The financial crisis and the well-being of Americans Angus Deaton Center for Health and Well-being Princeton University September 2011 The Hicks Lecture, Oxford, May 16th, 2011. I am grateful to the Gallup Organiz- ation for access to their data, to Jim Harter of Gallup for his extensive help in understanding the design of the Gallup Healthways Wellbeing Index survey, and to Sangeeta Agrawal, Jim Harter, and Frank Newport for leading Gallup’s work on the adjustments discussed here. I thank Daniel Kahneman, Daniel McFadden and Norbert Schwarz for extensive help and comments. I also acknowledge helpful comments on an earlier version from Tony Atkinson, David Cutler, Paul Dolan, Marc Fleurbaey, Ori Heffetz, John Helliwell, David Laibson, Richard Layard, John Muellbauer, Matthew Rabin and Arthur Stone. This work was supported by the Gallup Organization and by the National Institute on Aging through grants AG024928–06 and P30 AG024361 to Princeton and P01 AG05842-14 and R01 AG049629-01 to the National Bureau of Economic Research. The financial crisis and the well-being of Americans Angus Deaton, Princeton University ABSTRACT The Great Recession was associated with large changes in income, wealth, and unemployment, changes that affected many lives. Since January 2008, the Gallup Organization has been collecting daily data on 1,000 Americans each day, with a range of self-reported well-being (SWB) questions. I use these data to examine how the recession affected the emotional and evaluative lives of the population, as well as of subgroups within it. In the fall of 2008, around the time of the collapse of Lehman Brothers, and lasting into the spring of 2009, at the bottom of the stock market, Americans reported sharp declines in their life evaluation, sharp increases in worry and stress, and declines in positive affect. By the end of 2010, in spite of continuing high unemployment, these measures had largely recovered, though worry remained higher and life evaluation lower than in January 2008. The SWB measures do a much better job of monitoring short-run levels of anxiety as the crisis unfolded than they do of reflecting the evolution of the economy over a year or two. Even large macroeconomic shocks to income and unemployment can be expected to produce only small and hard to detect effects on SWB measures. SWB, particularly evaluation of life as a whole, is sensitive to question order effects. Asking political ques- tions before the life evaluation question reduces reported life evaluation by an amount that dwarfs the effects of even the worst of the crisis; these order effects persist deep into the interview, and condition the reporting of hedonic experience and of satisfaction with standard of living. Methods for controlling these effects need to be developed and tested if national measures are to be comparable over space and time. 1. Introduction The financial crisis that began in the summer of 2008 saw a rise in the unemploy- ment rate from 4.8 percent in April 2008 to 10.6 percent at its peak in January 2010, a 4.4 percent drop in employee compensation over five months in 2009–10, large stimulus-associated tax credits and rebates, a 4.7 percent drop of personal disposable income in May 2008 and 1.7 percent in May 2009, as well as a collapse and subsequent recovery of the stock market—the S & P 500 Index on March 6th, 2009 had fallen to 40 percent of its all time high of October 2007, and then more than doubled again by end 2010. Through the fall in the market and the fall in the prices of housing and of other assets, sixty percent of households saw their wealth decline between 2007 and 2009, and 25 percent lost more than half of their wealth, not including defined benefit pensions, Bricker et al (2011); these declines were widespread, affecting large shares of households across all age, income, and education groups, Chakrabarti et al (2011), Hurd and Rohwedder (2010). Financial losses were associated with reductions in consumption, and many households reduced consumption even without experiencing financial losses, Christelis et al (2011), Shapiro (2010). 1 These are large fluctuations in magnitudes that matter to people. Income, wealth, and joblessness are among the measures on which economists have traditionally focused. In the well-being literature too, a host of studies identify income and unemployment as two of the most important and reliable determinants of self-reported subjective well-being (SWB). Unemployment, in particular, typically exerts a larger negative influence than can be accounted for by the associated reduction in income. Although there is less literature on the effects of wealth on well-being, a 60 percent drop in the market has dramatic effects on expected future incomes, especially for those who are nearing a retirement to be funded out of accumulated saving or defined-contribution pension funds. These events had different economic implications for people of different ages; the elderly are not much affected by unemployment or employee compensation, but some are susceptible to stock market fluctuations. Young people may shrug off falls in wealth when they have not yet accumulated much and have many years before they need it, while their parents, nearing retirement, may see an imminent threat to their future. 2 The crisis brought harm to many, but it is a boon to researchers on subjective well-being, for whom it provided an unparalleled opportunity to examine how these events affected the standards of living, the emotional experiences, and life evaluations of those who lived through it. Our ability to make this evaluation is made possible by the data from the Gallup Healthways Well-being Index (hence- forward GHWBI). Starting on January 2nd, 2008, Gallup has run a daily (landline and cell-phone) telephone poll of 1,000 randomly-sampled adult Americans each day who are asked about how their lives are going, whether they are satisfied with their standard of living, and whether they experienced a range of feelings on the previous day. Over the three year period examined here, from 2nd January 2008 to 29th December 2010, there are around a million observations on self-reported well-being, as well as on demographics, income, occupation, employment status and numerous health measures. These data allow daily tracking, not only of national averages, but of the outcomes of different groups. In addition to investigating reports of well-being over the crisis, I look at a range of methodological issues. One is the long-standing question of whether variations in self-reported