Can Money Buy Happiness After All?

New research suggests an old paradox might not be true.

"Everybody wants more cash!" declares Capital One bankcard TV pitchman Jimmy Fallon. Everyone except for one cute baby, that is, who rejects Fallon's offer of 50 percent more cash back by throwing Cheerios at him. Perhaps the Capital One baby is a devotee of the Easterlin Paradox?

In his seminal 1974 article, "Does Economic Growth Improve the Human Lot? Some Empirical Evidence," the economist Richard Easterlin noted that while incomes in various countries had increased, reported well-being and life satisfaction on surveys had not. In other words, more money didn't make people happier.

In the four decades since, the Easterlin Paradox has more or less become established as the conventional wisdom. Later researchers argued that what really matters for a person's overall life satisfaction is relative income. The implication is that if relative socioeconomic positions don't change when everyone gets richer together, a country's average happiness doesn't increase. Getting ahead of the Joneses makes a person happier, but merely keeping up with them does not.

Other researchers argued that rising incomes put people on a hedonic treadmill. When incomes increase, people gain a short-term boost in happiness, but once they get used to the new riches and their aspirations grow, their level of happiness drops back to where it was before the raise.

Looking over cross-country comparisons of income and happiness in 2003, the British economist Richard Layard concluded, "Above $15,000 per head, higher average income is no guarantee of greater happiness." The upshot was that fostering economic growth is futile: When everyone becomes richer, no one becomes happier. Indeed, your competition with the Joneses is a negative externality, because the Joneses' success lowers your relative income, making you feel less happy. As the novelist Gore Vidal quipped, "Every time a friend succeeds, I die a little."

If the Easterlin Paradox is real, the Capital One baby is right to reject more cash, since it likely won't produce more happiness. But in recent years, additional research has cast doubt on the concept. Maybe more cash makes people happier after all.

The most salient work has been done by the University of Pennsylvania's Daniel Sacks and two other economists, Betsey Stevenson and Justin Wolfers, both at the University of Michigan. In a 2008 study updated in 2010 for the National Bureau of Economic Research (NBER), they compare survey data on subjective well-being with income and economic growth rates in 140 countries. Within individual countries, they found, richer people are happier than poorer people; people in richer countries are happier than people in poorer countries; and over time, increased economic growth leads to increased happiness. "These results together suggest that measured subjective well-being grows hand in hand with material living standards," they conclude.

Interestingly, the researchers find that "a 20 percent increase in income has the same impact on well-being, regardless of the initial level of income: going from $500 to $600 of income per year yields the same impact on well-being as going from $50,000 to $60,000 per year." So at higher levels of income it takes more money to buy an extra bit of happiness. But the researchers found no point at which more money will not buy more happiness'"certainly not at Layard's $15,000 per capita.

How much happier on average are people living in rich countries compared to people living in poor countries? On a zero- to 10-point life-satisfaction scale, people in poor countries average three points; those in middle-income countries score around five or six points; and citizens of rich countries get between seven and eight points. If rich countries are happier places, that strongly suggests they got that way by means of economic growth. (For what it's worth, the World Happiness Database reports that the U.S. averages 7.4 points on the happiness scale.)

Since 1970, total world product has more than quintupled (in constant 2005 dollars) from $11 trillion to $57 trillion today. At the same time, world population has increased from 3.7 billion to 7 billion, which means that the globe's average annual per capita income has increased from about $3,000 to more than $8,000. Taking into account the trends in all of the well-being survey data, the researchers find that in "recent decades the world has gotten happier, and nearly all of the gains are attributable to gains in GDP."

There is one outlier in the trend data collected by Sacks, Stevenson, and Wolfers: the United States. As average per capita incomes have increased (in constant 2000 dollars) from around $19,500 in 1972 to $37,500 today, average American happiness has hardly budged. According to data from the General Social Survey, 86 percent of Americans in 1972 said they were either pretty happy or very happy. The figure was 89 percent in 2006. This stall might reflect the fact that the rise in inflation-adjusted median household incomes has been smaller, moving from $45,000 in 1970 to just $50,000 in 2011.

In a 2008 NBER study, "Happiness Inequality in the United States," Stevenson and Wolfers did find that differences in levels of happiness among some demographic groups have narrowed. "Two-thirds of the black-white happiness gap has been eroded, and the gender happiness gap has disappeared entirely," they note. The gender difference evidently diminished because American women became a bit less happy than men over time. General Social Survey data show that an average of 34.3 percent of women and 31.8 percent of men reported being very happy in surveys taken between 1972 and 1989. Those averages fell between 1990 and 2006 to 30.9 and 31.1 percent respectively. And college-educated Americans became happier, whereas fellow citizens with only a high school education or less became less happy. The researchers speculate that Americans have been unsettled by "a host of economic, social, and legal changes," offsetting the gains in U.S. happiness that one would ordinarily expect higher incomes to have produced. 

Nevertheless, the most recent findings in happiness research generally vindicate the wisdom of novelist Gertrude Stein: "Whoever said money can't buy happiness didn't know where to shop."