Deaton and Stone (2013) Identify “Two Happiness Puzzles”

Angus Deaton and Arthur A. Stone, “Two Happiness Puzzles.” American Economic Review 103(3): 591-97, 2013 [pdf].

• If the Easterlin Effect is correct, and if it arises from the fact that people care about relative, not absolute income, then a rise in someone else’s income hurts me. That is, individual income increases in these circumstances involve a negative externality – and perhaps such increases should be dissuaded by a Pigovian tax, as with other negative externalities. 

• Deaton and Stone can find little or no evidence for the Easterlin Effect either within the US or across countries, however – this is their first happiness puzzle. Their non-result is especially strong when using an evaluative measure of happiness – the rung (0 to 10) of a ladder representing quality of life – as opposed to a hedonic measure, based on reported happiness (reported today concerning yesterday). Indeed, there is some evidence that living in the same zip code as rich people raises average happiness. For Deaton and Stone, universal increases in income will increase happiness markedly. 

• Religious individuals tend to report higher evaluative happiness – but more religious countries or states do not appear to be happier, even (in cross country data, though not in the US) after controlling for average income. This aggregation inconsistency is the second happiness puzzle, and it applies only to evaluative happiness, not hedonic happiness. (More religious countries report higher average hedonic happiness, but not higher evaluative happiness.) In the US, religious states also seem to have worse social problems, like crime and ill health. One speculative explanation is that social problems tend to cause people to be religious, and as the problems are ameliorated, religiosity declines.