subjective well-being (SWB) over time correspond to 3 what might be expected from cross-section analysis. A three year period is too short to address the Easterlin paradox, that long-term growth appears not to generate the increase in SWB that would be predicted from the positive effects of income in the cross-section, but I can examine whether the large fluctuations in income and unemployment generate fluctuations in SWB that match the findings from the cross-section. The literature on well-being over the business-cycle, Di Tella, MacCulloch, and Oswald (2001, 2003), Wolfers (2003), di Tella and MacCulloch (2009) has relied on data pooled over several countries, rather than on tracking well-being over time within a single country as here, although Stevenson and Wolfers (2008) show that the output gap in the US predicts well-being. This literature also argues that people dislike inflation and unemployment, even controlling for their own experience, which would drive a wedge between the cross-sectional and time-series effects of macroeconomic outcomes, see also Clark, Knabel and Rätzel (2011) for discussion and reinterpretation. I also ask whether the temporal tracking of self-reported well-being measures is useful for economic policy beyond the standard dashboard of measures such as employment, income, and financial market indicators. Many happiness researchers 4 argue that SWB provides a deeper and more comprehensive measure than standard economic indicators and should take priority over them. That SWB should be routinely collected by national statistical agencies, at least as a supplementary measure, was given impetus by the positive recommendations in Stiglitz, Sen, and Fitoussi (2009), and many statistical offices in Europe are currently moving in this direction. Yet questions remain. Although SWB measures have led to many important insights in the cross-section—for example about the relative importance of income and unemployment, or of marriage and marital dissolution, or of non- priced amenities—the usefulness of average SWB for macroeconomic monitoring over time is far from established, and investigating that is one of my main concerns in this paper. The paper is constructed as follows. I start, in section 2, with a brief discussion of concepts of well-being, including reminders of longstanding concerns about happiness measures in general, and within SWB measures, the differences between hedonic and evaluative measures of well-being; this distinction is important in what follows. Section 3 discusses the behavior of the life evaluation over the crisis, and documents the sensitivity of the measure to questionnaire order effects. It also 5 presents an attempt to repair the series to permit substantive analysis. Section 4 shows what happened to life evaluation and hedonic experience over the crisis, and Section 5 relates that experience to macroeconomic magnitudes such as income, unemployment, and the stock market. Section 6 concludes. 2. Preliminaries: concepts and measures of well-being Self-reported well-being is my main topic in this paper, but I do not wish to approach it uncritically, but rather to keep in mind longstanding objections to these measures. Sir John Hicks, after whom this lecture is named, played a central role in banishing cardinal utility from economics, replacing it with “choice” utility, an ordinal representation of preferences, together with a welfare economics that eschewed interpersonal comparisons and, at the individual level, emphasized the income required to attain a given standard of living. This long standing skepticism has been eroded in recent years by a literature in economics and psychology that has demonstrated the usefulness of self-reported well-being measures in a number of contexts. Nor has choice utility gone unscathed. Experimental work has also found biases in recollections of events that will sometimes cause choices to 6 deviate from people’s own preferences, Kahneman, Wakker and Sarin (1997) suggesting that direct measures of momentary feelings, integrated over time, might be more reliable guides to decision that remembered utility. Yet many of the original concerns remain important. One of the most important is associated with adaptation to circumstances. If people become accustomed to economic misery, so that the response of SWB to such pain is only temporary, the continuing harm is no less real nor demanding of policy attention just because people say that they are used to it. Sen (1985, 14) notes that “a person who is ill- fed, undernourished, unsheltered, and ill can still be high up in the scale of happiness or desire fulfillment if he or she has learned to have `realistic’ desires and to take pleasures in small mercies.” By accepting people’s own assessment in such circumstances, “the metric of happiness may, therefore, distort the extent of deprivation in a specific, and biased way,” and “it would be ethically deeply mistaken to attach a correspondingly small value to the loss of well-being because of this survival strategy,” Sen (1987, 45–6). I accept these arguments, and believe that we should not base policy on a measure that is subject to hedonic adaptation. Yet the extent to which any particular measure of SWB is actually subject to the 7 adaptation critique is a question that can be investigated empirically, so that it is possible that Sen’s concern is hypothetical, or is hypothetical for some measures but real for others. Note also that Sen does not deny the goodness of happiness in and of itself, only that it is an unreliable indicator of overall well-being. Put differently, “(t)he central issue is not the significance of happiness, but the alleged insignificance of everything else, on which many advocates of the happiness perspective seem to insist,” Sen (2009, 173). Beyond that, not everyone accepts that questions about pleasure, or about how life is going, reveal anything about those aspects of life that are the most important or most meaningful, Nussbaum (2007). A second concern, documented in the psychology literature, focuses on the measurement of SWB, particularly in response to questions about the evaluation of life as a whole. The answers to these questions are often treated as if “global feelings of well-being . . . remain relatively constant over extended periods, and that people can describe them with candor and accuracy,” Campbell (1981, quoted in Schwarz and Strack, 1999). But as Schwarz and Strack’s review makes clear, actual reports “do not reflect a stable inner state of well-being” that is always 8