these facts tell us that the scales are unbalanced and that our CEOs could take home less of the pie so that there would be more for the rest of us. In 1980, for comparison, CEO pay was only 42 times that of the average worker.

Another objection to my proposal steams from the notion that it would probably require raising taxes on our top earners. If we impose higher taxes on top earners or limitations on executive pay, many people think, we would penalize productivity and hence damage the economy. The argument is that businesspeople will not be motivated to work harder and entrepreneurs will not be motivated to start new businesses because, if taxes are higher, their payoffs will be less. But this way of thinking is not borne out by history. Our economy grew during the 1950s when the marginal tax rate was in some cases 91% and it continued to grow through the ‘60s and ‘70s when the marginal rate was 70%. What’s more, even “under those burdensome rates,” writes Warren Buffett in an Op-Ed article, “both employment and gross domestic product increased at a rapid clip.”

More often than not I find the above arguments serve more to mask monetary selfishness than they do to solve the social and economic problems at hand. If Congress passes legislation that directs some income from top earners downward, the economy would not suffer and the quality of many American lives would improve.

If the findings of Kahneman and Deaton are right, then the fiscal policies we enact affect on our own happiness and we ought to pass legislation that produces a society that is both more equitable and more happy. The recent spike in the suicide rate ought to remind us of what’s really at stake.

Advertisements

5580186619_9a4d671463_b

My article on minimum wage, originally published on PolicyMic:

In the months following the State of the Union address, in which Obama called to raise the federal minimum wage from $7.25 to $9 an hour, a series of conservative arguments about the negative effects of minimum wage hikes has appeared.

Most of these arguments are false or highly confused. They fail to accurately weigh the positive and negative effects of the minimum wage or they suffer from unawareness of the relevant facts.

One often heard claim is that minimum wage hikes increase unemployment. The standard argument for this, as the editors at the Wall Street Journal put it, is that workers whose skills do not merit a wage increase “will be priced out of the job market and their pay won’t rise to $9. It will be zero.”

This argument is remarkably simple and this gives it some intuitive appeal. But in a field as complex as economics, such simplicity should warrant more suspicion than confidence.

The fact of the matter is that raising the minimum wage does not increase unemployment. According to a study by John Schmitt from the Center for Economic Policy Research published this February, there is “little or no employment response to modest increases in the minimum wage.”

Another influential study from 2010 by Dube, Lester, and Reich found “no adverse employment effects” to minimum wage increases. And many other studies make similar claims. What’s more, even studies with conservative biases admit that the negative employment effects of minimum wage increases are small.

Why is this so? It turns out that when minimum wage goes up, employers react in more subtle and effective ways rather than by simply firing their workers. In response to minimum wage hikes, employers tend to improve efficiency, give smaller bonuses to more highly paid employees, or else absorb the costs of minimum wage increases by accepting smaller margins.

Another common response of employers is to pass on the cost of higher wages to consumers by raising prices. Many people point to this fact in arguing against minimum wage increases. Christina Romer a professor at Berkeley, for example, writes that the burden of higher prices “may harm the very people whom a minimum wage increase is supposed to help.”

But a wider investigation tells a different story. One study by Sara Lemos that reviewed over 30 academic papers on the price effects of the minimum wage showed that most studies find that “a 10% US minimum wage increase raises food prices by no more than 4% and overall prices by no more than 0.4%.” So the negative effects of higher prices are strongly offset.

Another well documented benefit of minimum wage increases is reduced labor turnover. Dube, Lester, and Reich’s study found that turnover rates “fall substantially following a minimum wage increase.” And what’s more, the cost savings associated with reduced turnover “may compensate for some or all of the increased wage costs,” comments Dr. Schmitt.

Indeed it is because the positive effects of minimum wage increases so strongly outweigh the negative that another study by Doug Hall and David Copper estimates that raising the minimum wage to $9.80 an hour by July 2014 would actually add over $20 billion to the economy and create approximately 100,000 new jobs.

