As we give thanks this week, it may seem to some that we don’t have as much to be thankful for as in prior years. Our nation — indeed, the whole world — faces difficult economic times. More households have at least one earner out of work. Many households have seen their wealth decline as the values of their homes and retirement savings have dropped sharply. And yet, many of us still have much for which to be thankful.
The revised third-quarter gross domestic product numbers released Tuesday show that the U.S. economy contracted more sharply than initially estimated. Wednesday’s reports on new jobless claims, consumer spending, orders for durable goods and new home sales and prices all were somber. Clearly the fourth quarter will show further declines in output of goods and services and in employment. Next year will be a time of financial stress for many households.
Will we therefore be less happy? Economic theory tells us yes. The reasoning is as follows: If people choose to consume more goods and services, it means they are getting additional satisfaction of needs or wants by so doing. They are getting more satisfaction, more “utility” in theoretical terms, from having more. Therefore they are happier.
Force them to cut that consumption because of a bad economy and they will sacrifice some satisfaction or needs or wants, some degree of happiness — given the traditional economists’ qualification of “all other things being equal.”
But the decline in happiness is almost certainly less than the decline in consumer spending. There is no way we can tell for sure because we cannot measure “happiness” or “utility” in any objective way.
Any one individual may know that a chicken breast makes them happier than a lamb chop or that they would rather have a Toyota than a Ford. But we cannot measure this happiness on any scale, and we cannot even compare it to how much satisfaction any other individual gets from the same goods.
We do know, however, that the idea of “diminishing marginal returns” applies to consumption as well as to other areas. When you are earning $50,000 a year, getting a raise that will let you spend an extra $1,000 per year adds to your satisfaction, but not as much as if you were earning $20,000 and got an extra thou.
So, all other things being equal, a 10 percent drop in income need not reduce our happiness by 10 percent if that could be measured.
Moreover, the old adage that misery loves company is verified by research. It is easier to have to drive an older car, forgo an expensive vacation or give up eating out if your friends and neighbors are doing the same things.
Indeed, some hardships apparently bring a sense of solidarity that partially compensates for deprivation. People who lived through the Depression or in post-war Europe often speak of this. They don’t say necessarily that the increased social closeness made it all worthwhile, but they do say it made day-to-day life easier.
To say, however, that a decline in national income, and hence in the income of many households, need not bring an equal decline in happiness ignores the harsh fact that not everyone suffers equally.
In introductory macroeconomics courses, professors point out that while inflation affects everybody to some extent (since virtually everyone buys something) unemployment affects a small fraction of society — those who actually lose their jobs — a great deal, while those with secure employment suffer little.
My wife and I both have secure jobs. We don’t anticipate that 2009 will be any more difficult financially than 2008 has been. But for those who will be out of work for extended periods, the pain may be great.
The argument made above, that a decrease in consumption spending need not cause a proportional decrease in happiness, assumes that one can cut back smoothly on most expenses.
But if an extended period out of work, or a pay cut or fewer hours or lower small-business profits, means that you cannot pay your mortgage, your car payment or even your rent, the resulting stress may feel off the scale. The distress of having your house foreclosed on or of going through bankruptcy is extreme. And for many, this can be triggered by relatively small declines in income.
If you have few financial worries, be grateful for that. If you do have such worries, appreciate the non-monetary things you may have such as family, friends and health. Have a happy Thanksgiving.
© 2008 Edward Lotterman
Chanarambie Consulting, Inc.