The rational for this result is that poor people spend more of their incomes than their affluent counterparts. So when their income is increased through minimum wage hikes, they spend more money and this added spending could boost demand and stimulate employment as a result.

This does not mean that raising the minimum wage is always a good idea. In response to some of the arguments I’ve given, many conservatives often ask the loaded question, “Why not raise the minimum wage to $100 an hour?” An increase that substantial would cause the negative effects of the minimum wage to outweigh the positive and nearly all economists agree that this would do catastrophic damage to the economy. That is not what we should do and nor is it what anyone is suggesting. What I intend to say is, given our current economic conditions, an appropriately sized increase to the minimum wage would be beneficial.

Moreover, by any reasonable standard, the current minimum wage is too low. If the minimum wage had kept up with inflation since 1968, it would be $10.67 today.

Still, some conservative extremists go so far as to say that there should be no minimum wage at all. Milton Friedman said in an interview that when you impose a minimum wage, you “assure that people whose skills are not sufficient to justify that kind of a wage will be unemployed” — a claim echoed by enumerable conservative columnists over the generations.

But I believe this claim is confused. People who work for the minimum wage are paid just enough to avoid starvation and to have somewhat consistent shelter. Many of these people are one accident away from total financial ruin. If we really believe that there are people whose skills are so low that they do not warrant a wage that provides consistent food and shelter, then we ought to offer some sort of remedial education or other program for these people, since the notion that there are Americans whose potential skills are so low that they do not deserve enough pay to fulfill basic physiological needs is absurd.

Picture Credit: Flickr

Female Usurpers

29 September 2012 — Leave a comment

With the publication of Hanna Rosin’s The End of Men, Liza Mundy’s The Richer Sex, and most controversially, Naomi Wolf’s Vagina, a spate of essays about gender and sex in the modern world has appeared. And the future, according to some, looks grim for men. Just look at some data. In elementary and high school a full three quarters of Ds and Fs are earned by men. Men earn only 40% of bachelor’s and master’s degrees. And now women under 30 out-earn men under 30. What’s more, in 1950, only 5% of men in their prime were not working; today, a startling 20% aren’t. Perhaps the most widely expressed explanation of why this is happening is this: “The information age economy rewards traits that, for neurological and cultural reasons, woman are more likely to posses,” writes David Brooks in his column on Rosin’s book. “To succeed today you have to be able to sit still and focus from an early age. You have to be emotionally sensitive and aware of context. You have to communicate smoothly. For genetic and cultural reasons, many men stink at these tasks.”

So what are men supposed to do? Rosin actually argues for a different explanation: That women are more adaptable and men more attached to the outdated mores, to put it crudely. A change in attitude is essentially what’s needed on her view. But I’m not sure that this is right. In elementary and middle school, if boys are 2.8 times more likely to be medicated for some kind of attention disorder and if three quarters of Ds and Fs are really earned by boys, then doesn’t this suggest that the system is rigged against them? Recommending a change in attitude might help someone in his or 30s or 40s, but telling a five-year-old that he’s too attached to the old ways doesn’t seem to make much sense.

At any rate, whatever the true reasons for the male decline are, we can all agree that we are on the horizon of a major change in family structure. Today the average wife contributes 42.2% of her family’s income — up from the 2 to 6% that wives contributed in 1970; and in almost 40% of American marriages today, the wife earns more than the husband. Data suggests this trend will continue. Soon enough, it’s likely that the majority of American households will have a female primary breadwinner, an event that would overturn a social order some six thousand years old.

I think this change should benefit everyone. Anne-Marie Slaughter wrote in her colossal Atlantic article, “Why Women Still Can’t Have It All,” that it is impossible for the most high-ranking and successful women, by today’s customs, to be both good mothers and reliable professionals: that the idea of a healthy work-life balance is a myth. But what Slaughter failed to consider in her article is that men haven’t had it all either. Traditionally, while men have been the breadwinners, they have also not been involved fathers and parents — the brunt of that role was traditionally borne by women. As a follow-up article in the Times says, as more women rise to positions of authority, we can expect changes in the workplace that encourage better parenting by both sexes — more flexible hours, mandatory maternity and paternity leave, and other measures that both eliminate advantages to hiring men over women and enhance family life. In short, changes that benefit men just as much as women.

Interestingly, many of these workplace alterations are enabled by the internet and other technologies. And many female leaders are taking advantage of them. “According to the Women’s Business Center,” Slaughter writes, “61 percent of women business owners use technology to ‘integrate the responsibilities of work and home’; 44 percent use technology to allow employees ‘to work off-site or to have flexible work schedules.’” Since work is not necessarily tethered to the workplace, as it has been before, it is now possible to leave the office at 5:30 to have a family dinner at home and to help the kids with their homework. The work time can easily be made up on the computer after dinner. This is something that wasn’t possible until recently.

Women are more likely than men to bring about changes of these sorts because even women who are primary earners still spend more time raising their children than their male counterparts. It’s still the expectation that women bear the brunt of the parenting. However, the more change that is realized in the workplace that promotes healthy work-life balance for both sexes, the more reason we have to believe that that expectation will change too.

There is a caveat, however. The optimistic outlook I’ve expressed presupposes that, for a significant number of families, the male ego can withstand being out-earned by his spouse. The data on this issue are fascinating. According to “The Weaker Sex,” an article by the Atlantic’s Sandra Tshing Long, a “2010 study showed that when a woman’s contribution to household income tops 60%, the couple is more likely to divorce.” What’s more, “women who are financially dependent on their husbands tend to be faithful, while, paradoxically, financially dependent men tend to stray.” Whoa! There are several questions we should ask about these statistics. Are they indicative of some immutable biological reality? Or are the reactions of financially dependent men more likely to be engendered by our social norms, which are mutable? If the former is true, then this presents a major stumbling bloc for the women’s movement and the trajectory of American culture generally. If the latter is true, on the other hand, (which is what I suspect) then both men and women will have to be involved in altering our norms.

But here cynicism abounds. In Sandra Tshing Long’s article, for example, she expresses frustration about financially subordinate men to whom she and others find themselves attached. She describes a dinner out with her friends — all divorced mothers, except one married mother who recounts the inadequacies of her husband for failing to change a lightbulb in the garage after her repeated plea. “I find Ron in the kitchen, as usual,” she says, “cooking a red sauce from scratch when Prego is just as good. I ask him to take care of it.” Short story: after three nights of asking, he still doesn’t. $275 an hour couple’s therapy ensues.

Later, Long describes her own frustrations with her boyfriend whom she out-earns and with whom she shares a home. “When the 2012 Type A woman listens to you describe a problem in your workday,” Long writes, “she is mentally leaping forward, positing solutions, and also deciding how well or poorly you’ve handled the situation.” Too many poorly handled situations can lead to big trouble: “I made the mistake of asking ‘How was your day?’” she continues, “and he made the mistake of responding, and as I watched his mouth move, I felt my trigger finger twitch and thought those awful words only a woman who needs a man neither to support her nor to be a father to her children can think: How long until I vote you off the island?”

I think there is something somewhat disagreeable about Long’s reading of the female breadwinner paradigm. Why do the men in her article seem so pathetic? Is this what we can expect the norm of female breadwinners to be like? Why doesn’t she just vote her boyfriend off the island? And why does the homemaker — male or female — always seem to lose? Consider the situation: A dinner. All attendees but one are divorced mothers. The bias is palpable. I don’t think this is a telling look at the future norm of female breadwinners.

So what will that norm look like? I really don’t know. But one thing is certain: True gender equality will not be achieved until all the various genders come to an understanding of one another. We might as well face facts: Men are not going anywhere and it’s likely that their economic dominance will soon be usurped by women. A healthy and productive series of norms needs to be developed and disseminated — norms that do not disparage the homemaker or anyone’s gender or biology. I don’t think any of the articles and books I’ve read over the passed couple weeks make progress on any of these fronts. We need honest and open discussion about the coming reality. What we don’t need is another spate of provocateur books and articles.